Cayman Finance commissioned Prof. Andrew P. Morriss to conduct an analysis of Cayman’s labor market to explain the characteristics of and the differences among the three main revenue-producing industries (financial, tourism, construction) and the impact of Cayman’s immigration policies on each.
The Cayman Islands are at a crossroads.
Starting from almost literally a nonexistent financial services sector in 1960, Cayman created a world-class financial industry that helped it pass Britain in GDP per capita by 1980. This remarkable development story – which should be required reading for all leaders of developing nations – was the product of collaboration among a broad range of Caymanians, U.K. officials, and a group of immigrants, principally lawyers. My co-author Tony Freyer and I describe this collaboration in our recent paper, “Creating Cayman as an Offshore Financial Center: Structure and Strategy since 1960.”
Cayman had to fight to accomplish this remarkable feat. Cayman beat the Bahamas for the offshore banking business in the 1970s, in part because the Bahamas attempted to restrict work permits for expatriates. It beat Bermuda for the medical malpractice captive insurance business in the 1980s because Bermuda’s policies were too restrictive to attract this business. And it beat Curacao – at the time the largest Caribbean financial center – for the international business financing business in the 1980s when Curacao failed to adapt to the changing international regulatory environment in time.
For more than 50 years, Cayman has been the jurisdiction that has regularly innovated and best managed the constant pressure from the U.S. and European governments and some international organizations seeking to limit international financial centers’ role in the world economy. As a result of Cayman’s success, the financial sector has consistently grown faster than the Caymanian economy as a whole. The revenue this provided to the government allowed it to greatly expand the range of infrastructure and services it provides, from education to health care.
Employment opportunties for Caymanians
The growth of the Caymanian financial services sector has led to considerable employment opportunities for Caymanians. If we compare the level of employment in financial services and law in Cayman with the level in Delaware, the U.S. state with the most similar economic strategy, there are at least 18 percent more Caymanians per capita employed in the financial sector than in Delaware’s financial and corporate services industry. (Note, these calculations do not count those on a work permit; these figures are for Caymanians only.)
A precise calculation is impossible given differences between the U.S. and Caymanian labor statistics definitions, but I deliberately did these rough calculations in a manner likely to underestimate the level of financial services employment in Cayman. Given Cayman’s small population, it has produced a much larger number of financial sector employees than its size would predict. This is a remarkable accomplishment, and suggests that the benefits of the financial industry are widely spread among Caymanians.
Benefits of immigration
The economics literature on immigration, largely the result of studies of the United States and other large economies, helps explain how this came to be. Immigration has the largest benefits where immigrants and natives have different skill sets. This is exactly what financial sector immigration has brought Cayman. Bringing experienced accountants, bankers, lawyers and other professionals to Cayman has enhanced the Caymanian economy by adding to its stock of human capital – the skills that make labor productive. Moreover, it has brought individuals to Cayman with the business networks needed to expand Cayman’s customer base.
A recent study of “magic circle” law firms in London, which are comparable to the financial services law firms in Cayman, found that 53 percent of solicitors and 82 percent of barristers attended Oxbridge. Cayman’s small population produces some students who qualify for studies at Oxbridge or a comparable school elsewhere and who choose to leave home to study and are willing to spend five years or more building their professional networks working in London or New York. However, it is simply too small to produce enough such students to meet the demand from the financial services firms. If Cayman is going to succeed in the global competition for this business, it must be a center of excellence and both produce local talent and import it.
Cayman’s competitive advantage is attracting just those people to live and work in the islands. Highly skilled immigrants are drawn to Cayman not just by the beautiful surroundings and friendly people, but also because Cayman’s lack of direct taxation and burdensome regulations allow them to keep more of their income and to perform more effectively than would be possible in London, New York or Toronto. Cayman is thus in the enviable position of attracting the people who are best able to help grow its economy.
Cayman ‘under assault’
Make no mistake about it, Cayman’s position in this competitive industry is under a multipronged assault. The U.K. government is far less sympathetic to financial services than it was in the 1960s and 1970s, seeking both to protect London’s position against competition and, because of EU pressure, to reduce tax competition. In addition, the OECD’s (ironically, untaxed) bureaucracy is relentlessly campaigning against tax competition from its Paris headquarters. The Tax Justice Network is constantly in the media touting its claim that the “price of offshore” is too high for the world to afford. And the United States is cramming FATCA down on every jurisdiction it can find in hopes of raising costs elsewhere to reduce the competitive advantage of places like Cayman. Worse, this tactic is now being copied by other jurisdictions as well.
Nor are Cayman’s competitors sitting still. As then-MLA Annie Huldah Bodden noted in a 1981 debate in the Legislative Assembly, “Now let us be very realistic about it, there are other places in the world that would be glad to get some of the business that we have in this island.” In this challenging situation, Cayman must find a way to balance its need to manage immigration to protect its population with the need to encourage its financial industry to thrive.
What Cayman needs is an immigration policy that fully accommodates the needs of its major industries, finance and tourism. As an island of prosperity among less well-off neighbors, Cayman must control its borders or risk being swamped by immigrants seeking to escape their nations’ poverty. But Cayman must also enable the drivers of its economy to continue to grow by expanding their workforce faster than the Caymanian population is growing if it wishes to maintain and enhance its position as a leading international financial center.
Andrew Morriss is D. Paul Jones Jr. & Charlene A. Jones Chairholder in Law at the University of Alabama. The paper by Morriss and Freyer can be accessed here.