Soft Targets: Asymmetric Power and Constrained Development in Island States

We interviewed Marla Dukharan, a leading Caribbean economist specialising in small-island developing states (SIDS), to discuss how contemporary global tax governance structures shape the economic development and political economy of island states, particularly in the Caribbean. Our discussion covered two areas. We began by examining the characterisation of many SIDS as tax or financial secrecy havens—that is, jurisdictions characterised by low-tax regimes or lack of financial transparency, and limited financial regulatory supervision (Hanlon & Heitzman, 2010)—and the associated harms attributed to them. The discussion then turned to how SIDS, given their structural constraints, may mitigate these pressures through intraregional cooperation and advocacy. A central argument emerging from the discussion is that limited developmental capacity renders SIDS particularly vulnerable to external climate, geopolitical and economic pressures, while resilience depends on reorienting development strategies toward redistribution and regional interdependence. The analysis proceeds in two parts. The first examines the external political and regulatory pressures facing SIDS with offshore financial centres (OFCs), highlighting the role of sanctions and dominant narratives in shaping their development trajectories. The second broadens the focus to consider structural challenges affecting island states more generally, emphasising the importance of distributional outcomes and intraregional cooperation in fostering resilience.

External Political and Financial Pressures

We began our discussion by highlighting the role of ‘name-and-shame’ strategies in sanctioning non-compliant jurisdictions. Particularly, we focused on the EU List of Non-Cooperative Jurisdictions for Tax Purposes, which identifies jurisdictions deemed non-compliant with standards of tax transparency, exchange of information, and fair tax competition. As of February 2026, the list comprises ten jurisdictions, many of which are SIDS. In parallel, the EU operates a separate list of high-risk third countries under its anti-money laundering and countering the financing of terrorism (AML/CFT) framework, which requires enhanced due diligence for transactions involving listed jurisdictions. This list similarly includes several SIDS.

Dukharan contends that these ‘name-and-shame’ mechanisms do not function purely as neutral compliance assessments but operate as instruments of asymmetric regulatory and political power. The lists are disproportionately populated by countries in the Global South, while major financial centres in advanced economies are less frequently subject to comparable assessment and designation. This pattern, she argues, suggests that listing practices reflect geopolitical leverage rather than objective governance benchmarks. She drew attention to the inclusion of Russia in the EU’s tax blacklist a year following its invasion of Ukraine in 2022, right after EU sanctions took effect—marking the first time a predominantly white country was ever included on any EU blacklist. Russia was added to the EU tax blacklist on grounds of harmful tax practices rather than money laundering or terrorism financing—which in itself is inconsistent with prevailing global financial compliance concerns. The timing and framing of this inclusion, she suggested, illustrate how listing decisions may be shaped by political context. Dukharan contends that this example questions the legitimacy of international regulatory standards given their irregular and selective enforcement.

The asymmetry becomes more pronounced when considered alongside data on global financial secrecy. Dukharan references the Tax Justice Network’s Global Financial Secrecy Index in further support of this argument. This index ranks countries by their role in enabling the concealment of financial assets from legal and regulatory oversight, and routinely places major Global North jurisdictions, including the United States and Switzerland, among the largest contributors to global financial secrecy (Tax Justice Network, 2025). She contends that the comparative volume of financial services provided by SIDS with OFCs constitutes only a fraction of that channelled through these major economies, yet these Global North jurisdictions do not appear on either of the European Union compliance assessment lists as frequently as SIDS do.

Although Dukharan did not dismiss the existence of compliance deficiencies within SIDS, she emphasised that their scale and systemic significance are not demonstrably greater than those observable in major financial centres in the Global North. From this perspective, the differential treatment of small island jurisdictions within international compliance regimes appears indicative of asymmetries in geopolitical power, rather than a candid assessment of microprudential risk. Smaller states, lacking the capacity, diplomatic influence, and economic leverage of larger economies, are more readily subjected to reputational sanctioning and external scrutiny. Consequently, mechanisms such as blacklisting and enhanced monitoring requirements function as instruments through which regulatory authority is exercised unevenly, if not weaponised, across the international system.

These pressures have tangible economic implications for the development prospects of SIDS. The reputational consequences associated with being categorised as a high-risk or non-cooperative jurisdiction can discourage capital inflows. Kida and Paetzold (2021) find that graylisting by the Financial Action Task Force (FATF) can reduce inflows by 7.6% of GDP. Cao et al. (2024) exemplify how these harms may spill beyond the financial services sector, finding that reputational harm to Panama following the 2016 leak of millions of documents exposing offshore financial activity and tax avoidance, known as the Panama Papers, also affected the tourism sector. In turn, such external political pressure may constrain development opportunities available to offshore financial centres and SIDS in general.

Structural Treaty Asymmetries and the Allocation of Taxing Rights

Beyond the reputational and regulatory pressures associated with international blacklisting practices, Dukharan further argued that the harms associated with SIDS operating as OFCs are overstated. Particularly, she focused on claims that offshore financial centres are principal drivers of tax leakage from developing states, approximately USD 200 billion annually (Shaxson, 2019). However, Dukharan contends that the more consequential structural issue lies in how taxing rights are allocated through the design of international tax treaties. She argues that these agreements determine which jurisdiction has the primary authority to tax income generated through cross-border economic activity and therefore play a critical role in shaping the distribution of tax revenues across the international system. While offshore financial centres, such as Mauritius, have been credited as having tax treaties which enable tax avoidance, developing countries’ fiscal capacities are most eroded by treaties with advanced economies, such as the United Kingdom and Italy (ActionAid, 2016).

Although many SIDS have fewer and less restrictive taxation treaties with developing states than advanced economies, we believe that Dukharan’s argument warrants further qualification. In absolute terms, the estimated losses via treaties are paled by the estimated annual revenue losses via tax havens. Janský and Šedivý (2018) estimate, for 14 developing countries in sub-Saharan Africa and Asia, that the highest potential tax revenue losses are in the hundreds of millions USD and around 0.1 percent of GDP, with the Philippines incurring the largest losses in both absolute and relative terms; around 95 percent of losses come from dividends, and four investor countries — Japan, the Netherlands, Switzerland and Singapore — together account for more than half of the losses.

The analysis by Janský and Šedivý (2018) highlights an alternative role of geopolitical dynamics in the sanctioning of non-compliance with international standards. Specifically, their identification of major economies, such as the Netherlands, Switzerland, and Singapore, is important because these jurisdictions, in addition to the United Kingdom and Ireland, are classified as conduit international financial centres (Garcia-Bernardo et al., 2017). In Garcia-Bernardo et al. (2017), a conduit jurisdiction is an intermediary between an onshore jurisdiction (i.e. where revenues or capital originate) and a sink jurisdiction (i.e. where revenues are hidden). While this is not a rigid description of the roles jurisdictions play in the flow of international finance, an underlying theme is that conduit jurisdictions are not frequently attributed with the fault of facilitating tax avoidance. Nonetheless, evidence from Fuest et al. (2022) indicates that 87% of German MNE tax-haven profits are booked in European conduit OFCs, with only 13% being booked in sink OFCs, which are often SIDS.

Figure 1 · Tax treaty revenue losses

This evidence further solidifies the geopolitical dynamics that shape OFC scrutiny and intensify the vulnerabilities faced by SIDS. From our perspective, this suggests a more nuanced interpretation of the drivers of revenue loss in developing countries. While tax treaties may play a relatively minor role, a greater share of these losses in developing country revenues may be attributable to advanced economies as facilitators of international tax arbitrage and evasion. This evidence is concurrent with the earlier-mentioned discrepancy between advanced economy rhetoric and practice as it pertains to blacklisting.

The Spillovers from Onshore Political Economy Pressures

Our discussion then turned to the harms attributed to SIDS as facilitators of tax and regulatory arbitrage in advanced economies. Dukharan returned to the argument that SIDS function as scapegoats for fiscal dynamics that originate elsewhere, but extended the analysis into the political economy of advanced-economy governments themselves. She drew on a line of argument associated with Branko Milanović, a leading economist on global inequality, who contends that contemporary inequality is increasingly driven by disparities within countries rather than between them. Milanović (2016) attributes much of this trend in developed economies to globalisation, the rising capital share of income, and homoploutia (the growing overlap between high-wage earners and those receiving substantial rents from capital).

In this context, the structure of domestic taxation becomes a central determinant of distributive outcomes. Dukharan argued, however, that advanced economies face political economy constraints which make it difficult to raise revenue from high-income individuals and corporations, given the influence of elites and well-resourced interest groups in shaping tax and other policy. This dynamic is consistent with the long-standing analyses of Olson (1965) and Stigler (1971), who formalise the principle that concentrated interest groups tend to prevail over more diffuse ones because the per-member benefit of organising and the cost of policy losses are much higher for small groups than for large ones. The implication is that the trajectory of redistributive policy is shaped by the distribution of organised pressure, which systematically favours elite interests.

This dynamic becomes most acute during periods of fiscal stress, when demands for revenue and public spending rise without a corresponding expansion in the political space to meet them through progressive taxation. The decade following the Global Financial Crisis exemplified this tension, particularly in Europe, where stagnant growth and widening inequality coincided with sustained pressure for fiscal consolidation and improved public services. Dukharan’s framing suggests that one response to such gaps is to redirect political pressure toward external targets with limited capacity to retaliate. From this purview, SIDS specialising in international financial services become “low-hanging fruit” for regulatory action, the sanctioning of which can mitigate domestic pressure for reform without direct confrontation with local elites. The timing of the OECD’s Base Erosion and Profit Shifting (BEPS) Initiative, launched in 2013, is at least consistent with this pattern, and the broader post-crisis Western turn toward protectionism, including tariffs against China, reflects a similar preference for external rather than domestic redistributive policy. The vulnerabilities differ in scale, however: a large economy can absorb shifts in trading partners’ regulatory stance, whereas finance-oriented SIDS depend on favourable external perceptions for their core economic activity, making such shifts a primary vulnerability (Cao et al., 2024; Kida & Paetzold, 2021).

Dukharan’s framing illuminates a structural feature of the dynamics between advanced economies and SIDS’ political economy. The constraints on advanced-economy governments, imposed by elite dynamics, can manifest as constraints on SIDS growth. The link is indirect, but it captures the asymmetric costs and limited bilateral bargaining capacity that SIDS face. For jurisdictions which rely on their offshore financial centres as a pillar of development, the cost of resisting advanced-economy mandates is substantial.

Inequality and Resilience in Island States

She argues that island development strategies should prioritise redistributive policies and intraregional interdependence as a means of strengthening regional resilience, rather than focusing primarily on economic growth alone.FROM THE ARTICLE

A common theme throughout our conversation was that island societies face mounting structural challenges. While the geopolitical pressures referenced were salient for OFC island states, Dukharan’s argument expanded beyond finance-oriented economies to encompass other vulnerabilities faced by SIDS. She argues that island development strategies should prioritise redistributive policies and intraregional interdependence as a means of strengthening regional resilience, rather than focusing primarily on economic growth alone.

First, Dukharan challenges the orthodox prioritisation of economic growth in island states, arguing instead that development strategies should focus on redistributing the gains from existing production. She emphasises that policymakers in Pacific island states such as Fiji and Vanuatu often prioritise maintaining broadly equal living standards across populations. In favour of her argument, there has been growing concern about the maleffects of unequal growth across the globe. As argued previously, the concentration of economic prosperity has negative effects on the fiscal capacity of advanced nations, and this principle is true in island states. As a result, to alleviate constraints on SIDS development, Dukharan argues that greater emphasis should be placed on societal wellbeing rather than economic growth, with policy attention directed toward taxation, housing, health, and infrastructure. This implies a broader reorientation of development strategy in SIDS away from growth-led models toward policies that prioritise distributional outcomes and social welfare.

Second, Dukharan elucidates that the inward focus of redistribution should not lead SIDS to adopt isolated or siloed development strategies. Rather, she argued that resilience is a complementary dimension of development that island states must prioritise. She highlights that the policy levers available to developed states, such as monetary policy interventions, are not feasible for island states, pointing to the need for alternative forms of collective action. As a result, Dukharan argues that this points to the importance of greater intraregional interdependence among island states. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) provides a key example of collective action operationalised through regional risk pooling, designed to enhance resilience to shared environmental shocks such as hurricanes and floods by spreading the financial burden across member states. Notably, the CCRIF issued a USD 90.1 million payout to the Jamaican government following Hurricane Melissa, supporting rapid liquidity and post-disaster recovery. Consequently, such mechanisms strengthen fiscal responsiveness and reduce the long-term burden of reconstruction (de la Plaza, 2022).

Beyond structural vulnerabilities, Dukharan further emphasises that improving resilience in SIDS cannot be pursued without addressing external trade dependencies. She highlights that many SIDS remain heavily reliant on imports from the Global North, particularly the United States in the Caribbean context. While acknowledging that the size of SIDS limits their abilities to diversify away from imports, Dukharan supported the idea that resilience can be enhanced through expanded trade with the Global South, which may reduce dependence on economic centres of the Global North. For the Caribbean, this would include countries across Latin America, including Brazil, Mexico, and Colombia. Taken together, these dynamics suggest that addressing inequality in SIDS requires not only domestic redistribution, but also a restructuring of external economic relationships that improve small island economies’ resilience.

Conclusion

Overall, the discussion with Dukharan evaluated the extent to which the development trajectories of small-island developing states are shaped by structural asymmetries within the global economic and regulatory system. The conversation elucidated that external compliance regimes, including blacklisting and enhanced monitoring frameworks, do not operate solely as neutral governance mechanisms, but reflect broader geopolitical dynamics that disproportionately expose small island jurisdictions to reputational and financial pressures. This asymmetry is further reinforced by the structure of international tax arrangements, where advanced economies play a central role in facilitating tax arbitrage, despite attracting less scrutiny than SIDS. At the same time, the political economy of advanced states contributes to the externalisation of domestic fiscal pressures, positioning SIDS as convenient targets for regulatory action. Taken together, these dynamics suggest that the vulnerabilities faced by SIDS are not simply a function of their domestic economic structures but are embedded within wider global systems of power and governance. In response, Dukharan’s framework emphasises that resilience requires a dual reorientation: internally, through greater attention to redistribution and social welfare, and externally, through strengthened regional cooperation and reduced dependence on Global North economic structures. This underscores the need to reconceptualise development in SIDS beyond growth alone, recognising the interdependence between domestic policy, external constraints, and regional collective action in shaping more equitable and sustainable outcomes.

References

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The views expressed are those of the interviewee and author(s) and do not necessarily reflect those of BJAR.