THE VIEW
The View
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Why Hong Kong must avoid the tyranny of regulation

Nobel Prize-winning economist George Stigler was right: regulations tend to benefit industries, not the consumers they serve

PUBLISHED : Tuesday, 01 November, 2016, 1:09pm
UPDATED : Tuesday, 01 November, 2016, 10:45pm

Although Milton Friedman was the most famous advocate of free market ideas in the late 20th century, it was his colleague, Nobel Prize-winning economist George Stigler of the University of Chicago, who developed the theoretical arguments against government intervention in favour of free and unfettered markets.

Stigler questioned why regulations exist. The standard economic arguments are that they either correct market failures (for example, externalities like pollution) or pursue other policy goals (like income equality) in the public interest.

The premise is that government is motivated to do public good, and it can do so in an effective and cost-efficient manner.

But Stigler used an evidence-based approach to argue that usually regulations are designed to benefit industries rather than the customers they serve.

He attributed this to the fact that regulatory processes are subject to consultation and vulnerable to stakeholder influence. Stakeholders who have large stakes and permanent interests in the industry are more likely to end up with the most influence.

Stigler found that most regulations raise barriers to industry entry (for example, through licensing, quotas, and price control), under the guise of maintaining market orderliness and assuring standards of quality and performance. He argued that the main result of such barriers is to limit competition, especially from new entrants, rather than to protect customers.

Consumers typically have very little influence and are often neglected by regulatorsbecause they are a dispersed group, while concentrated interests likeindustries are politically more influential.

Stigler concluded the invisible hand of the market place may be a better friend of the consumer than the visible hand of the regulator.

George Stigler [of the University of Chicago] concluded the invisible hand of the market place may be a better friend of the consumer than the visible hand of the regulator

Advocacy groups have emerged to advance the interests of certain consumers and offset the influence of powerful producers. But in gaining influence, these groups have had to focus on a single issue (or limited issues). They do not and cannot represent the full diversity of customer concerns. And they too end up trying to capture the regulatory process for their constituencies.

Regulations tend to grow as society seeks to solve its economic issues through non-market processes. One of Stigler’s concerns was that every enacted regulation creates a constituency of beneficiaries who become the new vested interest. Their organised lobbies and advocates further complicate the policy environment.

Hong Kong is in real danger of travelling down this path. Three aspects of our political arrangement are nurturing it.

First, under the Basic Law the government must balance its budget. Hong Kong is, however, beholden to many interest and advocacy groups. To accommodate some of their demands, regulation can become an imperfect substitute for taxation because it transfers resources from payers to recipients without having to go through the government balance sheet.

Second, the present establishment coalition relies considerably on the support of organised interests that are not averse to using their influence to influence the regulatory process. This happened under the British colonial system and it is happening today under the Basic Law, but to a greater extent. An elected Chief Executive is even more vulnerable to the powerful voices or organised interests and populist demands.

Third, given a constitutional arrangement where legislators have curtailed powers and opposition parties are unlikely to capture government power, the opposition members are not accountable for delivering solutions to policy problems. They merely are accountable for their campaign platforms.

Moreover, the elections system has been designed to allow minority opinions to be over-represented. As a result, extreme radical views have gained support from opposition voters, which has polarised and fragmented political positions.

Bold decisions of the past that advanced Hong Kong’s economic development have become almost unimaginable in today’s political environment

Bold decisions of the past that advanced Hong Kong’s economic development – such as buying back the franchise to open up the international telecommunications market and terminating the interest rate agreements to open up banking competition – have become almost unimaginable in today’s political environment.

Yet deregulation of industries to open up markets and unlock entrepreneurial capacity could be an important driver of economic productivity. Financial technology, education, medical and health care are obvious areas where considerable gains can be achieved.

Take land, property and housing as an example. Liberalising current rules could increase supply in a way that would avoid creating market disorderliness and improve efficiency, transparency, and equity. Such measures would go a long way towards promoting growth with equality.

The selective deregulation of immigration to enhance our population quality would also promote growth with equality. Wage differentials between skilled and unskilled workers will narrow when the latter becomes scarcer. Population growth is increasingly important given Hong Kong’s rapidly ageing population – one of the most rapid in the world.

All too often, people are hostile to freer markets. Many are not aware that “un-free” markets hold far more problems in store. George Stigler defended freer markets not for ideological reasons, but on empirical and scientific grounds. He showed that for the most part, they have had a good track record.

Richard Wong is the Philip Wong Kennedy Wong professor in political economy at the University of Hong Kong

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