Wednesday, July 20, 2011

Gulf widens as Jersey's finance cuckoo crowds nest

The Telegraph has published an article about Jersey's over dependence on offshore financial services, which have crowded out other economic sectors making the island more vulnerable to state capture by special interests (i.e. banks, law firms, and related lobbyists).

Jersey's latest business tendency survey has shown strongly positive performance for the finance sector while other sectors were negative. At The Telegraph notes:

"The survey supports the growing criticism in Jersey that the island has become too dependent on its all-powerful financial services that stifle the growth of other sectors by inflating costs such as rent and food"

This crowding out process is a recognised phenomenon. Kent University's Dr Mark Hampton, a Jerseyman, and TJN's John Christensen, also a Jerseyman, have studied the process in Jersey and conclude that other small island hosts of offshore financial services are also vulnerable to crowding out and state capture:

"Financial capital, represented by highly concentrated financial services corporations, has managed to effectively capture the state in many small islands for its own advantage." (p.1014)

This poses major problems for the rest of the world. As financial services migrates offshore to exploit tax loopholes and 'light touch' regulation, major banks and other financial institutions exert their enormous political influence on small island local politicians, many of whom have little or no knowledge of international finance, to push for increasingly lax regulation. As Nick Shaxson argues in Treasure Islands, small islands have become the crucibles for creating high risk financial instruments in a deregulated environment. And its the rest of the world that takes the hit.

But we digress from The Telegraph's description of Jersey's predicament. While local politicians talk up the prospects for industrial diversification we find such talk mere wishful thinking:

, according to Senator Philip Ozouf, "is well advanced in its plans to a develop as a centre of excellence in information technology".

Reality check: Jersey has never been a pole of research into information technology, has no research capacity in this area, no workers skilled to take on such work, and little likelihood of being able to compete with long established poles in Europe or North America. Worse, the island's extraordinarily high cost of living makes it very hard to attract the necessary investment or skilled labour.

As Hampton and Christensen have argued in another paper, opportunities for diversification are limited both by crowding out and by the phenomenon of 'path dependency', the latter arising from past actions and policy choices which restrict the range of viable development alternatives.

Without a plan B, Jersey's prospects remain weak. But the reality is that any plan B will require significant adjustments in the island's cost base, not least the crippling cost of local housing. Just ponder this fact: the price of an average three bedroom house in Jersey at end March 2011 was an eye-watering half million pounds.


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