How does a small country become rich?
One paradigm has been forgotten. It is remarkably simple.
A nation can become wealthy by design.
I saw firsthand an example of this.
Colin Powell, CBE. Source: States of Jersey
Before he died in 2019, I attended a talk by Colin Powell. Not the former US secretary of state, but the British economist.
This Colin is acknowledged as the architect of the economy of Jersey.
Colin said at the talk: ‘I suppose I feel about Jersey the way a born-again Christian does about their faith. I have a greater sense of ardour for it because I came to it as an outsider.’
Mont Orgueil, Jersey, Channel Islands. Source: Wikimedia Commons
Today, the small island of Jersey is one of the world’s most prosperous self-governing territories. In 2023, its GDP per capita increased 7% to £63,500 (NZ $136,525).
137 km to the north, in UK, the equivalent was £33,257 (NZ $71,502). In New Zealand, it was $68,967.
The government of Jersey has no debt and very significant reserves.
In recent years, it offered funding for tuition fees at UK universities (up to £9,250 a year) for most Jersey students. In contrast, their British-based compatriots will take out loans.
This from a jurisdiction with low taxes. The Jersey government says it’s focused on a ‘low, broad, simple and fair’ system. There is no inheritance, wealth, or capital-gains taxes. Corporate tax is 0%. (10% for regulated financial-services companies). Income tax is levied at a flat 20%.
Naturally, the country has been labelled by some as a ‘tax haven’. This label is contested.
In 2013, UK Prime Minister David Cameron said, ‘It was not fair any longer to refer to any of the Crown dependencies as tax havens, as they have taken action to make sure that they have fair and open tax systems.’
Designing Jersey’s economy
In the 1970s, the island faced a very uncertain future.
Looking ahead, it could no longer rely on tourism from Britain or the gentleman farmers that made up its economy. The advent of cheap flights to warmer destinations like Spain and shifting trade in European agriculture meant the writing was on the wall.
Colin Powell came at the right time. According to an obituary by the States of Jersey:
Colin was a young Cambridge-educated economist when he was appointed Economic Advisor to the States of Jersey in 1969. His brief was to “carry out the research required to establish the nature and characteristics of the island’s economy, and… provide forecasts of the rate at which it is likely to grow.
When Colin’s report appeared in 1971 it was clear that he had delivered much more than the brief; not only a detailed examination of the Jersey economy, but a blueprint for its future development.
The economy looked very different in 1971: tourism contributed more than half the island’s income and finance just 9% – less than agriculture. The framework he recommended, favouring high-quality businesses, soon proved a catalyst for growth. Within a few years the island was host to global institutions like Citibank, HSBC and Royal Trust Company of Canada, while numerous complementary businesses flourished, providing legal, accounting, trust and fund administration services.
While he was the last person to claim credit for Jersey’s emergence as a leading international financial centre, Colin deserves recognition for his study of Jersey’s economy more than 40 years ago, and for his accomplished stewardship of the island’s economic fortunes in the years that followed.
A blueprint to attract wealth
There are lessons, not only from Jersey, but from other wealth centres such as Singapore, Switzerland, Ireland, and Taiwan.
New Zealand already has some advantages that could attract quality businesses and people looking to invest:
- It is one of the world’s most stable and peaceful countries.
- Ranked 3rd worldwide in the Transparency International’s Corruption Perceptions Index.
- Ranked 6th worldwide in The Heritage Foundation’s Economic Freedom Index.
- Comparative advantages in agriculture, food production, and renewable electricity.
- A haven from geopolitical risks in the more densely populated Northern Hemisphere.
- An opportune time zone for global finance. Business hours run before other global markets open.
- Well-established trusts law to protect and grow assets in the face of global uncertainty.
- No inheritance, wealth, or capital-gains taxes.
The next part of the equation is to develop a framework to establish New Zealand as a magnet for global wealth.
Consider the Heritage Foundation’s New Zealand score
Source: Heritage Foundation (updated October 2023)
Economic freedom is correlated to high GDP. The top four countries (Singapore, Switzerland, Ireland, and Taiwan) score better on the ‘12 Economic Freedoms’ above. They earn the title ‘Free’ as opposed to ‘Mostly Free’.
Obstacles for New Zealand are ‘Government Spending’ and ‘Tax Burden.’
The total tax burden in New Zealand is 33.8% of GDP. It is 12.6%, 28.0%, 21.1%, and 9.2% respectively in Singapore, Switzerland, Ireland, and Taiwan.
Clearly, as part of the plan, we would need to consider our company tax rate. At 28%, it’s much higher than these countries, and even the OECD average of around 21%.
While the coalition government has reduced spending since the score was calculated, the state still casts too long a shadow over the economy. That crowds out investment in the more dynamic private sector.
It’s now time to refine the plan and improve the prosperity settings.
This will build a greater set of opportunities. In time, a better standard of living for New Zealanders.
Regards,
Simon Angelo
Editor, Wealth Morning
(This article is the author’s personal opinion and commentary only. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)