By:
Gilbert NMO Morris
www.landfallcentre.com

Salutations:
i. As a Rotary Scholar and as a Bahamian, I am pleased to be here today, and as ever, speaking to a Bahamian audience is one of my most assured pleasures.
ii. This is so because, whatever wisdom one is able to share is poured into the very environment where one lives and shares with family, friends, neighbours and fellow citizens.
iii. I am also pleased at all the wonderful work that Rotary has done in our country and around the world.

 Introduction:
iv. In the early stages of retail, there was a subscription method, by which a person would entre his or her name on a list, and if accepted, was allowed to purchase a product or a service.
v. The “market effect” of this was that it created a tight exclusive market, the commercial psychology of which Europe is still trying to escape to this day.
vi. A “subscription economy” has a similar market effect.
vii. This is often referred to in the economics text books as oligarchy. However, I like subscription because the market effect is less formal and more accidental.

 The Bahamas Economy:
viii. I believe we have in The Bahamas one of the most unusual mixtures of economic phenomena amongst open economies.
ix. There are “two theatres” of economic activity mainly, although there are any number of smaller, more discreet phenomena that contributes to the economic life of the Bahamas.
x. The two theatres are:

xi. The problem of analyzing the Bahamas Economy is that almost all of the data is unreliable. And we have found that the grey-to-black market is so substantial that it influences growth statistics in ways we have yet to account for. As such, we accept little that is said by the IMF or World Bank or other bodies, because we believe an entirely new interpretive model is necessary for nations at our stage and in our condition of development.
xii. Try to examine the issues by doing the following ‘thought experiment’:

1. Think of the islands as being empty and devoid of activity.
2. There must be something to trade that creates the fundamental economic demand/supply nexus
3. Let call this trade “tourism” and “financial services”
4. Once established, then there will be a need for government services, so civil servants
5. That need will also imply a demand for housing for the private sector workers and civil servants, along with other services on a demand/supply platform (ie: food stores, banks, insurance companies, auto retailers, construction firms, utilities and entertainment)
6. The government will want to tax this activity to ensure rules and regulations are defined clearly and followed. In the Bahamas the government taxes at a rate of 20-22% of GDP  (This method of taxation is an issue)
7. In all of the other activities – which are largely transactional – there must be clear predictable rules which citizens can follow. The predictability of the rules actually influence the values of every good, service or asset bought and sold in the economy.
8. In our view the central problem in the economy of the Bahamas is the absence of clarity of these rules and their application.

Particular Issues:
Taxes -
xiii. Let’s take the tax issue first. I and my colleagues at the Landfall Centre have serious questions about custom’s duties. This is so mainly because the government has no incentive to create a business friendly environment, through transparencies and efficiencies. They get their money upfront, whether you make money or not, and whether it is their fault that you will not make money; either because of crime, congestion, poor services, delays and/or corruption.
xiv. We have also rejected the notion of a VAT as a potential collections problem, and because the leverage associated with VAT comes from its operations in economies with large manufacturing processes.
xv. We believe a 5% customs duty and a 8% sales tax would be more business friendly on the one hand, and the efficiencies would mean that the government would have to collect all of its taxes which we believe to be more that$250 million uncollected on the other.
xvi. Second, a sales tax would mean lawyers, accountants, physicians and other services professionals would pay their share as well.
xvii. In this model, the government would have an incentive to develop a sound business environment with efficiencies because if business suffers revenue losses owing to inefficiencies in government services, government would suffer losses as well.

 Particular Issues:
Market Processes -
xviii. In the thought experiment above, we saw that the primary industries were required to meet the demands of the workers in the private and government sector. The private sector uses licenses and approvals to produce jobs and their employees and customers – now in-pocket with cash – are an expression of demand.
xix. I said for instance that this included housing. Let us look at that, again, in efforts to examine some faultlines in our system. This analysis will lead us into the questions concerning the black/grey markets.
xx. Optimally, in a well managed economy, economist expect affordable house prices to be about 3.5 to 4 times gross annual income or GDP per capita.
xxi. In the US, depending on the period and location, actual house prices for affordable homes has been as low as 2.5 times gross annual GDP per capita.
xxii. In the Bahamas, looking at the most popular affordable home prices – approx. $125-140,000 – that would represent – if we accepted $16-17,000 per capita GDP – at least 8 times annual income. (In our view however, our GDP figures are not reflective. Our view is that real GDP per capita is approx. $11,000, and so that would mean the average affordable home price is 12.2 times gross annual income. If we took the average of all home prices in the Bahamas, the number balloons to 24 times gross annual income.
xxiii. In our view this is extremely problematic for the vitality of our economy and the advancement of the ordinary. One may say that in Japan the case is similar, except that the average Japanese is better educated or skilled, and can translate those skills into higher wages in any neighboring country, in some cases in many parts of Japan away from the central metropolis.
xxiv. In 1984 Mrs. Thatcher began the “Council Flat” sales, in which she reduced the prices of the flats to about 3.5 times GDP per capita. The retail boom in Britain in the last 7 years is in part a reflection of that, since now, those buyers have equity & appreciation to draw down on.
xxv. We took the extraordinary step of looking at the total square footage of houses in 2002, and the average cost per sq. ft., and found that the per capita income could not support those residential buildouts.
xxvi. In fact, we concluded that there is such significant grey/blackmarket activity in the Bahamas, including theft that if one were to clean up corruption, many mortgages would go unpaid.

Particular Issues:
Capital and Credit –
xxvii. Our base of capital and credit is too low in the Bahamas. There is too incestuous a relationship between credit opportunities and politics – no matter who is in power, and the commercial bank basis for credit extension cannot support any meaningful development policy.
xxviii. My remarks on banks is this: In New York it is possible to go into a kiosk like a telephone booth and do all your banking right there. Bank are riding themselves of branches or outsourcing to smaller community banks. In my view, in three years, Bahamians will be able to borrow money over the internet. Another competitive issue will be that with all the loans from international banks for developments in the Bahamas, those banks (Citibank, Deutsche Bank, JP Morgan etc) will begin to ask, why should we lend billions to developers in the Bahamas, have them pay Bahamian staff high salaries, and let some other bank have the retail business, when they have created no customer loyalty and do not have a comparable platform of services?
xxix. These banks will be less interested in collateral and more in the quality of the business plan and commitment of the borrower to pay.
xxx. Already in Florida we see what are called “low doc” or “no doc” lending, where as long as you have a job, you can get 125% financing without collateral.
xxxi. A key to the advance lending markets abroad is the brokerage system which monetizes the risk differently from banks. Broad opportunity created by these structures mean an orderly growth in asset pricing and access to credit further down the wealth chain.
xxxii. The absence of these lending structures, and the limited resources generally imply that too much ordinary financing involves some grey-to-black market dealings.
xxxiii. In our view, no lending institution is credible whose debt services model cannot capture at least 35% of the labour market. And given the real GDP per capita ($11,000), it mean that almost every mortgage in the Bahamas operates on the “make it fit” model.
 
 

Particular Issues:
Mentors & Angel Investors -
xxxiv. There is a rule which has been followed in Europe and America concerning an approach to noblesse oblige as a development strategy: No rich man will become wealthy if he does not create other rich men, nor will he long remain rich.
xxxv. For example, Microsoft created nearly 11 billionaires and more than 1000 millionaires. (This excludes those with over $500,000 dollars net worth because of Microsoft).
xxxvi. The large players in this economy are not industrious in this way. Here I am not speak of helping one’s cousin’s son. But finding talented, driven young people who need guidance and financing, even if they fail. Daniel Schneider – who bought the Washington Redskins for $800,000,000 was loaned $2 million dollars by Mortimer Zukerman a day after they met. He repaid the loan and 3 years later lost all his money. The next time Zuckerman loaned him $20 million, which led to $200,000,000 and finally Zuckerman’s share of the Redskins worth more than $200,000,000 it self.
xxxvii. Why did Zuckerman do this? TALENT! Not political party or relationships…drive, creativity and talent.
xxxviii. If you look around the Fortune 500 companies in the US, you find they are littered with the understudies of Nelson Rockefeller. For instance, Parsons who is Chairman of Time Warner is such a fellow, as was Robinson who ran AMEX. Steven case who founded AOL was an understudy of Ross Perot and so on. These relationships and the open approach to investing with younger talent is a key driver of the US economic model.
xxxix. In order to be able to create Mentor or Angel investor opportunities, we must have a vibrant capital market as the mechanism through which such investors can inflict consequences in appropriate circumstances.
xl. Tied to the concept and issue of mentorship is an amazing phenomenon in Nassau, in particular. When I discussed investing in younger people, I was not speaking gratuitously. There must be profit in it, but we cannot systematize such a process until we begin to doing it in earnest. One striking feature of our utter failure in this regard is the nearly 1 million Sq. Ft. of empty space in downtown Nassau. Apparently, some owners insist on high rents for the buildings, even in cases where the buildings have been empty for years. Rather than taking a lower price per sq. ft. they prefer some personal pricing formula. (Indeed, most real estate in Nassau is priced by a “hubris premium” rather than market value. ie: “dis what I want for it, and nothing else!”. We know that because if there were a market value consistent with the expected prices the buildings would be rented).
xli. This interrupts the market process, because if these buildings are empty, there is no real market for them at the prices being asked, and the prices SHOULD be low. This is how one energizes the marketplace, because in a lower price cycle, new entrants are able to entre the market and create value.
xlii. I think many property owners – commercial in particular – are in for a rude awakening. When the internet Ordinary Services Platform (OSP) powers up in 3 years, Banks, Insurance companies, law and accounting firms with large buildings will find they cannot compete. The OPS is meant to place as much of any ordinary service as possible on the internet, and outsource as much as possible to do so. Operations with high building mortgages and maintenance costs will suffer. Property owners will find – unless there is economic strategy to combat it – that their buildings will have lost even greater market value.
xliii. If one explained to some Bay St. property owners that a low price is better than no price, they balk at the suggestion; thinking as they do, ‘if I have 1 million dollars in the bank and an empty building I can hold on for 10 years, until someone like Kerzner or the US government, or someone pays me what I want’. They fail to see that congestion, poor infrastructure and ridiculous price expectations have undermined the value of their buildings, when a low priced tenant would have added value through improvements, and that those improvements added to the low rent would not only result in a net appreciation in most cases, but their properties would be safer, and the lower rent is really an amortization of the higher rent they MAY receive if they waited for years as too many of them are now doing.

Particular Issues:
Trade -
xliv. Mr. OB Ferguson made a point recently reported in the papers, upon which I do not think there can be an improvement: "Our system is not adequate to deal with the nuances flowing from globalization and these multi-national corporations which are exporting a sophisticated culture into a 1970 industrial relationship system which causes difficulties to arise."

Conclusion:

I think we have a short window to improve our economic model. As I have said, I think financial services – as one would find in the Singapore model, along with IT and any services area in Florida that is over priced should be our aim. But first we must educate our children and reduce the influence of personality, connections and subscription in our economy, thereby reduce the impacts of corruption or grey economies; which is a reflection of inefficiencies.