By 2030, the world economy will likely look very different than it does today. Socio-economic changes, coupled with technological advances, will likely shift economic power from the West and towards today’s emerging economies in Africa, Latin America, Asia, and the Middle East. Amid this shift there will be a need for innovative solutions to new business problems arising from borderless economies, outmoded legal jurisdictions, and an increased need for international partnerships and co-operations.
We have outlined five key areas where we see International Financial Centres (IFCs) will be able to play to their strengths and perform a major role in helping shape the future global economic leaders:
Supporting the Stabilisation of Latin American Economies
Between 2008 and 2018, Latin America’s middle-class expanded[i] from 33 million households to 46 million households. In 2018, 14 per cent of the population aged 15 or over in Latin America had attained a higher education degree, a rise from 8 per cent in 2000.
But for that burgeoning generation to be able to realise its full potential in the next decade, its private sector will need to find some surety. Political uncertainty in the region’s largest economies and ongoing corruption have all played into disappointing growth forecasts – the International Monetary Fund predicts the region’s GDP will only rise by 1.4 per cent in 2019.
A vital component to stabilising the Latin America region is creating security for individuals and businesses, given they live in regions that can lack the political stability and legal strength to ensure their long-term plans can be executed with certainty.
IFCs have a long track record of recognising and subscribing to the common-law principle of privacy and the individual’s right to privacy, especially in relation to personal and business transactions. We are seeing an increase in the number of small businesses and families seeking a safe and secure harbour for their wealth, away from disruptive politics and interventionist states. By incorporating their wealth and assets in an IFC, they are able to grow their businesses with steady income streams and business structures safe from business-unfriendly jurisdictions.
Making it easier for emerging entrepreneurs to succeed
It’s not just Latin America that is set to see an explosion in its youthful middle class in the coming decade. According to the European Commission, by 2030[ii], the global middle class is expected to reach 5.3 billion people, and most of this growth will be in Asia.
For that population to thrive, small businesses will need to be cultivated. The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce. In emerging markets, most formal jobs are generated by small business, which create 7 out of 10 jobs. IFCs are already helping young businesses - vital to a burgeoning middle class - thrive in developing economies.
Currently, many jurisdictions in emerging economies are not as business friendly as those in the West. The “Ease of Doing Business” Index[iii] finds that the least business friendly states are in Africa and the Middle East. Even China, now a global powerhouse for trade and commerce, is ranked outside the top nations for business-friendliness[iv].
Archaic corporation laws, onerous rules around business, and debt and asset management as well as intrusive governments and weak rules of law make many jurisdictions in emerging regions not conducive to starting a business. IFCs are allowing small businesses today to set up secure and robust business structures offshore, so entrepreneurs can run their nimble businesses without fear of tripping over antiquated and arduous business rules in their home jurisdiction.
Setting up a business in a tried-and tested jurisdiction also gives investors more confidence to help a company grow. Careem Inc., the Dubai-based ride-sharing platform, is a prime example of start-up entrepreneurs successfully securing investment via an incorporated investment vehicle in an IFC. Established in 2012 as a website-based service for corporate car bookings, the business was recently valued at US$1 billion and is widely recognised as the "Uber of the Arab world".
It found that its early investors were more assured of its future even when it was temporarily banned for operating in the region because it was based offshore. Middle East-based firms can be subject to opaque bankruptcy and debt default laws, for example, but being a BVI vehicle allowed Careem to avoid those rules, which satisfied investors.
Careem is a great example of a small businesses gaining access to a tried-and tested jurisdiction. Through this access, IFCs can support the middle-class prospects of entrepreneurs all over emergent and emerging economies.
Championing Borderless Digital Economies With Fintech Innovation
An estimated 70 per cent of new value created in the economy over the next decade will be based on digitally enabled platforms[v]. This is presenting a new set of challenges for governments and regulators. Digital goods being highly mobile or intangible, the physical presence of a company in the market country is often not needed, which is at odds with the outdated international tax system.
As on-shore jurisdictions struggle to understand and accept emerging financial technologies, IFCs are now go-to destinations for fintech entrepreneurs. We are already seeing that cryptocurrency is fast becoming a symbol of ‘stateless’ digital economies. By 2030, it’s likely that currency managed on distributed ledger technology will be commonplace and may be driving global business.
The pioneers of stateless, digital assets are seeking jurisdictions that support and encourage these new asset classes. IFCs are leading the way in developing and facilitating this new global technology. A recent report found that the Cayman Islands, the BVI and Singapore were the top three jurisdictions of choice for Initial Coin Offerings in the world in 2018.
Moreover, another recent study found that 80 per cent of all crypto hedge funds operating in 2019 are domiciled in IFCs.
The potential for digital assets and a new digital economy is huge for the unbanked peoples in Africa, Latin America, Asia, and the Middle East. We’re already seeing how mobile financial technology is revolutionising the movement of money around Africa, for example. As innovative incubators for these technologies, IFCs can have a hand in making financial services available to billions.
Fostering Investment Into African Economies
Since 2000, at least half of the world’s fastest-growing economies have been in Africa. And by 2030, Africa will be home to 1.7 billion people. But key to growing those economies will be the ability for African nations to receive and use international development finance, mostly through Foreign Direct Investment (FDI).
According to a recent Overseas Development Institute (ODI) report, IFCs galvanised additional finance to developing countries of US$1.6 trillion between 2007 and 2014, much of which went into Africa. By using IFCs as an intermediary into the continent, private investors into FDIs are safe in the knowledge that their investment is subject to the legal jurisdictions of established international contract law centres. Also, IFCs provide a neutral location for funds to be amalgamated from multiple sources and then collectively invested into Africa.
Much of the increase in the use of IFCs for investment into Africa specifically has also been driven by Development Finance Institutions (DFIs) or development banks. A good example of IFCs working with DFI is the China–Africa Fund for Industrial Cooperation, a Chinese state-owned fund for investing in Africa. It has made investments in 92 projects in 36 countries, with US$23 billion of co-financing from private Chinese companies. These investments were made through BVI structures and have been instrumental in financing manufacturing and agricultural ventures in the likes of Zambia, Malawi and Rwanda.
Crucially, the risks of a DFI not using an IFC in Africa are also well-recorded. Norway’s Norfund stopped using non-OECD IFCs due to political pressure in 2009. As this prevented it from using business structures in Mauritius, the DFI made no new investments in sub-Saharan Africa in 2010 and 2011. Pipeline deals in the agricultural and small business sectors - essential to job creation and poverty alleviation - ground to a halt.
Facilitating China’s Global Vision
Only 15 years ago, China’s economy was one tenth the size of the US economy. But, by 2030 it will be the biggest economy in the world[vi]. As it supersedes the United States as the economic superpower, it will be developing both its ‘Going Global Strategy’ and its Belt & Road Initiative to expand its reach across Asia, Africa, the Middle East and into Europe. To achieve this, it will need to continue to develop international joint ventures and co-funded infrastructure projects, mediated through IFCs.
IFCs are already becoming a vital conduit to funding Chinese infrastructure projects throughout Asia, Africa and Europe. According to a recent study by Capital Economics, mainland Chinese and Hong Kong companies accounted for more than 40 per cent of the US$1.5 trillion in assets mediated through the BVI, underscoring the offshore investment centre’s growing status as a hub for Chinese overseas investment - outward investment in 2015 mediated via BVI business companies from China and Hong Kong stood at US$608 billion.
IFCs are vital to China’s ability to court international investment because inward investment by international entities is heavily regulated by China. The approval, registration, and filing procedures can be a complicated and time-consuming process. Incorporating offshore also enables joint venture businesses to choose to refer to English Common Law – the world’s most recognised and agreed-upon legal system.
Conversely, the statutory framework underpinning IFC vehicles has been well-tested in courts and is therefore trusted allowing for several variations of a Joint Venture and bespoke partnership agreements that help to create transparent, mutually beneficial cross-border agreements that suit all stakeholders.
IFCs – Crucial To The Leading Economies Of The 2030s
IFCs are a sound platform for business establishment, growth and diversification and will be crucial to help stimulate emerging economies in the next decade.
We must continue to champion the unique facets of IFCs, from their ability to foster international business partnerships to their capability of incubating and supporting the growth of innovative financial technologies. The time is now to ensure that we continue to deepen connections with business leaders and politicians in Africa, Asia, the Middle East, and Latin America and share a message of cooperation and growth.
The future is bright for the billions of people working to make today’s emerging nations the economic powerhouses of the world. It’s the job of IFCs to help shape that future for the many.