America’s ignored backyard: The decline of the US Virgin Islands
Before you read this article, it might be helpful to review my piece on the Caribbean debt crisis as background to this topic.
The US Virgin Islands, pre-crisis
The US Virgin Islands are a group of islands in the Caribbean Sea about 40 miles east of Puerto Rico. The three main islands are St. Thomas, St. John, and St. Croix. The majority of the islands’ 103,574 people live on St. Thomas and St. Croix, and the capital Charlotte Amalie is located on St. Thomas. The picture accompanying this article is of Charlotte Amalie’s harbor.
As was typical of the Caribbean, the US Virgin Islands were controlled by the various European colonial powers throughout most of its history, eventually settling into the hands of Denmark in the mid-1700’s. The islands became a major source of sugarcane for Denmark until the mid 19th century, when Denmark began having to transfer funds to its colony to keep it afloat. The United States and Denmark negotiated for possession of the territory, and it was eventually sold to the United States in March, 1917. Prior to the Caribbean debt crisis, the US Virgin Islands economy was heavily dependent on tourism, the production and sale of rum, and oil refining.
Starting in 2004, the islands began receiving a series of shocks to their economy from which they have never recovered.
The first major blow to their economy was struck in 2004 with the passage of the American Jobs Creation Act. Until that time, the Virgin Islands had what was called the Economic Development Commission (EDC), a program which was designed to bolster the Virgin Islands by offering tax breaks and incentives to businesses which moved from the mainland USA to set up shop in the islands. Rich business owners in the US such as Jeffery Epstein (some of you may have heard about him before) were exploiting this to evade taxes by claiming residence in the Virgin Islands.
Needless to say, when this was discovered, Congress decided to close this loophole, and made the residency requirements very strict in a rider to the American Jobs Act of 2004, unfortunately killing off incentives for legitimate businesses to move to the country. At the time of the loophole closure, the EDC was responsible for 20% of the government’s revenues, so this was a really significant blow to the islands’ economy and harmed foreign investment in the country.
The second major blow the US Virgin Islands suffered was the coming of the 2008 crash and the Caribbean debt crisis, which is covered more in depth in my previous article. Like most other countries, the islands, with an economy heavily dependent on tourism, found itself reeling from the decline in US tourist dollars after 2008. The third and most severe blow, however, came with the closure of the island’s HOVENSA refinery.
HOVENSA was an oil refinery that was originally built by the Hess Corporation, and it later became a joint venture between Hess and PDVSA, Venezuela’s state-owned oil company. It was the largest and most important private employer in the Virgin Islands, and also one of the largest oil refineries in the world. It was a key supplier of gas to the east coast of the United states and produced 350,000 barrels a day. It was also responsible for about 2,200 jobs total, both directly and indirectly.
The refinery lost about $1.3 billion from 2009 through 2011, which prompted Hess and PDVSA to make the sudden decision to close it down in January of 2012. The closure came with little warning and was announced only twenty four hours in advance. Prospects for its reopening seem dim, as it is expensive to maintain and transportation costs from the Virgin Islands make it a less attractive prospect.
Impact of the Caribbean debt crisis and 2008 recession
The Virgin Islands economy today has shrunk dramatically due to this series of shocks. This editorial notes that the Virgin Islands’ economy has shrunk by almost 25% since 2007.
The territory’s business activity has plummeted. This report has a chart showing how severe the decline is on page 8. In 2007, the total revenue of all businesses in the Virgin Islands amounted to $19.5 billion. By 2012, that total revenue had fallen to $6.8 billion, a 64.9% drop! The impact of these declines comes primarily from the southern island of St. Croix, where the HOVENSA refinery had been located before it closed.
The employment situation in the Virgin Islands also looks terrible. The overall unemployment rate in the territory was just 5% in 2007. By 2013, it spiked to a staggering 15.1%, with much of the territory’s pain again concentrated in St. Croix. The country’s population is also declining, with most of the losses again coming from St. Croix where the situation is worst.
The once healthy manufacturing sector of the economy has been gutted by the recession and now just consists of two rum distilleries and a few jewellery manufacturers, employing only 650 people.
The islands also have a serious violent crime problem. In 2010, a record 66 homicides were committed in the territory, making the country the most violent place in the United States on a per-capita basis. By way of comparison, New Orleans had just 28 homicides per 100,000 people in 2010. 2008 UN figures showed countries like Honduras and Jamaica with murder rates similar to those of the Virgin Islands. By 2013, the murder rate dropped to 38, which is an improvement but still extremely high compared to the US national average of 4.7 in 2012.
Poor law enforcement and policing is also a major problem. This CBS article notes the Virgin Islands police fail to make arrests in about two-thirds of homicides.
It is my opinion that the economic situation in the Virgin Islands remains dangerously precarious. Most of the growth the country has experienced since the onset of the Caribbean debt crisis has been in the tourism industry, and in the event of another serious recession in the mainland US, the already-struggling territory could find its GDP shrinking again and its unemployment worsening even further.
Sources: Much of the background information for this report came from my personal knowledge, but many of the gaps were filled in thanks to this excellent report here: http://www.usviber.org/CEDS%20Plan%202015.pdf and also this pair of articles had much information about crime: http://claudettevferron.com/wp-content/uploads/2015/05/Homicides-in-VI.pdf
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