Immigration poses some of the most difficult issues for small jurisdictions competing in the global financial market place.
On the one hand, these jurisdictions lack the population to produce enough professionals to create a competitive service sector. On the other hand, local residents are understandably reluctant to allow their communities to be changed by the arrival of large numbers of immigrants.
As a result, many of the smaller countries competing in financial services – including Cayman – have struggled over the years to find a balance on immigration policy that both meets their need to enhance their service sector and does not overwhelm the local community with immigrants.
Why allow immigration at all?
Immigration is important for the financial services sector for three main reasons. First, smaller jurisdictions do not have enough people to fully staff a competitive financial services industry. In a 2014 analysis I did for Cayman Finance, I compared the number of Caymanian and non-Caymanians in financial services with the numbers of employees in similar industries in Delaware and New York City.
Although the statistics do not line up perfectly as the U.S. and Caymanian governments define things differently, a rough calculation suggests that Cayman has 12-26 percent more Caymanians in financial services on a population adjusted basis than either Delaware or New York City has.
It seems clear that the financial industry thus demands more professionals than Cayman’s population can produce. This is no more surprising than that Cayman has to import sushi chefs. A relatively small population will not have enough people who want to be hedge fund accountants, financial services lawyers, or captive insurance managers to service an outsized industry.
Second, the industry needs professionals with networks not readily available in Cayman. The offshore financial sector relies heavily on professional networks between Cayman-based lawyers, accountants, insurance managers, and others and counterparts in London, New York, Toronto, and elsewhere. Such networks are acquired by studying and working in Britain, Canada, and the United States.
Not enough Caymanians appear to be willing to leave Cayman for an extended period to study and work abroad to build the networks needed. Even if every Caymanian with the grades and desire to do so went to Oxford and Cambridge, and stayed on to work in London’s financial industry for five years to build a network, the size of the financial sector would still require immigration to be competitive. To keep business flowing in, the industry’s networks must be refreshed by bringing to Cayman people with the necessary connections.
Third, the financial services sector is a prime example of a knowledge economy. Learning how to structure a financial transaction that complies with the increasingly complex web of financial regulations and succeeds in advancing clients’ goals is a skill that resides in individuals’ heads.
As economist Julian Simon noted: “Minds matter economically as much as, or more than, mouths or hands. In the long run, the most important economic effect of immigrants is their contribution to our stock of useful knowledge. And this contribution is large enough in the long run to dominate all the other benefits and costs of immigration.”
The only way to succeed in this sector is by recruiting the people with the best ideas to be part of your organization. Further, financial services are a fiercely competitive part of the global economy. To succeed, a country needs the best minds playing on its team.
What kind of immigration is needed to compete in financial services?
That there are benefits to immigration of skilled professionals does not mean that Cayman or any other jurisdiction should simply open its borders to everyone who wishes to come. Economist George Borjas argues that the gains to the local population from immigration are largest when the immigrants are different from the local population. If immigrants are like the locals, they merely expand the size of the overall economy by replicating what exists. When immigr ants who are different come to a country, they expand the range of services and skills available.
Bringing skilled financial services professionals to Cayman fits Borjas’ criteria. Because of the high work permit fees incurred when bringing in a professional, financial services firms bring only highly productive immigrants to Cayman. Moreover, the reason those professionals are recruited to Cayman is because they bring skills and networks not available locally.
How can Cayman compete without being swamped by immigrants?
Immigration carries with it costs. More people mean a need for more schools, hospitals, and other infrastructure. (More people also mean more demand for services, which in turn spurs more provision for services. Immigration has undoubtedly benefited many Caymanians by expanding the size of the local economy in ways that increase the quality and variety of the goods and services they buy, as well as by expanding competition to provide those goods and services.)
One of the most important things Cayman can do is to insist that the costs of the extra infrastructure be financed on a pay-as-you-go bond system, in which the immigrants contribute through taxes and fees to funding the payment of the bonds. Balancing revenue to the government from work permit fees and the additional customs duties collected with the demands of a larger population is one means of ensuring the balance is appropriately struck.
Further, Cayman can continue to invest in education for its population. Ensuring that every Caymanian who wishes to do so has the opportunity to study at the institutions that serve as the foundation for a professional network of the caliber needed to bring business to the islands is a critical step to deepening the involvement of Caymanians in the financial services sector. It is not just money that is the obstacle to studying and working overseas.
For example, it is hard to leave one’s family and a place as friendly and lovely as Cayman for the cold and rain of a British legal education and city career. Encouraging those who have an interest in financial services careers to make the investment in studying and working abroad will need to go beyond offering financial support.
Finally, Cayman could collect better data on employment. Regular, accurate surveys of employment would help the government and citizens get a clearer picture of where Caymanians and immigrants work. The government already collects considerable information in administering the work permit system. Adding to that information on Caymanians and making the data available for analysis would be a significant step toward improving immigration policy.
Cayman needs to regularly reassess and debate its immigration policy because it is part of a highly competitive, global market for financial services where the most valuable assets are the knowledge and networks of the professionals in the industry.
Those professionals are almost as mobile as the capital they manage – for the right price, financial services industries can move quickly from one jurisdiction to another. If Cayman makes a mistake on its immigration policy, it could quickly suffer a setback to its competitive position.
If it gets it right, Cayman will have a significant advantage over other IFCs, who are also struggling to find the right balance in their immigration policies.