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  • Sep 16, 2014
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THE WEEK EXPLAINED

The Week Explained: Unintended Consequences

PUBLISHED : Monday, 12 November, 2012, 12:00am
UPDATED : Monday, 12 November, 2012, 2:31am

At best the new government plan to cool housing prices has only a small chance of success. But for those of us at the battered end of the small and medium enterprise spectrum, it is not only a failure but one that is producing damaging effects.

This is because the iron rule of unintended consequences has already kicked in.

While the government focused on residential property, it missed the fact that, if it tampered with this sector, speculators would likely shift their interest to commercial properties where there is no penalty for making a quick buck.

As it happens my company is in the middle of buying a factory for the mundane purpose of expansion. Within a day of the new policy being announced we lost out on buying the factory (a speculator jumped in with a better offer) and have entered what can only be called delicate negotiations with the owner of another set of premises who flatly refuses to negotiate and, says the agent, should not be contacted in case he decides to up the price.

So I am not offering thanks to the government geniuses who thought up this wheeze. Did it occur to them that companies wishing to expand, create employment and stimulate economic growth might become mired in the brown stuff?

Should we join the speculators? Probably not - it's a sure way of hollowing out our economy, turning it into some kind of Cayman Islands paradise for punters, while creating new recruits for a jobless underclass. I am pretty sure that this is not what the government has in mind, but unintended consequences are the norm not the exception when it comes to government policy. The economist Adam Smith famously described this process as being the "invisible hand" at work. He was talking not about government action but about individuals in pursuit of personal gain being "led by an invisible hand to promote an end which was no part of his intention".

We don't need to search for fancy government initiatives to see the invisible hand at work. Take the ever-rising tobacco taxes, which lead to an increase in cigarette smuggling as the incentive to bring in untaxed tobacco rises alongside the price.

Then, more substantially, there is the currency peg, designed to preserve the stability and credibility of the Hong Kong dollar, but leaving the local economy vulnerable to the vagaries of US fiscal policy.

As matters stand the Americans want to keep interest rates low both to stimulate the economy and to discourage a rise in the value of the greenback. The unintended consequence of this for Hong Kong is that these low rates exert a heavy penalty on cautious savers who get negative real returns on bank deposits. The low interest rates also provide a great borrowing incentive for the very speculators the government is trying to discourage.

A more complex consequence of government policy is the Home Affairs Department's Enhancing Self-Reliance Through District Partnership Programme. Basically this ruse is designed to encourage district-based social enterprises with cash grants. However, as the blogger Ming Wong has pointed out, the grants can only be made to registered charities providing jobs for disadvantaged social groups.

It is unlikely these charities will have the means to create viable enterprises. The incentive to be viable is blunted by the two-year length of the grants, which discourages long-term planning - if the project fails it can be closed and another opened that qualifies for a new grant. Meanwhile, those who want to work in this field and have better commercial ideas are shut out. The result is the scheme is a dud, albeit one with good intentions.

And that's how the law of unintended consequences works; it mercilessly merges good intentions with others to produce results that are hard to predict.

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