• Fri
  • Aug 22, 2014
  • Updated: 5:10am
In Business
PUBLISHED : Tuesday, 01 April, 2014, 11:51am
UPDATED : Wednesday, 02 April, 2014, 8:05am

Why Hong Kong’s latest No 1 ranking was greeted with silence

Hong Kong beats Russia and Malaysia by a long shot to take top spot on the Crony-Capitalism Index, but nobody's cheering

You know how it is when Hong Kong tops a world comparison table: first comes a flurry of self-congratulatory articles, and then there will be a smug government statement to the effect that this confirms whatever it is supposed to confirm.

However, total silence followed the publication of a recent international survey by The Economist, drawing on material from the IMF, World Economic Forum and Forbes magazine.

Hong Kong has not only topped a world comparison league but did so by a mile.

The simple reason for the silence that followed this news is explained by the table's title: the crony-capitalism index. Hong Kong ranks No1 by a long shot, followed by Russia and Malaysia. Even Indonesia, much criticised for excessive crony capitalism, is ranked in 10th place, making Hong's Kong's reigning position that bit more "impressive".

The Economist league table is designed to identify economies that are dominated by "rent seekers". In other words, it looks at the fortunes of business leaders who have been able to secure a larger share of the business pie not by helping to expand the size of their local economies but by grabbing a larger share of the pie itself.

The Economist defines economic rent as being "the difference between what people are paid and what they would have to be paid for their labour, capital, land [or any other inputs into production] to remain in current use". As ever, an index of this kind is open to challenges, because there are lapses in data, especially from places such as China.

Also, economic rent often emerges from the existence of cartels that both create wealth and distort the market in which this wealth is being produced.

Thirdly, the index focuses solely on the wealth of billionaires, while a great deal of economic rent is extracted below the billionaire watermark.

However, none of these caveats need apply to Hong Kong where the complex of government-abetted cartels and monopolistic practices are not hard to identify. Thus everyone doing business in Hong Kong knows they tend to pay extortionate amounts in rent because the property market is so dominated by a small clutch of players that make the market more or less whatever they determine it to be.

Moreover, the concentration of power is aided and abetted by the government's monopoly over land ownership and the way it distributes land at auctions that - because of the size of the lots on offer - effectively ensure that only the very largest companies, alone or in combination, have any chance of securing land for development.

Other sectors in which Hong Kong's small clutch of tycoons have made their fortunes demonstrate that government regulation and control not only produced the tight system of cartel domination but allowed it to flourish. The examples that come readily to mind, aside from property development, are: banking, ports, energy supply, transportation and, as Ricky Wong is finding out much to his cost, communications.

The common thread running through all these sectors is government regulation.

Look at the same question from another angle, and it becomes equally clear why Hong Kong reigns supreme in the crony capitalism league.

Not one of Hong Kong's biggest companies has developed substantial businesses outside its cartel comfort zone. In the United States, which now ranks 17th in the league, much of the new wealth creation comes from corporations that have developed world-beating products in the technology sphere.

Meanwhile, Japan, despite its exquisite network of crony-type business arrangements, still manages to find itself at the bottom of the league table (in 21st place) because so many of its richest people are making world-beating products that are sold in a truly competitive marketplace.

Companies and consumers shoulder real costs arising from this web of monopolies

The disquiet over cartel operations in Hong Kong led to the enacting of a competition law two years ago, but it has proved to be so toothless as to have had more or less zero impact.

If this were merely a matter of abstract ideology, it really would not matter where Hong Kong stood in this iniquitous league, but companies and consumers shoulder real costs arising from this web of monopolies, and it adds considerably to the price of doing business here.

Moreover, Hong Kong's cartel-dominated economy runs contrary to the international trend, where this kind of dominance is being reduced. According to The Economist, the proportion of billionaire wealth derived from rent-seeking industries declined from 76 per cent in 2008 to 58 per cent this year.

As for the people at the lower end of the economic tree, in case anyone cares, this is very bad news indeed, because there is a direct correlation between the poverty gap and the degree of crony capitalism.

Every global survey of the gap between rich and poor has Hong Kong, infamously, near the top of the league. None of this is new information, but seeing it starkly reported in the way that it has been should, at the very least, stir some feeling of discomfort and demonstrates why "the world's freest economy" remains firmly headed in the wrong direction.

Stephen Vines runs companies in the food sector and moonlights as a journalist and broadcaster

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This article is now closed to comments

whoaman
Excellent article that highlights the 'legal' corruption in Hong Kong. Once again it exposes the incredible hypocrisy and ineffectiveness of the the HK gov't - and as one reader commented, it's not just because of the British - HK has belonged to China for 17 years already, plenty of time to reverse cronyism. But of course, never would happen with LKS in charge.
shouken
I do not see how electing the democrats to office in 2017 or 2047 is going to change the squalor, short of a communist/socialist revolution.
wiseman
No, you (impala) are not idealistic. As Honger said, you are just an excessively naive adult who does not know how the world actually works.
ejmciii
Good point. Corruption is endemic to the Chinese. It is naive to think they might change. Got it. Somehow, I don't think it is naive to think that even Chinese people can move from cronyism. Chinese people are not worse or better than anyone else. Now the masters in the North may not agree, but so it goes. We naive people can still hope that HK could be different. Where do they find you people?
clc2
Is it terribly surprising that so many of these "cronies" have been willing participants in M&A from Beijing?
Buy out the cronies and you've bought out the municipality. Soon, two countries one system.
fullcircle
That is the reason the ranking was treated with such silence, Stephen. I'm sure you knew that. I'm afraid, you've let your seething anger with the HK government got the better of you on this one; sorry for the candour.
fullcircle
As they say, relying on the top-line indication of an index doesn't tell you what's happening on the ground. As someone who follows and often agrees with SV's opinions, I'm surprised he pinned an opinion on the C-C index. It's a laudable effort for the Economist to spawn such a C-C Index but even the E is fallible, as in the moniker of the index. It looks like the index has invariably become more an indicator of asset concentration than crony capitalism per se, confusing policy deficiency and/or economic mismanagement for crony capitalism. HK fares worse than Malaysia for CC? The ruling government of Malaysia handed an exclusive import licence of luxury vehicles to one of its previous cabinet ministers for nothing (no public tender) and that arrangement ran for a decade if not more. The Chief Minister (voted in and reinstated over some 20 years by a rigged election system) of its eastern province of Sarawak on the island of Borneo reduced a swath of the world's oldest rainforest within his province to no more than 20% what it used to be while pocketing the proceeds of all that land concession for himself and his family instead of the provincial or national coffers. These are just two of the thousands of cases of handouts without tenders under the watch of the government there and in most cases directly orchestrated or abetted by them. If that is the kind of country that the C-C index claims has a better standing than HK in crony capitalism, how credible is the index?
johnyuan
Behavior wise, there are three things the “rent seekers“ can do to extract themselves from their one-track mind in making and hording money as the only purpose in their life:
1. Get out of their towering office and go to a teahouse and shoot some breeze there with people.
2. Let go some of their employees who only deal with foreign markets for their boss but are not on the ground with the locals.
3. Go and find their place in Hong Kong where real respect will be accorded during and after their life.
johnyuan
Why Hong Kong has become uncompetitive globally?
.
From my posting elsewhere:
.
I also frown on overuse of internal politic to achieve economic ends which I believe most conglomerates suffer from. Conglomerates can take advantage in internal cross funding to make a product or provide a service for bigger market share without innovation. Hong Kong’s LKS conglomerate is of this kind rendering Hong Kong’s economy highly uncompetitive. Hong Kong people pay highly for their flats, food and electricity. LKS notices that and made a convoluted confession most recently. 
johnyuan
We must thank SV for his courage to report and write this article in SCMP. Thanks also to The Economist for conducting the research. While local people themselves know about the “rent seekers” economy, it is now officially in the international news.
.
The news is met in silence by the government understandably of which it is part of the pusher of “rent economy” by colluding with the few powerful cartel businesses.
.
This finding in The Economist is holding a mirror primary up against LKS. It should silence LKS from further lecturing on the wrong doings that ruin Hong Kong by the people in Hong Kong. LKS is divesting his holdings from local to business abroad but it does not diminish his “rent economy” practice that affecting so much of Hong Kong.
.
SV’s being in business himself, I hope he would do well without repercussion from the parties he wrote about in this article.

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