Lessons From Hong Kong

Commentary, Role of Government, Peter Holle

Hong Kong reverted back to Chinese ownership on July 1. The bustling city of six million thrived under British colonial rule. The question now is: Will absorption by the mainland throttle a prosperity built upon what has until now been regarded as the freest economy in the world?

Back in the sixties, Hong Kong had a negative image. Cheap and flimsy plastic toys come to mind. Sweatshops, primitive living conditions, and a tropical swamp symbolized the place for Canadians who, at the time, had about the highest living standard in the world.

Back then Canada was easing into an unprecedented expansionary phase in government. It was the dawn of various new welfare and spending programs. As the cliché goes, there’s no such thing as a free lunch. The growth of entitlements was accompanied by mushrooming public sector payrolls, rising taxes and regulatory interventions, big debts, and a quantum leap in the size and pervasiveness of government.

But we were kind of smug back then. What lessons, if any, could a backward, poor, free-enterprise place like Hong Kong teach Canada? Our leaders chose to move the nation down the path of the caring, sharing welfare state. Meanwhile, governments kept a low profile in Hong Kong. Families were the primary welfare net. Governments kept out of the way and focused on the bare minimum-roads, police, and the courts.

Well, as it turns out, the lesson of Hong Kong is that smaller government translates into higher living standards.

On a per capita basis, the average Hong Kong resident today is richer and more prosperous than the average Canadian. A few short decades ago Canadians were much richer. Hong Kong is an amazing story of what an economically free people can accomplish. In 1960 its per capita income was less than comparable figures for poor places like Mexico and about a quarter that of Canada. Thirty five years of sustained growth changed this picture dramatically. In 1996 Hong Kong’s per capita income stood at about $27,000, compared to $24,000 in Canada.

What happened? Why did it grow faster? The place is cramped and has no natural resources. It absorbed millions of destitute refugees from the rest of China during the Communist upheavals under Mao. Why did its economy grow at an average pace of 5% over the last decade, far faster than our own economy?

While governments in Canada absorb about 48% of the economy in spending and taxation, Hong Kong’s public sector apparatus takes under 18% of its economy. Smaller government means low taxes. Hong Kong has no sales tax, no capital gains tax. Its citizens enjoy a 15% average tax rate on income. Corporate profits are taxed at only 16.5 percent. Citizens keep most of what they earn and are allowed to decide what they want to consume. The middle man, if you will, is out of the picture.

But, there must be a cost to this system? High unemployment? No, Hong Kong’s booming economy, now the world’s eighth largest trading economy, features a 2.8% jobless rate, a fraction of our own. Unsafe, dangerous, sweatshop economy? No, again. Manufacturing now accounts for only 9% of the city’s economy. As a powerful financial centre, no doubt fuelled by minimal taxation, services accounted for about 84 % of its economy in 1995.

Assuming the mainlanders don’t suffocate Hong Kong with large government, and the corruption and high taxes that inevitably accompanies politics, it is safe to assume that Hong Kong will continue to be a winner. The economic reality is that China brings to the partnership both natural resources and cheap labor, while Hong Kong brings neither-just intelligence, expertise and the wealthy heritage of a free-market tradition.

In the global economy, compact governments and low taxes means high growth, more prosperity, and more jobs.

Too bad many of our own folks still don’t get it.