Evolutionary Economic Geography for OFCs: Do Political Ties to the Onshore Reduce Capital Inflow Volatility?

This paper analyses the structural change in small-island economies-sometimes labeled offshore financial centers ( OFCs)-that have seen wealth-generating activities through offshore financial services decrease in value since 2008. At the same time, OFCs have come under increasing scrutiny from supranational organizations such Organization for Economic Co-operation and Development and European Union for perceived unfair tax practices and money laundering activities. Some OFCs have proactively adjusted to this sea change by broadening the economic base through development of new offshore business activities such as e-gaming, film industry, and niche manufacturing. Most have increased co-operation with onshore regulatory bodies to promote service and product legitimacy. Econometric analysis explores the assertion that OFCs that do not have a political link to the onshore may be exposed to greater capital inflows volatility than OFCs that have such a link. Case study analysis using the theoretical lens of evolutionary economic geography illustrates that a small OFC is creating spatialities of economic novelty by adapting economic development strategies deployed during the successful development of the center prior to the recent recession. Our findings reveal the importance of political links to the onshore to reduce capital inflow volatility and the importance of local public-private interaction to legitimize post-recession development. [ABSTRACT FROM AUTHOR]