While our politicians spent the new year attempting to mitigate the embarrassment of their longstanding, adamant denials of Bermuda’s indubitable status as a tax haven being now well and truly exposed as a farce, much of the rest of the island were asking just how else are they deceiving us, and will Bermuda ever recover from this interminable crisis?

Indeed, these events are not unrelated as, in addition to enriching our local lawyers and accountants, Bermuda’s ill-advised, erstwhile pursuit of a tax-haven development model under both our Progressive Labour Party and One Bermuda Alliance-led governments in recent years served only to preoccupy our policymakers, regrettably thwarting their every chance of recognising the root causes of our crisis.

In fact, the strength of recent economic recoveries in the Cayman Islands, Jersey and Guernsey (Figure 1) may well have encouraged the belief among some of our government officials and business leaders that perhaps Bermuda wasn’t pursuing our more recently acquired tax-haven development model quite hard enough.

Of course, our offshore competitors were much earlier converts to the tax-haven business, so perhaps Bermuda had more to learn in arriving late to the game. One can only hope, with this political charade now behind us, we can finally get on with the business of genuinely turning Bermuda around.

As with any science, before diagnosing the root causes of our economic problems, it helps to examine the relevant data — and an examination of ours quickly reveals economic dysfunction on a globally unprecedented scale.

In particular, Bermuda has two simply stunning economic imbalances, each the mirror image of the other, which economists would term, in their technical jargon, our “fundamental macroeconomic internal and external imbalances”. And if the technical jargon sounds terribly complicated, I assure you, these concepts are readily understood.

Our internal imbalance refers to the discrepancy between Bermuda’s savings and investment, and ours is the very largest such gap of any country in the world (Figure 2).

More specifically, Bermuda has one of the world’s very highest levels of savings while at the same time our rate of investment ranks as one of the world’s lowest. And this discrepancy is not a short-term or recent phenomenon. In the past 40 years, Bermuda’s savings has exceeded our investment in every year bar one, but this imbalance widened appreciably in the mid-1990s and has grown steadily ever since.

At this point many Bermudians will be saying: “Hang on a second, I thought we were in a crisis. How can we possibly have one of the world’s highest rates of savings?”

Welcome to the economics of tax havens. With their zero to low rates of tax on corporate profits and other sources of capital income, and their high reliance on labour and consumption taxes, the extreme regressivity inherent in the tax regimes of tax havens provides ample opportunity for staggering sums to be saved in the upper echelons of income distributions.

However, our sums truly are staggering.

As I was sure to highlight at the 2018 Chamber of Commerce/PwC Budget Breakfast, while the Bermuda Government in the ten years since 2007 racked up an additional $2.2 billion in debt, the island’s private sector banked $21.2 billion in savings (and that excludes the corporate profits of our international business sector, Figure 3).

Yes, that’s $21.2 billion — roughly $1,000,000,000 for every square mile of the island, or enough to cover our national debt before you get to Flatts if driving due west from the airport.

Or, viewed alternatively, our private savings of $21.2 billion achieved during the crisis is slightly more than the combined assets of Bermuda’s banks, betraying that the vast majority of these funds were not banked in Bermuda — they’ve obviously left the island — but I get ahead of myself.

To be clear, “private-sector savings” includes the savings of individual households and businesses, with the lion’s share of our savings accruing to Bermuda’s households. $21.2 billion. No mean feat for an economy with a total annual income of $6 billion.

To make appropriate international comparisons, we divide our annual savings by total income. Expressed as a ratio of total income, or GDP, Bermuda’s private-sector savings is approximately 36 per cent, which is more than sufficient to qualify us as one of the highest-saving countries of the world.

That’s higher than Europe’s highest-saving countries of Norway, Germany, Switzerland and Ireland; higher than three out of four of the “Asian Tigers” of Hong Kong, Singapore, Taiwan and Korea; and larger than the formidable savings of Japan. However, it is still somewhat less than the mega savings of China (Figure 2).

And as you can see, in comparison with these other high-saving countries, Bermuda’s investment looks appallingly weak. In fact, our investment looks weak in relation to virtually every other country in the world.

And once again, this is not a recent phenomenon. For multiple reasons, Bermuda’s investment has been chronically weak since the late 1980s, or for fully more than a generation.

To fathom the urgency of our investment deficiency, it helps to understand what these numbers represent.

Broadly speaking, a country’s investment refers to its government, household and corporate spending on items considered “physical capital”.

This includes transportation equipment — such as buses, trucks, ferries, motorcycles and cars — computers, software, houses, office buildings, hotels, heavy machinery, such as power generators, cranes or MRIs, and, additionally for governments, infrastructure spending, such as schools, bus stops, roads, bridges and airports.

In growth or development economics, the road to prosperity for nations is hardly shrouded in mystery.

For countries, prosperity is critically dependent on a nation’s investment in sufficient, high-quality capital. Getting that right is absolutely essential.

This includes spending on what economists term physical capital and human capital. Physical capital refers to items such as those categorised earlier, while human capital refers to spending on education and training.

The importance of spending on human capital should not be underestimated. If invested wisely, such spending can enhance the skills of a country’s citizens considerably.

Indeed, education and training have the potential to facilitate people being vastly more productive, or significantly more creative in achieving their potential, in the process earning substantially higher incomes for themselves and their families, while at the same time enhancing their nation’s productivity in providing highly valued goods and services to others.

In recent years, think of the output created by the workforce at Apple or Google.

But physical capital is just as critical to a nation’s productivity, income, economic growth and wealth over time. In fact, in addition to their high-quality, inclusive schooling, more than anything else the economic miracles of China and the Asian Tigers are attributed to their unique ability to consistently channel their vast savings into wisely chosen projects entailing significant physical capital.

By “wisely chosen”, we mean investments that prove to be highly productive, paying substantial subsequent returns.

So in very general terms, we now know where Bermuda has gone wrong.

It’s our long-term, chronic weakness in physical-capital spending and our lack of investment in “wisely chosen” high-return projects that are responsible for our crisis.

In comparison with other countries, Bermuda has a bountiful supply of college graduates, but if we are to stem the flow of the island’s “brain drain” of our younger, better-educated Bermudians to foreign countries, we must raise our investment spending substantially and do our level best to ensure those investments are selected wisely.

Before recognising how this is to be accomplished, it helps to understand why this has not already happened — and here we must examine the mistakes of our past.

Bermuda’s policymakers are not completely unaware of these problems and, in coming to terms with the changes Bermuda needs to make, it’s worth developing an awareness of our policymakers’ unsubstantiated beliefs, prejudices, misconceptions, cognitive blind spots, preconceived notions, competing mental distractions, theoretical disciplinary deficits, shortages in specialised practical judgment, ideological allegiances and sundry other mental missteps generally responsible for errors of thought.

In other words, it helps to understand just why our policymakers have experienced such difficulty in identifying the appropriate solutions to our crisis.

This brings us to the mirror image of our internal imbalance: our “fundamental macroeconomic external imbalance”. And this, too, is easily understood.

• This is the first part of a series examining not just the principle causes, but, even more importantly, the appropriate solutions to the island’s economic crisis. Robert Stubbs is an economist, CFA, holds an International Bond Dealer Diploma and has completed the ACAS actuarial exams. He was formerly Head of Research for Bank of Bermuda and his professional interests at present lie in enterprise risk management