The challenges faced by the British Virgin Islands tourism and financial services sectors in the present international economic climate are analysed by Virgin Islander Benito Wheatley, Program Board Associate at the Institute of Caribbean Studies in Washington, D.C. The paper is published below with the kind permission of Mr. Wheatley. The views expressed in the paper are those of the author and do not necessarily reflect the editorial opinion of Overseas Territories Review.
Fiscal year 2009 has started off on a less than optimistic note for the British Virgin Islands (BVI). In the tourism sector, industry reports estimate that tourist arrivals are down 15 to 20 percent in the first quarter and present a bleak forecast for the remainder of the year. In the financial services sector, data indicates that by the end of 2008 new international business company incorporations were down 20 percent, presumably on uncertainty about the future of the financial industry.
What these trends indicate is that the BVI is beginning to feel the negative effects of the global economic crisis, as the economies of its major tourism markets in the United States (US) and Europe enter into recessions and the global financial crisis prompts calls by international leaders for financial reform, including enhanced regulatory oversight and scrutiny of offshore financial centers. These developments have created unfavorable global economic and financial conditions for tourism and financial services industries in the BVI.
The nature of the current crises has limited the government and private sectors’ abilities to adjust the Territory’s economic position in the short-term or scale back the impending economic downturn that is beginning to take effect. In the interim, the private sector will have to make painful cutbacks, while the government considers stimulus measures to help propel the economy along during what is expected to be an economically challenging fiscal year.
The deteriorating economic situation raises important questions about the viability of the BVI’s economy and the durability of the twin pillars economic strategy pursued by BVI governments since the early 1980s: Is the BVI’s twin pillars (i.e. tourism and financial services) economic strategy sufficient to sustain economic growth? Are third, fourth and even fifth economic pillars necessary to ensure the Territory’s economic survival? What other sectors and industries should be developed in the interest of economic security? The answer to these questions and how the society’s leadership responds to today’s harsh international climate will largely determine the economic future of the BVI.
The viability of the twin pillars economic strategy is currently under test by the global economic and financial crises, which have exposed the strategy’s underlying weakness: over-reliance on the tourism and financial services sectors for economic growth and too narrow a focus on the United States and certain European and Asian markets. The BVI’s tourism and financial services sectors’ dependence upon favorable economic and financial conditions in North America, Europe, and Asia for economic growth make the Territory’s economy particularly vulnerable to economic shifts and financial swings in the world’s leading economies, as well as shifting attitudes toward financial regulation within their societies.
While the strategy has provided the BVI with robust economic growth during periods of economic expansion and growth in its target markets, it has lead to economic contractions during economic downturns or financial turbulence. Essentially, the twin pillars economic strategy is too narrow in scope and does not encourage diversification of the economy beyond tourism and financial services or the establishment of other sectors and industries that can provide economic growth and help mitigate the negative effects of global economic slowdowns, downturns, or recessions.
Initially, tourism and financial services were logical targets for the development of low capital-intensive industries in the BVI that could quickly generate employment and revenue for an under-resourced and under-developed society. However, after years of robust economic growth the society became comfortable with the consistent economic gains and financial returns generated by tourist arrivals and offshore banking. For far too long, government and the private sector operated under the assumption that the economies of North America, Europe, and Asia would grow indefinitely. This assumption, however, has been proven false by the global economic and financial crises that is wreaking havoc on the world’s leading economies, many of which are now in recession.
The dangers of an undiversified economy are all too clear as the crises have demonstrated after hundreds of layoffs in tourism sectors throughout the Caribbean and a series of international financial scandals that have intensified opposition by world leaders to offshore financial centers, often referred to as tax havens. In some Caribbean economies, tourism accounts for more than 50 percent of employment and government revenues, while financial services employs a significant portion of the region’s working population and contributes disproportionately to the operating budgets of various governments. In the BVI, it is the collective failure of the society as a whole to adequately diversify the economy that has left the Territory in its rather precarious economic position.
Diversification of the economy is the logical solution to insulating the Territory against future global calamities such as the global economic and financial crises. Notably, consecutive governments have dubbed agriculture the third economic pillar of the economy, but in reality this is not the case. The agricultural sector is not a major contributor to gross national product and output in the farming and animal husbandry industries is little above the smallholder level.
Despite public rhetoric about the importance of agriculture, the sector has received marginal support and investment when compared to the capital and other resources poured into the tourism and financial services sectors by government and the private sector. As it concerns food security, the development of a modern agricultural sector is paramount and should be vigorously pursued by the farming community with the support of government. However, despite its strategic importance, the agricultural sector is not an optimal candidate for a third economic pillar.
The problems of land scarcity, access to water, and labor costs place incredible constraints on commercial production and it is highly unlikely that the agricultural sector will achieve the level of output required to firmly establish the sector as an engine of economic growth for the Territory.
Exploration of other sectors is urgently needed to identify and develop other industries that can provide the immediate economic boost needed in the near-term to lift the Territory’s economy during the projected lean years of global economic recovery. One such sector is the growing back-office market. In the back-office sector, support-services industries perform back-office operations (i.e. accounting, communications, technical support etc.) for corporations, financial institutions, and technology firms seeking cost savings. India is a popular destination for the outsourcing of technical support and communications with its massive call center operations. The BVI has many natural advantages that would make it a strong competitor for back-office services, particularly in the outsourcing of finance, accounting, communications, and administrative office functions.
First, the BVI boasts a relatively well educated English-speaking population and an experienced workforce that has supported the financial services sector for the past 25 years. The Territory’s wealth of experience in the offshore banking industry would be highly attractive to back-office clients seeking to outsource finance and accounting functions to low cost centers.
Second, the BVI has the basic infrastructure required to conduct back-office operations. The islands are equipped with a modern communications network that boasts high speed internet, facsimile, video conferencing, cellular, and telephone services. This is complimented by the wide availability of commercial office space that offers all the amenities of the modern office. Notably, the government and BVI Electricity Corporation have committed to providing the islands with a first class electricity grid that can meet all the Territory’s power needs.
Third, the Territory’s geographical location places it within a comfortable distance from the United States, and its financial capital New York City in particular, and within the same time zone (Eastern Standard Time). The Territory’s international airport offers daily service to Puerto Rico and Antigua where connecting flights are available to the US, UK, and other international destinations. In addition, the Territory has relatively dependable local postal services and a variety of internationally renowned express mail carriers, including the US Postal Service, FedEx, UPS, and DHL.
Fourth, the BVI is politically stable and an Overseas Territory of Britain. The Territory’s political status and options for legal recourse would provide back-office clients with a real sense of security and a high degree of comfort in conducting business in the Territory.
Finally and most importantly, BVI residents can offer back-office services, at least in the fields of accounting and finance, at a relatively lower hourly rate or salary than their counterparts in the US and UK, where the cost of an accountant or financial analyst to perform basic functions is significantly higher. At present, mutual funds, hedge funds, investment banks, commercial banks, and various other financial institutions are under intense pressure to find cost savings in today’s poor financial climate. The cost of the mutual fund industry’s back-office operations located in Ireland, Luxembourg, and various regions of the United States, has risen significantly on labor costs and firms are now seeking cheaper alternatives elsewhere. The back-office sector presents the BVI with potential opportunities for the development a new industry, which should be explored and pursued if found to be commercially viable.
Whatever the sectors and industries identified for development, the key is that the BVI arguably requires additional economic pillars to diversify the economy and firmly buttress the Territory against external shocks such as the global economic and financial crises. How the society responds to the challenge of economic diversification will have a profound impact on the BVI’s economic future. Failure to act in these uncertain times will only jeopardize the wealth and prosperity so hard earned by BVIslanders and others over the course of a generation.