Since the end of the global recession in 2009, the Virgin Islands has encountered difficulties in consolidating its economic recovery. Initiatives to stimulate the economy have achieved only modest success as growth remains constrained by unfavourable global economic conditions. In particular, the United States and European economies, to which the territory’s own economy is linked, continue to experience financial and economic turmoil and are forecast by the International Monetary Fund to grow at anemic rates of 1.8 percent and 1.1 percent, respectively, in 2012.
In addition, the gradual weakening of the world economy and the adoption of unfriendly regulatory policies and tax measures (the United Kingdom’s Air Passenger Duty, for example) by a number of developed countries aimed at offshore financial centres and the airline industry, have contributed to a global economic environment of low growth in which the territory must operate. These factors are dampening the VI’s economic outlook for 2012 and beyond.
Against this backdrop, a question must be asked: How can the territory achieve economic recovery under the stifling global economic conditions of today? The answer is not simple. On the one hand, the VI’s economic recovery will depend on external factors over which it has no control. On the other hand, it will depend on the territory’s own efforts to enhance the global competitiveness of its tourism and financial services industries.
Externally, the VI is highly dependent upon the US and Europe for economic growth. The US is the territory’s main source market for tourists. In 2010, 842,497 tourists visited the VI, the large majority of whom were American. A similar, but unconfirmed, number visited in 2011. Europe is also an important tourist market, but exports a much smaller number of visitors to the territory. In the financial services industry, Asia drives the incorporation sector, but trust and estate business is driven by Europe and funds business by the US.
The ongoing economic and financial turmoil in these countries and their governments’ reactionary responses have weakened their economies’ internal demand for offshore financial services and international tourism. As a result, the territory’s economy remains constrained, having recorded economic growth of just two percent in 2010 after seeing an 11.6 percent drop in gross domestic product in 2009. End of year figures for 2011 are expected to be little better, and an appreciable acceleration of growth in 2012 is unlikely.
The IMF in its September 2011 World Economic Outlook report (“Slowing Growth, Rising Risks”) indicated that the economic recoveries of the US and Europe are losing momentum and a resumption of growth will depend on their governments’ actions to stimulate economic growth and address the chronic debt and deficit problems facing their economies. These developments suggest that the VI must prepare for the eventuality of an extended period of low growth in the US and Europe and lower demand for its tourism product and offshore financial services. Already respected economists have begun describing the years ahead as the US’ and Europe’s “lost decade.”
In light of the difficulties being experienced by these economies to which the VI is economically linked, the territory must take action to boost its own economic growth and security.
In the tourism sector, this can be achieved by improving the quality of the VI’s tourism product. A number of important measures are needed in this regard.
First, the territory needs a five-star hotel and the complementary international convention and wedding facilities that are standard in leading tourism destinations. The continued absence of these accommodations and facilities only undermines the VI’s global competitiveness and endangers the future of the tourism industry. Their development in the near-term would also generate much needed economic development in the construction sector and give a much needed boost to related retail businesses.
Second, the territory needs additional land-based tourist attractions to compensate for its modest historical sites and museums, limited luxury shopping and underdeveloped art-and-craft market. The natural choice is the hosting of cultural festivals surrounding food, art, crafts, music and dance. These types of activities would add much needed flavour to the mix of available land-based entertainment and differentiate the VI from competitors who boast many of the same natural attractions (i.e. sand, sea and sun) and have superior historical sites and shopping.
Third, the territory needs direct flights from the US, UK and Brazil to the Terrance B. Lettsome International Airport. When traveling to the VI from or through these countries, the layover and transfer bottlenecks encountered in Puerto Rico and Antigua and ferry bottlenecks in the United States Virgin Islands make the territory a less attractive tourist destination relative to other Caribbean or Central American countries that offer the convenience of direct flights. The Terrance B. Lettsome International Airport’s runway must be extended to accommodate wide-body jetliners that can make the long-haul flight from North America, South America and Europe, which would ease the travel burden on tourists originating from these regions.
Fourth and last, the territory needs a robust marketing campaign to sell the VI as a destination to the rest of the world. In response to the recent downturn in international travel in North America and Europe, other Caribbean and Central American countries have aggressively marketed themselves in North America and Europe using television, radio and print media. The VI must employ similar marketing strategies to make up lost ground in the global marketplace.
Like the tourism industry, the financial services sector requires a number of measures to improve its global competitiveness, which is driven by both marketing and actual services.
On the marketing side, the VI needs a targeted global marketing campaign and a sustained presence in both mature financial markets, such as those in the US and Europe, and fast-growing emerging markets like Brazil, India and China. In particular, the rapid economic expansion of emerging markets presents real opportunities for the VI to drive trust and estate, fund administration, and company incorporation business to its shores.
In the area of shipping registration, aggressive marketing is also needed to promote the territory as a jurisdiction. As a member of the British Red Ensign Group holding Category One status, the VI must seek to build up its shipping registry by taking advantage of the current surplus of cargo ships and other freight vessels in the global shipping market that require registration. To realise this goal the VI Shipping Registry’s local operations must be ramped up and an international presence must be established in major shipping markets in the US, Europe, Japan, South Korea and leading emerging economies that include China, India and Brazil.
More generally, the VI’s overall attractiveness as a financial jurisdiction can be enhanced by widening the range of corporate and professional services offered to clients in an effort to begin moving the territory toward becoming a one-stop financial services centre. In doing so, special emphasis should be placed on building up capacity in the accounting sector, which naturally complements other sectors of the industry.
The measures described above would go a long way in boosting the economy’s growth in the short-to-medium term. However, over the long run additional measures will be needed to achieve sustained economic growth. This will mean expanding and diversifying the tourism and financial services sectors and developing new economic sectors from which economic growth can be generated. By broadening the VI’s economic base, the economy’s resilience will be strengthened and its vulnerability to external shocks (i.e. financial crisis and global recession) will be reduced.
To realise this goal, the territory will need an economic plan that sets out a policy framework for developing the economy, whose components would include, among other things, sectoral strategies for economic growth and a bona fide investment policy.
In the final analysis, the VI cannot change the dynamics of low growth that have beset the world economy. Its main economic sectors are linked to the floundering economies of the US and Europe, whose economic and financial problems have contributed to a stifling global economic environment. Despite these challenges, the VI’s economic recovery continues, led by financial services, and a return to respectable growth remains attainable.
The key to achieving this goal lies in improving the global competitiveness of the tourism and financial services industries and investing in new sectors over the longer term. By strengthening these areas, the VI will eventually see a return to the strong economic growth that has characterised its economy for the last three decades.