Opinion: Diversification – What Is That?
[Written by Larry Burchall] During the lead-up to this Budget Debate and with all the talk about Bermuda’s economic present and future, one concept keeps popping up – diversification. The principle thought behind diversification is that Bermuda needs to have another one or two legs to support or even supplant Tourism and International Business. That got me thinking. What exactly does all of that mean?
For a nation – any nation – there are only four generic ways to earn a national living. Large countries can use all four. Smaller countries may only be able to use one or two. A few nations may only be able to use one. Of the four generic ways of earning a national living, I reckon that Bermuda can and does only use one. I’ll explain why, but first, let’s agree the four generic methods.
- ONE - Sell natural resources to the rest of the globe. Saudi Arabia and Kuwait do this. They make their primary living by selling oil. When their oil runs out, as one day it will, they’ll need an alternative. Iceland used to make its national living by catching and selling fish. Fish stocks began to decline so Iceland turned its national hand to selling services.
- TWO – Sell agricultural products. Many countries earn large parts of their external revenue by selling grain or meat. Australia and New Zealand are good examples. Agriculture is a re-generating process. Every year, absent natural disasters, there’s a new crop of corn or cattle or cauliflower or flowers or oranges to sell.
- THREE – Sell manufactured goods. Japan, with Toyota now the world’s biggest maker and seller of cars sets the pace here. Then there’s “Made in China” for everything from clothes to electronics.
- FOUR – Sell services of one kind or another. Bahamas and Caymans are excellent examples of this kind of national earning. Tourism for the Bahamas. Business services for Caymans.
There’s nothing else beyond these four generics. The piracy practiced by sections of the Somali community is a form of service transaction. They extract their external exchange incomes through ransoms. The Philippines earns a partial living from the repatriated foreign exchange from hundreds of thousands of Filipinos who work overseas. Again, it’s another form of selling a service.
Big countries – USA, Canada, India etc… – may engage in all four or three or two of the four as the way in which their primary national incomes are earned.
So what about us lot? We are 50,000 Bermudians on 13,000 acres, surrounded by an ocean but with no major fisheries, no underground or undersea oil, no metal ores, no diamonds; with a per capita income currently around $85,000 value in US dollars. How does Bermuda do it?
Bermuda sells services. Intellectual services in the form of Insurance. Personal services in the form of Tourism. Don’t believe me? That’s fine – but you find the natural resources, or agricultural products, or manufactured goods that Bermuda produces in sufficient quantity to support our $85,000 per capita incomes. You find them.
Bermuda stopped earning a living by selling agricultural produce back in the 1920’s. The transition from agricultural produce selling to selling services happened between 1910 and 1930. Since 1930, Bermuda has existed, has grown, has prospered and gotten rich, by selling services.
From 1930 to 1940, the service was Tourism – personal services. From 1940 to 1947, Bermuda lived off the Second World War and its immediate aftermath – but still personal services. From 1947 to about 1995, Bermuda lived of Tourism and the Cold War – still personal services. From 1995 until today, Bermuda has lived off International Business [IB].
However, the transition to IB was a subtle but radical shift. The shift was from selling personal services to Tourists who had come to Bermuda, to mostly selling intellectual services to people all over the globe; but still with a strong personal service component to investors and businesses who were located in and operated from Bermuda.
From Tourism providing 80 percent of all foreign exchange in the 1970’s, Bermuda has transitioned to where IB provides 90 percent of all foreign exchange. And, Bermuda is 100 percent reliant on this steady inflow of foreign exchange. Nowadays, that foreign currency flows in amounts large enough to sustain an $85,000 per capita income.
Love it, like it, dislike it, or hate it. Those are the facts.
The key, core, and deepest secret lies in the fact that Bermuda shifted from selling easy-to-understand personal services to human beings (Tourists) and thus earning around $40,000 per capita; to selling abstract intellectual services to the whole world and personal services to the hundreds of major investors who had chosen to operate their esoteric global businesses from Business Platform Bermuda – and thus earning around $85,000 per capita.
So no agriculture, no natural resources, and no manufactured goods like the 42” plasma TV’s that roll off the assembly lines in China – and that us lot see as ‘must haves’. What alternative or different ways can Bermuda use to maintain its $85,000 per capita incomes? How does Bermuda diversify?
It’s obvious that whatever it is, it has to be some form of service. Back in the old days, us lot did indulge in piracy – like some of today’s Somalis. Today, though, I think that would be frowned upon – by others. However with the gangs and crime wave and drug importations there may be many amongst us who’d happily resort to piracy. But I don’t think we could really do that on an international scale anymore.
We could turn to agriculture by growing and selling marijuana. Given the paucity of agricultural land, but given the intensity of cultivation offered by hydroponics (and we seem to have some experts in that field amongst us), we might find that Bermuda could provide enough ‘wacky tobaccy’ to satisfy a big chunk of the demand in the Northeast States of the USA.
From 1920 to the 1930s, the USA tried Prohibition by banning the sale of all alcohol products in the whole of the USA. Booze such as whiskey, gin, rum, vodka, etc… were all treated as illegal items, much like marijuana is today.
Bermuda responded to that US law by importing huge quantities of those beverages from the UK and other places, transferring them to small boats; and then smuggling those beverages – illegal in the USA but legal in Bermuda – into the USA. In essence, Bermuda ‘Rumrunners’ as they were called were busting US drug (alcohol) laws. Bermuda and many ‘Front Street’ merchant Bermudians profited handsomely from that.
Using exactly the same business logic means that ‘wacky tobaccy’ could be treated the same; and provide the same handsome profits. That would be selling an agricultural product; so Bermuda would have diversified its ‘economy’ and would have a triad. IB. Tourism. Wacky T.
If we do not go that route – and I do not think that we will; then we are left with finding another form of service to sell.
That takes us back to intellectual services of some kind because we no longer have the capacity, nor can we even build the capacity, to house and service the number of Tourists needed to create the revenue flow to sustain an $85,000 per capita income level.
That means that Bermuda’s future is tied to maintaining a business model that can sell intellectual or business services to the other 199 nations on the globe. That is Bermuda’s present. That will be Bermuda’s future.
The alternative is to accept a much lower per capita income – something around $30,000 per capita if we end up reverting to and relying only on the sale of personal services to landstaying air arriving Tourists.
What does that mean in money-in-your-pocket? It means that general income levels in all of Bermuda would drop around 60 percent. If you are currently earning $1,000 a week, your actual income would decline to about $400 a week. But bread would still cost its current $5 a loaf, gas would still cost $8.70 a gallon, and BELCO’s primary fuel would still cost $100 – or more – a barrel. So the real drop in your income would feel and behave much more like a drop to $200 a week. Imagine living – in Bermuda – on about 20 percent of your current income – whatever that income is!
Bermuda has only one real alternative. Keep IB and make it work. Or fall back on Tourism alone and take a massive hit in overall and individual income levels.
Keeping IB, and keeping it successful, means ensuring that IB is treated as a customer – not an irritant. Keeping IB means that we let go of the dream of resurrecting Tourism to its 1981 heyday and honestly set about the task of making Bermuda a successful business platform that has a strong land-based air arriving Tourism adjunct.
That’s the only real way forward. All the rest is a variant in cuckoo talk.
You may agree. You may disagree. But if you disagree, I’m curious.
What real world and practical alternative do you see that will fit 50,000 Bermudians living on 13,000 acres at 32n64w and that will maintain our current $85k per capita?
Capt. Burchall,
I’m surprised you went so far down your wacky tobaccy tangent to make your point. I think it clouded your argument. Certainly there are options on this front such as an upscale, Vin Mariani inspired Amsterdam style tourism model than trying to return to the drug running trade, but I should hope that times are not so dire that we must consider such alternatives.
There are other means of diversification. For example, moving to take a greater part in the online services. Certainly not simply repeating the “ecommerce” buzzword but really examining what kinds of services can be domiciled here to benefit from the advantages we offer. For example, the Isle of Man has captured much of the online gambling market. Bermuda could look to similar services such as online video games, virtual economies and other online-only service industries that could benefit from being located here.
Alternatively Bermuda still has potential in the area of Agriculture beyond wacky tobaccy. Great examples of what has yet to be readily explored is open ocean Aquaculture and generating biofuel through harvesting seaweed.
Further Bermuda could work to serve as a test bed for new technologies. As an example, Bermuda could be an ideal test bed for electric vehicles.
There are many options, though all of these would need capital and support, neither of which can be undertaken when we’re encumbered by heavy debt and perhaps left with no industry to assist us. So in this I agree with you that IB should remain a key focus and partnership.
Well said Mr. Pitcher! As well as being leading innovators in these new forms of services or agriculture, we could also branch off from these industries and create “Agro-tourism” or “Techno-tourism” to increase our nations revenue and global awareness!
I think Mr. Burchall’s discussion on diversification is timely and crucial for Bermuda as a whole to consider as the island goes forward. A diversified economy is an economically safer economy – the old adage of “not having all one’s eggs in one basket” comes to mind! Unfortunately, as well all know too well, small island locales, especially those extremely isolated like Bermuda, are very limited in terms of size and natural resources. This makes diversifying Bermuda’s economy challenging.
I too agree with Mr. Pitcher’s visions of encouraging more on-line services to take up an on-line domicile in Bermuda. This can work in the same way that many international companies are company registered in Bermuda but operate off-shore. His example of the Isle of Man is exactly what I too had thought about many times. During some post-graduate research that I am conducting on a separate topic, I have had the opportunity to talk to some of these on-line companies, some of which were owned and operated by Bermudians. These companies were offering their products (software based) to external clients but had their operations based on-island. The positive part about these types of industries is that the footprint to operate such business can be quite small when compared to the global outreach that they may have, although energy needs due to data storage, etc. can be large in some cases. They also can employ locals and can operate with small outfits yet bring about very large sums of foreign exchange in proportion to their staff numbers. Indeed, it is worth taking a more robust look at in terms of adding to the diversity of the economy.
I also believe that Bermuda can do much more in terms of its natural resources, specifically as Mr. Pitcher speaks of, aquaculture, agriculture (hydroponics especially for crops) and offshore fisheries. It will take time and investment to grow the industry and make it attractive however, in the long run it too is a valuable area worth some attention.
The same goes to eco-tourism – an area of tourism that I feel Bermuda is seriously lacking especially in proportion to how it is marketed in other island jurisdictions. However, I do not think that “government intervention” is the problem but rather a lack of entrepreneurial spirit when it comes to creatively coming up with these type of offerings.
I am interested in what “Well Said!” spoke about in terms of ‘Techno-tourism’…I will Google that and find out more.
Mr. Burchall, I find your opinion to be very interesting, and I do agree that Bermuda, unfortunately, does not have many options in the way of diversification. So, yes, IB and tourism must remain at the forefront, yet they both need a drastic overhaul if they are to survive and thrive in the future. Here is what I suggest:-
Bermuda is too expensive to do business in. Yes, payroll tax has been rolled back, but that is only one ingredient in the “pie” of IB. The cost of setting up business here, and to maintain that business, is a discouragement to overseas investors, who have become extremely prudent in where they put their cash. I work in a law firm, and an attorney in our department was contacted by an overseas client about the possiblity of setting up a business here. The potential client, on receiving a breakdown of the necessary fees and costs, which included Government regulatory fees, was extremely put-off. He stated that his company was also looking at other jurisdictions, and found that doing business in Bermuda was 70% more expensive than other similar jurisdictions. I don’t disbelieve that. We have got to do better at keeping costs down if we want to attract and hold on to those overseas investors. Why do we need to be so much more expensive than Cayman, or BVI, etc? I wonder sometimes if it is necessary to charge as much as we do for our “intellectual services” or if we have just gotten greedy.
I will use a simple analogy: if I had a lemonade stand, I would rather sell my lemonade for $1.00 than $2.00, especially if I knew that someone else had a stand nearby and was selling theirs for $2.00. I would not worry about losing money, because I know that the difference in income would be made up, not just from my regular customers, but also from the customers I could attract from the other lemonade stand! Offer something just as good or better, for a more attractive price, and you will realize the profits.
In regards to tourism, we do not have to let this industry die. We need to offer something that will make people WANT to come here. Setting up low-cost airlines like AirTran is not enough. What good is it to offer cheap flights to Bermuda when a) the hotels, restaurants and shops are still extremely expensive and b) the tourists have litle to do when they get here? We need to look at what other places are doing right. People ARE travelling on vacations, they are just choosing not to come here.
I know many Bermudians who love going to Las Vegas – it’s not all about the gambling, but they tell me, there is so much to do there, you could spend hours walking along the Strip, with the beautiful hotels, seeing a car show, going to the shops. And Vegas is really cheap right now, apparently. And what about the Atlantis resort in Barbados? That place is fabulous, which amenities for the whole family, and you can go there on a cheap travel package. Bermuda needs to step up its game. Maybe it’s time to offer resort gaming here. Maybe we should market ourselves to the young “Spring Break” crowd which we lose out on every year, or to family groups. Right now, our tourism product is geared toward only a very limited set – the very wealthy. That needs to change if we want to stay competitive.
Mr. Burchall,
Great piece. I knew we used to be pirates, i didn’t know we used to be drug runners. Adds some context to a lot of things. The question is HOW do we stimulate IB. I think we’ve done a decent job of it noting the growth over the last 10 years, the last few have been sticky, but thats more global than local.
Is this something for governement or something for private industry to take care of. I hear a lot of people talk about “stimulating” IB, but very few specifics short of scrapping term limits, which don’t really apply to IB in the first place.
:S…OK so after googling “techno-tourism”, I have found that this is not the right terminology for attracting visitors to Bermuda based on our new technological advancements i.e. energy initiatives or domiciled online ventures.
Mr. Chapman, I have explored the idea of starting an open water Aquaculture business but I’m wary of the idea being seized or exploited by the government, as it would HAVE to be utilized on their property. This would not only allow the public to know where their local seafood is coming from but it could also incorporate an idea of regenerating depleted fish stock by releasing a certain % of farmed fish back in to the wild. Again, we could be world leaders in this industry and generate interest from other countries allowing us to lend a hand in adopting our radical, yet beneficial idea.
Larry,
Dare I say the most significant factors that affect BI and attract them to Bermuda are:
Favorable Regulation
But above all no taxation on profits or capital gains.
If that is the case, does it follow that if we retain those two key benefits to having a business domiciled in Bermuda, that all will be well?
Sadly NO!
We have ridden the tide of globalization for 50 years. But the tide has changed course. The internet has provided the general public insight into the inner workings of the financial system. It knows that the Financial system did not fail through natural causes, it failed through the people who knew the system inside out and benefited most from the system, gaming the system to the advantage of cerrtain players, which caused a total imbalance. Things were not as they seemed on the surface. AAA mortgages were actually toxic. Banks were actually knowledgeable about this and some made a fortune out of it whilst others that they sold to lost.
How does this affect Bermuda?
It means that less regulation is no longer acceptable and the disproportionate sharing of wealth and power is no longer being tolerated.
Bermuda’s no tax regime is being attacked on all sides by changes, overhauls to tax systems around the world. More resources are being poured into clawing back tax revenue evaded and avoided. Money laundering of all types is outlawed. Above all transparent of information negates the advantage of squirelling away profits in tax havens as now the general public can see the tax gap created, between what the various governments intended to raise and what it was able to collect.
Bermuda is not just an insurance centre, it is a place for capital and profits to flow. This business is being attacked in the ways I mentioned. There is civil unrest in many industrial countries that tax evasion and avoidance have meant that ordinary people have had to sacrifice more and more.
I must stop here, except to say don’t get tied up in local politics, look at what the rest of the world is doing and find a way to fit in!
Ecommerce must be the way to go but how? We must provide actual services here and not just a bolt hole for capital and profits!