By John Christensen
Tax Justice NetworkOctober-December 2007
I am a Jerseyman. When I was appointed economic adviser to the Jersey government in the 1980s, the States of Jersey was committed to economic diversity. For three decades tourism had been the engine of growth, with significant agriculture and light manufacturing alongside it. That was the Jersey that most people wanted: we did not want to put all our eggs into one basket.
Fast-forward to today, and Jersey is transformed. Financial services account for over half the island's economic base (see Table 1) and all other activities, including construction, retailing, public services, even the hospitality sector, depend heavily on offshore finance.
Much of the answer lies in local politics. Many Jersey politicians were and are closely involved with banks and law firms linked to offshore finance, and self-interest has frequently been conflated with public interest. In the macho political environment of 1980s Britain, reticence about promoting abusive tax haven activity succumbed to pressures to take 'Jersey PLC' down the profit-maximising route. The island aggressively competed to attract more banks -- and demand for offshore services took off. Money flooded in, and headline economic growth was impressive: what could be wrong with that?
Unfortunately, as any good economist will tell you, things are not so simple. When money floods in, local prices and costs go up. As things get more expensive, other industries cannot compete - and they die out. Tourists find other places to visit, at lower cost. Locally grown agricultural goods are elbowed out by cheaper imports. This is similar to what has happened to many oil producing countries: a phenomenon commonly known as the Dutch Disease (after huge gas discoveries in the Netherlands in the1960s, which led to serious harm for the economy.)
When I started working in the sector in 1987 inflation was twice the UK rate. Unqualified school leavers were earning higher salaries than graduates in the UK. Construction costs were more than twice those in France and south west England. Today Jersey has one of the world's highest costs of living, and average house prices are over 20 per cent higher even than in London - which is really saying something.
Visitors to Jersey are often shocked by the high incidence of poverty amongst local people. This is partly because of the high cost of living, but also because of the paucity of social protection. Wage levels are depressed for semi-skilled and unskilled workers. The minimum wage is set low at £5.40 per hour, below the level of all EU states when adjusted for cost of living. Many workers are forced by low wages and high rents to work multiple jobs and accept very poor accommodation. Taking the EU's benchmark for assessing relative poverty (60 per cent of median income), 45 per cent of single pensioners in Jersey, and 64 per cent of single mothers and their children, are currently living in relative poverty.
Tourism in Jersey has crumbled under the weight of high labour and construction costs. Tourism's local defenders were no match for the well-connected and amply resourced representatives of the finance industry. Although lip service was (and still is) paid to the quest for economic diversity, the number of tourist bedspaces has more than halved just in the last decade, and tourist volumes have fallen below the critical mass needed to sustain many retailing and leisure activities.
The accepted wisdom of the 1970s and 1980s was that tourism and financial services were compatible on small islands. Jersey shows that resource constraints induce huge competitive pressures between the industries, and financial services end up crowding out pre-existing activities.
I challenged the wisdom of this development strategy in the 1980s, to no avail. Now the tables have turned: confronted with stiff competition from other tax havens, and external pressure to remove some of its abusive tax practices (see Richard Murphy's article on What Future for the Crown Dependencies?), Jersey faces a precarious future. To make matters worse, financial market instability in the second half of 2007 has exposed high levels of risk associated with securitised debt instruments, one of the few areas of expertise in which Jersey is a world leader. Demand for securitisation services has fallen flat.
Economic concentration is no accident: tourism's demise in Jersey links directly to political decisions taken in the 1970s and 1980s, at which time the island became captive to the global ambitions of the offshore financial services industry.
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