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<html>
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<title>C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?</title>
</head>
<body>
<h1>C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?</h1>
<p>
Given the general lack of laissez-faire capitalism in the world, examples
to show its benefits are few and far between. Rather than admit that the
ideal is simply impossible, conservative and right-"libertarian" ideologues
scour the world and history for examples. Rarely do they let facts get
in the way of their searching -- until the example expresses some negative
features such as economic crisis (repression of working class people or
rising inequality and poverty are of little consequence). Once that
happens, then all the statist features of those economies previously
ignored or downplayed will be stressed in order to protect the ideal
from reality.
</p><p>
One such example is Hong Kong, which is often pointed to by right-wingers
as an example of the power of capitalism and how a "pure" capitalism will
benefit all. It has regularly been ranked as first in the <i>"Index of Economic
Freedom"</i> produced by the Heritage Foundation, a US-based conservative think
tank ("economic freedom" reflecting what you expect a right-winger would
consider important). Milton Friedman played a leading role in this
idealisation of the former UK colony. In his words:
</p><p><blockquote><i>
"Take the fifty-year experiment in economic policy provided by Hong Kong
between the end of World War II and . . . when Hong Kong reverted to China.
</p><p>
"In this experiment, Hong Kong represents the experimental treatment . . .
I take Britain as one control because Britain, a benevolent dictator,
imposed different policies on Hong Kong from the ones it pursued at home
. . .
</p><p>
"Nonetheless, there are some statistics, and in 1960, the earliest date
for which I have been able to get them, the average per capita income in
Hong Kong was 28 percent of that in Great Britain; by 1996, it had risen
to 137 percent of that in Britain. In short, from 1960 to 1996, Hong Kong's
per capita income rose from about one-quarter of Britain's to more than
a third larger than Britain's . . . I believe that the only plausible
explanation for the different rates of growth is socialism in Britain,
free enterprise and free markets in Hong Kong. Has anybody got a better
explanation? I'd be grateful for any suggestions."</i> [<b>The Hong Kong Experiment</b>]
</blockquote></p><p>
It should be stressed that by "socialism" Friedman meant state spending,
particularly that associated with welfare (<i>"Direct government spending is
less than 15 percent of national income in Hong Kong, more than 40 percent
in the United States."</i> [<b>Op. Cit.</b>]). What to make of his claims?
</p><p>
It is undeniable that the figures for Hong Kong's economy are impressive.
Per-capita GDP by end 1996 should reach US$ 25,300, one of the highest in
Asia and higher than many western nations. Enviable tax rates - 16.5%
corporate profits tax, 15% salaries tax. In the first 5 years of the
1990's Hong Kong's economy grew at a tremendous rate -- nominal per
capita income and GDP levels (where inflation is not factored in) almost
doubled. Even accounting for inflation, growth was brisk. The average
annual growth rate in real terms of total GDP in the 10 years to 1995
was six per cent, growing by 4.6 per cent in 1995. However, looking
more closely, we find a somewhat different picture than that painted
by those claim Hong Kong as an example of the wonders of free market
capitalism. Once these basic (and well known) facts are known, it is
hard to take Friedman's claims seriously. Of course, there are aspects
of laissez-faire to the system (it does not subsidise sunset industries,
for example) however, there is much more to Hong Kong that these
features. Ultimately, laissez-faire capitalism is more than just low
taxes.
</p><p>
The most obvious starting place is the fact that the government owns all
the land. To state the obvious, land nationalisation is hardly capitalistic.
It is one of the reasons why its direct taxation levels are so low. As one
resident points out:
</p><p><blockquote><i>
"The main explanation for low tax rates . . . is not low social spending.
One important factor is that Hong Kong does not have to support a defence
industry . . . The most crucial explanation . . . lies in the fact that
less than half of the government's revenues comes from direct taxation.
</p><p>
"The Hong Kong government actually derives much of its revenue from land
transactions. The territory's land is technically owned by the government,
and the government fills its coffers by selling fifty-year leases to
developers (the fact that there are no absolute private property rights
to land will come as another surprise t boosters of 'Hong Kong-style'
libertarianism) . . . The government has an interest in maintaining high
property values . . . if it is to maintain its policy of low taxation. It
does this by carefully controlling the amount of land that is released
for sale . . . It is, of course, those buying new homes and renting from
the private sector who pay the price for this policy. Many Hong Kongers
live in third world conditions, and the need to pay astronomical
residential property prices is widely viewed as an indirect form of
taxation."</i> [Daniel A. Bell, <i>"Hong Kong's Transition to Capitalism"</i>,
pp. 15-23, <b>Dissent</b>, Winter 1998, pp. 15-6]
</blockquote></p><p>
The ownership of land and the state's role as landlord partly explains
the low apparent ratio of state spending to GDP. If the cost of the
subsidised housing land were accounted for at market prices in the
government budget, the ratio would be significantly higher. As noted,
Hong Kong had no need to pay for defence as this cost was borne by the
UK taxpayer. Include these government-provided services at their market
prices and the famously low share of government spending in GDP climbs
sharply.
</p><p>
Luckily for many inhabitants of Hong Kong, the state provides a range of
social welfare services in housing, education, health care and social
security. The government has a very basic, but comprehensive social welfare
system. This started in the 1950s, when the government launched one of the
largest public housing schemes in history to house the influx of about 2
million people fleeing Communist China. Hong Kong's social welfare system
really started in 1973, when the newly appointed governor <i>"announced that
public housing, education, medical, and social welfare services would be
treated as the four pillars of a fair and caring society."</i> He launched a
public housing program and by 1998, 52 percent of the population <i>"live
in subsidised housing, most of whom rent flats from the Housing Authority
with rents set at one-fifth the market level (the rest have bought subsidised
flats under various home-ownership schemes, with prices discounted 50 percent
from those in the private sector)."</i> Beyond public housing, Hong Kong <i>"also
has most of the standard features of welfare states in Western Europe. There
is an excellent public health care system: private hospitals are actually
going out of business because clean and efficient public hospitals are well
subsidised (the government pays 97 percent of the costs)."</i> Fortunately for the
state, the territory initially had a relatively youthful population compared
with western countries which meant it had less need for spending on pensions
and help for the aged (this advantage is declining as the population ages).
In addition, the <i>"large majority of primary schools and secondary schools
are either free of heavily subsidised, and the territory's tertiary
institutions all receive most of their funds from the public coffers."</i>
[Bell, <b>Op. Cit.</b>, pp. 16-7 and p. 17] We can be sure that when conservatives
and right-"libertarians" use Hong Kong as a model, they are <b>not</b> referring
to these aspects of the regime.
</p><p>
Given this, Hong Kong has <i>"deviated from the myth of a laissez-faire economy
with the government limiting itself to the role of the 'night watchman'"</i> as
it <i>"is a welfare state."</i> In 1995-6, it spent 47 percent of its public
expenditure on social services (<i>"only slightly less than the United Kingdom"</i>).
Between 1992 and 1998, welfare spending increased at a real rate of at least
10 percent annually. [Bell, <b>Op. Cit.</b>, p. 16] <i>"Without doubt,"</i> two experts
note, <i>"the development of public housing in Hong Kong has contributed greatly
to the social well-being of the Territory."</i> Overall, social welfare <i>"is the
third largest [state] expenditure . . . after education and health."</i> [Simon
X. B. Zhao and l. Zhand, <i>"Economic Growth and Income Inequality in Hong Kong:
Trends and Explanations,"</i> pp. 74-103, <b>China: An International Journal</b>,
Vol. 3, No. 1, p. 95 and p. 97] Hong Kong spent 11.6% of its GDP on welfare
spending in 2004, for example.
</p><p>
Moreover, this state intervention is not limited to just social welfare
provision. Hong Kong has an affordable public transport system in which
the government has substantial equity in most transport systems and grants
franchises and monopolised routes. So as well as being the monopoly owner
of land and the largest landlord, the state imposes rent controls, operates
three railways and regulates transport services and public utilities as
monopoly franchises. It subsidises education, health care, welfare and
charity. It has also took over the ownership and management of several
banks in the 1980s to prevent a general bank run. Overall, since the
1960s <i>"the Hong Kong government's involvement in everyday life has
increases steadily and now reaches into many vital areas of socio-economic
development."</i> [Ming K Chan, <i>"The Legacy of the British Administration
of Hong Kong: A View from Hong Kong,"</i> pp. 567-582, <b>The China Quarterly</b>,
no. 151, p. 575 and p. 574] It also intervened massively in the stock
market during the 1997 Asian crisis. Strangely, Friedman failed to note
any of these developments nor point to the lack of competition in many
areas of the domestic economy and the high returns given to competition-free
utility companies.
</p><p>
The state did not agree to these welfare measures by choice, as they were
originally forced upon it by fears of social unrest, first by waves of
migrants fleeing from China and then by the need to portray itself as
something more than an uncaring colonial regime. However, the other
form of intervention it pursued <b>was</b> by choice, namely the collusion
between the state and business elites. As one expert notes, the
<i>"executive-led 'administrative non-party' state was heavily influenced
by the business community"</i> with <i>"the composition of various government
advisory boards, committees and the three councils"</i> reflecting this as
<i>"business interests had an overwhelming voice in the consultation
machinery (about 70% of the total membership)."</i> This is accurately
described as a <i>"bureaucratic-cum-corporatist state"</i> with <i>"the interests
of government and the private sector dominating those of the community."</i>
Overall, <i>"the government and private sector share common interests and
have close links."</i> [Mae Kam Ng, <i>"Political Economy and Urban Planning,"</i>
<b>Progress in Planning</b>, P. Diamond and B. H. Massan (eds.), vol. 51,
Part 1, p. 11 and p. 84] Sizeable fortunes will be made when there are
interlocking arrangements between the local oligarchies and the state.
</p><p>
Another commentator notes that the myth of Hong Kong's laissez-faire regime
<i>"has been disproved in academic debates more than a decade ago"</i> and points
to <i>"the hypocrisy of laissez-faire colonialism"</i> which is marked by <i>"a
government which is actively involved, fully engaged and often interventionist,
whether by design or necessity."</i> He notes that <i>"the most damaging legacy
[of colonial rule] was the blatantly pro-business bias in the government's
decision-making."</i> There has been <i>"collusion between the colonial officialdom
and the British economic elites."</i> Indeed, <i>"the colonial regime has been at
fault for its subservience to business interests as manifested in its
unwillingness until very recently, not because of laissez-faire but from
its pro-business bias, to legislate against cartels and monopolies and to
regulate economic activities in the interests of labour, consumers and the
environment . . . In other words, free trade and free enterprise with an
open market . . . did not always mean fair trade and equal opportunity: the
regime intervened to favour British and big business interests at the expense
of both fair play and of a level playing field for all economic players
regardless of class or race."</i> [Ming K Chan, <i>"The Legacy of the British
Administration of Hong Kong: A View from Hong Kong,"</i> pp. 567-582, <b>The
China Quarterly</b>, no. 151, p. 577, p. 576, p. 575 and pp. 575-6] Bell
notes that a British corporation <i>"held the local telephone monopoly
until 1995"</i> while another <i>"holds all the landing rights at Hong Kong
airport."</i> [<b>Op. Cit.</b>, p. 21]
</p><p>
Unsurprisingly, as it owns all the land, the government has <i>"a strong
position in commanding resources to direct spatial development in the
territory."</i> There is a <i>"three-tiered system of land-use plans."</i> The
top-level, for example, <i>"maps out the overall land development strategy
to meet the long-term socio-economic needs of Hong Kong"</i> and it is
<i>"prepared and reviewed by the administration and there is no public
input to it."</i> This planning system is, as noted, heavily influenced by
the business sector and its <i>"committees operate largely behind closed
doors and policy formulation could be likened to a black-box operation."</i>
<i>"Traditionally,"</i> Ng notes, <i>"the closed door and Hong Kong centred urban
planning system had served to maintain economic dynamism in the colony.
With democratisation introduced in the 1980s, the planning system is
forced to be more open and to serve not just economic interests."</i> [Mae
Kam Ng, <b>Op. Cit.</b>, p. 11, p. 39, p. 37 and p. 13] As Chan stresses,
<i>"the colonial government has continuously played a direct and crucial
role as a very significant economic participant. Besides its control
of valuable resources, the regime's command of the relevant legal,
political and social institutions and processes also indirectly shapes
economic behaviour and societal development."</i> [<b>Op. Cit.</b>, p. 574]
</p><p>
Overall, as Bell notes, <i>"one cannot help but notice the large gap
between this reality and the myth of an open and competitive market
where only talent and luck determine the economic winners."</i> [<b>Op. Cit.</b>,
p. 16] As an expert in the Asian Tiger economies summarises:
</p><p><blockquote><i>
"to conclude . . . that Hong Kong is close to a free market economy
is misleading . . . Not only is the economy managed from outside the
formal institutions of government by the informal coalition of peak
private economic organisations, but government itself also has
available some unusual instruments for influencing industrial
activity. It owns all the land. . . It controls rents in part of
the public housing market and supplies subsidised public housing
to roughly half the population, thereby helping to keep down the
cost of labour. And its ability to increase or decrease the flow
of immigrants from China also gives it a way of affecting labour
costs."</i> [Robert Wade, <b>Governing the Market</b>, p. 332]
</blockquote></p><p>
This means that the Hong Kong system of "laissez-faire" is marked by
the state having close ties with the major banks and trading companies,
which, in turn, are closely linked to the life-time expatriates who
largely run the government. This provides a <i>"point of concentration"</i>
to conduct negotiations in line with an implicit development strategy.
Therefore it is pretty clear that Hong Kong does not really show the
benefits of "free market" capitalism. Wade indicates that we can consider
Hong Kong as a <i>"special case or as a less successful variant of the
authoritarian-capitalist state."</i> [<b>Op. Cit.</b>, p. 333]
</p><p>
There are other explanations for Hong Kong's high growth rates than
simply "capitalism." Firstly, Hong Kong is a city state and cities
have a higher economic growth rate than regions (which are held back
by large rural areas). This is because the agricultural sector rarely
achieves high economic growth rates and so in its absence a high
growth rate is easier to achieve. Secondly, there is Hong Kong's
location and its corresponding role as an entrept economy. Wade
notes that <i>"its economic growth is a function of its service role
in a wider regional economy, as entrept trader, regional headquarters
for multinational companies, and refuge for nervous money."</i> [<b>Op. Cit.</b>,
p. 331] Being between China and the rest of the world means its traders
could act as a middleman, earning income from the mark-up they could
impose on good going through the territory. This is why Hong Kong is
often referred to as an entrept economy, a place that imports, stores,
and re-exports goods. In other words, Hong Kong made a lot of its money
because many Chinese exports and imports went through it and its traders
marked-up the prices. It should be obvious if most of Western Europe's
goods went through, say, Liverpool, that city would have a very good
economic performance regardless of other factors. This option is hardly
available to most cities, never mind countries.
</p><p>
Then there is the issue of state ownership of land. As Mae Kam Ng
reports, monopoly ownership of all land by the state sets the context
for super-profits by government and finance capital generally. [<b>Op. Cit.</b>,
p. 13] Unsurprisingly, most government land <i>"is sold to just three
real-estate developers"</i> who <i>"sit on huge tracts of land, drop-feeding
apartments onto the market so as to maintain high property prices."</i>
Between 1992 and 1996, for example, prices increased fourfold and
profits doubled. The heads of two of the property firms were on the
list of the world's ten richest men in 1998. <i>"Meanwhile, potential
new entrants to the market are restricted by the huge cost of paying
land-conversion premiums that are the bedrock of government revenues."</i>
This is a <i>"cosy arrangement between the government and major developers."</i>
[Daniel A. Bell, <b>Op. Cit.</b>, p. 16]
</p><p>
The role as headquarters for companies and as a financial centre also
plays a part. It means an essential part of its success is that it gets
surplus value produced elsewhere in the world. Handling other people's
money is a sure-fire way of getting rich and this will have a nice impact
on per-capita income figures (as will selling goods produced in sweat-shops
in dictatorships like China). There has been a gradual shift in economic
direction to a more service-oriented economy which has stamped Hong Kong
as one of the world's foremost financial centres. This highly developed
sector is served by some 565 banks and deposit-taking companies from over
40 countries, including 85 of the world's top 100 in terms of assets. In
addition, it is the 8th largest stock market in the world (in terms of
capitalisation) and the 2nd largest in Asia. By 1995, Hong Kong was the
world's 10th largest exporter of services with the industry embracing
everything from accounting and legal services, insurance and maritime
to telecommunications and media. The contribution of the services sectors
as a whole to GDP increased from 60 per cent in 1970 to 83 per cent in 1994.
</p><p>
Meanwhile, manufacturing industry has moved to low wage countries such as
southern China (by the end of the 1970's, Hong Kong's manufacturing base
was less competitive, facing increasing costs in land and labour -- in other
words, workers were starting to benefit from economic growth and so capital
moved elsewhere). The economic reforms introduced by Deng Xiaoping in
southern China in 1978 where important, as this allowed capital access to
labour living under a dictatorship (just as American capitalists invested
heavily in Nazi Germany -- labour rights were null, profits were high). It
is estimated about 42,000 enterprises in the province have Hong Kong
participation and 4,000,000 workers (nine times larger than the territory's
own manufacturing workforce) are now directly or indirectly employed by Hong
Kong companies. In the late 1980's Hong Kong trading and manufacturing
companies began to expand further a field than just southern China. By the
mid 1990's they were operating across Asia, in Eastern Europe and Central
America. This shift, incidentally, has resulted in deindustrialisation and
a <i>"decrease in real income among manual workers"</i> as they moved to the lower
end service sector. [Simon X. B. Zhao and l. Zhand, <b>Op. Cit.</b>, p. 88]
</p><p>
Then there is the criteria Friedman uses, namely per-capita GDP.
As we have repeated stressed, averages hide a lot of important
and relevant information when evaluating a society. So it must
be stressed that Friedman's criteria of per capita income is an
average and, as such, hides the effect of inequality. This means
that a society with huge numbers of poor people and a handful of
ultra-rich individuals may have a higher average income than a
more equal society. This is the case of, say, America compared to
Sweden. Unsurprisingly, Hong Kong is a very unequal society and
this inequality is growing (so his claim that Hong Kong is
capitalist refutes his 1962 assertion that the more capitalist
economies are more equal). <i>"Behind the impressive GDP figures,"</i>
indicates Chan, <i>"is a widening income gap between the super-rich
and the grassroots, with 650,000 people reportedly living below
the poverty line."</i> [<b>Op. Cit.</b>, p. 576] As Bell points out, 13%
lived below the poverty line in 1999, compared to 8% in 1971. This
is partly explained by <i>"the rising proportion of elderly people and
single-parent families."</i> However, economic integration with China
has played a role as Hong Kong's manufacturing sector <i>"has been
almost entirely transferred to the southern province of Guangdong
(where labour is cheaper and workers' rights are practically
non-existent), with the consequence that Hong Kong's industrial
workers now find it much harder to find decent jobs in Hong Kong.
Most end up working in low-paying service jobs without much hope
of upward mobility."</i> [<b>Op. Cit.</b>, pp. 21-2]
</p><p>
As other experts note, while Hong Kong may have a GDP-per-capita
of a developed nation, its distribution of household income was
similar to that of Guatemala. Looking at the 1960s onwards, income
distribution only improved between 1966 and 1971, after this period
the share of the bottom 30% of the population went down continuously
while the top 20% saw an increase in their share of total income. In
fact, from the 1980s, <i>"the top 20% of households managed to account
for over 50 per cent of the total income."</i> In fact, the bottom 60%
of the population saw a decline in their share of income between 1971
and 1996. Overall, <i>"high-income households increased their wealth
progressively faster than low-income households."</i> This polarisation,
they argue, will continue as the economy de-industrialises: <i>"in the
absence of proper social policies, it will generate a small, extremely
wealthy class of the 'new rich' and simultaneously a large population
of the 'working poor.'"</i> [Simon X. B. Zhao and L. Zhand, <b>Op. Cit.</b>,
p. 85, p. 80, p. 82, p. 84 and p. 102]
</p><p>
Given that everywhere cannot be such a service provider, it does not
provide much of an indication of how "free market" capitalism would
work in, say, the United States. And as there is in fact extensive
(if informal) economic management and that the state owns all the
land and subsidies rent and health care, how can it be even considered
an example of "free market" capitalism in action? Unless, of course,
you consider that "economic freedom" best flourishes under a
dictatorship which owns all the land, which has close links to
business interests, provides a comprehensive, if basic, welfare state
and is dependent on another country to provide its defence needs and
the head of its executive. While most American's would be envious of
Hong Kong's welfare state, it is doubtful that many would consider
its other features as desirable. How many would be happy with being
under a <i>"benevolent dictator"</i> (perhaps being turned into a colony of
Britain again?) whose appointed government works closely with the
local business elite? Having a political regime in which the wealthy
can influence the government without the need for elections may be
considered too a high price to pay just to get subsidised housing,
health care and education. Given a choice between freedom and a high
rate of growth, how many would pick the latter over the former?
</p><p>
It is no coincidence that like most examples of the wonders of the
free market, Hong Kong was not a democracy. It was a relatively
liberal colonial dictatorship run. But political liberty does not
rate highly with many supporters of laissez-faire capitalism (such
as right-"libertarians", for example). However, the two are linked.
Which explains why we have spent so much time debunking the "free market"
capitalism claims over Hong Kong. It is more than simply a concern over
basic facts and correcting inaccurate assertions. Rather it is a concern
over the meaning of freedom and the dubious assumption that freedom can
be compartmentalised. While Hong Kong may be a more appealing example
that Pinochet's Chile, it still rests on the assumption that the masses
should be excluded from having a say over their communities (in their
own interests, of course, and <b>never,</b> of course, in the interests of
those who do the excluding) and that freedom is simply the ability to
change bosses (or become one yourself). Ultimately, there is a big
difference between "free" and "business-friendly." Hong Kong is the
latter simply because it is not the former. Its success is testament
that dictatorships can be more reliable defenders of class privilege
than democracies.
</p><p>
This can be seen from the attitude of Hong Kong's business elite to
the democratic reforms introduced in the 1990s and integration with
China. Significantly, <i>"the nominally socialist Chinese government
consistently opposed the introduction of further social welfare
programs in Hong Kong."</i> This is because <i>"it has chosen to enter into
a strategic alliance with Hong Kong's business class"</i> (<i>"To earn
support of corporate bosses, the Chinese government organised timely
interventions on behalf of Hong Kong companies"</i>). Unsurprisingly, the
first Beijing-appointed executive was made up of successful business
men and one of its first acts was to suspend pro-labour laws passed
by the out-going legislature. [Bell, <b>Op. Cit.</b>, p. 17, p. 18 and
pp. 19-20] The Chinese government opposed attempts to extend democracy,
imposing a complex electoral system which, in the words of the <b>Asian
Wall Street Journal</b>, was a <i>"means of reducing public participation
in the political process while stacking the next legislature with
people who depend on favours from the regime in Hong Kong or Beijing
and answer to narrow special interests, particularly the business
elite."</i> [quoted by Bell, <b>Op. Cit.</b>, pp. 18-9]
</p><p>
This reflects the fact that business tycoons are worried that democracy
would led to increased welfare spending with one, for example, predicting
that the <i>"under-educated, and those who did not pay tax would elect
candidates who stood for more social spending, which would turn Hong
Kong into a 'welfare state' . . . If we had a 100-per-cent directly
elected LegCo, only social welfare-oriented candidates will be elected.
Hong Kong is a business city and we [sic!] do not want to end up being
a social welfare state."</i> [<i>"Tycoon warns on protests,"</i> <b>The Standard</b>,
29 April 2004] Such a government can ignore public opinion and the
electorate more than in an independent democracy and, of course, can
be more influenced by business (as the history of Hong Kong testifies).
</p><p>
Overall, it is fair to say that Friedman only saw what he wanted to see
and contrasted his idealised vision with Britain and explained the
divergent economic performances of both countries to a conflict
between "socialism" and "capitalism." How he failed to notice that
the reality of Hong Kong was one marked by collusion between big
business and the state and that in key areas the regime was much
more "socialist" than its British counterpart is difficult to
understand given his willingness to use it as an example. It seems
intellectually dishonest to fail to mention that the state owned all
the land and was the biggest landlord with at least 50% of the
population living in subsidised housing. Then there are the facts of
almost free medical treatment at government clinics and hospitals
and an education system almost entirely funded by the government.
These are all massive interventions in the marketplace, interventions
Friedman spent many decades fighting in the USA. He did, however,
contribute to the myth that the British were benign imperialists and
the "free market" they introduced into Hong Kong was in the interests
of all rather than for those who exercised the dictatorship.
</p>
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