Poster Child for What?

The Heritage Foundation and Wall Street Journal recently released their Index of Economic Freedom for 2005. Not surprisingly, Hong Kong headed the list of 166 countries as the world’s freest economy as it has almost every year since the Index was first published. Hong Kong remains the world’s“poster child for economic development around the world,” said the Foundation..

China ranked 112th. That is not surprising either considering that China is still formally a communist state even if the command economy has given way to market socialism. Considering their relative positions, one might think that a huge gulf, an enormous chasm, exists between Hong Kong, the paradise of free markets, and China, paradigm of the command economy.

That’s not how a lot of Hong Kong people see it these days. “China’s cities are becoming more like us every day,” says Michael Kadoorie, scion of an old Hong Kong business family, owner of the territory’s leading electric power company. He wasn’t just observing that there are a lot of cars on the streets.

Or, consider the recent remarks of Gordon Wu, proprietor of Hopewell Holdings, “Hong Kong has lost the backbone of its success, a level playing field.” he said in a recent interview. He grumbled that he did not want to bid on any more government projects because the rules were becoming opaque, capricious and weighted towards insiders.

Hong Kong, the poster child for free-market economic development? More like a poster child for crony capitalism.

A growing number of people are beginning to think that China’s economy may, at least in some respects, be more receptive to open competition and more supportive of a robust private sector than Hong Kong’s. Political scientist and longtime observer Michael DeGolyer, put it this way in a recent essay in the Toronto Star:

“While regulation and taxation still lag behind Hong Kong standards
the battle for market share is far more contested in the [Chinese] mainland
than in the monopoly and cartel plagued and developer-dominated
Hong Kong.”

Writing on the 20th anniversary of the signing of the Joint Declaration that set the terms for Hong Kong’s return to China, DeGolyer went on to say:

“Free market ideologue Margaret Thatcher undoubtedly never thought
China would outdo the rabid Thatcherites when it came to competition
and trade. But 20 years on, not only the prospect looms before us but
China makes every other imitator of Manchester manufacturing pale in
comparison.

Of course, Hong Kong still scores high on many of the criteria that the Heritage Foundation uses to rank economies. Its tax rate is relatively low. There is no tax on capital gains or savings. The rule of law is firmly in place. The civil service is free of corruption. Yet Hong Kong is falling behind in aspects no one would have imagined.

Why, for example, are there no big discount retailers in Hong Kong? The last time any major retailer made a foothold in Hong Kong was the British retailer Marks and Spencer in the late 1980s while Hong Kong was still a British colony. Yet Wal-Mart stores are opening all over China – two of them just across the border in Shenzhen.

In Hong Kong “collusion” has suddenly become the buzz word for 2005 much as “democracy” (meaning the direct election of all public officers) wa the political issue for most of 2004. In his most recent policy address Chief Executive Tung Chee-hwa felt compelled to declare his opposition to “collusion between business and government.”

Of course, the two are connected. The Chief Executive is not picked by the people. He is selected by a committee made up mainly of big business interests. Half of the legislature too is picked from narrow special interests. Tung himself is the scion of a major ship owning family. Since the handover of Hong Kong in 1997, Tung has been dogged by the belief of many that he is beholden to special interests.

Exhibit A in the indictment is a decision the new SAR government made fairly soon after the handover. In 1999 the government awarded several hectares of prime government-owned land on the east side of Hong Kong Island (almost all land on Hong Kong island is government-owned) to a company controlled by Richard Li, the son of Hong Kong's richest man, Li Ka-shing, a prominent Tung supporter. He proposed building Cyperport, which was billed as an incubator for transforming Hong Kong into a regional high tech center.

Nothing too controversial about that, excerpt the government did so without putting the project out for public bidding. Many observers believe Cyberport was Tung’s biggest blunder (among many). Over the years the issue has continued to fester and is one reason for Tung’s continuing unpopularity.

Last month -- six years after the project was awarded -- the government felt compelled to defend its action. Secretary of Commerce, Industry and Technology John Tsang wrote a lengthy defense of the government’s role, which was carried as an opinion piece in six Hong Kong newspapers. (Some refused to carry the article complaining of the government’s unusual demand that it be run unedited and uncommented on. “We’re Nobody’s Mouthpiece,” declared The Standard)

Tsang argued basically that the decision had to be made quickly if Hong Kong were to be competitive in the fast-moving high tech environment of the dot-com boom. And to be fair, there was considerable angst in Hong Kong in the immediate aftermath of the Asian Financial Crisis (which broke out one day after the July 1, 1997, handover) that Hong Kong was losing its competitiveness to other Asian cities, such as Singapore and Shanghai. There still is.

The issue has come to the fore again in part because of another mammoth development pending on government-owned land. The proposed West Kowloon Cultural Center will comprise four museums, four large concert halls and theaters and a school for the performing arts. Every major cultural institution in the world, from the Pompidou Center in France to the Guggenheim Foundation in America, is watching this project closely.

But the government’s decision to put the entire project out for tender as a single project means that only a handful of the wealthiest property developers in the city have the means to bid. Many of the smaller, though still wealthy property developers have been lining up against the project, until and unless it is withdrawn and broken into smaller pieces on which they might compete.

This year marks the 20th anniversary of the signing of the Joint Declaration between Britain and China in 1985 setting the terms under which Hong Kong would revert to Chinese sovereignty. At that time, China was just beginning with the market reforms that would transform the country, 20 years later, into an economic powerhouse. It was still seen mainly as a backward, country dominated by the dead hand of the communist party.

So the best efforts of the British negotiators their Hong Kong allies were directed at trying to insulate Hong Kong from China and from the Communist Party cadres, who lacking any understanding of how the free market works, were sure to muck things up if they were given a chance to run Hong Kong’s economy.

Twenty years on, Hong Kong is the one that seems to be stuck in the past and it is China that has moved ahead in many ways. Hong Kong pales in comparison with the kind of freewheeling enterprise that characterizes much of China’s economy today. The world’s “freest economy” might benefit from a little of the cowboy capitalism from across the border.