Islands as Offshore Financial Centres: The Free(r) Flow of Capital

A number of islands have served as the host location for financial services over the past few decades, and these offshore financial centres (OFCs) have been the object of research and analysis since the 1970s. This contribution begins by establishing the historical context experienced by the OFC in order to explore the present situation for the island economy hosting one. The specific point of distinction determining that a financial centre is ‘offshore’, actually, is not its location on an island, but rather the operation of a legal regime to provide financial services to non-resident individuals and companies. The politico-economic rationale behind the decision to host an OFC involves several factors, including the rents collected from the services provided to foreign capital and its owners, the employment opportunities available to island residents, and the low environmental impact of an OFC as compared to alternative economic development proposals. Thus, there is a distinct difference between the island OFC when compared to a large state financial centre (e.g., Luxembourg, Netherlands, UK, or US) where these financial centres operate primarily as a complementary feature within a larger, diversified economy. At the same time, the island OFC is subjected to challenges that arise from its size and relative location within global finance which are not necessarily experienced by other financial centre jurisdictions. Several of these challenges are highlighted in this chapter, followed by some concluding thoughts on what the immediate future may hold for the island OFC.