For a good game we just need a level pitch

PUBLISHED : Thursday, 22 April, 2004, 12:00am
UPDATED : Thursday, 22 April, 2004, 12:00am

IF I DID not feel the obligation to do my own work when writing this column, I would fill the space today by lifting a recent study word for word from the McKinsey Quarterly and just leave it at that.

It would possibly take up all of this page but it would still be the best thing that Chief Executive Tung Chee-hwa and his senior officials could read all this year on what they can do to help Hong Kong's economy.

Forget education, says McKinsey alumnus William Lewis in the article The Power of Productivity. Forget high technology initiatives. Forget foreign capital investment. Forget development loans. Forget assistance to small and medium-sized enterprises. The only thing that really counts in building wealth is ensuring that every individual and corporation has a level playing field and can compete in an open market.

Take education. It is widely considered of crucial importance for upgrading skills to the level required by a sophisticated economy and Mr Tung and his colleagues certainly subscribe to this. They talk endlessly of investing in education and 'improving the quality of our people', an insult to us if ever there was one.

But Mr Lewis says McKinsey's research over many years has shown that it does not really help much. Workers in any poor country suffering from low education standards are quickly trained to produce at the same levels as their counterparts in countries that have high education standards as long as they are given full scope to develop their productivity.

'If illiterate Mexican immigrants can reach world-class productivity levels building apartment houses in Houston, illiterate Brazilian workers can do so in Sao Paulo. Poor countries don't have to wait until they build bigger and better school systems and educate a whole generation of workers.'

Similarly, he disparages the idea that massive capital investment is required. All too often, he points out, the gains made through this route come not from more efficient work but from a low rate of return on ever higher amounts of capital inefficiently employed. Japan has been a fine example of this and Japanese workers have paid the price in lower living standards than they ought to have enjoyed.

But money will always find uses in which it is put productively to work and, for poor countries, massive injections of foreign capital are not a prior requirement for economic success.

'If local businesses followed the proven approaches for organising production and managing a workforce, poor countries could grow much faster than people realise. Domestic savers and foreign investors hungry for good returns would also supply these countries with plenty of capital for new investments.'

The underlying problem, says Mr Lewis, is that for the last 60 years, economists and international institutions have focused on the macro approach, first in stressing development aid, infrastructure and technology and then macroeconomic policies such as flexible exchange rates, low inflation and government solvency.

'But that's like trying to learn about the physical universe by using only the telescopes of astronomy; most real understanding in physics has actually come from studying the interaction of the tiniest particles in the universe.'

The real key to growth, he says, is the microeconomic ability of companies to compete with each other on a level playing field.

Unfortunately, there are pervasive obstacles to this in many countries, in part because people favour social objectives that inspire high minimum wages, small-business subsidies and other such policies.

'They may not be aware of the unintended adverse consequences that create major barriers to growth. Instead of attempting to achieve social objectives by limiting competition, countries should allow fair competition and thereby generate more national income, which can then be redistributed through taxes and government subsidies for the desperately poor.'

Such countries often also suffer because they adopt policies that favour special interests. These may be presented as helpful to growth but inevitably they hinder it because they limit competition and stop inefficient enterprises from failing and making room for efficient ones.

The immediate answer to this, says Mr Lewis, is for governments to focus on consumers rather than producers: 'Goods have value only if consumers want them. Otherwise sheer production does little to raise standards of living.'

Read it, Mr Tung. It is a superb study and every word of it applies to Hong Kong. Here is a signpost to the path that you should have taken and can still take.