Small island economies, offshore finance and development
Playing host to Offshore Financial Centres may ultimately prove to be damaging to the economic prospects of small island economies
The challenge of coming up with a development strategy which is both sustainable and capable of meeting the long-term aspirations of a state is a notoriously difficult task. For small island economies, their modest size, remoteness, limited domestic markets and greater exposure to exogenous shocks further complicate the problem. These are the factors that make them inherently vulnerable. To overcome such weaknesses many small islands have been encouraged by powerful financial actors to manipulate their sovereignty and domestic laws with a view to making themselves ‘tax havens’, or Offshore Financial Centres (OFCs), as means to their development.
Many of the small islands which host OFCs were once part of the British Empire. Even today many remain Crown Dependencies, with two of the most prominent examples being the Bailiwick of Jersey and the Bailiwick of Guernsey. Like many of their counterpart island OFCs, both Jersey and Guernsey came under great pressure from financial elites to adopt an offshore strategy. Over the course of several decades following the Second World War the Bank of England, with the support of the Ministry of Overseas Development, used its influence as a major financial institution to persuade the islands to develop an offshore financial sector.
In doing so, the islands hoped to capitalise upon the benefits associated with the capture of highly mobile capital. While it is true that, like many other small island OFCs, both Jersey and Guernsey have experienced high levels of GDP per capita and are now wealthy places, many supporters of this strategy overlook the extent to which the offshore sector can come to dominate domestic island life. The consequences can be dramatic, resulting often in a ‘capture of the state’: a process whereby private interests come to control and influence the state’s decision-making process for their own advantage and with little regard for the well-being of the island’s inhabitants.
Proponents of course argue that the offshore financial industry has delivered economic growth to many small islands, lifting them out of poverty and freeing them from the plight of aid-dependency by delivering increased government revenues derived from rents and license fees. But, as I have suggested, there also exist major downsides to these achievements.
In the cases of Jersey and Guernsey, where the OFC has grown exceptionally large, domestic markets and island life have come to be dominated by the resident OFC. The presence of an OFC influences everything – from housing prices to employment opportunities. It also means that the island’s future prosperity and success is intimately bound up with, and exposed to, exogenous factors imposed by the powerful elites that manage the world of offshore finance. With little representation and even less bargaining power, small islands and their development goals are in effect held hostage to the whims of powerful international actors and the footloose capital they serve.
The problem is compounded by the distinctive political, economic and cultural orientation of small island economies. For example, while Jersey enjoys a parliamentary system with elected representatives and Guernsey a deliberative assembly of states, both subject to regular elections, some other small islands lack the presence of a vibrant system of party politics and hold few, if any, general elections. Their political representatives are usually drawn from specialist rentier interest groups who represent and prioritise the judicial needs of the offshore industry. The resulting absence of proper democratic checks and balances has meant that many small islands pursuing the OFC route to development are left without effective means of holding the executive body to account.
As a consequence, the decisions made by elected representatives are largely left unchallenged. They enjoy unbridled power, with many of them now deeply entrenched and serving long tenures in political office. A paucity of higher education institutions and the absence of an independent media, which elsewhere form the bedrock of internal intellectual critique, further exacerbate the problem. For example, neither Jersey nor Guernsey has a university. Instead, provision in higher education is oriented towards professional and academic qualifications in the field of financial services. Each also has but one resident newspaper: The Jersey Evening Post in Jersey and The Guernsey Evening Press and Star in Guernsey. In such contexts, island OFCs tend unsurprisingly to move towards ‘consensus politics’, with only those individuals seen to toe the official island party line being allowed a public voice or considered as potential representatives.
The Organisation for Economic Cooperation and Development (OECD) has suggested that the high level of social cohesion displayed by many small islands can be a key resource for overcoming the inherent vulnerabilities they face. However, there is again another side to this argument. The shared sense of community enjoyed amongst island populations can also be harmful. Strong societal ties can inhibit individuals from voicing dissent or opposing the island’s political and economic trajectory for fear of being ostracised from the community.
The problem overall is that jurisdictions such as Jersey and Guernsey, which have tailored their domestic policies almost exclusively towards the provision of offshore financial products and services, have increasingly found that their fiscal independence and economic fortunes are intimately and wholly bound to the success or failure of their core offshore sector. In this process a unique political economy has been created – one in which the state’s development trajectory has been captured by the prevailing needs of the offshore community, which are then prioritised over any non-offshore-related domestic policies.
While the pursuit of an offshore strategy has undoubtedly brought prosperity to many small island economies, like Jersey and Guernsey, these economic advantages may prove to be short-lived and ultimately harmful. By acting as barriers to diversification and obstructing other potential future development projects, offshore sectors may ultimately hinder economic progress for their host islands more than they advance it.
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