Jersey: Finance will follow privateering

From the Jersey Evening Post:

The Island should be looking to the creative industries to replace the finance industry in future, a former senior banker told an audience of business leaders this week. Members of the Jersey branch of the Institute of Directors heard John Boothman say that action needed to be taken, as the finance industry would disappear at some point.

‘Finance will go the way of cider making and privateering,’ Mr Boothman told the audience of over 100 business leaders at the lunch at the Grand Hotel. (Hat Tip for story: TJN Jersey)

Selling schemes to dodge the taxes and regulations of reputable jurisdictions is the modern form of privateering (piracy,) of course. What Jersey is suffering from here is the Jersey Disease - something we've blogged about before, here and here, for example.

It's a version of the "dutch disease" that afflicts mineral-rich countries whereby the rise of one single industry (like oil production) crowds out other sectors by forcing up the real exchange rate and the price of assets such as housing (average house price in Jersey is not far shy of US$ 1 million) and by sucking all the country's resources (such as human resources, financial capital, and infrastructural goods and so on) into support of that sector, draining (and killing off) all the others. Well that's what finance does too: it not only does all of the same things, but in jurisdiction after jurisdiction that we've studied, it captures the politics too.

But there are other factors that inhibit economic diversification in Jersey.

First, to be blunt, decades of attracting relatively low-skill client management and offshore booking activity has left the island with a workforce that is largely adapted to clerical work, albeit dressed up with fancy job titles. Clerks don't generally make for creative types, and it will take a gigantic investment in education and training to make the shift to genuinely creative industries. John Boothman should take a look at the development literature around the subject of what economists call 'path dependency' to understand why the recent past tends to shape future possibilities.

Second, the high cost base discussed above creates a huge barrier to profitable investment and reflects the very long term political dominance of the rentier and landowner class. There is remarkably little genuinely productive capitalistic investment in Jersey itself, and the rentier class, which dominates the political decision-making processes, has shaped the tax regime to their interest - low property rates, no capital gains tax, and no wealth taxes. Amongst other things this has pushed land values through the roof: a land value tax would remedy this problem.

Third, virtually all sectors, from construction through to telecoms, are dominated by complex monopolies. Lack of competition has throttled innovation and kept profits high, but no effective measures have been taken to either regulate these monopolies or introduce effective competition.

Fourth, there is virtually no culture of genuine entrepreneurship. The finance industry is largely bureaucratic. Ditto large parts of the public sector. Investment in research and development just doesn't happen on-island, and the barriers confronting start-ups - including the high rents, the skilled labour shortages, the absence of centres for research and development, the scarcity of opportunities for sourcing inputs locally, and so on, all mitigate against economic diversification in the current climate.

For decades, Jersey politicians have blown hot and cold about the need to diversify, but actions speak louder than words, and their actions over the past forty years have worked entirely in the
direction of enlarging the offshore financial centre at the expense of other industries. With all due respect to John Boothman, the economic fundamentals mitigate against diversification, and talk about looking to the creative industries is - to coin a Jersey-saying - mere pissing into the wind.

In practice Jersey will find it very hard to find a Plan B.