Government protection isn't free

When a shift in the free market occurs, rarely is the appropriate reaction an increase in regulations. Yet that is precisely the first instinct of many governments.

We see this dynamic play out in the Cayman Islands too often. Something “happens” in the economy. Someone complains. Government steps in with a “solution.” And then the real problems begin.

Two such instances are highlighted in today’s Compass, concerning “home-sharing websites” such as Airbnb, and price reporting requirements proposed for fuel importers. In both instances, our government has responded to private sector activity by threatening, explicitly or implicitly, to put those businesses out of business.

Does anyone really believe that a government clampdown on short-term rental accommodations is going to make Cayman a more attractive destination for tourists (or tourism entrepreneurs)? Or that the government’s demanding to know about fuel importers’ operating costs is ultimately going to benefit consumers?
We think not.

The more probable outcomes are that fewer people will visit Cayman than otherwise would have, fewer rooms will be added to Cayman’s “hotel inventory,” and companies engaged in importing fuel into our country might reconsider.

If one, or both, of our fuel distributors were to abandon this market, Cayman would, quite literally, be close to “out of gas.” This is a very dangerous game that government appears to be playing.

That being said, we do understand why our officials have been tempted to act in these two cases. Tourism is one of the key pillars of Cayman’s economy, and the Airbnb-listed accommodations compete directly with existing small (and large) operators who have been meeting expensive government-mandated requirements, such as licensing, property inspections and taxes. The situation is not unlike the scenarios playing out in many countries between “ride-sharing” programs such as Uber and legacy taxi cab companies.

Globally, government regulation often comes perilously close to “protectionism,” and those who are being protected are not consumers but entrenched, and oftentimes politically connected, “practitioners” who benefit by measures that increase the “cost of entry” into their industries.

In regard to fuel importers, it is undeniable that the price of gasoline in Cayman is both high, and highly volatile. Gasoline, of course, differs from other imports, such as T-shirts, in that it is a vital commodity. So, again, we understand the government’s temptation to act – and it does have options.

Planning Minister Kurt Tibbetts is exactly correct when he seeks to ensure that there is a competitive relationship – not a collusionary one – between our two petroleum importers. If Mr. Tibbetts has evidence of collusion or price fixing, he should publicly and persuasively present it.

However, the very last thing Cayman needs is what Mr. Tibbetts has proposed as “government’s next step” – “outright market price regulation.”

Government price controls are antithetical to a free-market, capitalist-based economy, and Mr. Tibbetts would do well to review the economic literature – there’s plenty of it – before venturing further into the morass of state-controlled pricing in selected industries.

The bottom line is, even in a small place such as Cayman, successfully controlling commerce in a country is an extraordinarily complex operation that requires the deftest of touches, not the heaviest of hands. The surest way to influence an economy is certainly not by government threats or, even worse, government edicts.



  1. Globally, government regulation often comes perilously close to "protectionism," and those who are being protected are not consumers but entrenched, and oftentimes politically connected, "practitioners" who benefit by measures that increase the "cost of entry" into their industries.

    Not only increasing the ”cost of entry” into the protected industries but…

    Guaranteeing the profits and lack of competition for the protected ”clique” of elite business owners who are members of the exclusive club.

    How far is successive elected CI governments going to go with this entrenched system ?

    When we thought ”communism” was a economic system only supported by the use or threat of force, we come to a time when we might have to reconsider that definition.

    This system of government intrusion in private businesses and lives in the Cayman Islands is bordering perilously close on authoritarianism that rivals any authoritarian regime in the world.

    Where will it stop ?

  2. Good editorial this time.
    Economy is based upon the resources of the ideas. AirBnB is an example of the new idea that has sprouted into a new and successful business. Huge amounts of money and enterprise and businesses that are happening today were not even possible 20 years ago because the ideas were not even there.

    So CIG should stop demanding the share of someone else’s pie and being fixated on grandiose ridiculous projects such as the cruise dock. Instead they should brush up their brilliant minds for new ideas. And be open to ideas of others.

    New rules won’t keep thrivers from thriving, just accentuate CIG stone age mentality. It is time to accept that generation gap is becoming an obstacle to progress in the Cayman Islands. A new way of thinking is long overdue.

    You can’t legislate thriving for others by establishing new rules and regulations, you have to orchestrate your own thriving.

  3. Firstly, there are lots of free-market, capitalist-based books about benefits of state-controlled pricing in selected industries. Modern economics theory went far beyond simple idea that market fixes everything. Now the answer is more like market fixes everything … in some cases.

    Still it is unlikely to work with gas prices in Cayman. Gas prices in Cayman show high probability of suppliers collusion. The best way to fix collusion is to prove it and fine it. This is what government should be focusing on, not outright price control. And yes, to be able to prove it they need enough authority to be able to get information from companies, which seems to require some laws to be fixed.

    Just trying to imagine US Federal Trade Commission launching price collusion investigation against Esso and receiving in response advice to mind its on business because price information is Esso’s business secret. Ha-Ha.

  4. Whilst I agree with your Editorial Board that "successfully controlling commerce in a country…requires the deftest of touches, not the heaviest of hands", based of my knowledge of the Hon. Kurt Tibbetts, I believe that he will (in his usual manner), very cautiously, approach the question of "outright market price regulation", as alluded to in your Editorial. Over the weekend, I tried to reach Mr. Tibbetts (without success) to briefly discuss with him the pros and cons of the proposed ”Public Utilities Bill”. Although I am not a PPM Member, in the circumstances, I congratulate Mr. Tibbetts for his courage in tackling this very sensitive but important national issue, as our people are generally suffering from the very high cost of living in these Islands.

  5. Leaving aside the issue with AirBnB for the moment it is interesting to see the Compass’ stance on gas/petrol price regulation.

    The Compass is advising Minister Tibbetts that he "would do well to review the economic literature" on the subject as "Government price controls are antiethical to a free-market, capitalist-based economy".

    The Cayman market for retail gas/petrol is a duopoly with Esso and Rubis. This means that we do not have free-market or perfect competition. Research has shown the equilibrium price level in a two-player market is not socially optimal as it results in a transfer of economic rents to the duopoly. That is the consumer in the Cayman Islands pays more for gas/petrol than they would under perfect competition which is what the Compass appears to be assuming we actually have here. The duopolists can further move the price point away from the natural equilibrium of the free market if there is signaling and collusion between the parties.

    I’m as free-market as they come, however we do not have a free-market for gas/petrol in Cayman. I think the Compass’ assertion today is almost as silly as saying the CUC as a natural monopoly should not be regulated leaving the residents of the Cayman Islands to simply be price takers for whatever the utility wished to charge. I think the Compass has agreed that CUC should be regulated in the past. Often the threat of regulation or the approval of a third entrant by Government is the only thing that will keep prices in line in a duopolistic environment.

    Perhaps we should forgive the Compass for their view on gas/petrol in these Islands as after all the research on duopolies has only been around since the 1830’s when Cournot began writing about it. The Compass may not yet have had the time to "review the economic literature" on the subject themselves.

    ***Editor’s Note: The Compass Editorial Board is on record as encouraging the entrance of as many competitors into Cayman’s fuel market as wish to do so. i.e. ***