The Great Caribbean Divergence

Most jurisdictions formerly ruled from London as the British West Indies (BWI) are unimportant for offshore tax planning and offshore money creation, despite sharing traits conventionally associated with tax havens. Why have only some former BWI colonies become attractive locations for the main offshore activities while most others haven’t? We argue that soil fertility ultimately explains this variance. Settlers created plantation economies on islands with good soils and maritime economies on islands with bad soils. Plantation economies were profitable enough for income taxes. Maritime economies relied on subsistence farming and fishing, therefore lacking the required tax base. Plantation economies moreover experienced the horizontal mobilization of racialized laborers, whereas maritime economies were shaped by patron-client relationships. Plantation economies therefore democratized earlier than maritime economies, where white oligarchies prevailed. When the Suez crisis increased demand for offshore activities, the maritime economies thus combined no income taxes with white supremacy, conveying political stability to Western professionals and asset holders. Hence, offshore activities grew faster in maritime than in plantation economies during the 1960s, a divergence that has persisted because of agglomeration effects. We use Comparative Historical Analysis, combining statistical matching with process tracing, to probe the plausibility of our causal sequential argument.