    C.12 Doesn't Hong Kong show the potentials of "free market" capitalism?

   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.

   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 "Index of Economic Freedom" 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:

     "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.

     "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 . . .

     "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."
     [The Hong Kong Experiment]

   It should be stressed that by "socialism" Friedman meant state
   spending, particularly that associated with welfare ("Direct government
   spending is less than 15 percent of national income in Hong Kong, more
   than 40 percent in the United States." [Op. Cit.]). What to make of his
   claims?

   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.

   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:

     "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.

     "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."
     [Daniel A. Bell, "Hong Kong's Transition to Capitalism", pp. 15-23,
     Dissent, Winter 1998, pp. 15-6]

   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.

   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 "announced that public housing, education, medical,
   and social welfare services would be treated as the four pillars of a
   fair and caring society." He launched a public housing program and by
   1998, 52 percent of the population "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)." Beyond public housing, Hong Kong "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)."
   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 "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." [Bell, Op. Cit.,
   pp. 16-7 and p. 17] We can be sure that when conservatives and
   right-"libertarians" use Hong Kong as a model, they are not referring
   to these aspects of the regime.

   Given this, Hong Kong has "deviated from the myth of a laissez-faire
   economy with the government limiting itself to the role of the 'night
   watchman'" as it "is a welfare state." In 1995-6, it spent 47 percent
   of its public expenditure on social services ("only slightly less than
   the United Kingdom"). Between 1992 and 1998, welfare spending increased
   at a real rate of at least 10 percent annually. [Bell, Op. Cit., p. 16]
   "Without doubt," two experts note, "the development of public housing
   in Hong Kong has contributed greatly to the social well-being of the
   Territory." Overall, social welfare "is the third largest [state]
   expenditure . . . after education and health." [Simon X. B. Zhao and l.
   Zhand, "Economic Growth and Income Inequality in Hong Kong: Trends and
   Explanations," pp. 74-103, China: An International Journal, Vol. 3, No.
   1, p. 95 and p. 97] Hong Kong spent 11.6% of its GDP on welfare
   spending in 2004, for example.

   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 "the Hong Kong government's involvement
   in everyday life has increases steadily and now reaches into many vital
   areas of socio-economic development." [Ming K Chan, "The Legacy of the
   British Administration of Hong Kong: A View from Hong Kong," pp.
   567-582, The China Quarterly, 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.

   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 was by choice, namely the
   collusion between the state and business elites. As one expert notes,
   the "executive-led 'administrative non-party' state was heavily
   influenced by the business community" with "the composition of various
   government advisory boards, committees and the three councils"
   reflecting this as "business interests had an overwhelming voice in the
   consultation machinery (about 70% of the total membership)." This is
   accurately described as a "bureaucratic-cum-corporatist state" with
   "the interests of government and the private sector dominating those of
   the community." Overall, "the government and private sector share
   common interests and have close links." [Mae Kam Ng, "Political Economy
   and Urban Planning," Progress in Planning, 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.

   Another commentator notes that the myth of Hong Kong's laissez-faire
   regime "has been disproved in academic debates more than a decade ago"
   and points to "the hypocrisy of laissez-faire colonialism" which is
   marked by "a government which is actively involved, fully engaged and
   often interventionist, whether by design or necessity." He notes that
   "the most damaging legacy [of colonial rule] was the blatantly
   pro-business bias in the government's decision-making." There has been
   "collusion between the colonial officialdom and the British economic
   elites." Indeed, "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." [Ming K Chan,
   "The Legacy of the British Administration of Hong Kong: A View from
   Hong Kong," pp. 567-582, The China Quarterly, no. 151, p. 577, p. 576,
   p. 575 and pp. 575-6] Bell notes that a British corporation "held the
   local telephone monopoly until 1995" while another "holds all the
   landing rights at Hong Kong airport." [Op. Cit., p. 21]

   Unsurprisingly, as it owns all the land, the government has "a strong
   position in commanding resources to direct spatial development in the
   territory." There is a "three-tiered system of land-use plans." The
   top-level, for example, "maps out the overall land development strategy
   to meet the long-term socio-economic needs of Hong Kong" and it is
   "prepared and reviewed by the administration and there is no public
   input to it." This planning system is, as noted, heavily influenced by
   the business sector and its "committees operate largely behind closed
   doors and policy formulation could be likened to a black-box
   operation." "Traditionally," Ng notes, "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." [Mae Kam Ng, Op. Cit., p. 11, p. 39, p. 37 and p.
   13] As Chan stresses, "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." [Op.
   Cit., p. 574]

   Overall, as Bell notes, "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." [Op. Cit.,
   p. 16] As an expert in the Asian Tiger economies summarises:

     "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." [Robert Wade, Governing the Market, p. 332]

   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 "point of concentration" 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 "special case or as a less successful variant
   of the authoritarian-capitalist state." [Op. Cit., p. 333]

   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 "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." [Op. Cit., 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.

   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. [Op.
   Cit., p. 13] Unsurprisingly, most government land "is sold to just
   three real-estate developers" who "sit on huge tracts of land,
   drop-feeding apartments onto the market so as to maintain high property
   prices." 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. "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."
   This is a "cosy arrangement between the government and major
   developers." [Daniel A. Bell, Op. Cit., p. 16]

   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.

   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
   "decrease in real income among manual workers" as they moved to the
   lower end service sector. [Simon X. B. Zhao and l. Zhand, Op. Cit., p.
   88]

   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). "Behind the impressive GDP figures,"
   indicates Chan, "is a widening income gap between the super-rich and
   the grassroots, with 650,000 people reportedly living below the poverty
   line." [Op. Cit., p. 576] As Bell points out, 13% lived below the
   poverty line in 1999, compared to 8% in 1971. This is partly explained
   by "the rising proportion of elderly people and single-parent
   families." However, economic integration with China has played a role
   as Hong Kong's manufacturing sector "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." [Op. Cit., pp.
   21-2]

   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, "the top 20% of households managed to account for over 50 per
   cent of the total income." In fact, the bottom 60% of the population
   saw a decline in their share of income between 1971 and 1996. Overall,
   "high-income households increased their wealth progressively faster
   than low-income households." This polarisation, they argue, will
   continue as the economy de-industrialises: "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.'" [Simon X. B. Zhao and L. Zhand, Op. Cit., p. 85, p. 80, p. 82,
   p. 84 and p. 102]

   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
   "benevolent dictator" (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?

   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 never, 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.

   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, "the nominally socialist Chinese government consistently
   opposed the introduction of further social welfare programs in Hong
   Kong." This is because "it has chosen to enter into a strategic
   alliance with Hong Kong's business class" ("To earn support of
   corporate bosses, the Chinese government organised timely interventions
   on behalf of Hong Kong companies"). 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, Op. Cit., 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 Asian Wall Street
   Journal, was a "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." [quoted by Bell,
   Op. Cit., pp. 18-9]

   This reflects the fact that business tycoons are worried that democracy
   would led to increased welfare spending with one, for example,
   predicting that the "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." ["Tycoon warns on protests," The
   Standard, 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).

   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.
