What Would Milton Friedman Say?
September 22, 2006
China often bullies local officials into implementing disastrous economic policies. But in Hong Kong, the Beijing-appointed chief executive is coming up with bad ideas all by himself.
Last week Donald Tsang declared the end of “positive noninterventionism,” or laissez faire governance. Predictably — and encouragingly — the claim ignited a furor in Hong Kong, whose prosperity was built on free trade and small government. But the Donald held firm. On Tuesday, he argued in an op-ed published in a number of Chinese- and English-language newspapers that “government has to adapt its work” to suit “changing needs.”
We thought that was the role of the private sector. Thanks to “positive noninterventionism,” Hong Kong boasts one of the world's wealthiest, most flexible economies. In the 1960s, the city industrialized; in the 1970s, it exported; in the 1980s, it moved its manufacturing base to mainland China; in the 1990s, its service sector blossomed. Today, average unemployment hovers between 3% and 4%; growth is forecast at around 6.2% this year, 5.5% next year.
Mr. Tsang has a better idea. The government needs “to act when there are obvious imperfections in the operation of the market mechanism,” he wrote. Perhaps he's forgotten a few recent government ventures. Take Hong Kong Disneyland, to which the territory shelled out HK$23 billion ($2.95 billion) in subsidies. After a year, the park has proved a flop. Or Cyberport, a government-backed entree into the hi-tech era. Now it's just another property development.
Maybe Beijing can help, Mr. Tsang says. At an economic summit earlier this month, he lectured Hong Kong policy makers on the need to pay close attention to China's latest five-year plan. Whatever happened to one country, two systems?
“Positive noninterventionism” was the term coined in the 1980s by former Financial Secretary Sir Philip Haddon-Cave to encapsulate the Hong Kong's government's longstanding policy of minimal meddling in the economy. This week Mr. Tsang insisted that only the name has changed and that he still believes in the principle of “big market, small government.” If so, it doesn't help to talk about the death of a policy that has provided the foundation for Hong Kong's economic success.
At the time of Hong Kong's handover to China on July 1, 1997, this page called Mr. Tsang, then financial secretary, a “lonely voice” fighting other Beijing appointees to preserve Hong Kong's traditional economic formula. Now he's singing another tune.
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Hong Kong Wrong
By MILTON FRIEDMAN
October 6, 2006; Page A14
It had to happen. Hong Kong's policy of “positive noninterventionism” was too good to last. It went against all the instincts of government officials, paid to spend other people's money and meddle in other people's affairs. That's why it was sadly unsurprising to see Hong Kong's current leader, Donald Tsang, last month declare the death of the policy on which the territory's prosperity was built.
The really amazing phenomenon is that, for half a century, his predecessors resisted the temptation to tax and meddle. Though a colony of socialist Britain, Hong Kong followed a laissez-faire capitalist policy, thanks largely to a British civil servant, John Cowperthwaite. Assigned to handle Hong Kong's financial affairs in 1945, he rose through the ranks to become the territory's financial secretary from 1961-71. Cowperthwaite, who died on Jan. 21 this year, was so famously laissez-faire that he refused to collect economic statistics for fear this would only give government officials an excuse for more meddling. His successor, Sir Philip Haddon-Cave, coined the term “positive noninterventionism” to describe Cowperthwaite's approach.
The results of his policy were remarkable. At the end of World War II, Hong Kong was a dirt-poor island with a per-capita income about one-quarter that of Britain's. By 1997, when sovereignty was transferred to China, its per-capita income was roughly equal to that of the departing colonial power, even though Britain had experienced sizable growth over the same period. That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests.
The success of laissez-faire in Hong Kong was a major factor in encouraging China and other countries to move away from centralized control toward greater reliance on private enterprise and the free market. As a result, they too have benefited from rapid economic growth. The ultimate fate of China depends, I believe, on whether it continues to move in Hong Kong's direction faster than Hong Kong moves in China's.
Mr. Tsang insists that he only wants the government to act “when there are obvious imperfections in the operation of the market mechanism.” That ignores the reality that if there are any “obvious imperfections,” the market will eliminate them long before Mr. Tsang gets around to it. Much more important are the “imperfections” — obvious and not so obvious — that will be introduced by overactive government.
A half-century of “positive noninterventionism” has made Hong Kong wealthy enough to absorb much abuse from ill-advised government intervention. Inertia alone should ensure that intervention remains limited. Despite the policy change, Hong Kong is likely to remain wealthy and prosperous for many years to come. But, although the territory may continue to grow, it will no longer be such a shining symbol of economic freedom.
Yet that doesn't detract from the scale of Cowperthwaite's achievement. Whatever happens to Hong Kong in the future, the experience of this past 50 years will continue to instruct and encourage friends of economic freedom. And it provides a lasting model of good economic policy for others who wish to bring similar prosperity to their people.
Mr. Friedman, the 1976 Nobel laureate in economics, is a senior research fellow at Stanford's Hoover Institution.
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