‘Hai’-ly Recommended: Freedom and Competition for HK

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There was a time when Hong Kong was an island of economic freedom.  It thrived and grew in the postwar period.  A hardworking, low-cost labour force was put to good use by entrepreneurs and professionals from all over China.  Both groups were fleeing Communist oppression and found a home under the Lion Rock and under the light touch British administration.

Sir John Cowperthwaite  郭伯偉爵士 resisted his own government in London to ensure that light touch remained the order of the day.  The 1960’s saw poverty in Hong Kong, then measured at those living on less than the HKD equivalent of $400 a month, drop from 50% of the population to under 16% during his tenure.

At this time China was mostly closed and certainly unfree.   Hong Kong reached out to the rest of the world and did business with the mostly free bits of it.   Two way trade with the United States, Europe and other freer and free-ish economies of the world was the source of wealth that reduced poverty and paid for the growth of infrastructure, including education and hospitals.  Hong Kong built on its free market elements of open trade and low taxes by improving rule of law and strengthening property rights through its successful war on corruption in the 1970s.

China began the long trajectory of economic opening post-Mao and Hong Kong has benefited mightily.  The literal decimation of manufacturing as a percentage of economic activity occurred during a massive boom where unemployment hit a historic low, according to the IMF, of 1.9% in 1989.   The opening of Shenzhen, and later the rest of China, produced manifold opportunities as Hong Kong repositioned and repositioned again to take advantage of more economic freedom in China – and the rest of the world.

Birds of a feather

Hong Kong’s mythology, touted by officialdom and non-officialdom alike, emphasises heavily our economic freedom and how that has been our advantage.  It has reduced poverty and generated the prosperity that supports our human and physical infrastructure and welfare state.  But it takes two to tango – sometimes three or more in the peculiar dances of re-export, transit tourism and being a global financial centre.  If Hong Kong has become an economic heavy-hitter, it is not based on our huge consumer market.  We do have some disproportionately high consumption of some goods compared to our population, but mostly it is the flow of goods,capital, people and services between relatively free economies that drive our wealth.

Hong Kong has and continues to do a disproportionate amount of business with countries at the top of The Fraser Institute’s Economic Freedom of the World index.   Leaders include (in order, after #1 Hong Kong):  Singapore, New Zealand, Switzerland, the UAE, Mauritius, Finland, Bahrain, Canada and Australia.  New Zealand, Switzerland, Canada and Australia stand out especially as vibrant partners, regardless of the distances and disparities between their economies and Hong Kong.  In recent years, Canada has moved up the Freedom Index and Hong Kong’s export charts as their nearest comparable, the US, has declined on both.  Switzerland, the UAE and Australia are standouts and others do respectable trade with Hong Kong considering the size of their economies, proximity and populations. Chile, at #11, recently signed a Free Trade Agreement with Hong Kong and has seen banks, mining companies, wine firms, logistics companies and more invest in Hong Kong since.

As Hong Kong’s geographic neighbours, the Asian Tigers of the 1980’s and 1990’s, increased their economic freedom, Hong Kong increased her trade with these jurisdictions, lending again to her prosperity.

Viva Shanghai!  Viva Singapore!  Viva Qianhai!

The new Shanghai free trade zone and Qianhai Economic Zone have produced no small measure of hand-wringing, prodding, suggestions and anxiety.  Pronouncements from Beijing have been described as reassurances to let Hong Kong know they shouldn’t be too concerned.  Mr. Li Ka Shing has warned against complacency. The HKET’s general tilt is toward opportunity and the HKEJ towards threat, demanding response.  Others are less concerned.  In particular, the SCMP’s best, Holland and van der Kamp, have cautioned against fearful overreaction, doubting the actual amount of freedom promised will be delivered.

Much of this sounds like concerns in the past about Singapore.  Always nipping at Hong Kong’s heels on the economic freedom indices, Singapore has produced the same kinds of concerns in Hong Kong, seen as a regional competitor with an ability to take decisive action on bold policy measures to keep the pressure  on Hong Kong.

However, Singapore has always been a great partner for Hong Kong.  Trade and investment flows continue to grow year after year.  Singapore may have gained the edge over Hong Kong in particular financial services, such as private banking, foreign exchange and futures trading – but has lost some of  its edge in asset management and hedge funds as it increased regulation.  It exports products to Hong Kong that we don’t do – for example, oil and gas and consumer electronics.  But, by and large, the partnership works.  Hong Kong does well by Singapore’s economic freedom.  It is a major trading partner and source of inbound investment.  Its trade with Hong Kong has grown by an average of 5% per annum over the past four years, regardless of both jurisdictions’ small populations.  

The more economic freedom in China, the better

Indeed, we should be pushing for more economic freedom across China, encouraging and assisting where we can.  Hopefully the era where the brash Hong Kongers were seen as lording their success over their mainland confrères is long past and we can work as partners to increase the scope of economic freedom together.  

Our Chief Executive devoted the theme of his speech on National  Day to how Hong Kong’s ‘One Country, Two Systems’ status and international connections could help China grow.  He cited the Heritage Foundation Economic Freedom Index top spot as a plus, a welcome respite from some other rhetoric that has been heard in recent years.  He encourages Hong Kong to “actively adapt to the new environment of cooperation and competition, identifying new roles that we can play and new functions that we can perform.  As Chinese nationals, we, together with all people of China, should make contributions to the development of our country while doing our best to maintain the prosperity and stability of Hong Kong.”  We all know how Shenzhen’s opening was a boon for Hong Kong.  Of course the same has been true for Shanghai’s opening and the broader opening of China.  We should welcome more.

Bring on the Dream Team

The main concern should not be more economic freedom in Shanghai, Qianhai and any other ‘hai’s experimenting with economic freedom – the concern should be not enough.  Our heads of departments, bureaus, undersecretaries and more seem to be making weekly trips to the Chinese Academy of Governance on learning expeditions.  Perhaps Hong Kong could humbly offer to reciprocate by assisting any neighbours seeking to increase their economic freedom through improved rule of law, lower taxes, lighter touch regulations and openness.  Of course, this would need to be delivered with the blessing of various national and provincial level officialdom, but China’s economic freedom and prosperity is in our mutual interest.  While recognising that support in China for the new Shanghai Free Trade Zone may not be monolithic, it can’t hurt to make our  facilities available to those with the political will and ability to make change.  While it would likely be a bad idea to step into China’s internal politics in such matters, if a door is opened with invitation, we should have formal and informal solutions to support the cause of greater economic freedom north of the border.

Hong Kong could take a page from the much vaunted Shanghai school system and their practice of using retired star teachers to help institutions there.  Economists, financial experts, academics and more could be enticed into providing assistance in an institutional manner.  Leading lights in Hong Kong in all fields never seem to retire, really.  But those in a gentler phase of their career, like Joseph Yam, Frederick Ma and KC Kwok could be convinced to assist in a more structured fashion.  Harbour Times will refrain from naming a full economic dream team (some of whom grace these pages from week to week) that are fully committed at present, but would welcome suggestions from readers.  This need not be restricted to China, but any nation keen to grow.  Witness the growing Hong Kong-Chile connection – they need not be next door neighbours.

Most  importantly, Hong Kong needs to defend its own economic freedom.   It maintains the top rankings, but the business community is feeling beleaguered over recent years and it is hard to see where economic freedom has been improved.  True, taxes have been kept low and simple – until the stamp duties came along.  Legal institutional support for some sectors, like arbitration, seem to be working well and creating a new competitive advantage for Hong Kong.  The small business sector successfully fought off more complex taxes in the form of a GST some years ago.

However, the business community has lost most battles in recent years including competition law, minimum wage and MPF.  Small business is bracing for the labour strife and administrative hassle of standard working hours.  Corporate welfare has been ineffective and wasteful at best, hugely divisive and inequitable at worst.  While our competitors, especially in Mainland China, may be far behind Hong Kong in terms of keeping their economies free, they will catch up – hopefully with our help.

 

Lose some, win some

Hong Kong will certainly lose some business sectors’ activity to some parts of China as they develop competitive advantage.   We may not be the world’s #1 RMB trading centre if Shanghai really does take off the way some people thinks it will (and some think it won’t).  We will lose business to ports on the mainland as they drop trade barriers and improve efficiency.  We will lose retail business if taxes drop and rule of law, including fighting counterfeits, improves.  Good! We should hope for these developments as soon as possible.

If we do have the pillars of our economic freedom firmly in place, we will continue to thrive as we have since Sir John Cowperthwaite said ‘NO’ to the British government in the 1960’s.  Harbour Times doesn’t have the answer as to where the growth and prosperity will come from.  The nature of free markets includes understanding that no one person or government can have all the answers when predicting the outcome of trillions of small decisions made by free men and women.  But the resilience engendered by a free market environment, especially in the hands of Hong Kong’s natives and the freewheeling immigrants it attracts, will continue to provide the wealth that enriches families and enables us to care for the less fortunate.

But mostly win some

We should support and congratulate that success in China and any other partners we can work with around the world, near and far.  Our complacency must be against departing from the economic freedom that made Hong Kong great.  It must be against resting on our laurels.  It must be against whingeing about competition.  Our efforts must be to enable others to become successful as we have – and to grow with them.

More economic freedom in Hong Kong, China and abroad will enrich Hong Kongers in the spiritual and material world.  In that light,  we wish the best on all our competitor-partners, and look forward to competing like hell to make us all stronger!