Exiles sail away to homelands of convenience

SO OFTEN the most thoughtful questions come from the intelligent non-specialist. The Shetland oil disaster prompted a reader to inquire why industrial countries such as Britain accepted the use of flags of convenience, such as Liberia, or perhaps more important, tax havens such as Liechtenstein. Why not just make their use illegal?

There is no reason, of course, why Liberia - a recognised nation state with a seat at the UN - should not compete with other countries to attract ship owners. And if the big industrial countries wished to clamp down on flags of convenience, they would do so. They, like the tiny tax havens, are allowed to exist because it actually suits the big industrial countries. Or rather, it has suited them up to now. A change currently taking place in international relations suggests that the industrial world may already be reclaiming the ground it has given up.

Flags of convenience are not yet a source of great contention. The Liberian register, for example, is run very well; but it is run by professionals from New York and is untroubled by the mayhem in Liberia. Its ships have a fair to good safety record, better, in fact, than those of the United States. Indeed, if the country were run as well as its shipping register, it could be one of the richest in Africa.

The main shipping nations could ban flags of convenience, but no country wishes to place its own indigenous shipping companies at a regulatory disadvantage. There is no reason why Britain should not set up its own offshore register, and there is talk that it might do so. But why bother having a row with the British trade unions when it is easier to let owners go to Liberia?

Tax is a much bigger issue. Twenty years ago it suited industrial countries to levy very high taxes on their richest people because the leakage was small. Governments knew about attracting foreign investment from companies and created all sorts of incentives for them. But they did not worry much about people leaving because very few did. A handful of pop stars, media magnates or racing drivers might move to places such as Monaco for tax reasons, and the rather less rich might retire to the Channel Islands to escape death duties. Very few British business people, of whom Robert Maxwell was the most prominent, located their businesses legally (though not physically) in places such as Liechtenstein. A few writers chose to move to Ireland to take advantage of the freedom from tax granted to them there. But the costs and inconvenience of relocation limited the leakage.

Now the situation has radically changed, for people are far more mobile. Skilled workers have a wider choice of location as the job market has become international: British or American professionals can move more or less anywhere in the English-speaking world, and will increasingly be able to move within the EC. A generation of economic growth has created a larger group of people who live principally on their savings and can move almost anywhere. There are an estimated 160,000 Britons living in Spain and 44,000 Japanese live in Britain. Mobility has spread even to the insular Japanese.

This new mobility has changed the relationship of governments with their nationals. Instead of competing only for the votes of the existing population, they are increasingly having to stop people leaving and attract new ones in. The mobile proportion, even of the industrial world's population, is still quite small; in terms of influence and prosperity, however, it is enormously important.

All industrial countries have consequently been looking at their tax systems to see whether they can hold on to would- be tax exiles, and ideally attract the mobile rich as well. Every major industrial country, bar none, ended the Eighties with a lower top income tax rate than it started with. Corporation taxes, too, were often adjusted to attract new investment. Tax havens have had a tough time.

For individuals, it was worth retiring to Jersey if you were subject to a tax rate of more than 90 per cent, as it was on income from savings in Seventies, but it is hardly worth it on one of 40 per cent. For companies, however, the very laxness of regulation in tax havens has become a disadvantage. While companies and individuals alike hate paying tax, well-designed regulation can be an attraction. On Monday, Germany unveiled financial regulations, including laws against insider dealing, designed to make Frankfurt attract more financial business. After BCCI, putting 'registered in Luxembourg and the Cayman Islands' on a bank's notepaper is unlikely to draw in the millions. After Maxwell, legal domicile in Liechtenstein carries an implicit health warning.

If countries can prevent their nationals from resorting to tax havens by encouraging them to stay at home, they will not need to make the use of tax havens illegal. Eventually something similar will happen with flags of convenience. They make no intellectual sense, but if a country's own regulations are unattractive to shippers, its bargaining position is weak. It cannot ban the use of flags of convenience without either driving its shippers out of business or forcing them to register under another host country.

The underlying lesson is that in an increasingly international world, national governments have far less power than their electorates may believe, or they themselves sometimes pretend. Governments must compete, not boss people about.