speri.comment: the political economy blog

Small island states, tax havens and tourism: what price their development?

It is important to consider the damaging environmental consequences of the common association of offshore finance with large numbers of short-term visitors

Adam Barber, PhD student at SPERI

Adam-Barber100x100In a previous post I addressed the issue of those small states which have deliberately manipulated their sovereignty and jurisdictional autonomy to play host to a number of offshore financial centres (OFCs) as a means of meeting their developmental aspirations.  I argued that, although some development goals had indeed been met partly because of increased revenues generated by the provision of offshore financial services, these gains were often unsustainable and accompanied by a number of political and economic detriments.

In this piece I want to return to the problems of Small Island Economies (SIEs) that play host to OFCs but turn my attention to the environmental and ecological costs they incur.  My argument will again be that, for these islands, the limited and short-term economic gains accrued are substantially outweighed by the accompanying environmental costs.

Essentially, there are two types of OFC, namely ‘notional’ and ‘functional’ centres.  Notional OFCs act as so-called ‘booking centres’ where banks and other financial institutions record fiscal exchanges which have occurred in a separate location.  They typically only have a nominal or very subtle effect on the host state.  Functional OFCs, on the other hand, are fully operational centres where numerous financial activities and exchanges take place and a physical presence is required from professional financial-service providers, including banks and law firms.  Functional OFCs inevitably have a much larger effect on the host state, contributing significantly to the local economy and exercising a much larger influence over the political, economic and environmental trajectory of the state in question.  These are the OFCs that concern me.

The development of an OFC is often connected to growth in tourism.  Indeed, the existence of a robust, well developed tourism sector is often considered to be a prerequisite for hosting an island OFC.  Tourism and offshore finance also conveniently demand many of the same infrastructural requirements, such as good transportation and communication links to the outside world.  However, for all the advances in communication technology, face-to-face meetings between offshore providers and the wealthy clientele they aim to attract is still the preferred method of conducting business.  Wealthy individuals, who are the predominant users of offshore services, are likely to make frequent visits to their preferred OFC and stay for extended periods of time.  As such, the offshore industry requires that the local economy is capable of providing high-end tourism and recreational facilities that meet the premier requirements of wealthy individuals and business professionals, with prominent OFCs, such as the British Virgin Islands and the Cayman Islands, along with the Bailiwicks of Jersey and Guernsey, all boasting luxury hotels and exclusive leisure facilities like golf courses, spas and gymnasiums.

For many SIEs pursuing an offshore strategy, the development of a strong tourist industry appears not only to deliver economic diversity, but also create employment opportunities and contribute directly to increased levels of capital formation.  However, these economic benefits have to be set against considerable environmental costs, because the reality is that an influx of temporary visitors, combined with the construction of transportation links and other leisure facilities, have resulted in the overuse – indeed arguably the misuse – of domestic resources.  Island life has sometimes been severely altered, leaving behind environmental degradation and ecological destruction.  For example, beach-front developments in the Seychelles and Mauritius have been both directly and indirectly linked with exacerbating water shortages as hotels and leisure facilities built on low-lying coastal areas increase the risk of surface water contamination via salt-water intrusion.   Moreover, the over-consumption of already limited domestic water supplies by hotels and golf courses has further compounded this problem, generating shortages for the indigenous island population.

Almost inevitably, the expansion of tourist facilities typically occurs at the expense of the environment, with areas of natural beauty exploited for building materials or converted to accommodate new hotel complexes and leisure facilities.  Such dramatic land-use change can have a catastrophic impact on a previously healthy ecosystem.  When the consumption rate of tourism exceeds the ability of the local environment to sustain such high-quality premier attractions, then, without the proper planning and oversight which is sadly often lacking in such developments, visitor areas become over-exploited, jaded and unattractive.  For example, in the Caribbean the expansion of tourist facilities has led to widespread deforestation and loss of beaches as land is cleared to supply the building industry with both materials and acreage.  It is sometimes argued that these negative effects could be offset or minimised with appropriate oversight.  Yet the fact remains that responsible tourism, such as ecotourism, currently only accounts for a nominal share of the global tourism sector and is often side-lined because of its higher cost.

Tourism in SIEs may also have some indirect environmental consequences due to the erosion of local knowledge of ecosystems likely to result from the employment of indigenous people by the tourist industry.  For example, this type of work tempts local workers with higher wages than traditional island industries such as fishing or agriculture.  Moreover, working in hotels and other leisure facilities tends to be viewed as ‘clean’ and ‘easy’ with shorter working weeks compared with more demanding, conventional island industries.  Employment in tourism is also considered by many locals to be more stable.  Yet what is lost at the same time is often that acute awareness of the local environment which has traditionally informed the effective and sustainable use of natural resources through self-regulation and informal understanding of local ecological needs.  Fewer people can read the environment in ways that used to be protective of it.  Indeed, its preservation becomes extraneous to the everyday lives of more and more island people as tourism develops.  In Malta, for example, huge visitor numbers and property price inflation, attributed to a vibrant tourism trade, have been linked to the abandonment of traditional island industries and renewable resource consumption as islanders increasingly find that their traditional insular lifestyle is supplanted and expelled by exogenous influences.

What does all of this mean for small island development, broadly conceived?  It suggests surely that the growth of a strong tourism sector in accordance with the demands of the provision of offshore finance requires that many SIEs subordinate their indigenous environmental needs to those of international capital and the global tourism industry and its many users.

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