Its territory may be small in size, but Hong Kong's achievements are substantial. Hong Kong's gross domestic income per capita was $24,690 in 2002 - more than that of Canada, France, and Germany. At the heart of Hong Kong's success is its economic system, which for the last three decades was the freest in the world. The Economic Freedom of the World: 2004 Annual Report, which was published on July 15, saw Hong Kong retain its top position. But recent trends suggest that Hong Kong's economic freedom has been slowly eroding. That should be of concern to the people of Hong Kong and their government.
Few people today recall how poor Hong Kong was half a century ago. In those days "experts" believed that countries like Hong Kong were destined to remain poor. After all, Hong Kong was small, had merely 500,000 people and virtually no natural resources. To top it off, the international economic system, conventional wisdom of the day held, was exploitative and unfair. To compensate for all such shortcomings, poor countries were urged to plan their economies. Autarky and protectionism were in the vogue everywhere. It is a testament of the courage and strength of conviction of the men who steered Hong Kong's economy in those days that they opted to go in the opposite direction.
"Hong Kong," the Nobel laureate Milton Friedman wrote in 1991, "has had an extraordinary degree of economic freedom: no tariffs and no import or export quotas... Taxes have been very low, 10 to 12 percent of the national income... There are few regulations on business, no price controls, no wage controls." More than a decade later, things do not seem so rosy. Hong Kong's overall economic freedom rating slipped from 9.1 in 1995 to 8.7 in 2002. Government consumption grew and so did concerns about the integrity of Hong Kong's legal system. Between 1995 and 2002, Hong Kong's rating for those two categories fell from 8.0 to 7.2 and 10.0 to 8.3 respectively.
Undoubtedly, the mainland's interference in Hong Kong's governance is a growing problem and Hong Kong's democratically elected legislators have a duty to oppose Beijing's encroachments. Protection of the integrity of the legal system from political interference is especially important if Hong Kong is to retain its reputation as a place with even-handed approach to protection of private property and enforcement of contracts. Instead, the legislature has been increasingly interfering with the economy.
Minimum wage legislation increased, lowering Hong Kong's rating in that area from 7.4 in 1995 to 4.3 in 2002. Flexibility in hiring and firing decreased from 8.8 in 1995 to 7.8 in 2002. Administrative obstacles for opening businesses increased as well and Hong Kong's rating fell from 8.5 in 2000 to 6.7 in 2002 in that area. Management's dealings with government bureaucracy increased, driving the rating from 9.5 in 1995 down to 6.0 in 2002. The overall regulatory environment concerning credit, labor and business worsened from 8.7 in 1995 to 8.1 in 2002.
The threat to Hong Kong's economic freedom comes from both domestic and outside interference. On the one hand, Beijing authorities exercise growing control over Hong Kong's institutions, which may be the inevitable consequence of the mainland's desire permanently to unify the territory with the mainland. On the other hand, Hong Kong's elected representatives, who are dissuaded from opposing Beijing in political matters, increasingly focus their efforts on regulating the economy.
As another example of British constitutional engineering suggests, increasing economic regulation may be an unintended consequence of the British handover of Hong Kong to China. Devolution of government from Westminster to Edinburgh left the Scots with a large and expensive body of legislators. Their powers are limited to a few specific areas, such as healthcare, education and transport. As a consequence of the desire of the Scottish lawmakers to "do something," the regulatory burden in those three areas has been growing exponentially. As John Blundell of the London-based Institute of Economic Affairs wrote recently, independent Scotland would be the 60th country in the economic freedom chart - much lower than Great Britain as a whole.
I once asked Sir John Cowperthwaite, the Scot who presided over Hong Kong's laissez-faire economy during the 1950's and 1960's, whether he agreed with those who said that the secret of his success was in "doing nothing." He said that he did not agree, because aside from leaving the economy alone, he spent much of his time thwarting central planners in London. Today, the people of Hong Kong need to rediscover the wisdom of Sir John Cowperthwaite. They must stand firm against political busybodies in Hong Kong's legislature and always remember that economy free from political interference is the reason why today they are prosperous.