The invisible hand

PUBLISHED : Tuesday, 27 July, 2010, 12:00am
UPDATED : Tuesday, 27 July, 2010, 12:00am

Commenting on the recent passage of minimum wage legislation in Hong Kong, The Economist recently lamented the erosion of the city's free-market ways and the end of what it described as a remarkable economic experiment. Hong Kong's growth model in the 1980s - continuous growth, low tax, decent welfare - was much praised by free-market economists. Milton Friedman portrayed it as the last bastion of classical capitalism. Since then, the myth has grown, tended by some people - including the Basic Law drafters who sought to preserve the 'positive non-interventionism' principle of Hong Kong capitalism.

Philip Haddon-Cave, the colonial financial secretary, coined the term in the late 1970s because the government's attitude towards the economy was 'frequently but inadequately described as being based on a philosophy of laissez-faire'. He saw a responsibility on the part of the government to respond when industries with social obligations ran into trouble and when an institution needed regulation to prevent inequitable practices. The prefix 'positive' was used to articulate a more flexible or 'revisionist' interpretation of the legacy inherited from his predecessor, John Cowperthwaite.

In the 1970s, the government began embarking on various interventionist policies and measures - such as free education, public rental housing, the Home Ownership Scheme, building the Cross-Harbour Tunnel and an underground railway, regulating the stock market and setting up industrial estates - for the purpose of economic and social development. Erosions of 'non-interventionism' have been a feature ever since Haddon-Cave's time; in fact, non-interventionism has always been a facade.

Not bound by any ideological dogma, the bureaucrats could choose to expand welfare and public services to meet rising expectations, as long as the government could afford it. The latter-day colonial regime embraced regulatory controls and had extensive, direct and indirect involvement in social and community services, relying on land revenue instead of taxation as the principal means of supporting these services. This built in the problems of a narrow tax base and hegemonic power enjoyed by land developers.

The acclaimed model started to experience tension in the 1990s, when the rise of representative politics led then-financial secretary Hamish Macleod to declare that positive non-interventionism had outlived its usefulness.

After 1997, the new political system - combining the incorporation of business and professional interests with popular representation - encouraged more demands for government handouts and interventions.

As the free market, on its own, is unable to deal with its moral hazards, the government has had to step in and accept the need for legislation on a minimum wage and fair competition.

Economic setbacks and uncertainties, following the 1998 Asian financial crisis and the recent global financial meltdown, demand a more fundamental rethink by the government. Global competition and economic restructuring require proactive strategies and policy action.

The government has to invest more in education, training and infrastructure development. It has to safeguard Hong Kong's position as the premier financial, shipping and trading centre, and promote integration within the Pearl River Delta region, where the city's economic future partly lies in the coming decade. It also has to provide a better regulatory environment. In short, it has to be assertive.

In April last year, the government identified six areas (including education, innovation and technology, culture and creative industry) as Hong Kong's new growth sectors, in addition to the existing financial services, trading and logistics, professional services and tourism. This does not yet amount to the government picking the runners, but its steering role is prominent.

Like all governments riding through rough political and economic seas, the Hong Kong administration cannot thrive on dogma, but has to adjust its role and policies pragmatically.

Rather than bemoaning the passing of an era, or a myth built on some unilateral understanding of a far more complex reality, it is better to appreciate the new challenges and structural problems faced by the city, as it struggles to maintain its brand of capitalism in order to survive and prosper under China's market socialism.

Anthony Cheung Bing-leung is an executive councillor and founder of SynergyNet, a policy think tank