The Bahamas

The Bahamas engineered itself into a tax haven and tourist destination through deliberate policy choices after World War II—decisions that created prosperity while making the nation permanently dependent on American visitors and foreign money.

The archipelago's history before the mid-20th century was a series of short-lived booms: salt raking, cotton during the American Civil War, rum-running during Prohibition, military bases during World War II. Each collapsed when conditions changed. After 1945, the government looked at this pattern and decided to build something more durable: year-round tourism and offshore financial services.

The Hotels Encouragement Act of 1949 offered customs duty refunds and other concessions to stimulate hotel construction. In 1949, the Bahamas received just 32,000 tourists—wealthy Americans and Europeans escaping winter weather for a few months. The Cuban Revolution of 1959 unexpectedly accelerated growth: tourists and money that had flowed to Havana redirected to Nassau. By 1968, the Bahamas welcomed over one million visitors annually.

Freeport on Grand Bahama emerged from the 1955 Hawksbill Creek Agreement, which granted extraordinary concessions to developer Wallace Groves. The planned industrial zone pivoted to tourism when casinos opened in 1963; Nassau followed with its own casinos by decade's end. The gambling industry attracted visitors beyond the beach-and-sunshine market.

Offshore finance developed in parallel. The absence of income, wealth, and inheritance taxes had attracted capital since the 1930s. Bank secrecy laws combined with these tax advantages created explosive growth: from five U.S. bank branches in the entire Caribbean in 1965 to 400 in the Bahamas alone by 1991, holding $287 billion in deposits. The Bahamas became the world's second-largest offshore banking center after Switzerland.

Independence came in 1973 under Prime Minister Lynden Pindling. Despite fears of capital flight—there was a brief currency run in 1967 when the Progressive Liberal Party took power—the new government never moved against offshore finance. The economic model proved too valuable to disrupt.

Today, tourism provides roughly 51% of GDP and employs half the workforce. Financial services contribute up to 17% of GDP. The economy is sophisticated by Caribbean standards—per-capita income exceeds $30,000—but narrowly based. Hurricane exposure is existential: major storms can devastate infrastructure and disrupt tourism for years.

The 2025 challenge is international tax reform. The OECD's Pillar Two framework establishes minimum corporate tax rates that threaten the Bahamas' zero-tax model. European blacklists already constrain the financial sector. Climate change intensifies hurricane risk while sea-level rise threatens low-lying islands.

By 2026, the Bahamas must determine how to maintain prosperity when both pillars of its economy face structural pressure. Diversification options are limited for an archipelago of 400,000 people. The strategy that created middle-income success may not sustain it through the transformations ahead.