The Great Panama Hypocrisy

Offshore financial centres have an important role to play in the present and future global economic paradigm.

Small islands and developing countries which use their resources to position themselves as providers of legitimate and transparent (subject to international norms) services to a community of increasingly demanding but willing clients should be left to carry out their business without undue pressure

The greatest features of the immediate post World War II world economic history had been the great “decolonization” movement and the “swinging 60s” which marked the beginning of almost thirty years of constant economic growth in the most developed countries. This was then followed by the frenzied globalization of the world economy driven by developments in communication and travel technologies and the neo-liberal credo of free market ideology.

This trend lasted as a dominating paradigm until the Great Financial Crisis (GFS) of 2008 which has challenged many of its basic premises, although there does not seem to be any new clear-cut model which is now emerging from the debris of the GFS. The signalling characteristics of the globalization phase are twofold: an increasingly unequal distribution of income which has seen the infamous 1% of the world population earning more than 80% of all wealth created in the global economy and the rapid “financiarization” of the economy which has led economic commentators to speak of the real economy as a separate entity as opposed to a presumably “virtual” or “unreal economy”.

The particular model of capitalism which has emerged from this phase and which persists as the dominant form is characterized by the ever-larger space occupied by speculation and finance in wealth accumulation. Technological developments, especially in communications and instant transfer of data and information has brought about radical changes in the nature of the global financial business in which algorithmic trading (technological platforms which permit automatic trading with little or no human intervention) now constitutes more than 90% of total trading in the global system.

There is evidently a direct cause and effect relationship between this new dominant paradigm of financial capitalism and the development of specialized financial centres (New Jersey, the Virgin Islands, Guernsey, the Bahamas, Singapore, Mauritius) to name but a few which have used their competitive advantage to set up the institutions to integrate the “global supply chain” which support these developments.

Faced with an increasing trade liberalization and globalization scenario, which has all but destroyed its erstwhile successful model of development, Mauritius has applied its ingenuity and entrepreneurial drive to set up what was originally an “off shore” centre but which has been and is quickly evolving into “financial centre.” The difference between these two being of course a matter of substance, institutional framework, openness to international scrutiny and value addition in the processes.

The case for Mauritius and other financial centres

It is an undisputable fact that there are high risks associated with the development of such centres around the globe as the quality and depth of service from one centre to another will inevitably vary and the odd case of “criminal” activity will be detected every so often. The question which arises is whether these occurrences are reason enough for a blanket representation of all financial centres as being dens of thugs and present-day robber barons.

For that matter the largest global banks of the highest reputes from Credit Suisse to City Bank and including Barclays Bank Plc, BNP or so many others have over the past years been found guilty of massive fraud often with active complicity of their executives – we have not yet heard any voices claiming for the elimination global banks in the international exchange economy.

In a revealing interview in the New York Times (4th April) when questioned over the fact that no prominent American politician seemed to be linked to the Panama Papers, James Henry an economist and senior adviser to Tax Justice Network, had this to say: “Americans don’t need to go to Panama. Basically we have an onshore haven industry in the US that is as secretive as anywhere.”

The first level of hypocrisy which needs to be strongly condemned is the fact that the OECD club of rich nations would do well to look into their own backyard before raising a hue and cry and accusing all “offshore financial centres” of being the den of crooks. The underlying Euro-centred sense of high moral grounds and resulting preconceptions and suspicion towards these entities (read the OXFAM papers) deserves to be censured without reserve. As The Guardian wrote recently even while commenting on the Mossack Fonseca affair, “Using offshore structures is entirely legal. There are many legitimate reasons for doing so. Business people in countries such as Russia and Ukraine typically put their assets offshore to defend them from “raids” by criminals, and to get around hard currency restrictions. Others use offshore for reasons of inheritance and estate planning.”

The case of David Cameron, who has been caught in the frenzy of the Panama Papers not so much for any wrongdoing as for having initially been economical with truth regarding the fact that his family had actually had recourse to offshore entities in their financial dealings, is an interesting illustration of the whole dilemma. One year ago in a speech in Singapore referring to the role of offshore centres, he had declared that “the corrupt, criminals and money launderers” take advantage of anonymous company structures. This did not prevent him and his family presumably not “corrupt, criminals and money launderers” from making what is legitimate, beneficial and honest use of the same structures when it came to the management of their finances.

Offshore financial centres have an important role to play in the present and future global economic paradigm. Small islands and developing countries which use their resources to position themselves as providers of legitimate and transparent (subject to international norms) services to a community of increasingly demanding but willing clients should be left to carry out their business without undue pressure.

* Published in print edition on 22 April 2016