Treasure islands in trouble
From The Economist
Britain’s Caribbean dependencies have been hurt by economic stagnation, the war on tax havens and their own fiscal recklessness and corruption.
Last month McKeeva Bush, the ousted premier of the Cayman Islands, appeared in court to contest a string of charges, some stemming from alleged use of his government credit card in American casinos. His next date with the judge is in June. But in a general election on May 22nd voters delivered their own verdict: with most votes counted, it seemed they had re-elected Mr Bush to the West Bay seat he has held since 1984.
With or without the Bush affair, corruption would have been high on the list of election issues in a society where “everybody expects that you are going into politics to make your money”, as a former auditor-general recently put it. But there is plenty more to worry Caymanians and the inhabitants of Britain’s other remaining scraps of empire in the Caribbean: Anguilla, the British Virgin Islands (BVI), Montserrat and the Turks and Caicos Islands. Tourism and international finance have brought prosperity but the “twin pillars” are showing cracks. Fiscal fumbling has compounded the problem and has strained relations with Britain, which has long provided an economic backstop. The region’s two big tax havens, Cayman and the BVI, are under attack as never before.
The world economic slowdown hit these small, open economies hard. Tourism, the biggest employer, has rebounded but remains below its peak in some places. Arrivals by sea in the BVI were 667,000 last year, down from 802,000 in 2008. (A new dock capable of handling the largest cruise ships is expected next year and there are plans to upgrade the airport.) Finance, the biggest earner, is a mixed bag. Offshore shell-company registrations (a BVI speciality) are back near record levels. Hedge funds and banking (mostly Cayman) are down by 10-20%.
The real problem is not sagging revenues but public-sector profligacy, argues Gordon Barlow, a former head of the Cayman chamber of commerce. In 2005-09 growth in government spending averaged 12% a year as the civil service ballooned. The loss-making state-owned airline has sucked in subsidies equal to Cayman’s entire public debt, Mr Barlow estimates.
The Overseas Territories’ economic problems are not as severe as those of independent Jamaica and St Kitts and Nevis, which have had to restructure their debts. But the depletion of their reserve funds spooked Britain into imposing fiscal plans with borrowing limits last year. Negotiations have been difficult. Anguilla’s chief minister, Hubert Hughes, signed a pact last month, but not before accusing Britain of being “hell-bent on destroying the livelihood of the people”. He has called for an independence referendum.
In some cases Britain has pushed for income taxes to supplement the fees and indirect taxes that the territories rely on. But these do not go down well with footloose offshore types. Under pressure from the Foreign Office, Cayman’s government last year proposed a 10% levy for foreigners, who make up half the 38,000 workforce. This was scrapped when businesses squealed. Wary of scaring away business, the BVI has not raised the $350 fee for incorporation since 2004.
Avoiding fee rises is seen as important at a time when tax havens are under bombardment, especially from Europe. The five territories, Bermuda and others have been arm-twisted into backing a multilateral scheme for the automatic exchange of tax information. A longer-term threat is the growing international call for public registration of the “beneficial” (ie real) owners of companies and trusts. Standards must be applied evenly, says Orlando Smith, premier of the BVI, “otherwise, businesses will simply go to other jurisdictions.”
Offshore optimists note that China and Russia, whose citizens are big users of Caribbean havens, have not signed up to the information-sharing pact. But remaining attractive to clients while complying with ever more stringent international rules is “an increasingly difficult needle to thread”, says Andrew Morriss of the University of Alabama. No wonder the territories are trying to diversify away from finance, which in the BVI’s case accounts for 60% of government revenues. Anguilla is looking at fishing, Cayman toying with medical tourism. But hip replacements will not be as lucrative as hedge funds.
Britain is gently encouraging these efforts, while recognising that, as an official puts it, “There isn’t a long list of options.” It is trying to improve governance, too. After it threatened to veto a Cayman port project which had been awarded to a Chinese company without an open tender, bidding was restarted. Britain retains the power to block laws, suspend constitutions and dismiss governments. The Turks and Caicos constitution has been suspended twice, most recently in 2009 after an inquiry found “a high probability of systemic corruption”. This led to three years of direct rule by the British-appointed governor.
Putting your man in charge is one thing, putting money on the table quite another. To avoid it, Britain will have to play its hand carefully. It has to be seen to join the likes of France and Germany in taking a firm stand against offshore financial shenanigans, especially now that the prime minister, David Cameron, has made tax and transparency themes of this year’s G8 agenda. On May 20th he told Britain’s dependencies to “get [their] houses in order”. But if the havens lose their cash cow, they might have to go cap-in-hand to London. “Taxpayers Bail Out Tax Havens” is the last headline Mr Cameron wants to see.
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