Tale of two small countries. Obvious reason for vast economic disparity between Cayman and Belize

Richard Rahn.

Cayman is rich, and Belize is poor. Why? Both are small Caribbean countries with the same climate and roughly the same mixed racial heritage, and both were English-speaking British colonies. Belize (the former British Honduras) received its independence in 1981, while Cayman is still not fully independent but is self-governing at the local level, with its own currency, laws and regulations.

Belize should be richer: It has a larger population than Cayman (345,000 as contrasted with Cayman’s 54,000). Belize has a much larger and more varied land area with many more natural resources, including gas and oil, and some rich agricultural land that Cayman lacks. Both have nice beaches, but Belizehas the second-largest barrier reef in the world after Australia and also has Mayan ruins. Yet Cayman, with fewer points of interests, has done more to attract tourists.

Back in the early 1970s, Cayman was as poor on a per capita basis as isBelize today. Both countries had ambitions to be tourist and financial centers. Cayman succeeded and has about six times the real per capita income of Belize. What did Cayman do right and Belize do wrong?

Perhaps most important is that Cayman had and maintained a competent and honest judicial system, which gave foreign investors confidence that their property would be protected. Cayman also has a very low crime rate. Tourists and other visitors walk around freely day or night in Cayman without fear. Unfortunately, the same cannot be said for many parts of Belize, where crime is often a problem. In addition, many judges in Belize are poorly trained, incompetent and, in some cases, corrupt. These issues cause foreign investors to consider higher-risk factors for projects in Belize as contrasted with Cayman.

The Washington Times

Belize has a more investor-friendly tax system than the United States, but Cayman has no corporate or individual income taxes on noncitizens and citizens alike - advantage Cayman. The problem for Belize is that it is competing with the likes of Cayman, Bermuda, the Bahamas and the British Virgin Islands, but not the United States. Also, the regulatory environment in Cayman is largely free of corruption, which is not true inBelize.

The latest Index of Economic Freedom ranks Belize as the 77th most economically free country in the world (out of 179). If Cayman were large enough to be ranked, it almost certainly would be in the top 10. There is a very high correlation between economic freedom and per capita income. Any country can decide to become more free. Belize ranks a miserable 93 out of 183 countries ranked by the World Bank’s DoingBusiness project.

It is obvious why Cayman is rich and Belize is poor, and it comes down to one word: governance. If Belize would clean up its courts, fully protect property rights and adopt the best economic practices of its competitors, it could quickly become rich. For instance, it takes an average of 44 days to get all of the required permits to open a new business. In some countries, such as Estonia, Singapore and even the Commonwealth of Virginia in the U.S., the required paperwork to open a business can be done online. Thus, days have been reduced to just a few hours.

There is no reason any country has to remain poor. Countries are not poor because of climate, lack of natural resources or race. Countries as locationally varied as Singapore, Mauritius, Korea, Chile, Estonia and Cayman have become relatively rich over the past few decades. Those countries that are still relatively poor are poor because they have not put in place the necessary institutions, political structures and policies.

The United States and a number of other wealthy nations are becoming less free and thus, not surprisingly, are growing more slowly.

Belize could become rich and the U.S. and Cayman could become poor. It all depends on whether the political entities elect wise and courageous leaders.

Democracy versus bureaucracy

By Richard W. Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

The financial crisis in Europe has resulted in the appointment of new prime ministers in both Greece and Italy, in reality, by the Germans and French, rather than through the ballot box in Greece and Italy. This raises the question, “Is it possible to have both a bureaucratic welfare state and a democracy that protects individual liberties?”

In the United States, as well as most other countries, the people are increasingly governed and regulated by unelected bureaucrats who create “administrative law.” The rise of the bureaucratic state, at least in the U.S., is only about 80 years old. The number of federal employees grew slowly over the first hundred years of the American Republic so by the time of the firstGrover Cleveland administration in the 1880s, there were still fewer than 100,000 federal civilian employees. By 1925, the number had grown to about a half a million, and now there are almost 3 million civilian federal government employees, plus another 17 million state and local government employees. Many government services are now contracted out, such as printing and maintenance, so the proportion of government employees engaged in some sort of regulation, rather than providing a service, has risen.

The war on terrorism and the ongoing global financial crisis have resulted in a great increase in the power of unelected officials. It is true that elected officials are the ones who have created the bureaucracies that reign over the people, but that fact does not mean that either the will of the people or their liberties are being protected. There are two fundamental reasons for this trend: The first is as government takes on more and more functions, its complexity and size grows, making it increasingly unmanageable. The second reason is that politicians promise the people more than can be delivered, and when the time ultimately comes to pay the bill, the politicians have a great incentive to duck and try to delegate the decisions to others (e.g., the supercommittee), so they do not have to take direct responsibility.

When the elected (now deposed) Greek Prime Minister Georgios A. Papandreou, said that he wanted to submit the austerity program being imposed by the other eurozone countries to a vote of the Greek people, he was quickly forced by the German and French leaders to rescind the proposal. He was then required to step aside for an unelected “technocrat” to carry out the austerity program, which the Greek people would probably have rejected. In a similar vein, anyone who has seriously looked at the numbers knows that the U.S. Medicare program must be cut back. Only a few politicians, such as House Budget CommitteeChairman Paul Ryan, are willing to stand up and state the obvious and propose real solutions. The others do their best to hide, with the aid of a compliant press, as they have done with Obamacare. One provision of the new health care law empowers unelected panels of technocrats to make reductions in Medicare benefits each year in order to hit budget targets. This enables the politicians to claim they are not responsible for the cuts, but someone behind the tree is.

All of these nondemocratic procedures are designed to thwart the will of the people and ultimately, individual liberty. None of these observations is new. F.A. Hayek, in his best-selling book, “TheRoadtoSerfdom”(1944), argued that socialism and the welfare state would ultimately lead to a totalitarian society. Other wise economists and political scientists, including James Buchanan, Gordon Tullock, Richard Wagner, William Niskanen and James Q. Wilson, have written influential books and papers in the past half-century, warning about the rise of the bureaucratic state.

What is new is that due to the global financial crisis, the rate at which democratic control and individual liberty are being destroyed has greatly accelerated. Most of the world’s developed democracies, including the United States, are running unsustainable budget deficits with ratios of gross domestic product to debt spiraling out of control. The electorate in most countries is in denial and votes against politicians who act to cut back the unfundable “entitlements.” Hence, power to make the necessary changes is delegated to authoritarian bureaucrats and central bankers who understand their job is to destroy the value of the government debt by inflating the currency through the printing press.

Despite the depressing global situation, there are glimmers of hope. There are a couple of examples of developed democratic countries that were headed toward a Greek fiscal meltdown but were able to summon the political will to make necessary changes in spending, taxing and regulations. Sweden and Canada are perhaps the two best examples of countries where the politicians across the political spectrum were able to come together in the mid-1990s to make necessary changes. Canada sharply cut back government spending and greatly reduced its GDP-to-debt ratio. Sweden now has the least progressive tax structure (other than the flat-tax countries) of the developed economies, so most Swedes realize if they demand more government services they are going to have to pay for them, rather than some invisible “rich” person.

Control by the electorate in the United States will continue to diminish as long as the people demand more from government than they (not someone else) are willing to pay for and the economy can support. The loss of democracy might be tolerable if judges would start demonstrating some courage in protecting the liberties of the people against the unelected bureaucrats as the Constitution requires them to do. Short of these changes, it is hard to be optimistic about the future.