Of all the miracle economies of East Asia, the most miraculous is Hong Kong. Its per capita income of $23,000 makes it far richer than its colonial master, Britain. It is twice as rich per head as Korea, which often gets more international attention. All this in a country threatened for decades with extinction by China, flooded continuously with refugees from China, and lacking any natural resources.
What explains the miracle? I was at a conference in Hong Kong last week, and its finance secretary, Mr Donald Tsang, gave a cogent explanation. Hong Kong, he said, had followed the 11 commandments of good policy. Moses would have envied the outcome.
- Thou shalt encourage free trade. All East Asian tigers emphasised exports, but Hong Kong emphasised imports too, and it fared even better than the others. Hong Kong is the nearest any country has come to completely free trade. Many others (like the USA) claim to favour free trade but in practice their politicians impose controls to placate favoured lobbies. Hong Kong has escaped this fate because, while nominally a British colony, it has in practice been run by trading and financial houses, rather like the Renaissance city-states of Florence and Antwerp (which too were the richest in their time). The biggest money in Hong Kong never lay in industry; it lay in trade, shipping, finance and real estate. These interests found more advantage in free trade than protectionism, and that explains Hong Kong’s unique openness. This strategy did not aim explicitly to conquer poverty, yet did so far more successfully than Mao’s china, and finally inspired Deng’s reforms.
- Thou shalt promote a free flow of capital. Finance is an essential companion of trade, and Hong Kong could not have become a great trader without financial muscle. Unlike most countries, Hong Kong has no equivalent of the Reserve Bank of India, and its currency notes are simply the promissory notes of the Hong Kong and Shanaghai Bank, a private sector bank whose shares you can buy on the stock market. Hong Kong has leapfrogged the USA and many European countries in making the transition to a post-industrial society based on services, above all on financial services. Industry now contributes only 10 per cent of Hong Kong’s GDP, services 83 per cent. Singapore has followed a similar route.
- Thou shalt promote competition and structural flexibility. Hong Kong’s open trading system has obliged its producers to compete with the best in the world. It has never listened to local industrialists who might have wanted favoured treatment or said it was unfair to expect them to compete with a multinationals. Hong Kong has disregarded the conventional (and quite respectable) argument for protecting infant industry, which has been used everywhere else from unsuccessful India to successful Korea. Hong Kongs’s entrepreneurs and workers have always been highly flexible in shifting from one line of production into another with no agitations against closures or exit policy. Hong Kong first specialised in textiles, then footwear, then plastic goods, then consumer goods and light engineering, and finally financial services. Trade unions exist only in name, yet its workers have prospered mightily. No class war here.
- Thou shalt save. See its over-flowing shops, and Hong Kong may strike you as consumerism gone wild. Yet its people have consistently saved more than 30 per cent of their income, and his has provided the capital for its breakneck expansion. It now proposes to have a provident fund scheme like Singapore’s to increase compulsory long-term savings, which are tailor-made to finance long-term investments in people and infrastructure.
- Thou shalt maintain fiscal discipline, 40 percent of the people of Hong Kong pay direct taxes, and only two percent pay the top income rate of 15 percent (stunningly low even by Mr Chidambaram’s standards).Yet the Hong Kong government has no fiscal deficit, and for years has run huge fiscal surpluses. These surpluses not total HK $119 billion !In India, such a nest-egg would quickly have been dissipated by politicians in subsidies and loan write-offs. But Hong Kong has, with only a few well-targetted exceptions, charged user fees high enough to cover costs of services. The unsubsidised people of Hong Kong have fared for better than the subsidised ones of India.
- Thou shalt create sound social infrastructure. Hong Kong is the classic proof that an open economy does not mean laissez faire (non-intervention by the state). It has an activist government providing almost half its housing stock, and financing almost half of all education and health spending. No less than one-fifth of Hong Kong’s students are enabled to go to university, creating on of the most skilled workforces in the world.
- Thou shalt maintain external balance. Hong Kong has done so not through trade or currency controls but by paying its way in the world, without depending on aid, trade concessions or even external government debt. Initially it borrowed commercially to finance its infrastructure development,. Later it turned into a capital surplus country financing the rest of the world. It is the largest foreign investor in China, the second largest in Thailand.
- Thou shalt maintain financial stability. Hong Kong’s exchange rate has long been fixed to the dollar, greatly increasing its financial credibility and eliminates currency risks for investors. Other countries run inflationary policies and so have to keep devaluing. Not Hong Kong.
- Thou shalt maintain a sound banking system. An economy is only as strong as its banks. The owned capital of banks in Hong Kong totals 17 per cent of their loans. Against the standard Basle nor of 8 per cent (and the actual zero to 3 per cent in India before 1991). Real-time bank settlements enable money to pass instantly between bank accounts globally. No loan meals here, no write-offs decreed by politicians in the name of social upliftment.
- Thou shalt maintain complementary micro-economic policies. A prudent government may provide sound macro policy, but this must be consistent with thousands of micro-policies for each sector of the economy. Hong Kong has this coherence.
- Thou shalt practice what you preach. Governments must not simply lecture others on good behaviour, but provide good governance themselves. Corruption, organised crime and bureaucratic obfuscation exist in some measure in Hong Kong. Yet overall it enjoys good governance, and so the meritorious fare better than those with position or influence. Its citizens feel they are getting a fair deal, especially in relation to the low taxes they pay. Civil servants are both civil and give real service. Very unlike India.
Hong Kong has performed no miracle, says Mr Tsang, it has simply followed the 11 commandments of sound policy, and anybody else can do it too. Is anybody in India listening?