Sunday, February 17, 2008

Jamaica Struggles To Reinvent Itself Economically

Jamaica - "The Next Offshore Haven?"

After being sworn in as Jamaica's prime minister last September, Bruce Golding announced his ambitious plans for this Caribbean island. Among Golding's plans, he raised the possibility of the island becoming another offshore financial center.
Perhaps P.M. Golding was gazing with envy at it nearest neighbor to the west, the Cayman Islands, and due south to Panama. So he noted: "There are other islands in the Caribbean that have done very well in their offshore activities and we believe that it is an area that Jamaica can secure benefits from."
As leader of the Jamaica Labour Party (JLP), Golding promised to reverse Jamaica's fortunes. He's battling 18 years of the People's National Party (PNP) government failed efforts to solve problems of slow growth and crime.
Golding admitted that 10 or 15 years ago, he would "not have been prepared to consider" Jamaica as a possible offshore tax haven. But now, he said, "Regulatory mechanisms are sufficiently well developed to give us the kind of protection that we want in order to ensure that we are not taken advantage of."
Golding has set up a special advisory committee, headed by a tax expert from PricewaterhouseCoopers, to explore the development of an "International Financial Services Center" in Jamaica.
Jamaicans Need an Economic Booster Shot
Jamaica, located south of the eastern tip of Cuba, certainly needs an economic shot in the arm.
Its 2.8 million people struggle under an average GDP of only US$4,800 each. The economy faces serious long-term problems, including high interest rates, increased foreign competition, exchange rate instability, a sizable merchandise trade deficit, large-scale unemployment and underemployment, and a debt-to-GDP ratio of 135%.
Jamaica's onerous debt burden is the fourth highest per capita in the world. It's the result of government bailouts to ailing sectors of the economy, most notably the financial and banking sector in the 1990s - not a good omen for an offshore center.
The historic irony is that, under British control after 1655, sugar made Jamaica one of the most valuable colonial possessions in the world for more than 150 years.
Today more than 60% of the economy depends on services, mainly tourism. Jamaica gained independence in 1962. Since emigration to the U.K. was restricted in 1967, a major flow has been to the United States and Canada.
About 20,000 Jamaicans emigrate to the U.S. each year. Another 200,000 visit annually. Remittances from the expatriate communities in the U.S., U.K. and Canada, estimated at up to US$1.6 billion per year, are a big chunk of Jamaica's economy.
Is This Plan Even Possible?
Is it possible that a debt ridden, third world country could become an international offshore financial center?
Derek Sambrook, a long time member of The Sovereign Society Council of Experts and director of Trust Services in Panama, observes:
"In today's services industry the ability to diversify and adapt, despite being a well-worn cliché, is a must... "
"This brings to mind Jamaica...which wants to become an offshore financial services center as part of its government's drive to shake Jamaica loose from its economic inertia. Inspiration comes from having looked close by and watched the success some Caribbean neighbors have enjoyed as offshore centers. Kingston, the capital, is seen as the future magnet to which international investors, finance advisers and other business professionals will be drawn. If only it was that simple."Jamaica might draw some hope from the example of other third world island nations in the region. Barbados, in the eastern Caribbean, is not a full fledged tax haven. But the Barbados' low business and professional taxes, combined with a network of bilateral double tax treaties with major nations, makes it a favorite for foreign investment, especially among Canadians.
Belize, another former British colony in the Caribbean area, over the last two decades has crafted itself into a relatively successful offshore haven with a fully developed set of offshore trust, corporate and banking laws. Nevis has done likewise.
What Transforms a Country into an Offshore Tax Haven?
Whenever we at The Sovereign Society look at possible offshore venues for investment, tax savings, asset protection and maximum financial privacy we ask these questions:
1. How long has the current system of government been in place? Is the jurisdiction politically stable?
2. How long a legal tradition has the haven had? Does its legal and judicial system have reputation for "fair play" with regard to foreign investors?
3. Does the jurisdiction have a large enough variety of legal entities to satisfy the average person seeking an estate planning or business solution?
4. Does the jurisdiction have and defend financial secrecy laws? How strictly are they applied? What exceptions to secrecy exist?
5. Taxes: Does the haven impose taxes on foreign investors? How easily can these taxes be avoided legally? Are there tax treaties or tax information exchange agreements in effect?
With a high national debt, unemployment, difficulty with criminal gangs, and no special laws in place to attract offshore financial interests, Jamaica would seem to have a long way to go to achieve status comparable to the Caymans, Panama or even Belize or Nevis.
But as Prime Minister Golding says: "The most important thing is trying to restore hope, so that the people of Jamaica can find the energy that they didn't think they had - to make it seem that things are getting better, rather than leave them feeling that they are facing a blank wall of hopelessness and despair."

Why this Financial Crisis is Different...And Infinitely Worse
During previous economic crises and financial shocks, the Federal Reserve, foreign central banks and money-center banks have successfully stopped the carnage in asset values. But this crisis is remarkably different.
This sub-prime induced mess threatens untold damage to bank balance sheets and investor confidence. And it's still inflicting wounds across the Western world.
The main difference between the sub-prime mortgage crisis and prior systemic shocks is the ability or inability of coordinated intervention to halt the disease. By "coordinated intervention" I mean the government bailing out reckless institutions that really have no business continuing as a corporation, let alone warranting a bailout.
But that's how things work in the financial world: If a crisis develops, you don't fix it. Instead, you throw piles of money at the problem until the bleeding stops. That's what worked in 2002, 1998, 1990-1991 and in 1987.
But this strategy simply won't work to cork the bottle known as "sub-prime." It's not an area of the market that you can just throw hundreds of billions and hope the problem goes away.
So what makes this crisis so terrible? If you look at past economic disasters like the S&L Crisis in 1989-1991, the Russian rouble and Long Term Capital Management blow-up 10 years ago or even the regional Asian economic crisis in 1997-1998, these previous shocks were far more contained. They were contained and centralized in one sector of the economy.
In contrast, this sub-prime crisis is NOT contained. It's a diabolical monster, and it's morphed into a runaway train that's threatening to spread to consumer auto loans, credit card installment debt and commercial real estate loans. Wall Street has securitized and packaged all this debt just like mortgage-backed collateralized debt obligations, or CDOs.
Thus far, the sub-prime crisis has cost global banks about US$107 billion. That's chunk change compared to what the final tab will cost over the next few years.
As this crisis spreads to other structured products tied to synthetic loans, the government will need to invest even more money to stabilize the financial system. That includes help from our "White Knights" - the Sovereign Wealth Funds or SWFs.
This crisis, like others in the post WWII period, will eventually pass. But it's a big mistake to think the worst is behind us. I think there's more bad news coming from earnings, domestic consumption and growing personal bankruptcies.
The truth is, most investors and bankers themselves still don't have a handle on the depth of this crisis or how much it'll cost taxpayers and shareholders.
I'm starting to bargain hunt amid the stock-market carnage, especially in stocks that pay big dividend yields. But I also know the worst isn't over either, so I'm saving some powder. You should too.

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