Is Hong Kong’s Free Economy a Myth?

Hong Kong has been known as the freest economy in the world.

But skeptics argue that such claims may not be accurate as Hong Kong’s capitalist political economy may have been shadowed by cronyism.

Writes Eddie Leung and Pepe Escobar at the Asia Times,

For the Heritage Foundation is a matter of routine to rank Hong Kong as the freest economy in the world - with a whopping overall score of 89.9 compared with a world average of 59.5. This Milton-Friedmanesque paradise is extolled for "small government, low taxes and light regulation".

Much is made of "business freedom" and "labor freedom". True - you can open a business in three days; you just need a Hong Kong ID, a form and US$350. But depending on the business, you will be squeezed by monopolies and oligopolies in no time. And if you are "labor", chances are in most cases you can only aspire to some sort of glorified slavery.

Heritage researchers may be excused for losing the plot between dinners at the Mandarin Oriental and partying in Lan Kwai Fong, both favored drinking and dining spots near the central business district. Behind all those luxury malls and the best bottles of Margaux, real life Hong Kong has absolutely nothing to do with a free economy encouraging competition on a level playing field. It's more like a rigged game.

The dark secret at the heart of Hong Kong is the unmitigated collusion between the government and a property cartel - controlled by just a few tycoons; the Lis, the Kwoks, the Lees, the Chengs, the Pao and Woo duo, and the Kadoories (more about them on part 2 of this report). These tycoons and their close business associates also happen to dominate seats on the 1,200-member Election Committee that chooses Hong Kong's chief executive…

We should be back again to a Chinese maxim: land is power. All the conglomerates controlled by Hong Kong tycoons are fattened on owning land. The local government is the sole supplier of land. So no wonder it keeps a vested interest in the property market - and that's a huge understatement - as it pockets fortunes from land sales and premiums on so-called "lease modifications".

As for the maxim that prevails across the city's property market cycles, it's always been the same: "Buy low and sell high".

Read the rest here.

Hong Kong has certainly not been an ideal laissez faire economy as no country in this world has been.

But rankings of economic freedom, whether by Heritage Foundation or by the Fraser Institute, has been relatively established and have not been measured on absolute terms.

It is also important to note that for as long as the distribution of any resources are politically determined, the natural outcome will be one of collusion, horse trading, favoritism and corruption.

Virtuous or moral government is an illusion more than Hong Kong’s free economy is a myth.

Government officials are human beings too limited by knowledge problem, cognitive biases, value preferences (determined by education, religion, culture, ideologies, family values and etc…), peer pressure, social standings, career ambitions and etc...

While some of Hong Kong’s wealthiest may have made their fortunes from cronyism (or politicized real estate policies), the above critics who resort to claims of “oligopolies and monopolies” that leads to “high prices land policy” and “glorified slavery” fails to recognize that Hong Kong’s property boom has also been influenced by the US Federal Reserve policies via the US dollar peg.

Also Asia’s increasing social mobility has been an influence to Hong Kong’s property market.

Hong Kong has been the second hottest property market in the world according to MSNBC.com

The growing wealth of mainland Chinese, coupled with China’s property restrictions, has led to an influx of mainland buyers into Hong Kong’s residential market in recent years. According to industry estimates, three in 10 deals in Hong Kong’s luxury property markets are done by mainland Chinese buyers.

Property restrictions too add to the politicization of Hong Kong’s real estate market.

Finally the above authors seem to have misunderstood the meaning of competition by which they ascribe to flawed neo-classical concepts of oligopolies and monopolies through “captive markets” or “limited competition”.

Let me quote the explanation of Austrian economist Dr. George Reisman (bold emphasis mine)

Actual price competition is an omnipresent phenomenon in a capitalist economy. But it is completely unlike the kind of pricing envisioned by the doctrine of "pure and perfect competition." It is not the product of a mass of short-sighted, individually insignificant little chiselers, each of whom acts to cut his price in the hope that his action won't be noticed by any of the others. The real-life competitor who cuts his price does not live in a rat's world, hoping to scurry away undetected with a morsel of the cheese of thousands of other rats, only to find that they too have been guided by the same stupidity, with the result that all have less cheese.

The competitor who cuts his price is fully aware of the impact on other competitors and that they will try to match his price. He acts in the knowledge that some of them will not be able to afford the cut, while he is, and that he will eventually pick up their business, as well as a major portion of any additional business that may come to the industry as a whole as the result of charging a lower price. He is able to afford the cut when and if his productive efficiency is greater than theirs, which lowers his costs to a level they cannot match.

The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity. Furthermore, his cost-cutting ability permits him to forestall the potential competition of outsiders who might be tempted to enter his field, drawn by the hope of making profits at high prices, but who cannot match his cost efficiency and, consequently, his lower prices. Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.

Price competition is not the self-sacrificial chiseling of prices to "marginal cost" or their day by day, minute by minute adjustment to the requirements of "rationing scarce capacity." It is the setting of prices perhaps only once a year — by the most efficient, lowest-cost producers, motivated by their own self-interest. The extent of the price competition varies in direct proportion to the size and the economic potency of these producers. It is firms like Ford, General Motors and A & P — not a microscopic-sized wheat farmer or sharecropper — that are responsible for price competition. The price competition of the giant Ford Motor Company reduced the price of automobiles from a level at which they could be only rich men's toys to a level at which a low-paid laborer could afford to own a car. The price competition of General Motors was so intense that firms like Kaiser and Studebaker could not meet it. The price competition of A & P was so successful that the supporters of "pure and perfect competition" have never stopped complaining about all the two-by-four grocery stores that had to go out of business.

I agree that there have been accounts of cronyism in Hong Kong. But Hong Kong’s largely open economy has also been materially influenced by external forces (monetary transmission and mainland immigration and or speculation), focusing on one at the expense of the other only exposes of analytical bias and would signify a big mistake.

Thus to conclude that Hong Kong’s political economy has veered towards an oligarchic-monopolistic environment would “currently” seem exaggerated as there has been little evidence of the deficiency of price competition in the context of the promotion of efficiency, competence and ability.

I say “current” because Hong Kong seems to have taken the slippery slope towards China’s mixed economy (by the introduction of minimum wages) which may change the incumbent political economic setting.

Hong Kong may not be a laissez faire or classical liberal paradise, but relatively speaking, I don’t think that Hong Kong’s free market has been a myth, especially not when compared to the Philippines.

World Economic Freedom Down, Asia and Africa Up

Writes Mike Brownfield at the Heritage ‘Morning Bell’ Blog

Economic freedom — the ability of individuals to control the fruits of their labor and pursue their dreams — is central to prosperity around the world. Heritage and The Wall Street Journal measure economic freedom by studying its pillars: the rule of law, limited government, regulatory efficiency, and open markets. Things like property rights, freedom from corruption, government spending, free trade, labor policies, and one’s ability to invest in and create businesses all factor in to a country’s economic freedom.

Sadly, economic freedom declined worldwide in 2011 as many countries attempted — without success — to spend their way out of recession. The editors of the Index explain what has led to this troubling decline:

“Rapid expansion of government, more than any market factor, appears to be responsible for flagging economic dynamism. Government spending has not only failed to arrest the economic crisis, but also–in many countries–seems to be prolonging it. The big-government approach has led to bloated public debt, turning an economic slowdown into a fiscal crisis with economic stagnation fueling long-term unemployment.”

Though some might think that the United States — the land of the free, the home of the brave — is of course a leader in economic freedom, they would be wrong. The United States fell to 10th place in the world for economic freedom, and its score continues to drop. The U.S. ranked 6th in 2009, 8th in 2010 and 9th in 2011.

The Keynesian (kick the can) approach in resolving crises via government (deficit) spending has been experiencing rapidly diminishing returns. So the developed crisis afflicted world now utilizes more of central bank actions to supplement or buttress fiscal policies.

Yet with far more debt and accreted imbalances from inflationism, such implies temporary fixes and that we should expect another crisis down the road (perhaps at a far larger bigger scale)

Not all is bad news though. The little crisis scathed regions of Asia and Africa appears headed in the opposite direction, again from Heritage…

The United States isn’t alone in the trend away from increased economic freedom. Canada and Mexico lost ground in the Index, and 31 of the 43 countries in Europe saw reduced freedom, as well. Given Europe’s huge welfare programs and out-of-control social spending, that’s unfortunately not surprising. As the world suffers the economic repercussions of Europe’s debt crisis, the price of pursuing policies that constrict economic freedom should be clear.

For all the bad news that the Index uncovered, there is some good news for economic freedom around the world. Four Asia-Pacific economies–Hong Kong, Singapore, Australia and New Zealand–lead the Index with top scores this year, Taiwan has seen increased gains in economic freedom, and eleven of the 46 economies in sub-Saharan Africa gained at least a full point on the Index’s economic freedom scale. And Mauritius eighth place score is the highest ever achieved by an African country.

Much of the world, though, isn’t so lucky. While some countries have seen their economic freedoms increase, others such as India and China are constrained by government control and bureaucracy.

This only means that the wealth convergence dynamic will continue to intensify and that the wealth gap between the West and Asia, Africa and other emerging markets, who continue to embrace economic freedom, will persist to narrow.

Despite my cynicism, I still put some hope into meaningful reforms that can be made in the Philippines. This signifies a mixed opinion of mine, which can be called as the endowment effect or the home bias. The Philippines has shown some progress which means kudos the current administration (if true).

Yet our deepening linkage with the world will represent as the ultimate driver that would pressure the domestic political economic policies to align with the underlying trend, globalization, which drives the rest of the world.

As proof, if Cuba has been opening up her economy, which is not just statistics, (chart from Heritage Foundation), then so should the Philippines.

Economic Freedom: Philippines Gains on Regulatory Improvements

At last some genuine good news for the Philippines.

According to the latest Heritage Foundation study on the state of world’s economic freedom 2012 Index of Economic Freedom, regulatory efficiency has significantly improved to nudge our ranking up from last year’s 115 to 107.

Here’s the Heritage,

The Philippines’ economic freedom score is 57.1, making its economy the 107th freest in the 2012 Index. Its score is 0.9 point higher than last year, with a significant improvement in business freedom. The Philippines ranks 19th out of 41 countries in the Asia–Pacific region, and its overall score is slightly below the world and regional averages.

Despite the challenging global economic environment, the Philippine economy has been on a steady path of economic expansion. The government has pursued a series of legislative reforms to enhance the entrepreneurial environment and develop a stronger private sector to generate broader-based job growth. Overall progress has been gradual, but regulatory efficiency has been notably enhanced. The economy has expanded at an average annual rate of close to 5 percent over the past five years.

There are lingering institutional challenges that will require deeper commitment to reform. Despite some progress, corruption continues to undermine prospects for long-term economic development. The inefficient judiciary, which remains susceptible to political interference, does not provide effective protection for property rights or strong and transparent enforcement of the law

While such improvements should be cheered at, we need broader advances not just in regulatory efficiency, but also in property rights, rule of law, open markets, the size and scale of governments founded on less interventionism.

But in watching mainstream media's penchant for government is the solution to our social problems, and political developments mainly focused on generating approval ratings via controversies, and by my recent experience, count me skeptical of such (statistical based) improvements.

Declining World Economic Freedom (includes the Philippines)

The Cato Institute and the Fraser Institute has just published the 2011 Economic Freedom of the World with bleak results.

From Cato’s Ian Vasquez (bold emphasis mine)

After having risen for decades, global economic freedom has fallen for a second year in a row. That’s according to Economic Freedom of the World: 2011 Annual Report co-published today with the Fraser Institute. The average global economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007 and has fallen to 6.64 in 2009, the last year for which data is available.

As the graph below shows, the United States has had one of the largest declines in the past decade. It now ranks in 10th place compared to 3rd in 2000, largely due to higher government spending and lower ratings on “rule of law” measures.

The report documents the strong, positive relationship between economic freedom and a range of indicators of standard of living including wealth, economic growth, longer life spans, better health care, lower poverty, civil and political liberties, and so on.

Economic freedom is central to human progress. As the response of activist governments to financial and ongoing debt crises fails to address underlying issues responsible for low growth and high unemployment, this report is an important empirical reminder about the wide-ranging consequences of politics or markets in determining the use of resources.

More from the study

Economic freedom has suffered another setback

• The chain-linked summary index permits comparisons over time. The average economic freedom score rose from 5.53 (out of 10) in 1980 to 6.74 in 2007, but fell back to 6.67 in 2008, and to 6.64 in 2009, the most recent year for which data are available.

• In this year’s index, Hong Kong retains the highest rating for economic freedom, 9.01 out of 10. The other nations among the top 10 are: Singapore (8.68); New Zealand (8.20); Switzerland (8.03); Australia (7.98); Canada (7.81); Chile (7.77); United Kingdom (7.71); Mauritius (7.67); and the United States (7.60).

• The rankings (and scores) of other large economies are Germany, 21 (7.45); Japan, 22 (7.44); France, 42 (7.16); Italy, 70 (6.81); Mexico, 75 (6.74); Russia, 81 (6.55); China, 92 (6.43); India, 94 (6.40); and Brazil, 102 (6.19).

• The bottom 10 nations are: Zimbabwe (4.08); Myanmar (4.16); Venezuela (4.28); Angola (4.76); Democratic Republic of Congo (4.84); Central African Republic (4.88); Guinea-Bissau (5.03); Republic of Congo (5.04); Burundi (5.12); and Chad (5.32).

The world’s largest economy, the United States, has suffered one of the largest declines in economic freedom over the last 10 years, pushing it into tenth place. Much of this decline is a result of higher government spending and borrowing and lower scores for the legal structure and property rights components. Over the longer term, the summary chainlinked ratings of Venezuela, Zimbabwe, United States, and Malaysia fell by eight-tenths of a point or more between 1990 and 2009, causing their rankings to slip.

The chain-linked summary ratings of Uganda, Zambia, Nicaragua, Albania, and Peru have increased by three or more points since 1990. The summary ratings of eight other countries—Bulgaria, Poland, El Salvador, Romania, Ghana, Nigeria, Hungary, and Guinea-Bissau—increased by between two and three points during this same period.

The spate of government interventions which can be seen via “higher government spending and borrowing” and various forms of legislative and monetary policy interventions, especially in the developed world (meant to save the highly privileged banking sector) has definitely been weakening the underlying trends of global economic freedom.

Distortion of price signals in the marketplace has been one big symptom.

All these will continue for as long as politics is the preferred avenue to solve current social predicaments.

Nevertheless, it’s hardly been good news for the Philippines…

…whose Economic Freedom continues to decline since 2005

Heritage Foundation’s Economic Freedom Scorecard For The Philippines

We’ve been told that elections would usher in important positive socio-economic changes.

But where things matters most, particularly economic freedom, there appear to be little signs of progress.

Here is the newly released Economic Freedom Index scorecard from the Heritage Foundation on the Philippines.

As one would observe, the Philippines falls BELOW the world average, and whose score has been nearly STATIC from the past administration until the present.

The Scoring Methodology: (all bold highlights mine)

Business Freedom

Potential entrepreneurs face severe challenges. The overall regulatory framework is burdensome, and the legal framework is ineffective, holding back more dynamic and broad-based expansion of the private sector.

[my comment:

These are symptoms of too many arbitrary laws and regulations which results to the onus of red tape, that increases the incidences of corruption and inefficiencies.

All these add to the business risk premium which raises the costs of doing business and the subsequent required investment hurdle rate.

Ever wonder why investment in the Philippines has lagged the region? And how unemployment rates remain high despite high level of educational attainment by the population?]

Trade Freedom

The Philippines’ weighted average tariff rate was 3.6 percent in 2007. Some high tariffs, import and export restrictions, quotas and tariff rate quotas, services market access barriers, import licensing requirements, restrictive and non-transparent standards, labeling and other regulations, domestic bias in government procurement, inconsistent and non-transparent customs valuation and administration, export subsidies, widespread corruption, and weak protection of intellectual property rights add to the cost of trade. Fifteen points were deducted from the Philippines’ trade freedom score to account for non-tariff barriers.

[my comment: protectionism results to inefficiency of resource allocation and crony capitalism]

Fiscal Freedom

The Philippines has relatively high tax rates. The top income tax rate is 32 percent. The top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), a real property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 14.1 percent.

[my comment: a double whammy for investments]

Government Spending

In the most recent year, total government expenditures, including consumption and transfer payments, held steady at 17.3 percent of GDP. Fiscal stimulus and restructuring of public enterprises have widened the fiscal deficit, which had almost reached balance in 2007.

[my comment: orthodox Keynesian policies for the benefit of the entrenched rent seeking political-economic class at the expense of society]

Monetary Freedom

Inflation has been moderate, averaging 4.7 percent between 2007 and 2009, and was holding steady in 2010. The government influences prices through state-owned enterprises and utilities and controls the prices of electricity distribution, water, telecommunications, and most transportation services. Price ceilings are usually imposed on basic commodities only in emergencies, and presidential authority to impose controls to check inflation or ease social tension is rarely exercised. Ten points were deducted from the Philippines’ monetary freedom score to account for measures that distort domestic prices.

[my comment: global inflation has been moderate and this has camouflaged or masked the imbalances from local state interventionism. Once global inflation rises meaningfully the ramifications of such imbalances will be magnified.]

Investment Freedom

Foreign investment is restricted in several sectors of the economy. In many industries where foreign investment is allowed, the level of foreign ownership is capped. All foreign investments are screened and must be registered with the government. Regulatory inconsistency and lack of transparency, corruption, and inadequate infrastructure hinder investment. Dispute resolution can be cumbersome and complex, and enforcement of contracts is weak. Residents and non-residents may hold foreign exchange accounts. Payments, capital transactions, and transfers are subject to some restrictions, controls, quantitative limits, and authorizations. Foreign investors may lease but not own land.

[my comment: embedded anti-competition policies all designed at propping up the economic interest of the elites combined with a legal system that is vulnerable to the influences of the same vested interest groups.

This should be a great example of what the great Frederic Bastiat’s calls as “legal plunder”

“Legal plunder can be committed in an infinite number of ways; hence, there are an infinite number of plans for organizing it: tariffs, protection, bonuses, subsidies, incentives, the progressive income tax, free education, the right to employment, the right to profit, the right to wages, the right to relief, the right to the tools of production, interest free credit, etc., etc. And it the aggregate of all these plans, in respect to what they have in common, legal plunder, that goes under the name of socialism.”]

Financial Freedom

The Philippines’ small financial sector is dominated by banking. In general, the financial system welcomes foreign competition, and capital standards and oversight have improved. Consolidation has progressed, and non-performing loans have gradually declined. The banking sector is dominated by five large commercial banks. Two large state-owned banks account for about 15 percent of total assets. Credit is generally available at market terms, but banks are required to lend specified portions of their funds to preferred sectors. The non-bank financial sector remains small. Capital markets are centered on the Philippine Stock Exchange. The impact of the global financial crisis on banking has been relatively small because of the sector’s very limited exposure to distressed international financial institutions.

[my comment: like all banking arrangements around the world a central bank led banking cartel. Only that this privileged industry has been fortunate enough to escape the latest crisis out of the bad experience from our own crisis episode.]

Property Rights

Although the Philippines has procedures and systems for registering claims on property, including intellectual property and chattel/mortgages, delays and uncertainty associated with a cumbersome court system continue to concern investors. Questions regarding the general sanctity of contracts and the property rights they support have also clouded the investment climate. The judicial system is weak. Judges are nominally independent, but some are corrupt or have been appointed strictly for political reasons. Organized crime is a serious problem. Despite some progress, enforcement of intellectual property rights remains problematic.

[my comment: similar to my outlook in Investment freedom]

Freedom from Corruption

Corruption is perceived as pervasive. The Philippines ranks 139th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. A culture of corruption is long-standing. The government has worked to reinvigorate its anti-corruption drive, but these efforts have been inconsistent. Reforms have not improved public perception and are overshadowed by high-profile cases frequently reported in the Philippine media.

[my comment-that’s the outcome of a political economic structure which relies mostly on political distribution of economic opportunities]

Labor Freedom

The labor market remains structurally rigid, although existing labor regulations are not particularly burdensome. Many of the country’s skilled workers have migrated to other advanced economies.

[my comment-similar remark on business freedom]

Overall, on the hype of change from a new administration, developments appear to be turning out as we predicted: the more things change the more they stay the same.

It is important to remember that any major reforms must not emerge only in terms “personality based politics” or the illusion of good government but a change that espouses a society of entrepreneurs or economic freedom

As Ludwig von Mises once wrote,

Prosperity is not simply a matter of capital investment. It is an ideological issue. What the underdeveloped countries need first is the ideology of economic freedom and private enterprise.