Sunday, September 06, 2009

Island tax havens shaken by financial hurricane

A lengthy article in today's Observer draws attention to how some of the small island tax havens, those engines of chaos in the global financial markets, have become victims of their own development strategies:

From the seemingly serene Caribbean islands of Grand Cayman and Antigua through to Jersey and the Isle of Man, all are under serious pressure raising questions about their ability to cope.

We blogged the Cayman budget crisis earlier this week. The situation in Jersey has been brewing for many years. The scandals that have rocked both Antigua and the Turks & Caicos islands were entirely predictable. This is what happens when the polities of small and vulnerable microstates become captured by powerful and highly mobile commercial interests. In competing to attract and retain the banks and their offshore clients, they have joined the ranks of the victims of the race to the bottom.

This was always on the cards. In fact we suspect that one of the reasons the Center for Freedom & Prosperity and their wealthy backers on the American far-right love these small island tax havens so much is precisely because they are so easily captured (in the political sense) and therefore malleable to the interests of footloose capital. But in singing the praises of low taxes and slack regulation, Dan Mitchell and others at the CF&P never warned them of the downside.

Our purpose in highlighting the emerging crises in small island tax havens is not to engage in a game of "we-told-you-so", but to flash up a warning sign of what might happen next. The tax haven development model has already caused harm across the globe. But given their lack of alternative development strategies there is a genuine risk that they will plough on regardless, further degrading their own tax and regulatory systems to attract business from even dodgier places.

This warning is not based on vague academic theories or hypothetical scenario planning. This month bankers and political delegations from the British Channel Islands are heading to China, where corruption is so endemic that it has been termed “a collective venture” involving the party, the state and private business. We cannot imagine how the Chinese public might be able to benefit from linking up to tax havens in the English Channel, but we do know one thing for certain: human rights won't be on the agenda.

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