The Offshore World: Sovereign Markets, Virtual Places, and Nomad Millionaires.

By Ronen Palan. Ithaca, NY: Cornell University Press, 2003. 240p. $29.95.

The explosive growth of the offshore world has been widely observed in recent years as tax havens, export processing zones, offshore financial centers, and flags of convenience have increased in number. Accounts of money laundering, tax evasion, and the flight of manufacturing to less regulated locales are common and largely attributed to the excesses of the offshore world. Social scientists have begun to examine the origin of the offshore and its implications for state and society, capitalism, and the international system. Ronen Palan's book addresses these issues in a theoretically sophisticated fashion, focusing particularly on the relationship between the development of offshore and state sovereignty. It makes important contributions to the literatures on globalization, state sovereignty, and the dynamics of the capitalist system, and the questions it raises are likely to be the object of research for years to come.

Among the book's strengths is its in-depth and comprehensive description of the historical evolution and current status of the offshore world; this material alone is sufficient reason to read the volume. The offshore, Palan demonstrates, is not a territorial space but a separate juridical realm created and maintained by states. States have divided their sovereign domain into two juridical spaces, “onshore” and “offshore,” leaving activities in the offshore realm largely unregulated or untaxed.

Palan persuasively argues that the evolution of the offshore was not predetermined, and he identifies several structural features of the state and capitalist systems that enabled it and points where actors had the choice to foster or impede it. He effectively synthesizes a variety of theoretical perspectives in arriving at this conclusion, exhibiting an impressive command of the weaknesses and strengths of various relevant literatures, especially historical institutionalism and Marxism. This does give the book a certain literature review feel, which is exacerbated by an almost endless series of direct quotations from numerous authors. The presentation is complex, though lucid, but is likely to frustrate scholars who insist upon clearly stated, falsifiable hypotheses.

The best-known theory of the development of the offshore centers on the contention that it emerged in the 1960s and 1970s in response to sharply higher corporate taxation, more intrusive state regulation, and declining corporate profitability. Palan demonstrates that this argument cannot account for the creation of the offshore world, which he traces to the nineteenth century. In this period, jurists and policymakers created the offshore in their efforts to reconcile the sovereignty of territorially based nation-states with the expansion of market relationships across borders. In asserting their territorial sovereignty, states forged compromises among themselves and with key societal actors that accorded foreign nationals the same protection as citizens, thereby creating several mechanisms that would later allow states to offer foreigners privileges they would not give to their own citizens.

The “commercialization of sovereignty,” in which states use their sovereign right to make law for commercial purposes, began in the 1920s, as a handful of states, notably Switzerland, sought to use their laxer regulatory environments for pecuniary gain by attracting business and capital to their lands. Other countries or dependencies, such as the Cayman Islands, emulated this strategy, and rapid growth of the offshore ensued, starting in the late 1960s when declining corporate profitability, higher levels of corporate and individual taxation, and improvements in communications and transportation technologies made offshore jurisdictions attractive alternatives to the heavily regulated and taxed onshore for banks, corporations, and high-wealth individuals. The United States opposed some dimensions of the offshore early on, but quickly joined in when it came to believe it could further its neoliberal agenda of globalization; indeed, international banking facilities located in the United States are among the most important worldwide.

As Palan details, the growth of the offshore has accelerated recently, and this is ushering in a new era of capitalism and the conception of sovereignty. Specifically, he claims that capitalism is adopting what he calls “nomadic” organization, in which actors move through smooth or open-ended space; nomadic forms are overlaying, not replacing, the principle of territorial organization. In addition to reordering systems of production and finance, this process will have profound effects on state and society. “What is the point in having territorial sovereignty over nonterritorial exchange?” Palan asks. “Such territorial sovereignty is obviously eroding” (p. 178). Indeed, he contends that the growth of offshore is helping to undermine the legitimacy of the nation-state by destroying its ideological foundations. In particular, it weakens the bond between the territorial state and its citizens, which is based on a concept of identity founded on the ideal of “the people” or “the nation.” Nevertheless, the state is not withering away: “A different ideal-type form of state, more adept at handling globalization and even capable of surviving the relative decline of the territorial principle, is replacing it” (p. 182). One pending question, only touched upon briefly by Palan, is whether “global governance” might help to fill the void as the territorial state loses its authority.

One difficulty with the author's analysis is that the offshore world is acknowledged to be only one of several factors contributing to the erosion of the territorial nation-state (or the creation of nomadic capitalism), but he fails to identify the others, how they interact with the offshore, or the relative importance of the different variables, making it hard to assess the impact of the explanation he advances. Another is that he does not indicate how we might operationalize and measure the degree of legitimacy and evaluate to what extent territorial nation-states are losing legitimacy and evolving toward a different type of state (and how exactly we would be able to recognize this new form of statehood). This is critical since even a cursory look at contemporary politics suggests that citizens still identify with a “nation” located within physical borders, even as the offshore deepens.

All told, Ronen Palan has written an important book that will influence our thinking about a variety of pressing topics, particularly the relationship between the offshore and state sovereignty. Though not an easy book, The Offshore World is a worthwhile one, and for any scholar interested in the development of the offshore and its ramifications, it is a must read.