• Strategy
  • The Economist

What It Takes to Succeed

For offshore financial centres, not only low taxes but a great deal besides.

Such expertise helps OFCs to beat off the competition. Bermuda’s reinsurance market is flourishing because it relies on a network of brokers, underwriters and actuaries that would be hard to replicate. By contrast, fund administration — in essence, the back-office work for investment funds — which thrives in Dublin, Jersey, Luxembourg, the Isle of Man and elsewhere, has become commoditised for run-of-the-mill equity funds. This is one reason why so many OFCs are fighting over hedge-fund business. Administering these funds requires expertise in areas such as valuing illiquid instruments and complex securities such as derivatives, so margins are fatter and clients tend to stick around.

But small jurisdictions sometimes find it difficult to attract and retain the people to provide the expertise. OFCs in balmy climates or close to onshore economies do better than tiny islands floating in the middle of the South Pacific. Proximity to “real” economies makes it easier to lure those experts (almost always expatriates), and clients also like the convenience of being in the same time zone as their OFC and talking to people in their own language.

Some islands are running out of space. Jersey, for instance, imposes strict housing restrictions. Bermuda is facing even greater strains on its capacity. Households are limited to owning one car to cut down on traffic, so affluent businessmen can be seen zipping to work on motorscooters. Getting permanent residency in Bermuda is difficult and house prices are vertiginous, not least because unlike most other OFCs Bermuda is the home base of many huge global businesses with large numbers of employees.

The influx of well-paid expatriates who drive up the cost of living can cause tensions with the local population. Kurt Tibbetts, a government minister in Cayman, says his government works on preserving social harmony by pouring money into education. Bermuda quietly pursues affirmative-action policies that give locals first refusal of any jobs before expatriates can be considered. For the leading OFCs, success comes with its own headaches.

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