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THE EMERGENCE OF AN OFFSHORE ECONOMY
Pergamon
Futures, Vol. 30, No. 1, pp. 63–73, 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0016–3287/98 $19.00 + 0.00
PII: S0016–3287(98)00006-8
THE EMERGENCE OF AN OFFSHORE ECONOMY Ronen Palan There has been growing interest over the past few years in the changing political structure of the world. Predictions range from the withering away of the state to the advent of a global state. This article proposes an alternative scenario: that the state system is not disappearing, but is in the process of creating secondary, relatively unregulated juridical spaces in which economic activities can develop more or less without hindrance. This secondary space, known as ‘offshore’, already dominates international finance and shipping, and plays a significant role in international trade and telecommunications. Offshore is a barrier to the extension of those social provisions that were traditionally provided by states. This paper offers an insight into the ways by which increasing integration of the global market is supported and facilitated by the state system. 1998 Elsevier Science Ltd. All rights reserved
There has been growing interest over the past few years in the changing political structure of the world. This interest has been fuelled, no doubt, by the commonly held view that internationalisation of production, the advent of global financial markets, real time communication and the spread of Western culture to every corner of the world (in short globalisation) is incompatible with a system of state. As a result, a great number of increasingly esoteric predictions are being put forward about the future character of the state system and international relations. In one fashionable view the state is currently being ‘hollowed out’ from within, soon to wither away. Another theory predicts the emergence of a global or transnational state to replace the state system; a further group of scholars is increasingly alarmed by the breakdown of political order and predicts a ‘new medievalist’
Dr Ronen Palan is co-editor of the Review of International Political Economy, and a lecturer in International Political Economy, Department of International Relations, School of Social Science, Arts Building, University of Sussex, Falmer, Brighton BN1 9QN, UK (Tel: + 44 1273 606755; fax: + 44 1273 673563; email: [email protected]).
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The emergence of an offshore economy: R Palan
political map. For others again, the state system may give way to a new world dominated by regional giants like Nafta, leading to AFTA, EU, and perhaps APEC, China and India.1 The numerous predictions are testament to a widely held view that structural changes are in the offing, but there seems to be little agreement or understanding regarding the nature of these changes. This article proposes an alternative scenario: I argue that the state system is not disappearing, but, on the contrary, is in the process of creating secondary, relatively unregulated juridical spaces in which economic activities can develop more or less without hindrance. The juridical space of sovereignty, therefore, is bifurcating into to two simultaneous domains, one still very much ‘on-shore’, subject to the strict controls, regulations and taxation of individual states; the other consists of ‘fictitious spaces’2 known as ‘off-shore’. The offshore economy is a new and relatively unregulated realm in which economic transactions take place with minimal intervention by the state. The nature of offshore Unfortunately ‘offshore’ means quite different things to different people. Foreign direct investment of multinational enterprises is often labelled as offshore. Investment by Japanese multinational corporations in Malaysia, for instance, is described as an offshore investment. Similarly an OECD study of global communication refers to foreign investment by national carriers as ‘offshore’.3 In financial literature, however, offshore is used in a more restrictive sense to describe unregulated international finance. The offshore financial market has replaced the Euromarket. Rather confusingly, however, the International Monetary Fund (IMF) and the Bank for International Settlement (BIS) consider only tax havens as Offshore Financial Centres (OFCs), though the City of London, which does not qualify as a tax haven, is considered the hub of global offshore finance. Then again, many writers consider export-processing zones as tax havens. Others again maintain that ‘flag of convenience’ (offered by countries such as Liberia, Panama, Vanuatu, Luxembourg, Marshall Island, Cyprus and the like) are forms of tax havens as well.4 The list can be supplemented by the new practice of re-routing Internet porn calls through zero-regulated countries such as Guyana and Niue. The lack of clarity is reproduced among the growing number of dedicated journals. Offshore Finance Canada, for instance, publishes articles that are concerned primarily with tax havens and tax issues. In contrast, Offshore Outlook, an on-line journal, lists the following as items of possible offshore relevance: 쐌 쐌 쐌 쐌 쐌 쐌 쐌 쐌
International private and family trusts Multi-currency dealings Global custody Offshore investment funds (unit trusts) Pension funds for multinational operations Offshore export processing Ship registration Aircraft leasing
Due to the great variety, it may come as no surprise to learn that many academics doubt whether it is appropriate to speak of the development of an offshore economy. In many ways this is correct. There are obvious differences, say, between offshore financial mar-
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kets and export processing zones. Nonetheless, there is a shared common ground that transcends sectorial barriers, and that is that offshore activities take place in specially designed regulatory spaces. Some of these spaces consist of physical territories; others are mere fictional or juridical realms. It is the emergence of such juridical enclaves, supported and maintained by the state system, which renders offshore a political and economic development of great significance. Offshore spaces I define offshore as juridical realms marking a differential degree of intensity by which states apply regulation, including taxation. There are currently three principle types of offshore realms. They include: 1. Territorial enclaves normally located near airports or ports as in the case of the export processing zones. 2. ‘Juridical’ or virtual enclaves, as in the case of the International Banking Facilities and the ‘spontaneous’ offshore financial centres. 3. Specialised unregulated jurisdictions, many of which consist of the small islands. The following section provides a brief sectorially based description of offshore spaces.
Offshore finance markets Offshore financial markets are defined as markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to non-residents free from most regulations and taxes. Most commonly the designation ‘offshore’ financial market is used interchangeably with the Euromarket. The Euromarket is a relatively unregulated international financial market which emerged in late 1958 in London. In response to the mounting speculation against the pound after the Suez Canal crisis, the British government imposed restrictions on the use of pound sterling in trade credits between non-residents. Consequently, British and other international banks sought to use US dollars in their international dealings. Transactions between non-residents that were mediated by banks located in London (whether British or not) were then considered to be taking place ‘offshore’, i.e. not under the regulatory laws and supervision of the British state.5 Originally, therefore, the Euromarket was a booking devise; it was created when books for foreign-to-foreign accounts are kept separate from books for domestic financial and capital transactions. Since the early 1970s Euromarket type facilities were emulated worldwide and supplemented by all the major ‘hard’ currencies. Hence, the term offshore financial market is now deemed more appropriate than Euromarket. The offshore financial market consists in fact of a number of markets of which two are best known. The offshore currency market (formerly known as the Eurodollar market) is an international market for lending and borrowing the world’s most important convertible currencies. The offshore currency market, or the foreign exchange market, is a shortterm financial market in which operators are permitted to raise funds from non-residents and invest or lend that money to non-residents free from most regulations and taxes. The offshore bond market (formerly the Eurobond market) are issues of government and
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corporation bonds, underwritten by an international banking syndicate and not subject to any country’s security laws. The main advantages of the offshore financial markets is the relative lack of regulation, including taxation. Thus, by and large, offshore banking is not subject to restrictions imposed on domestic banking such as interest rates ceilings, reserve requirements and exchange controls, withholding of interest income for tax and disclosure requirements. Furthermore, financial intermediaries are not subject to the regulations that may inhibit expansion in their domestic markets. Due to these competitive advantages, banks and other financial intermediaries are able to offer better services and rates in offshore financial markets. That explains the phenomenal growth of offshore financial markets. It is now estimated that about 80% of international banking transactions (in volume) take place in offshore financial markets. While the offshore financial market proved a bonanza to banks, corporations and wealthy individuals, it is becoming increasingly clear that its long-term effects are deleterious. Criticism centres on four aspects of the offshore financial market. Firstly, the offshore financial markets not only undermine state monetary policies, but more crucially, they undermine the state’s fiscal policies, with the effect of shifting indirectly the balance from direct to indirect taxation and hence exacerbating national and global inequalities.6 Secondly, the offshore financial market is increasingly operating as a large casino and as a result the financial system is increasingly divorced from the global production system.7 Thirdly, the effect of that is that, rather than servicing production and trade, some experts now believe that the global financial system in fact diverts resources from the ‘real’ economy into pure speculation.8 Fourthly, it is argued that the operation of this global casino systematically diverts resources from central banks towards private hands.9 Last but not least, secrecy and speed of operations has proved a boon to money launders, drug traffickers and other criminals.10
Offshore financial centres Offshore financial activities take place principally in the major financial centres of London, New York, Tokyo and the like. On the other hand, the Bank of International Settlements designates Offshore Financial Centres (OFCs) as regional centres that did not grow organically.11 In other words, OFCs are not the principle places in which the transactions of the offshore financial markets take place. OFCs are centres that offer an array of tax and regulatory incentives for non-resident investors and the complete flexibility granted to the management of foreign assets, i.e. to tax havens. It is not easy to define tax havens: the complexity of modern national taxation systems complicates the definition of tax havens. The Gordon report to the US Treasury Department states that “there is no single, clear, objective test which permits the identification of a country as a tax haven” (OECD 1987 p.21). In one form or another, practically every country in the world offers some sort of haven from taxation and regulation for residents of other countries. Ginsburg defines tax havens quite simply as those jurisdictions that promote themselves as tax havens.12 A more inclusive definition is of those countries with tax legislation especially designed to attract the formation of branches and subsidiaries of parent companies based in heavily-taxed industrial nations.13 In some countries, e.g. Switzerland, Luxembourg and Hong Kong, such tax legislation is only one aspect of a complex and thriving economy. Others, like the Cayman Islands or
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Bermuda are known primarily for their tax haven facilities. Tax havens are, therefore, deliberate state strategies aimed “to attract thereto international trade-oriented activities by minimisation of taxes and the reduction or elimination of other restrictions on business operations”14. Due to these objective difficulties, estimates of the number of tax havens vary greatly. The latest inclusive list contains no less then fifty states and/or jurisdictions. They tend to be small jurisdictions servicing the larger international trading blocks (see Table 1). Successful tax havens boast minimal or no personal or corporate taxation; effective bank secrecy laws, whereby bank or state officials are barred by law from disclosing the origins, character and name of holders of the funds; there must be few, preferably no restrictions on regulations concerning financial transactions; the secrecy of transactions must be protected; the territory must possess political and economic stability (hence some of the preferred locations such as the Cayman Islands, the Channel Islands, the US Virgin islands and the like are dependencies of large, prosperous and stable states); it should either be supported by a large international financial market or alternatively be equipped with sophisticated information-exchange facilities and/or be within easy reach of a major financial centre. By some estimates, more than half of the world’s stock of money passes through offshore centres, and about 20% of total private wealth is invested in these centres.15 The OFCs seriously challenge the supremacy of the financial centres of large industrial countries. They have contributed to the massive deregulation of the financial industry—capital and financial controls have been dismantled, markets opened, tax rates reduced and international co-operation improved. As a result, the regulatory and fiscal environments of domestic financial centres have converged with those of offshore centres and significantly reduced the comparative advantages that OFCs once had. The result is that in practice the distinction between offshore and onshore can become quite blurred. Both London and Singapore have now opened up their systems by abolishing exchange controls, although there are still licensing, taxation and other restrictions that have the effect of segmenting offshore and onshore transactions.
TABLE 1. WORLD-WIDE LIST OF TAX HAVENS Asia and the South Pacific:
Europe:
Central America: Caribbean:
Africa: Middle East:
Cook Islands; Honk Kong; Labuan (Malaysia); Marshall Islands, Mauritius, Nauru, Niue, Seychelles, Singapore, Sri Lanka, Vanuatu, Western Samoa Andorra, Austria, Campiogne, Cyprus, Isle of Man, Gibraltar, Greece, Guernsey, Hungary, Jersey, Liechtenstein, Luxembourg, Madeira, Malta, Monaco, Switzerland, Trieste, Vatican Costa Rica, Nicaragua, Panama Anguilla, Antigua and Barbuda, Aruba, Grenada, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Montserrat, Netherlands Antilles, Puerto Rico, St Kitts and Nevis, St Vincent, Turks and Caicos, US Virgin Islands Djibouti, Liberia, Tunisia Bahrain, Jordan, Lebanon Oman, U.A.E.
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Spontaneous offshore centers The blurring of the distinction between offshore and onshore finance is the result of the emergence of two additional types of offshore spaces: ‘spontaneous’ offshore financial centres and International Banking Facilities (IBFs). The best known and most important among the ‘spontaneous’ offshore centres is the City of London. It is so called because it allegedly grew up spontaneously. London’s position as the heart of the offshore financial market can be traced back to attempts by successive British governments to re-establish London as the centre of global financial activities following the Second World War. Under the 1947 Exchange Control Act some British banks were given permission to deal in foreign currency and since then the City of London developed in entrepot finance. In December 1951 the foreign market opened in London. However, due to a deteriorating balance of trade, restrictions on credit were imposed in September 1957, and as noted above, in particular they consisted of the banning of re-financing in sterling. That led to a parallel expansion in overseas borrowing and lending. The new facilities offered by London (and Paris as well) generated interest particularly among other central banks and official institutions. The other large ‘spontaneous’ offshore centre is Honk Kong that virtually has no limitations.
International Banking Facilities An International Banking Facility (IBF) is a more stringent type of offshore platform, in which companies must apply for a license to trade. The New York IBF emerged towards the end of the 1970s as the result of a prolonged and complicated battle between the US Treasury, the Swiss government and a number of Caribbean tax havens. With the active encouragement of the New York banking community, particularly Citibank and Chase, the US Treasury came to the conclusion that rather than fight the onset of offshore, the US stood to gain by encouraging its own offshore centre.16 A swift volte-face took place culminating in the establishment of the New York offshore market, the New York International Banking Facility (IBF), on 1st December 1980. In turn, the creation of the New York IBF spawned the creation of the Tokyo IBF and so the effects of offshore were spread much wider. The Singaporean IBF, known as the Asian Currency market, was established in 1968 when Singapore licensed a branch of the Bank of America to set up a special international department to handle transactions of non-residents. The Asian Currency market is a separate set of accounts in which all transactions with non-residents are recorded. Although ACU (Asian Currency Units) are not subject to exchange controls, the banks are required to submit to the exchange control authority detailed monthly reports of their transactions.
Export processing zones Export processing zones (EPZ) are relatively small, geographically spread areas within a country, the purpose of which is to attract export-orientated industries by offering them favourable investment and trade conditions as compared with the remainder of the host country. In particular, EPZs provide for the importation of goods to be used in the production of exports on a duty free basis. They may be seen, therefore, as the manufacturing equivalent of tax havens. EPZs are export enclaves within which special economic con-
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cessions apply, including an extensive package of incentives and very often exemption from certain kinds of legislation which apply outside the zones. Among the most common of such exceptions is that EPZs generally allow the duty-free entry of goods for re-export. Within the zone all the physical infrastructure and services necessary for manufacturing are provided: roads, power supplies, transport facilities, low-cost rent buildings. In a number of cases restrictions on foreign ownership which apply in the country as a whole are waived for foreign firms locating in the zone. The first export processing zone was established in Ireland near Shannon airport in 1959. As late as 1966 there were only two export processing zones in developing countries, one in India and one in Puerto Rico. As with their tax havens, their numbers began to grow rapidly in the 1970s. By 1986 there were 116 of them worldwide. It is estimated that globally some 1.3 million workers were employed across 116 EPZs in 1988. The overwhelming majority of these zones are located in the Caribbean (48%) and East Asia (42%). However Asia employs over 60% of those employed in such areas with the majority of EPZs concentrated in Singapore and Hong Kong. Almost all of today’s EPZs were established after 1971. In addition, export zones are supplemented by Chinese Special Processing zones and European enterprise zones. All three share the same principles of territorial enclaves, in some cases surrounded by a perimeter fence, in which a certain amount of regulation and taxation are withheld. Like the offshore financial centres, they offer bundles of legislation which are aimed at attracting businesses to areas they are unlikely to go to otherwise.
Flag of convenience The shipping industry is in theory one of the more regulated sectors in the economy. As a result a number of countries which lack what Johns describes as “internal profit making capacity” began to offer cheap and hassle free registration of ships.17 The International Transport Workers Federation defines Flag of convenience (Foc) countries as “countries which offer their maritime flag registration to owners from another country.” Foc registers traditionally offer ‘easy’ registration, low or non-existent taxes and no practical restrictions on the nationality of the crew. By transferring a ship from a genuine national register to a Foc, an owner runs away from taxation, safety regulations and trade union organisations.18 Ironically, as in most offshore instances, the United States has played a prominent role. In the 1920s the United Fruit Company created the Honduran registry to ensure the cheap and reliable transport of its bananas. Prohibition led to the birth of the Panamanian registry at about the same time. Panama boasts the biggest merchant fleet in the world. A close second, Liberia’s maritime ascendancy came during the Cold War. The United States needed a fleet of neutral ships to draw upon in the event of Soviet aggression. Liberia, boasts a registry publication, became the “grand-daddy of offshore zero-tax jurisdictions” in 1948 (Morris 1996). In recent years a number of traditional tax havens including Bahamas, Antigua and the Cayman Islands were pushing aggressively into the market. They were joined by two pacific islands, the Marshall Islands and Vanuatu, and by landlocked Luxembourg! Currently, over two thirds of the world’s merchant shipping is registered in such havens (see Table 2).19 Shipping registry is increasingly run as a business. The Liberian registry—as well as
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TABLE 2. ITF LIST OF FLAG OF CONVENIENCE REGISTRIES Antigua and Barbuda Bahamas Belize Bermuda Burma Canary Islands (Spain) Cayman Islands Cook Islands Cyprus Gibraltar Honduras
Lebanon Liberia Malta Marshall Islands Mauritius Netherlands Antilles Panama St Vincent Sri Lanka Tuvalu Vanuatu
(ITF 1996).
that of the Marshall Islands—is run out of Reston, Va., by International Registries Inc. Panama’s fleet-safety operation is based in Manhattan, not in Panama City. This is a lucrative business. Panama collected 5% of the federal budget from ship registration fees and annual taxes last year—and another $50 million or so for maritime lawyers, agents and inspectors.20 Indeed, Panamanian consulates that bring additional business are rewarded handsomely.
Telecommunications Technological advances and international deregulation in the telecommunication industry offers new opportunities for offshore developments. Globalisation in the telecommunications business has two complementary movements: on the one hand, public telecommunication operations (PTO) are stretching their service provision to other countries; while on the other hand, efforts are currently being made by many PTO to invite international corporate network users to locate their hubs in the PTO’s home country, an example of the ‘incoming’ dimension.21 PTO expect to obtain high profits from the lease of circuits with large capacity and increased international traffic. Countries construct cables and charge lower transmission rates. This competitive usage is leading to liberalisation of rules and regulations, with some countries aggressively promoting themselves as hassle free telecommunications centres. Offshore and the race to the bottom The offshore economy, therefore, is not literally ‘offshore’. On the contrary, it resides in purposefully constructed juridical enclaves. Such enclaves may take a number of forms: they can take the form of territorial enclaves such as export processing zones; they may consist of entire states as in the case of tax havens; or they may reside in sectorially defined bundles of regulations, as in the case of finance and telecommunications. Combined, these juridical enclaves are economically significant and their significance is likely to grow. It is currently estimated that between 65 and 80% of international banking transactions take place in offshore-denominated markets.22 There are over 700 EPZs, providing direct employment for over a million and a half workers worldwide. It is estimated that over one quarter of the Third World’s manufacturing export originates from one of these zones.23 More than two thirds of the world’s merchant shipping in tonnage belongs
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to flag of convenience states such as Liberia, Panama, Luxembourg, Cyprus, Vanuatu, Marshall Islands and the like. There is evidence for the growing importance of offshore activities in telecommunications. The spectacular proliferation and growth of such enclaves raises a number of important policy issues. It is widely recognised that the emergence of the offshore economy is due primarily to two, closely related developments. Firstly, the increasing sophistication and willingness of transnational capital to take advantage of differential regulations among states. This trend is surprisingly recent, and has been in evidence only since the early 1970s. Faced by rising taxation and regulations at home, declining corporate profits, Union militancy and, crucially, great improvements in the technology of communications and transportation, a growing number of multinational enterprises began a massive programme of relocation from the OECD countries towards carefully selected third world countries dubbed the New Industrialised Countries or the Nics. As Robert Aliber notes, offshore may be thought of as the externalisation of activities that has occurred “because governments national, state, or local often regulate the same transactions or activity in different ways”.24 However, the externalisation of activities has encouraged a complementary development as the Nics began to embrace the flow of foreign direct investment by offering special concessions including special trade zones and export processing zones and other tax haven facilities. The initial response among OECD countries to this disturbing trend was to try and legislate against the outflow of capital by imposing new tariffs, quotas and a variety of ‘informal’ barriers to trade. Eventually, however, OECD countries began to embrace the same tactics that served the Nics so well and adopted their own programme of financial and industrial deregulation. Offshore, in that sense, is closely related to sovereignty. It is due entirely to states’ willingness to use their sovereign privileges to devise laws and regulations that are aimed at attracting business into ‘their’ territory. The response of a growing number of states to rising capital mobility by offering a zero or near-zero regulatory realm has raised concerned about an imminent race-to-thebottom and international competition in regulatory laxity. As Johns observes: “Given that some countries adopt a permissive regulatory environment and others a stringent one, gaps and differentials arise in national systems of regulation. These differences can lead to perverse competition in regulatory laxity and a gravitation by some institutions to the least regulated financial centres.”25 The race-to-the-bottom syndrome encourages speculative ventures and system instability. While broadly correct, the race-to-the-bottom argument ignores some important counter-trends. In the case of finance, although the offshore financial market had registered an unprecedented rate of growth, there is a great deal of evidence to suggest that investors are not necessarily attracted to the least regulated financial environments. On the contrary, by and large they prefer the relative safety offered by the more regulated Offshore Financial Centres like the Caymans Islands, the Channel Islands or Switzerland, to the free-for-all buccaneer spirit of Antigua or Turks and Caicos. This trend has been underpinned by the growing importance of the rating agencies who, in effect, act as privatised surveying and regulatory bodies.26 Companies and individuals, therefore, tend to shy away from tax havens tainted by scandals or a lack of effective regulation in order to avoid the taxman or the rating agencies’ interest. In the case of shipping, the trend towards lower regulation has been checked by two developments, first, due to serious maritime disasters involving oil tankers flying the
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flag of convenience flags, many OECD states now insist on their own separate inspection, including evidence of proper treatment of sailors, before they allow ships to use their territorial waters or dock in their ports. In addition, the growth of maritime piracy over the past decade has persuaded ship owners to opt for the flag of a relatively highly regulated and taxed but diplomatically and militarily strong country over the flags of Panama, Liberia or the Vanuatu. The picture is not encouraging with regards to the free trade zones. Nonetheless, the broad picture is that the offshore economy is sufficiently large and differentiated to offer opportunities for niche markets to develop. As a result, there are great varieties in the degree of regulation and protection. Offshore, as I argued in this paper, is not an unregulated, free-for-all economic terrain, but only a relatively less regulated and untaxed economic realm that operates within the bounds of the state system. Conclusion The advent of the offshore economy is an event of great significance. The offshore economy is economically powerful—it already dominates global finance and shipping, and it plays an important role in international trade and telecommunication. Arguably, its political and social repercussions are of even greater importance. Socially, offshore is a barrier to the extension of those social provisions that were traditionally provided by states. This suggests that the heavily taxed ‘welfare’ states of the 1960s and 1970s are things of the past. Politically, offshore offers an insight into the ways by which the increasing integration of the global market is supported and facilitated by the state system. Acknowledgements The author would like to thank Jason Abbott, Angus Cameron, Susan Strange and an anonymous referee for their comments.
Notes and references 1.
2. 3. 4.
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On the ‘withering away of the state’ see, for instance, Ohmae, K., The Borderless World: Power and Strategy in the Interlinked Economy. Collins, London, 1990. On the advent of a global state, see Shaw, M., The state of globalization. Review of International Political Economy, 1997, 4(3) 497–513 and Wilkinson, D., The future of the world state: from civilizations theory to world politics. Paper prepared for presentation at the Annual Meeting of the ISA, London, 28 March–1 April 1989. On Neo-Medeivalism see Anderson, J. and Goodman, J., Regions, states and the European Union: Modernist reaction or postmodern adaptation? Review of International Political Economy 1955, 2(4) 600–631. On regionalism and global politics see Drache, D., Assessing the benefits of Free Trade. In The Political Economy of North American Free Trade, ed. Ricardo Grinspun and Maxwell A. Cameron. Macmillan, Basingstoke, 1993. The term ‘fictitious spaces’ was coined by Susan Roberts. See Fictitious capital, fictitious spaces: the geography of offshore financial flows in Corbridge. Corbridge, S., Martin, R. and Thrift, N. eds. In Money Power and Space, Blackwell, Oxford, 1994. See The Changing Role of Telecommunications in the Economy: Globalisation and its Impact on National Telecommunication Policy. The Organisation of Economic Co-operation and Development, Paris, 1995. This is the view of Peter Oppenheimer who directed the Bank of International Settlements’ desk on the Euromarket during the early 1960s. See Oppenheimer, P. M., Comment on Aliber, R. Z., Eurodollar: an economic analysis. In Eurodollars and International Banking, ed. P. Savona and G. Sutija. Macmillan, Basingstoke, 1985.
The emergence of an offshore economy: R Palan
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.
For a good and balanced discussion see Higonnet, R. P., Eurobanks, Eurodollars and International Debt. In Eurodollars and International Banking, ed. P. Savona and G. Sutija. Macmillan, Basingstoke, 1985. See Palan, R., Luring buffaloes and the game of industrial subsidies: a critique of national competitive policies in the era of the competition state mandatory changes. Global Society, 1988, 12, 3, forthcoming. For an influential and still possibly the best book on the subject see Strange, S., Casino Capitalism. Basil Blackwell, Oxford, 1986. A brilliant if highly controversial exposition of the thesis is in Allen, R. E., Financial Crises and Recession in the Global Economy. Edward Edgar, London, 1995. For a useful insight into the operations of the global casino see: Henderson, H. and Kay, F. A., Introducing competition to the global currency market. Futures 1996, 28, 4. See Gilmore, W.C. (Ed.), International Efforts to Combat Money Laundering. Cambridge Grotius Publications, Cambridge, 1992. Hewson, J.R., Offshore Banking in Australia: consultant’s report. In Australian Financial System Inquiry: Commissioned Studies and Selected Studies. Part 2. Macroeconomic Policy: External Policy. Australian Government Publishing Services, Canberra, 1982, p. 419. Ginsburg, A.S., Tax Havens. New York Institute of Finance, New York, 1991. Starchild, A., Tax Havens and International Business. Macmillan, London and Basingstoke, 1993, p. 1. Johns, R.A. Tax Havens and Offshore Finance: A Study of Transnational Economic Development. St Martin’s Press, New York, 1983, p. 20. See Cassard, M., Offshore banking, international banking IMF Working Paper WP/94/107, 1994. Hines, J. R. and Rice, E. M., Fiscal paradise: foreign tax havens and American business. Quarterly Journal of Economics, 1994, 109(1), 149–182. Johns, R. A., op. cit., ref. 14. The International Transport Workers Federations mission statement, http://www.itf.org.uk, 1996. Morris, J., ‘Flags of convenience’ give owners a paper refuge. Banners don’t always represent a nation— and they can mean a way around shipping regulations. The Houston Chronicle, 1996. Morris, ibid. OECD, op. cit., ref. 3, p. 29. Rose, H. Euromarkets, their uses. Financial Times, 24 November 1995. See McMichael, P., Development and Social Change: A Global Perspective. Pine Forge, Thousand Oaks, 1996; and Palan, R. and Abbott, J., State Strategies in the Global Political Economy. Pinter, London, 1996. Aliber, R. Z., The International Money Game. Macmillan, London and Basingstoke, 1976, p. 114. Johns, R.A., op. cit., ref. 14, p. 6. See Sinclair, T., Passing judgement: credit rating processes as regulatory mechanisms of govrnance in the emerging world order. Review of International Political Economy 1994, 1(1), 133–160.
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Futures, Vol. 30, No. 1, pp. 63–73, 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0016–3287/98 $19.00 + 0.00
PII: S0016–3287(98)00006-8
THE EMERGENCE OF AN OFFSHORE ECONOMY Ronen Palan There has been growing interest over the past few years in the changing political structure of the world. Predictions range from the withering away of the state to the advent of a global state. This article proposes an alternative scenario: that the state system is not disappearing, but is in the process of creating secondary, relatively unregulated juridical spaces in which economic activities can develop more or less without hindrance. This secondary space, known as ‘offshore’, already dominates international finance and shipping, and plays a significant role in international trade and telecommunications. Offshore is a barrier to the extension of those social provisions that were traditionally provided by states. This paper offers an insight into the ways by which increasing integration of the global market is supported and facilitated by the state system. 1998 Elsevier Science Ltd. All rights reserved
There has been growing interest over the past few years in the changing political structure of the world. This interest has been fuelled, no doubt, by the commonly held view that internationalisation of production, the advent of global financial markets, real time communication and the spread of Western culture to every corner of the world (in short globalisation) is incompatible with a system of state. As a result, a great number of increasingly esoteric predictions are being put forward about the future character of the state system and international relations. In one fashionable view the state is currently being ‘hollowed out’ from within, soon to wither away. Another theory predicts the emergence of a global or transnational state to replace the state system; a further group of scholars is increasingly alarmed by the breakdown of political order and predicts a ‘new medievalist’
Dr Ronen Palan is co-editor of the Review of International Political Economy, and a lecturer in International Political Economy, Department of International Relations, School of Social Science, Arts Building, University of Sussex, Falmer, Brighton BN1 9QN, UK (Tel: + 44 1273 606755; fax: + 44 1273 673563; email: [email protected]).
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political map. For others again, the state system may give way to a new world dominated by regional giants like Nafta, leading to AFTA, EU, and perhaps APEC, China and India.1 The numerous predictions are testament to a widely held view that structural changes are in the offing, but there seems to be little agreement or understanding regarding the nature of these changes. This article proposes an alternative scenario: I argue that the state system is not disappearing, but, on the contrary, is in the process of creating secondary, relatively unregulated juridical spaces in which economic activities can develop more or less without hindrance. The juridical space of sovereignty, therefore, is bifurcating into to two simultaneous domains, one still very much ‘on-shore’, subject to the strict controls, regulations and taxation of individual states; the other consists of ‘fictitious spaces’2 known as ‘off-shore’. The offshore economy is a new and relatively unregulated realm in which economic transactions take place with minimal intervention by the state. The nature of offshore Unfortunately ‘offshore’ means quite different things to different people. Foreign direct investment of multinational enterprises is often labelled as offshore. Investment by Japanese multinational corporations in Malaysia, for instance, is described as an offshore investment. Similarly an OECD study of global communication refers to foreign investment by national carriers as ‘offshore’.3 In financial literature, however, offshore is used in a more restrictive sense to describe unregulated international finance. The offshore financial market has replaced the Euromarket. Rather confusingly, however, the International Monetary Fund (IMF) and the Bank for International Settlement (BIS) consider only tax havens as Offshore Financial Centres (OFCs), though the City of London, which does not qualify as a tax haven, is considered the hub of global offshore finance. Then again, many writers consider export-processing zones as tax havens. Others again maintain that ‘flag of convenience’ (offered by countries such as Liberia, Panama, Vanuatu, Luxembourg, Marshall Island, Cyprus and the like) are forms of tax havens as well.4 The list can be supplemented by the new practice of re-routing Internet porn calls through zero-regulated countries such as Guyana and Niue. The lack of clarity is reproduced among the growing number of dedicated journals. Offshore Finance Canada, for instance, publishes articles that are concerned primarily with tax havens and tax issues. In contrast, Offshore Outlook, an on-line journal, lists the following as items of possible offshore relevance: 쐌 쐌 쐌 쐌 쐌 쐌 쐌 쐌
International private and family trusts Multi-currency dealings Global custody Offshore investment funds (unit trusts) Pension funds for multinational operations Offshore export processing Ship registration Aircraft leasing
Due to the great variety, it may come as no surprise to learn that many academics doubt whether it is appropriate to speak of the development of an offshore economy. In many ways this is correct. There are obvious differences, say, between offshore financial mar-
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kets and export processing zones. Nonetheless, there is a shared common ground that transcends sectorial barriers, and that is that offshore activities take place in specially designed regulatory spaces. Some of these spaces consist of physical territories; others are mere fictional or juridical realms. It is the emergence of such juridical enclaves, supported and maintained by the state system, which renders offshore a political and economic development of great significance. Offshore spaces I define offshore as juridical realms marking a differential degree of intensity by which states apply regulation, including taxation. There are currently three principle types of offshore realms. They include: 1. Territorial enclaves normally located near airports or ports as in the case of the export processing zones. 2. ‘Juridical’ or virtual enclaves, as in the case of the International Banking Facilities and the ‘spontaneous’ offshore financial centres. 3. Specialised unregulated jurisdictions, many of which consist of the small islands. The following section provides a brief sectorially based description of offshore spaces.
Offshore finance markets Offshore financial markets are defined as markets in which financial operators are permitted to raise funds from non-residents and invest or lend the money to non-residents free from most regulations and taxes. Most commonly the designation ‘offshore’ financial market is used interchangeably with the Euromarket. The Euromarket is a relatively unregulated international financial market which emerged in late 1958 in London. In response to the mounting speculation against the pound after the Suez Canal crisis, the British government imposed restrictions on the use of pound sterling in trade credits between non-residents. Consequently, British and other international banks sought to use US dollars in their international dealings. Transactions between non-residents that were mediated by banks located in London (whether British or not) were then considered to be taking place ‘offshore’, i.e. not under the regulatory laws and supervision of the British state.5 Originally, therefore, the Euromarket was a booking devise; it was created when books for foreign-to-foreign accounts are kept separate from books for domestic financial and capital transactions. Since the early 1970s Euromarket type facilities were emulated worldwide and supplemented by all the major ‘hard’ currencies. Hence, the term offshore financial market is now deemed more appropriate than Euromarket. The offshore financial market consists in fact of a number of markets of which two are best known. The offshore currency market (formerly known as the Eurodollar market) is an international market for lending and borrowing the world’s most important convertible currencies. The offshore currency market, or the foreign exchange market, is a shortterm financial market in which operators are permitted to raise funds from non-residents and invest or lend that money to non-residents free from most regulations and taxes. The offshore bond market (formerly the Eurobond market) are issues of government and
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corporation bonds, underwritten by an international banking syndicate and not subject to any country’s security laws. The main advantages of the offshore financial markets is the relative lack of regulation, including taxation. Thus, by and large, offshore banking is not subject to restrictions imposed on domestic banking such as interest rates ceilings, reserve requirements and exchange controls, withholding of interest income for tax and disclosure requirements. Furthermore, financial intermediaries are not subject to the regulations that may inhibit expansion in their domestic markets. Due to these competitive advantages, banks and other financial intermediaries are able to offer better services and rates in offshore financial markets. That explains the phenomenal growth of offshore financial markets. It is now estimated that about 80% of international banking transactions (in volume) take place in offshore financial markets. While the offshore financial market proved a bonanza to banks, corporations and wealthy individuals, it is becoming increasingly clear that its long-term effects are deleterious. Criticism centres on four aspects of the offshore financial market. Firstly, the offshore financial markets not only undermine state monetary policies, but more crucially, they undermine the state’s fiscal policies, with the effect of shifting indirectly the balance from direct to indirect taxation and hence exacerbating national and global inequalities.6 Secondly, the offshore financial market is increasingly operating as a large casino and as a result the financial system is increasingly divorced from the global production system.7 Thirdly, the effect of that is that, rather than servicing production and trade, some experts now believe that the global financial system in fact diverts resources from the ‘real’ economy into pure speculation.8 Fourthly, it is argued that the operation of this global casino systematically diverts resources from central banks towards private hands.9 Last but not least, secrecy and speed of operations has proved a boon to money launders, drug traffickers and other criminals.10
Offshore financial centres Offshore financial activities take place principally in the major financial centres of London, New York, Tokyo and the like. On the other hand, the Bank of International Settlements designates Offshore Financial Centres (OFCs) as regional centres that did not grow organically.11 In other words, OFCs are not the principle places in which the transactions of the offshore financial markets take place. OFCs are centres that offer an array of tax and regulatory incentives for non-resident investors and the complete flexibility granted to the management of foreign assets, i.e. to tax havens. It is not easy to define tax havens: the complexity of modern national taxation systems complicates the definition of tax havens. The Gordon report to the US Treasury Department states that “there is no single, clear, objective test which permits the identification of a country as a tax haven” (OECD 1987 p.21). In one form or another, practically every country in the world offers some sort of haven from taxation and regulation for residents of other countries. Ginsburg defines tax havens quite simply as those jurisdictions that promote themselves as tax havens.12 A more inclusive definition is of those countries with tax legislation especially designed to attract the formation of branches and subsidiaries of parent companies based in heavily-taxed industrial nations.13 In some countries, e.g. Switzerland, Luxembourg and Hong Kong, such tax legislation is only one aspect of a complex and thriving economy. Others, like the Cayman Islands or
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Bermuda are known primarily for their tax haven facilities. Tax havens are, therefore, deliberate state strategies aimed “to attract thereto international trade-oriented activities by minimisation of taxes and the reduction or elimination of other restrictions on business operations”14. Due to these objective difficulties, estimates of the number of tax havens vary greatly. The latest inclusive list contains no less then fifty states and/or jurisdictions. They tend to be small jurisdictions servicing the larger international trading blocks (see Table 1). Successful tax havens boast minimal or no personal or corporate taxation; effective bank secrecy laws, whereby bank or state officials are barred by law from disclosing the origins, character and name of holders of the funds; there must be few, preferably no restrictions on regulations concerning financial transactions; the secrecy of transactions must be protected; the territory must possess political and economic stability (hence some of the preferred locations such as the Cayman Islands, the Channel Islands, the US Virgin islands and the like are dependencies of large, prosperous and stable states); it should either be supported by a large international financial market or alternatively be equipped with sophisticated information-exchange facilities and/or be within easy reach of a major financial centre. By some estimates, more than half of the world’s stock of money passes through offshore centres, and about 20% of total private wealth is invested in these centres.15 The OFCs seriously challenge the supremacy of the financial centres of large industrial countries. They have contributed to the massive deregulation of the financial industry—capital and financial controls have been dismantled, markets opened, tax rates reduced and international co-operation improved. As a result, the regulatory and fiscal environments of domestic financial centres have converged with those of offshore centres and significantly reduced the comparative advantages that OFCs once had. The result is that in practice the distinction between offshore and onshore can become quite blurred. Both London and Singapore have now opened up their systems by abolishing exchange controls, although there are still licensing, taxation and other restrictions that have the effect of segmenting offshore and onshore transactions.
TABLE 1. WORLD-WIDE LIST OF TAX HAVENS Asia and the South Pacific:
Europe:
Central America: Caribbean:
Africa: Middle East:
Cook Islands; Honk Kong; Labuan (Malaysia); Marshall Islands, Mauritius, Nauru, Niue, Seychelles, Singapore, Sri Lanka, Vanuatu, Western Samoa Andorra, Austria, Campiogne, Cyprus, Isle of Man, Gibraltar, Greece, Guernsey, Hungary, Jersey, Liechtenstein, Luxembourg, Madeira, Malta, Monaco, Switzerland, Trieste, Vatican Costa Rica, Nicaragua, Panama Anguilla, Antigua and Barbuda, Aruba, Grenada, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Montserrat, Netherlands Antilles, Puerto Rico, St Kitts and Nevis, St Vincent, Turks and Caicos, US Virgin Islands Djibouti, Liberia, Tunisia Bahrain, Jordan, Lebanon Oman, U.A.E.
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Spontaneous offshore centers The blurring of the distinction between offshore and onshore finance is the result of the emergence of two additional types of offshore spaces: ‘spontaneous’ offshore financial centres and International Banking Facilities (IBFs). The best known and most important among the ‘spontaneous’ offshore centres is the City of London. It is so called because it allegedly grew up spontaneously. London’s position as the heart of the offshore financial market can be traced back to attempts by successive British governments to re-establish London as the centre of global financial activities following the Second World War. Under the 1947 Exchange Control Act some British banks were given permission to deal in foreign currency and since then the City of London developed in entrepot finance. In December 1951 the foreign market opened in London. However, due to a deteriorating balance of trade, restrictions on credit were imposed in September 1957, and as noted above, in particular they consisted of the banning of re-financing in sterling. That led to a parallel expansion in overseas borrowing and lending. The new facilities offered by London (and Paris as well) generated interest particularly among other central banks and official institutions. The other large ‘spontaneous’ offshore centre is Honk Kong that virtually has no limitations.
International Banking Facilities An International Banking Facility (IBF) is a more stringent type of offshore platform, in which companies must apply for a license to trade. The New York IBF emerged towards the end of the 1970s as the result of a prolonged and complicated battle between the US Treasury, the Swiss government and a number of Caribbean tax havens. With the active encouragement of the New York banking community, particularly Citibank and Chase, the US Treasury came to the conclusion that rather than fight the onset of offshore, the US stood to gain by encouraging its own offshore centre.16 A swift volte-face took place culminating in the establishment of the New York offshore market, the New York International Banking Facility (IBF), on 1st December 1980. In turn, the creation of the New York IBF spawned the creation of the Tokyo IBF and so the effects of offshore were spread much wider. The Singaporean IBF, known as the Asian Currency market, was established in 1968 when Singapore licensed a branch of the Bank of America to set up a special international department to handle transactions of non-residents. The Asian Currency market is a separate set of accounts in which all transactions with non-residents are recorded. Although ACU (Asian Currency Units) are not subject to exchange controls, the banks are required to submit to the exchange control authority detailed monthly reports of their transactions.
Export processing zones Export processing zones (EPZ) are relatively small, geographically spread areas within a country, the purpose of which is to attract export-orientated industries by offering them favourable investment and trade conditions as compared with the remainder of the host country. In particular, EPZs provide for the importation of goods to be used in the production of exports on a duty free basis. They may be seen, therefore, as the manufacturing equivalent of tax havens. EPZs are export enclaves within which special economic con-
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cessions apply, including an extensive package of incentives and very often exemption from certain kinds of legislation which apply outside the zones. Among the most common of such exceptions is that EPZs generally allow the duty-free entry of goods for re-export. Within the zone all the physical infrastructure and services necessary for manufacturing are provided: roads, power supplies, transport facilities, low-cost rent buildings. In a number of cases restrictions on foreign ownership which apply in the country as a whole are waived for foreign firms locating in the zone. The first export processing zone was established in Ireland near Shannon airport in 1959. As late as 1966 there were only two export processing zones in developing countries, one in India and one in Puerto Rico. As with their tax havens, their numbers began to grow rapidly in the 1970s. By 1986 there were 116 of them worldwide. It is estimated that globally some 1.3 million workers were employed across 116 EPZs in 1988. The overwhelming majority of these zones are located in the Caribbean (48%) and East Asia (42%). However Asia employs over 60% of those employed in such areas with the majority of EPZs concentrated in Singapore and Hong Kong. Almost all of today’s EPZs were established after 1971. In addition, export zones are supplemented by Chinese Special Processing zones and European enterprise zones. All three share the same principles of territorial enclaves, in some cases surrounded by a perimeter fence, in which a certain amount of regulation and taxation are withheld. Like the offshore financial centres, they offer bundles of legislation which are aimed at attracting businesses to areas they are unlikely to go to otherwise.
Flag of convenience The shipping industry is in theory one of the more regulated sectors in the economy. As a result a number of countries which lack what Johns describes as “internal profit making capacity” began to offer cheap and hassle free registration of ships.17 The International Transport Workers Federation defines Flag of convenience (Foc) countries as “countries which offer their maritime flag registration to owners from another country.” Foc registers traditionally offer ‘easy’ registration, low or non-existent taxes and no practical restrictions on the nationality of the crew. By transferring a ship from a genuine national register to a Foc, an owner runs away from taxation, safety regulations and trade union organisations.18 Ironically, as in most offshore instances, the United States has played a prominent role. In the 1920s the United Fruit Company created the Honduran registry to ensure the cheap and reliable transport of its bananas. Prohibition led to the birth of the Panamanian registry at about the same time. Panama boasts the biggest merchant fleet in the world. A close second, Liberia’s maritime ascendancy came during the Cold War. The United States needed a fleet of neutral ships to draw upon in the event of Soviet aggression. Liberia, boasts a registry publication, became the “grand-daddy of offshore zero-tax jurisdictions” in 1948 (Morris 1996). In recent years a number of traditional tax havens including Bahamas, Antigua and the Cayman Islands were pushing aggressively into the market. They were joined by two pacific islands, the Marshall Islands and Vanuatu, and by landlocked Luxembourg! Currently, over two thirds of the world’s merchant shipping is registered in such havens (see Table 2).19 Shipping registry is increasingly run as a business. The Liberian registry—as well as
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TABLE 2. ITF LIST OF FLAG OF CONVENIENCE REGISTRIES Antigua and Barbuda Bahamas Belize Bermuda Burma Canary Islands (Spain) Cayman Islands Cook Islands Cyprus Gibraltar Honduras
Lebanon Liberia Malta Marshall Islands Mauritius Netherlands Antilles Panama St Vincent Sri Lanka Tuvalu Vanuatu
(ITF 1996).
that of the Marshall Islands—is run out of Reston, Va., by International Registries Inc. Panama’s fleet-safety operation is based in Manhattan, not in Panama City. This is a lucrative business. Panama collected 5% of the federal budget from ship registration fees and annual taxes last year—and another $50 million or so for maritime lawyers, agents and inspectors.20 Indeed, Panamanian consulates that bring additional business are rewarded handsomely.
Telecommunications Technological advances and international deregulation in the telecommunication industry offers new opportunities for offshore developments. Globalisation in the telecommunications business has two complementary movements: on the one hand, public telecommunication operations (PTO) are stretching their service provision to other countries; while on the other hand, efforts are currently being made by many PTO to invite international corporate network users to locate their hubs in the PTO’s home country, an example of the ‘incoming’ dimension.21 PTO expect to obtain high profits from the lease of circuits with large capacity and increased international traffic. Countries construct cables and charge lower transmission rates. This competitive usage is leading to liberalisation of rules and regulations, with some countries aggressively promoting themselves as hassle free telecommunications centres. Offshore and the race to the bottom The offshore economy, therefore, is not literally ‘offshore’. On the contrary, it resides in purposefully constructed juridical enclaves. Such enclaves may take a number of forms: they can take the form of territorial enclaves such as export processing zones; they may consist of entire states as in the case of tax havens; or they may reside in sectorially defined bundles of regulations, as in the case of finance and telecommunications. Combined, these juridical enclaves are economically significant and their significance is likely to grow. It is currently estimated that between 65 and 80% of international banking transactions take place in offshore-denominated markets.22 There are over 700 EPZs, providing direct employment for over a million and a half workers worldwide. It is estimated that over one quarter of the Third World’s manufacturing export originates from one of these zones.23 More than two thirds of the world’s merchant shipping in tonnage belongs
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to flag of convenience states such as Liberia, Panama, Luxembourg, Cyprus, Vanuatu, Marshall Islands and the like. There is evidence for the growing importance of offshore activities in telecommunications. The spectacular proliferation and growth of such enclaves raises a number of important policy issues. It is widely recognised that the emergence of the offshore economy is due primarily to two, closely related developments. Firstly, the increasing sophistication and willingness of transnational capital to take advantage of differential regulations among states. This trend is surprisingly recent, and has been in evidence only since the early 1970s. Faced by rising taxation and regulations at home, declining corporate profits, Union militancy and, crucially, great improvements in the technology of communications and transportation, a growing number of multinational enterprises began a massive programme of relocation from the OECD countries towards carefully selected third world countries dubbed the New Industrialised Countries or the Nics. As Robert Aliber notes, offshore may be thought of as the externalisation of activities that has occurred “because governments national, state, or local often regulate the same transactions or activity in different ways”.24 However, the externalisation of activities has encouraged a complementary development as the Nics began to embrace the flow of foreign direct investment by offering special concessions including special trade zones and export processing zones and other tax haven facilities. The initial response among OECD countries to this disturbing trend was to try and legislate against the outflow of capital by imposing new tariffs, quotas and a variety of ‘informal’ barriers to trade. Eventually, however, OECD countries began to embrace the same tactics that served the Nics so well and adopted their own programme of financial and industrial deregulation. Offshore, in that sense, is closely related to sovereignty. It is due entirely to states’ willingness to use their sovereign privileges to devise laws and regulations that are aimed at attracting business into ‘their’ territory. The response of a growing number of states to rising capital mobility by offering a zero or near-zero regulatory realm has raised concerned about an imminent race-to-thebottom and international competition in regulatory laxity. As Johns observes: “Given that some countries adopt a permissive regulatory environment and others a stringent one, gaps and differentials arise in national systems of regulation. These differences can lead to perverse competition in regulatory laxity and a gravitation by some institutions to the least regulated financial centres.”25 The race-to-the-bottom syndrome encourages speculative ventures and system instability. While broadly correct, the race-to-the-bottom argument ignores some important counter-trends. In the case of finance, although the offshore financial market had registered an unprecedented rate of growth, there is a great deal of evidence to suggest that investors are not necessarily attracted to the least regulated financial environments. On the contrary, by and large they prefer the relative safety offered by the more regulated Offshore Financial Centres like the Caymans Islands, the Channel Islands or Switzerland, to the free-for-all buccaneer spirit of Antigua or Turks and Caicos. This trend has been underpinned by the growing importance of the rating agencies who, in effect, act as privatised surveying and regulatory bodies.26 Companies and individuals, therefore, tend to shy away from tax havens tainted by scandals or a lack of effective regulation in order to avoid the taxman or the rating agencies’ interest. In the case of shipping, the trend towards lower regulation has been checked by two developments, first, due to serious maritime disasters involving oil tankers flying the
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flag of convenience flags, many OECD states now insist on their own separate inspection, including evidence of proper treatment of sailors, before they allow ships to use their territorial waters or dock in their ports. In addition, the growth of maritime piracy over the past decade has persuaded ship owners to opt for the flag of a relatively highly regulated and taxed but diplomatically and militarily strong country over the flags of Panama, Liberia or the Vanuatu. The picture is not encouraging with regards to the free trade zones. Nonetheless, the broad picture is that the offshore economy is sufficiently large and differentiated to offer opportunities for niche markets to develop. As a result, there are great varieties in the degree of regulation and protection. Offshore, as I argued in this paper, is not an unregulated, free-for-all economic terrain, but only a relatively less regulated and untaxed economic realm that operates within the bounds of the state system. Conclusion The advent of the offshore economy is an event of great significance. The offshore economy is economically powerful—it already dominates global finance and shipping, and it plays an important role in international trade and telecommunication. Arguably, its political and social repercussions are of even greater importance. Socially, offshore is a barrier to the extension of those social provisions that were traditionally provided by states. This suggests that the heavily taxed ‘welfare’ states of the 1960s and 1970s are things of the past. Politically, offshore offers an insight into the ways by which the increasing integration of the global market is supported and facilitated by the state system. Acknowledgements The author would like to thank Jason Abbott, Angus Cameron, Susan Strange and an anonymous referee for their comments.
Notes and references 1.
2. 3. 4.
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On the ‘withering away of the state’ see, for instance, Ohmae, K., The Borderless World: Power and Strategy in the Interlinked Economy. Collins, London, 1990. On the advent of a global state, see Shaw, M., The state of globalization. Review of International Political Economy, 1997, 4(3) 497–513 and Wilkinson, D., The future of the world state: from civilizations theory to world politics. Paper prepared for presentation at the Annual Meeting of the ISA, London, 28 March–1 April 1989. On Neo-Medeivalism see Anderson, J. and Goodman, J., Regions, states and the European Union: Modernist reaction or postmodern adaptation? Review of International Political Economy 1955, 2(4) 600–631. On regionalism and global politics see Drache, D., Assessing the benefits of Free Trade. In The Political Economy of North American Free Trade, ed. Ricardo Grinspun and Maxwell A. Cameron. Macmillan, Basingstoke, 1993. The term ‘fictitious spaces’ was coined by Susan Roberts. See Fictitious capital, fictitious spaces: the geography of offshore financial flows in Corbridge. Corbridge, S., Martin, R. and Thrift, N. eds. In Money Power and Space, Blackwell, Oxford, 1994. See The Changing Role of Telecommunications in the Economy: Globalisation and its Impact on National Telecommunication Policy. The Organisation of Economic Co-operation and Development, Paris, 1995. This is the view of Peter Oppenheimer who directed the Bank of International Settlements’ desk on the Euromarket during the early 1960s. See Oppenheimer, P. M., Comment on Aliber, R. Z., Eurodollar: an economic analysis. In Eurodollars and International Banking, ed. P. Savona and G. Sutija. Macmillan, Basingstoke, 1985.
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5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.
For a good and balanced discussion see Higonnet, R. P., Eurobanks, Eurodollars and International Debt. In Eurodollars and International Banking, ed. P. Savona and G. Sutija. Macmillan, Basingstoke, 1985. See Palan, R., Luring buffaloes and the game of industrial subsidies: a critique of national competitive policies in the era of the competition state mandatory changes. Global Society, 1988, 12, 3, forthcoming. For an influential and still possibly the best book on the subject see Strange, S., Casino Capitalism. Basil Blackwell, Oxford, 1986. A brilliant if highly controversial exposition of the thesis is in Allen, R. E., Financial Crises and Recession in the Global Economy. Edward Edgar, London, 1995. For a useful insight into the operations of the global casino see: Henderson, H. and Kay, F. A., Introducing competition to the global currency market. Futures 1996, 28, 4. See Gilmore, W.C. (Ed.), International Efforts to Combat Money Laundering. Cambridge Grotius Publications, Cambridge, 1992. Hewson, J.R., Offshore Banking in Australia: consultant’s report. In Australian Financial System Inquiry: Commissioned Studies and Selected Studies. Part 2. Macroeconomic Policy: External Policy. Australian Government Publishing Services, Canberra, 1982, p. 419. Ginsburg, A.S., Tax Havens. New York Institute of Finance, New York, 1991. Starchild, A., Tax Havens and International Business. Macmillan, London and Basingstoke, 1993, p. 1. Johns, R.A. Tax Havens and Offshore Finance: A Study of Transnational Economic Development. St Martin’s Press, New York, 1983, p. 20. See Cassard, M., Offshore banking, international banking IMF Working Paper WP/94/107, 1994. Hines, J. R. and Rice, E. M., Fiscal paradise: foreign tax havens and American business. Quarterly Journal of Economics, 1994, 109(1), 149–182. Johns, R. A., op. cit., ref. 14. The International Transport Workers Federations mission statement, http://www.itf.org.uk, 1996. Morris, J., ‘Flags of convenience’ give owners a paper refuge. Banners don’t always represent a nation— and they can mean a way around shipping regulations. The Houston Chronicle, 1996. Morris, ibid. OECD, op. cit., ref. 3, p. 29. Rose, H. Euromarkets, their uses. Financial Times, 24 November 1995. See McMichael, P., Development and Social Change: A Global Perspective. Pine Forge, Thousand Oaks, 1996; and Palan, R. and Abbott, J., State Strategies in the Global Political Economy. Pinter, London, 1996. Aliber, R. Z., The International Money Game. Macmillan, London and Basingstoke, 1976, p. 114. Johns, R.A., op. cit., ref. 14, p. 6. See Sinclair, T., Passing judgement: credit rating processes as regulatory mechanisms of govrnance in the emerging world order. Review of International Political Economy 1994, 1(1), 133–160.
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