Tuesday, April 14, 2009

Just How Free Is the World’s Freest Economy?

Hong Kong has the freest economy in the whole world, according to both the Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal, and the Economic Freedom of the World report published by the Fraser Institute and the Cato Institute.

There are good reasons for this ranking. The highest tax rate on personal income in the country is only 16 percent, and there are no taxes on interest, dividends, or capital gains. Hong Kong has complete free trade. There is very little special-interest (mercantilistic) interference in most markets. Hong Kong is one of the least corrupt countries in the world. And its legal system is based on British common law.

These undoubtedly are the reasons why this tiny land of 7 million people, with no natural resources to speak of, has a per-capita income ($29,900) that rivals that of the United States. Hong Kong enjoyed meteoric economic success in the space of a few decades — and did so mainly under British rule. Ironically, while the mother country was stifled by socialism and the welfare state (before Margaret Thatcher, at any rate), the colony soared from Third World to First World status by adopting capitalism instead. By the time Hong Kong was turned over to China, its per-capita income exceeded that of Britain.

But just how free is Hong Kong? On a recent visit, I spent an entire week with people in and out of government, and what I learned was surprising and disturbing.

Shocking fact number one: One out of every two residents of Hong Kong lives in government housing. Shocking fact number two: Under Hong Kong’s system of socialized medicine, everyone is entitled to (nearly) free health care (there are only nominal charges, and even those are waived if your income is low). In a sense, Hong Kong is even more socialistic than the Chinese mainland when it comes to housing and health care.

Of course, when things are free, demand exceeds supply. So there is a waiting list for public housing, and the average wait to see a medical specialist is more than seven months. That is why almost one out of every two health-care dollars is spent privately — with people paying market prices to obtain promptly what they are supposed to be getting gratis.

It gets worse. In a country that is often held up as the quintessential alternative to the modern welfare state, it turns out that people can and do apply for . . . well . . . welfare. Shocking fact number three: One out of every seven Hong Kong residents is receiving cash payments from the government, and more than 40 percent of these people are neither old nor disabled.

To begin with, there is a basic cash benefit. Then there is a whole slew of child-related cash allowances, covering such items as day care, pre-school, kindergarten, textbooks, and school lunches. Add to that a transportation allowance, a utilities allowance, and even a burial allowance, and you get a whole new meaning of the idea of “cradle to grave.”

There are no lifetime limits to these benefits, but they are reduced if you earn any income. Start with an average $12,000 annual cash benefit. If the family earns $8,000, the benefit is reduced to $4,000. If the family earns $9,000, the benefit is only $3,000. In economic terms, these families face a 100 percent marginal tax rate on private-sector earnings. One wonders why anyone works at all in Hong Kong. The answer seems to be: There is a strong work ethic that overrides the lure of living off the state.

Shocking fact number four: There is no private property in Hong Kong — at least not real property. All land is owned by the government. Nominal owners are actually leaseholders who have merely acquired the right to use the property they have.

Ah, I know what you’re thinking. At least Hong Kong isn’t infected by political correctness and nanny-state lunacies. Think again. There are laws against age, sex, and race discrimination. Smoking in restaurants and office buildings is illegal. And (would you believe it?) Hong Kong has an indigenous population for whom some people feel a lot of guilt. Thus any male (females don’t count — an indigenous people’s exception to the no-sex-discrimination rule) who can prove he is a lineal descendant of a male who was living in the region in 1898 is entitled to a free plot of land on which to build a “small house.” Since land is so scarce, its value is worth many times the construction costs of a house — allowing many an 18-year-old to enter into a flip arrangement with a real-estate investor and become an overnight millionaire.

I don’t want to be too negative here. I would rank Hong Kong among the best places to live in the whole world. It is a city of glass and steel that is visually stunning. Schoolchildren wear uniforms. The people are unfailingly friendly. And although there are no obese people to speak of, it has some of the best restaurants in all of Asia.

The public-transport system is largely privatized and self-sustaining (no eco-friendly but uneconomical subsidies). There is a measure of school choice. One public school I observed posted ads touting its attributes. If it fails to attract enough students, it will have to close. The constitution requires a balanced budget. And maybe most important of all, government spending is only 20 percent of national income. By contrast, the U.S. government takes about 50 percent more than that; the average European government takes twice as much.

So what does the future hold? When the British turned Hong Kong over to China in 1997, the great fear was that China would try to turn it into a Communist state. As part of an effort to forestall that outcome, the British left the country with institutions that would move in the direction of true democracy with universal suffrage.

In retrospect, the fear was completely misplaced. Capitalism in Hong Kong is in far greater danger from its own citizens than it is from anyone in Beijing.

Ironically, the biggest problem is: The people of Hong Kong are just like us! They don’t understand free enterprise any more than Americans understand it. They are no more dedicated to it than we are. They do not think of free-market capitalism as a moral and ethical ideal any more than Americans or Europeans think of it that way.

True enough, people in Hong Kong are aware that theirs has been named the freest economy in the world, and they are proud of that fact — even though capitalism was handed to them by a colonial government that no one in Hong Kong ever voted for. But from what I can tell, they would be perfectly willing to let it die a death of a thousand cuts — just as the rest of the developed world has done.

All signs point in the wrong direction. The government is about to impose Hong Kong’s first minimum-wage law. It is pushing for expansion of the public sector in health care. And when the welfare cash allowances described above were reduced recently, almost all the members of the elected Legislative Council (which acts in an advisory role) protested the move.

The Chinese government has pledged universal suffrage in Hong Kong by 2020. But is that really such a good idea? Right now, the most important bulwark against the creation of a welfare state in Hong Kong is the fact that the citizens cannot vote for it.

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