Note: I wrote this soon after Hong Kong’s handover to Chinese rule, as part of my fellowship with the Phillips Foundation. This was in 1998. The lessons are still relevant.



In the late nineteenth century, hundreds of thousands of immigrants from China and Hong Kong braved a treacherous sea journey to come to work in America. Nearly 10,000 of them helped to build the railroads that stretched across the country, working long and gruelling hours so that they could make enough money to send back to their families. Many of these early Chinese immigrants first landed in the port of San Francisco, which they named “Gold Mountain.”

Today, immigrants from Hong Kong complain about the lack of job opportunities in North America. They say that they could make twice the money in Hong Kong that they make here, and be able to speak their own language and eat “real” Chinese food. They are heading back to the territory that is now under mainland Chinese rule in droves, creating an unexpected twist to Hong Kong’s “Brain Drain” story.

Communism’s detractors have long pointed to the flood of refugees pouring out of China and other communist countries when given the opportunity. When many in Hong Kong began seeking residence elsewhere after the signing of the Sino-British Joint Declaration it was termed the “brain drain” – an exodus of the territory’s best and brightest. When even more sought escape routes after the 1989 Tiananmen massacre, observers again pointed to the people “voting with their feet” against communist rule.

What observers did not anticipate is that those same people who fled Hong Kong before its return to China would be flooding back again en masse as early as 1991. Of course, some of those who left had intended to return all along, after securing a “safety net” foreign passport. However even many of those who had hoped to build a new home abroad are also returning to Hong Kong. Primary among their reasons for returning is the “lack of opportunity” in countries such as Canada and the U.S..

“Many men naively believe that their skills can be useful in Canada or the U.S.,” says one Hong Kong emigrant. “They end up earning half or even less overseas than in Hong Kong.”

Indeed, a 1991 report by “Employment and Immigration Canada” found that the majority of Hong Kong residents who emigrated to Canada experienced a significant drop in economic gains upon moving there.

Immigrants to Canada and the U.S. also give cultural reasons for wanting to return to Hong Kong: a sense of “not belonging” in their new home, unfamiliarity with the local customs, or with the language (especially for older immigrants). Invariably, however, they will cite the lacklustre economic environment as a prime reason for wanting to leave their new home and return to Hong Kong.

Many say that the pace of life in American and Canadian cities is “too slow,” or “boring.” Emigrants frequently complain of high taxes, and many simply find that the economic opportunities they would have in Hong Kong are nowhere to be found in North America.

Since 1980, some 650,000 Hong Kong residents have left the territory to seek foreign homes or at least foreign passports. Around 430,000 of these left after the Tiananmen massacre of 1989, and of this last group, it is estimated that approximately 12% have returned. According to some estimates, return rates are now up to between 20% and 30% of those who left in the early 1990s. It would appear that those same people who voted with their feet against communism are now using this method to vote against the mixed economies of North America.

What has changed? Why is there now less perceived opportunity in North America – historically the “land of opportunity” for people from all over the world? Chinese families would often pool all of their savings to send one family member to come here in the days when working long and dangerous days building a railroad looked like “opportunity” compared to what they had left behind in China. So why are emigrants to the U.S. and Canada now heading back by the thousands to what was once only a stopping point on the way to the lands where they would make their fortunes? The question is all the more puzzling given Hong Kong’s recent return to Chinese sovereignty.

Last summer, the territory’s transition from British to Chinese rule was greeted with apprehension in the U.S.. News coverage focused on the early-morning arrival of armoured personnel carriers on the day of the handover, and political cartoonists made much use of golden-goose-about-to-be-cooked images. Americans’ distrust of the Chinese Communist Government is well-placed – and concurs with the prevailing attitude in Hong Kong, where over 10% of the population opted for emigration or the acquisition of a foreign passport before the handover to Chinese rule. There is an irony in this distrust, however, and in the confidence with which American editorial writers and political commentators delighted in pointing out signs of impending doom for the territory on the eve of the transition.

The irony is this: That even five months after becoming a part of the largest remaining communist nation on earth, Hong Kong remains a much freer place in many respects than does the United States. While the government of Hong Kong has maintained a policy of minimal intervention in the economy and people’s lives for over a century, government in the United States has increased dramatically, both in size and in the degree to which it exercises control over the lives of its citizens.

If it seems extreme to suggest that a former colony that is now home to 4,700 of the same troops who carried out the Tiananmen massacre might be more free than the United States of America, consider the following: 615 out of every 100,000 people in the U.S. are in prison – more than twice the percentage for Hong Kong. Every year, U.S. Federal, state and local governments seize hundreds of millions of dollars in private property under asset forfeiture laws, although only a fraction of those whose property is seized are ever charged with a crime. While government in the United States consumes nearly 40% of the country’s National Income, government in Hong Kong consumes well below 20% of the territory’s GDP annually.
It is often said that the costs of economic suppression cannot be fully measured. How does one measure the loss of something that was never created: of businesses that never start because the entry costs are prohibitive; of income that might be earned; of goods that might be produced; jobs that might be created in the absence of restrictive regulations, corporate subsidies and high taxes?

What is worth looking at, however, are the very real differences – some measurable, some less so – between a society that is heavily regulated and taxed, and one that is taxed and regulated very little.

When Americans gained independence from British rule, they attempted to create a system that would protect its citizens’ freedom and keep the powers of government to a minimum. And for a while, it did. But slowly and over time, government’s role has grown to a level far beyond what the country’s founders had intended. Twenty-four years after the American war for independence was fought, the United States Federal Government spent only $20 per U.S. citizen, measured in 1990 dollars. Today it spends over $5,000 per person in those same dollars. Since 1900, Federal government consumption has gone from less than five percent of GDP to more than twenty-four percent today. When state and local consumption is added to this, the total consumed by government rises to nearly forty percent of the nation’s income.

Hong Kong also adopted the principles of minimal government intervention early on. Hong Kong, however, seems to have done a better job of living up to these principles. In 1996, the Hong Kong government took in only 16.6%, and spent 17.6%, of GDP. Taxes remain low at 15% for individuals, and 16.5% for corporations. Because of substantial personal allowances, more than half of Hong Kong’s workforce pays no tax at all. The most a Hong Kong resident could ever pay in taxes would be 15% of his or her income. The National Taxpayers Union estimates that an average family in the U.S. pays 35.4% of its income in Federal, state and local taxes, and another 15% in indirect taxes, bringing the total paid in taxes to 50.4% of the family’s income.
Some might argue that the “other side” to these figures could be found in increased benefits for U.S. citizens in the form of infrastructure, crime-prevention, social welfare, etc. The evidence, however, does not bear this out. Hong Kong has one of the strongest infrastructural bases in the world, with public transportation that is at least as good as any in the U.S. or Europe. The city was also one of the first in the world to have a fully-digitised telecommunications network. Nor does the safety of Hong Kong’s streets suffer from lack of funding: Hong Kong is one of the safest cities in the world, with crime rates that put most U.S. and European cities to shame.

The level of social welfare in Hong Kong also compares favorably with that in the major U.S. cities, and is in many ways superior. For example, even conservative estimates put homelessness in the U.S. at over 400,000, or .15% of the population. More liberal estimates claim that as many as two million U.S. residents, or .77% of the population, are homeless at any given time, and a survey by the National Coalition for the Homeless found that between 1985 and 1990, some seven million Americans had experienced homelessness. This is 2.7% of the population. Shelters operated by the City of New York house close to 20,000 people each night, or .27% of that city’s population (this estimate does not take into account the people housed by private shelters, or those who are not housed at all.)

The closest equivalent in Hong Kong to homeless shelters is the “caged-man-housing” – dormitory-style beds rented cheaply, each one surrounded by wire fencing to protect the property of the people (largely men) living there. The Hong Kong Government’s Housing Authority estimates that there are some 3,000 “caged men” at any one time in Hong Kong. Add this number to the estimated 3,000 street-sleepers, and the total is 6,000, or .095% of the city’s population. Even the most liberal of estimates put the number of caged men at 10,000, which would boost the total to .21% of the population, with only .04% actually homeless.

Nearly half of the population of Hong Kong lives in some form of public housing – all financed out of the 17.6% of GDP spent by Government, and by the rents these residents pay. This enormous task is made easier by the fact that Government is the sole landowner in Hong Kong and therefore does not pay for the land it builds on, but is impressive nonetheless, especially when all other public expenditures are taken into account.

To match government expenditures between a territory with a population of only 6.3 million, and a nation of 260 million is hardly a fair comparison, especially when the smaller territory has virtually no national defense expenditure. Even when national defense is taken out of the equation, however, the U.S. government still spends substantially more money per resident, (see graph) with little evidence to suggest that it produces any more value for its citizens. Indeed, the growth in standard of living for the people of Hong Kong has been nothing short of astronomical.

Per capita income in Hong Kong is $24,750 – the 15th highest in the world (the U.S. is 6th. ***2002***). What makes this remarkable is that as recently as 1960, per capita GDP was only $2,247 (in 1985 dollars) – comparable to such countries as Mexico and Argentina, and less than a quarter of that of the U.S. Between 1966 and 1976, real per capita GDP increased by 5.7% per year. Real GDP in the U.S. only grew by 2.7% during the same period. In 1996, U.S. GDP grew at a rate of 3.4%, compared to Hong Kong’s 4.7%.

Unemployment in Hong Kong has remained well below 3% for the 1990s with the exception of 1995, during which there was an unusually large influx of (returnees). The economy quickly adjusted, and unemployment was back down to below 3% within a few months. Average unemployment in the U.S. for this period was 6.12. During the past two decades, manufacturing’s share of employment in Hong Kong has fallen from over 40% to 15.3%, and well over 500,000 manufacturing jobs have been lost. Yet during this period, the highest unemployment rate recorded was only 4.5%, and this was an unusual and short-lived high.

For over a hundred and fifty years, Hong Kong has had few of the regulations and government programs that dominate economic life in America. While the territory does have minimal welfare assistance schemes, these are genuine safety-net programs, aimed at helping those who are truly in need. The level of welfare payments in Hong Kong historically have not encouraged dependence, nor have they been attractive enough to compete with work and business opportunities. Likewise, the level of regulation in the name of employment discrimination, zoning and the environment is bare-bones, compared to the United States.

In America, many believe that the high taxes we pay are necessary to fund needed programs and provide services that can’t be provided privately; many of us believe that the more money a government spends on social and economic problems, the more likely it is that these problems will go away; and activists for social justice believe that more regulation will help the disenfranchised and the powerless.

Hong Kong’s experience suggests otherwise. In the absence of high levels of taxation and regulation, the economy has been able to flourish, and it’s success is widely recognized as that of a “miracle economy.” Equally important is the fact that the Hong Kong people have been able to achieve this success without becoming dependent on the government for handouts, or finding themselves at the mercy of large corporations for employment: Hong Kong’s real success stories are the hundreds of thousands of small, owner-operated businesses that form the bulk of the economy. It is the territory’s relatively free environment that allows for this kind of opportunity for people to create their own success.

Hong Kong’s new government seems willing to depart from the policies that have made the territory one of the most successful in the world. Chief Executive Tung Chee Hwa’s plans, announced last October, include increased government spending, subsidising hi-tech industry, and other forms of official “guidance” for the economy.

Should Tung succeed in doing away with the territory’s traditional “laissez-faire” policy, the results for Hong Kong will be unfortunate. The lessons for the U.S., however are still there for anyone who cares to look at them. Anyone who believes that more government is the answer to the problems facing this country should take a close look at Hong Kong.



One of the most oft-quoted clichés about Hong Kong is that of the extreme contrasts between rich and poor. No travelogue is complete without its reference to images of impoverished hawkers plying their trade alongside wealthy tycoons in this bustling city.

Indeed, shabby dai-pai-dongs sit next to banks and jewellery shops in the island’s Central District – the territory’s banking and financial center. A glance down a busy street nearly anywhere in the city reveals images from all points along the economic and social spectrum: fishmongers and butchers shout out as they move their goods past suited men and women wielding cell-phones, middle-aged housewives stand on the sidewalk with their eyes glued to stock prices flipping across T.V. screens, and high-priced luxury cars share the streets with the territory’s taxi cabs, buses, trams, and minibuses.

On the surface, to someone visiting from New York or Los Angeles, Hong Kong would appear to have the more dramatic gap between rich and poor. Statistically, in fact, income inequality in Hong Kong is one of the highest in the world, according to such widely-used measures as the gini coefficient, which has risen from 0.430 to 0.518 in the past 20 years. (The higher the gini coefficient, the greater the inequalities in income.) The average gini coefficient for industrial countries and high-income developing countries is 0.338. In the U.S. it is 0.425, according to the U.S. Census Bureau. What the visitor will not find, however, are the inner-city ghettos, the alphabet cities and East L.A.s that are a feature of nearly every major U.S. city.

Contrast the images above with a drive up Manhattan, beginning at Wall Street and ending in Harlem. Once you get past say 102nd street, you’ll notice a dramatic change: now, instead of suspendered young men with slicked-back hair and women in sharply-cut business suits, there are unshaven men in rags pushing grocery carts, and standing against walls. Much of the business activity you’ll witness in this part of town is illegal, and you might even see a fight or two. If you’re smart, you’ll keep your car doors locked. Another thing you might notice is that most of the residents are black or Hispanic.

This kind of economic segregation is nowhere to be found in Hong Kong. Nor is the level of degradation seen in U.S. cities found in Hong Kong. Even in the famed “Walled City” (which was technically not under Hong Kong Government jurisdiction, and has now been torn down), well-dressed foreigners could walk through the tangled rabbit-warren of treacherously-built structures without fear of bodily harm. The same cannot be said of the worst areas of most U.S. cities.

At approximately 14%, Hong Kong’s official poverty rate is about the same as that in the U.S. (13.7% nationwide), and is lower than that of most U.S. cities, which is between 17% and 19%. This is impressive considering that as recently as 1960, over 50% of the territory’s population lived in abject poverty.

Crime in Hong Kong is practically negligible compared to the United States. In 1996, the U.S. Justice Department recorded 9.1 million violent crimes in the U.S., or 3,500 for every 100,000 people. In New York City, a metropolitan area with a population of 7.3 million, as compared to Hong Kong’s 6.3 million, there were 442,532 violent crimes in 1995, making a total of 1,559.9 violent crimes for every 100,000 people. Hong Kong experienced only 15,191 violent crimes in 1996, or 241 per 100,000 residents. These included 77 homicides, as against New York’s 1,178; 86 rapes – New York had 2,326; and 6,962 aggravated assaults as compared to New York’s 59,253. (See table.)

More important though, is the difference in perception (and therefore in behavior) between the poor in Hong Kong and the poor in the U.S.. In Hong Kong, even the very poor perceive that they can still get ahead. They see others around them raising their standard of living, and believe that they or their children, can do the same.

Stories are common in the territory of people like Li Ka Shing, Hong Kong’s most famous tycoon, who began his career making plastic flowers for export; Gordon Wu, one of Asia’s most prominent infrastructure developers, whose grandfather worked his way from being a taxi driver to owning a fleet of taxis; and Jimmy Lai, who swam across the border at the age of twelve to do manual labor and who now produces two of Hong Kong’s most widely-read publications (this after divesting himself of any interest in his first child, the highly successful casualwear retailer Giordano.)

While Americans tend to cynically deride such tales of success as fantastic “Horatio Alger” myths, people in Hong Kong witness these stories first hand and so are less inclined to be cynical about their own potential for success. This is apparent in their behavior: even the poorest in Hong Kong work hard to get ahead, and take the education of their children very seriously. This behavior is quite different from that of poor people in other countries who do not believe they or their children stand a chance of getting ahead.

“Upward mobility is a vital force driving the Hong Kong people in all walks of life,” says “The Hong Kong Advantage,” a study carried out by the Vision 2047 Foundation in Hong Kong. “The Hong Kong people are known for their optimistic business mentality, their strong work ethic, and their keen bargaining.”

The level of government welfare support available to Hong Kong residents would be considered shameful by Western standards. Yet Hong Kong does not have the massive homelessness seen in many U.S. cities. Hong Kong does not have the crime and poverty-ridden ghettos that plague New York, Los Angeles, and most other major American cities.

Hong Kong has no unemployment insurance, no minimum wage, and (as of December 1997) no mandatory pension scheme. Yet average income levels have risen more than seven-fold between 1976 and 1991. In 1976, the mean household income was under HK$2,000 a month (Approximately US$260). By 1991, it had risen to over HK$14,000 a month (US$1,813.) During that period, monthly income per household member has risen from HK$450 (U.S.$58) to HK$4,122 (U.S.$534) at current market prices. Currently, per capita income in Hong Kong is among the highest in the world, and is higher than that of the UK, Australia and Canada.

In addition, unemployment has never been a problem in the territory. If anything, labor shortages have dominated the 1990’s, with employers desperate to fill positions all the way from General Manager to construction worker. The few times that unemployment has risen above its normally low levels due to large immigrant influxes or other shocks to the economy, wages adjust quickly and employment returns to normal.

Critics attack the free market for the lack of job security it provides, and for leading to a high concentration of power in the hands of a few, diminishing the opportunities for everyone else. In Hong Kong however, the labor market adjusts rapidly to changes in the economy, and the levels of unemployment that are common in the U.S. and other western countries do not occur for longer than a blip on the screen before they are corrected by adjustments of prices and wages.

Hong Kong also has more businesses per capita than the U.S. does – nearly twice as many. There are 46 businesses for every 1,000 residents in Hong Kong, as opposed to only 24 businesses for every 1,000 U.S. residents. Clearly, efforts to provide job security and equality of opportunity through such means as minimum wage and anti-discrimination laws are not responsible for providing either one in Hong Kong.



A walk down the side-streets of practically any district on Hong Kong Island, Kowloon Peninsula, and even the New Territories, gives a visual impression of what makes the city run:
Restaurants, trading companies, and shops selling everything from herbal medicine and jewellery to oyster-shaped bathtubs line these crowded streets. Even real-estate companies have set up shop in tiny alcoves no more than three feet deep, open to the street and with only enough room for a narrow row of desks with laptop computers. One overseas visitor characterised the city as “Manhattan re-done as a shopping mall.”

These are not the Hongs – the big trading companies that dominated the economy in the early days of British rule. Nor are they the Li Ka Shings or the Y.K. Paos – the multimillionaire industrialists and property developers who dominate the headlines in the territory’s business press today. These are the mostly family-owned businesses that are the essence of Hong Kong’s economy. Just over ninety-eight percent of all companies in Hong Kong are considered “small or medium-sized,” meaning that they employ fewer than 50 workers (or fewer than 100 for manufacturing companies.)

In Hong Kong, there are few barriers to going into business for oneself. A sole proprietorship can be set up for HK$2,250 (US$291), with one visit to the Business Registration office. A limited company can be established for around $1,300, within 72 hours. More importantly, there are few government-created barriers to staying in business.

To illustrate this, imagine two hypothetical businesses: both are popular restaurants, both with the same revenues, and the same before-taxes (and other government-mandated) expenses. One restaurant is on Lockhart road, in Wanchai, Hong Kong. The other is in the Lower East Village in Manhattan.

Each restaurant takes in $100,000 a month in revenues. Rent is $3,500 a month for each restaurant, and pre-government labor costs average $30,000 a month. Declared profit for each restaurant averages $6,000 a month, and the owners of each restaurant receive a salary of $5,000 a month.

The New York restaurant pays an additional 7.5% of wages in FICA (the Federal Insurance Contributions Act) contributions. This amounts to $2,250 a month. In addition, the New York restaurant pays another $1,200 a month in Workers’ Compensation Insurance, which is required by law, as well as at least $2,464 in mandatory Unemployment Insurance for eight employees (a minimum rate of 4.4% paid on the first $7,000 in wages per employee). The New York restaurant also pays a nominal amount in State Disability Insurance.

In addition to simply paying the employer’s contribution of 7.5% of wages to FICA, the American restaurant must also collect the 7.5% paid by the employees. This amounts to an additional expense in money and time spent.

One U.S.-based restaurant owner estimates that 90% of his payroll processing costs are related to collecting taxes. In addition, he says, “if you have more than four or five people working for you, you need to be computerised to calculate this stuff, whereas you wouldn’t if it weren’t for the taxes.”

Restaurants in the U.S. are also required to collect taxes on employees’ tips. If tips reported by workers add up to less than a certain percentage of sales (this varies between establishments), the restaurant must make up the difference. The obvious solution is for the owner to require employees to declare at least the minimum amount in tips. While this does not create an additional dollar expense for the restaurant, it is one more administrative responsibility to be shouldered by a private business, in effect, doing the work of the IRS in collecting taxes. With the tax on tips, in particular, the owner must now be the “whipping boy” for the IRS, policing his or her workers to make sure they comply with the minimum declaration requirements.
The restaurant in Hong Kong pays none of these costs. While employees are taxed, there is no “withholding.” A business is only required to inform the Inland Revenue Department (Hong Kong’s tax collecting entity) of the amount paid to each employee each year.

In FICA and government-mandated employment costs alone, the U.S. restaurant pays an additional $5,914 a month, in this example. This is equal to nearly all of the restaurant’s profits. If the restaurant’s Unemployment Insurance rates go up, then government-related costs could easily outstrip profits. This does not even take into account the cost of complying with Occupational Safety and Health Administration (OSHA) and Environmental Protection Agency regulations or requirements under the Americans with Disabilities Act (ADA), to name a few.
In addition, a sales tax of 8.6% means that the prices customers actually pay at the New York restaurant are that much higher. Minimum wage requirements also force restaurants to raise prices – or else to cut back on costs. (Hong Kong has neither a sales tax nor minimum wage laws.)

“You can’t just pass (increased costs) through,” says the U.S.-based restaurant owner. “If prices rise too much, people stop eating out as much.” When restaurants can no longer raise prices, one of the first expenses to be trimmed back is labor.

A 1991 survey by the National Restaurant Association found that 42% of restaurants had cut back on their number of employees as a result of minimum wage increases, and that 44% had cut back on the number of hours worked. Those establishments which are already operating with a bare minimum staff may end up folding to their competition – ironically, depriving their employees of any wages at all.

In addition to these financial burdens that are simply a part of doing business in the U.S., are the reams of often vaguely-worded laws governing what a business can and cannot do.
For instance, if an employee of the restaurant in Hong Kong consistently does not show up for work, steals from the cash register when he does, and one day comes in drunk and physically assaults his boss, the owner will undoubtedly fire this person, if not bring charges against him.

If the American employer attempts to fire an equally offensive employee, he or she risks facing a lawsuit for “firing without good cause,” or for discriminating against a disabled employee (alcohol abuse is considered a disability under the Americans with Disabilities Act (ADA.))

This example sounds like a grotesque exaggeration, intended to distort the reality of well-intentioned employment law. It is not. Thousands of such cases are filed each year. Employers have been sued for such offences as refusing to hire a convicted criminal, and for failing to accommodate such “disabilities” as alcoholism and “personality disorders” – vague classifications which cover behavior ranging from “feelings of inadequacy” to “disregard for and violation of the rights of others.”

In one widely-publicized case, an employer was sued for failing to accommodate a “chemical imbalance” that caused a worker to steal money from other employees and bring a loaded gun to work.

The wide-ranging field of “employment law” dictates such things as questions an employer may not ask in a job interview. Off-limit queries include: where the applicant went to school, the age of the applicant, where the applicant was born, and whether the applicant has any friends in the company.

Hong Kong has minimal anti-discrimination laws, but more are being added. Recently, a Family Status Discrimination Ordinance was enacted, making it a crime to inquire as to an applicant’s marital status. The law was passed primarily in an effort to do away with discrimination against single mothers and others whose family situation might impact a potential employer’s decision to hire. However, it could just be the beginning of a trend of increasingly intrusive regulations that could lead to higher costs for all businesses, as well as a more restrictive and bureaucratic environment. Already, one local newspaper is on trial for running an allegedly sexist classified ad, and all indications are that more such suits are on the horizon. In the U.S., there is great debate as to whether such regulations even benefit those they are intended to help.

“Employment law is largely the law of employment discrimination,” writes Walter Olson, in “The Excuse Factory,” in which he outlines many of the abuses of employment law, “yet its biggest financial rewards go to complainants who are neither minority nor female.”

And the financial rewards are substantial. Median awards run from $100,000 to $375,000, according to one survey. Another survey found that verdicts requiring employers to make compensations in the millions of dollars were being handed down at a rate of one a month in California.

Even if the employer wins the suit, however, the costs of defending oneself can be enough to kill a small company – as in the case of Andrew Hwang.

Andrew Hwang is one of many small business owners whose livelihoods have been destroyed by regulations ostensibly aimed at protecting the “little guys” – and in Hwang’s case, ethnic minorities in particular. Hwang came to America in 1963, from Korea. In 1985, he founded his own company, “Consolidated Service Systems,” a janitorial service company that employed a predominantly Korean workforce. In 1987, the Federal Equal Employment Opportunity Commission (EEOC) filed a complaint against Hwang’s company for having a racially-imbalanced workforce, hired through “word-of-mouth” practices.

Hwang fought the EEOC, and after a case that dragged on for eight years, and cost his company $200,000, he won. The time and costs involved in the trial, however, proved too much for Consolidated, and the company was closed. Hwang began to look for work as an engineer.

John Rowe, once chief of the Chicago EEOC and now an EEOC general counsel in Washington, denies that the Commission is a threat to small businesses.

“We don’t run people out of business,” he says, “and when people have made us a proposal for limited financial outlays coupled with evidence that that was what they could manage to pay without jeopardizing their operations, that’s been accepted for that reason.”

Rowe doesn’t mention alternatives for those who believe they have committed no wrongdoing, such as Hwang.

Companies in the U.S. have been taken to court for rejecting job applicants because of past criminal convictions; for firing workers for lying and stealing; for “failure to promote” when no promotion was ever promised. Rulings have even been brought against companies for violating laws before the laws had even been enacted. While such suits are unlikely to bankrupt a giant corporation, they can spell death for smaller businesses, especially owner-operated businesses like Hwang’s.

It is not the dollar value of the awards, or even the costs of individual lawsuits that is the biggest problem, however. The threat of being sued, the very possibility that it could happen, has cast a chill on doing business in the United States. Employers are not only reluctant to make any meaningful inquiries in a job interview, for fear of the questions inviting a lawsuit, they are more cautious on a number of fronts.

Employers are much less willing to fire workers today than they were twenty years ago. While this is good news for delinquent employees, it is not so good for those who must work with them, or for the business itself, which can suffer from unproductive or even destructive workers.

Not surprisingly, employers think more carefully before hiring new workers as well. Depending on the agency involved, the various regulations apply to businesses with more than a certain number of employees. Many business owners make a conscious effort to keep their payrolls below these thresholds. Ironically, some employers have also become more wary of hiring workers in the “protected groups,” for fear of those workers generating discrimination or harassment suits in the future.

In addition, companies are now spending millions of dollars annually – money that could have been used to develop a new product, or hire more workers – on “sensitivity training” seminars, and on hiring outside consultants to advise them on such seemingly trivial tasks as designing the employee handbook. While consulting and management training companies profit heavily from this, it is not clear that anyone else does.

Employment law is not the only source of regulatory woes for U.S. business owners. Zoning, safety, and environmental regulations all combine to keep owners busy. There are currently more than 70,000 pages of regulations in the Federal Register, and the number is growing steadily each year. With so many rules, it is not surprising that many of them contradict each other. In May 1997, for example, an article in the Wall Street Journal told of a sausage plant that had been cited by OSHA for having slippery floors, but that was also required by the Department of Agriculture to keep its floors hosed down.

Zoning requirements vary from one locality to another. They can be used to prevent people from working in their own homes, to require property owners to paint their homes and businesses a certain color, and to send people to jail for allowing homeless people to stay in their homes free of charge.

Zoning restrictions create a wonderful opportunity for corruption, as is illustrated by the emergence of “expediters” in New York City. These are people who will assist citizens through the maze of procedures required to get zoning permits in that city. A major chunk of the expediter’s fee – which can run into the thousands of dollars – goes to bribe Building Department officials, according to a deputy buildings commissioner quoted in a local newspaper. Aside from straightforward graft, Zoning creates fertile ground for other forms of corruption. A Washington Post article, for example, reported that zoning plans in Washington, D.C. were so out of date that nearly any new building would require a variance granted by the zoning board. Millions of dollars worth of these variances were granted to developers in the downtown area in exchange for pumping money into low-cost housing and social services in other parts of the city, according to the Post.

In fiscal 1997, there were some 25,312 zoning violations recorded for Manhattan. In Hong Kong, between November 1996 and October 1997, only 92 zoning summonses were issued.
Well-intentioned environmental protection regulations can be another headache for people doing business in the U.S.. While debate rages over the proclaimed benefits of such regulations, and over who should bear the burden of cleaning up and diminishing pollution, it is hard for anyone to defend Environmental Protection Agency policy as it currently exists.

One of the most well-publicized of EPA abuses is the enforcement of its “Superfund” program designed to clean up toxic waste sites. Under Superfund, businesses from multinational oil companies to small-town diners are forced to pay hundreds of thousands of dollars in settlements for having legally disposed of their garbage in what have now been declared “hazardous waste sites.”

The problem is that even those who followed the law to the letter in disposing of their garbage are now being held criminally accountable for dumping hazardous waste. Add to this the vague nature of EPA regulations, and that they are interpreted according to the EPA’s own unpublished “guidelines,” and it becomes impossible for a business owner to know whether he or she is complying with the law – until it is too late.

It is estimated that Superfund alone costs businesses $80 billion a year, and taxpayers another $10 billion. Complying with the Resource Conservation and Recovery Act (RCRA) costs businesses and taxpayers another $30 billion, and the list goes on. In 1992, the Justice Department recorded $163,064,344 in penalties for 191 counts of environmental criminal indictments. Meanwhile, the results of such programs in actually cleaning up the environment are still unclear.

Environmental protection in Hong Kong is quite different. While the territory’s government is still in the process of designing its long-term environmental strategy, one key difference is likely to keep it from repeating the costly mistakes of U.S. environmental policy. This difference, ironically, is one of political accountability. The Hong Kong government recently scrapped its Sewerage Services Trading Fund, under which establishments which dispose of waste through the sewage system paid a surcharge. The trading fund had been operating on a deficit that would have reached HK$231 million (US$29.9 million) by the end of the 1997 financial year. Government was forced to end the program after it was unable to get support from the Legislative Council for increasing the surcharges.

What is significant about the decision is that it was made, in effect, as a result of public opposition, as well as the government’s unwillingness to simply pump more of taxpayers’ money into the program. Legislative Councillors who had not even been popularly elected nevertheless felt the need to defend the interests of the public, and consistently voted against raising the sewerage service’s surcharges. The idea of the United States’ EPA taking into account public opinion when forming its policies could only be the premise of a cruel satire. Like many government agencies in the U.S., the EPA is not accountable to U.S. citizens in any meaningful way, and is therefore free to impose unlimited costs on them – whether or not it lives up to its declared purpose of protecting the environment.

Environmental protection policy in Hong Kong is significantly different from that in the U.S. in that it aims to provide economic incentives to not pollute. By imposing a waste disposal surcharge, for example, the government increases the cost of polluting, creating an incentive to pollute less. There can be no such incentives in a program like Superfund, as the polluter has no way of knowing whether he or she is in violation of the law and therefore cannot modify his or her behavior so as to comply with it. Rather than hitting law-abiding citizens with crippling fines and lawsuits after they have legally disposed of their garbage, the Hong Kong government allows people to “pay as they pollute.” While the Sewerage Trading Fund has been abandoned for now, Government officials in Hong Kong say that other projects associated with the sewage disposal policy will remain intact.



In the U.S., many have accepted the idea that more government means more benefits and more protection for “ordinary” people. Most people associate a purely free-market economy with all-powerful monopolies, Dickensian working conditions and abuse of the “little guy” at the hands of powerful corporate interests. While only a few in this country advocate outright socialism, most agree that some level of government involvement in the economy is needed to protect the interests of the less powerful, and many believe that the bigger the problem, the more government involvement is required. At the very least, most of us believe that government intervention can only help the situation – few believe that there could actually be a downside to calling on the government to defend the “little guy.”

Hong Kong’s experience does not support this belief. If anything, the business environment in Hong Kong – the world’s most free-market economy – is more hospitable to “the little guy” than are the environments of North American and European countries. In addition, the only monopolies in the territory are those created directly or indirectly by government policy.

Some services such as the provision of electrical power, some public transportation, and airport and port services, among others are supplied by monopolies or oligopolies franchised by the government. Likewise, property development is dominated by a small number of companies, due to the enormous barriers to entry. Rather than being a result of free market policies, however, these barriers are the product of government’s ownership of all of the land in the territory, and the fact that government determines both the cost and the availability of land for development.
It is significant that in spite of the amount of concentrated power in the marketplace, Hong Kong is still one of the most competitive environments in the world. “The Hong Kong Advantage,” for instance, finds that, even with the “oligopolistic nature” of the private property sector, “Hong Kong’s large developers appear to be among the most efficient in the world, and have an international reputation for being successful at completing projects cost-effectively, at high speed, and to very high specifications.”

Likewise, the territory always scores high in global competitiveness rankings. According to the IMD World Competitiveness Yearbook, for instance, the territory’s fiscal and tax policies both rank first in the world in terms of encouraging entrepreneurial activity.

Nor do the franchises and oligopolies prevent smaller businesses from getting ahead. Hong Kong’s small and medium-sized businesses are among the most productive in the world, and the territory’s growth rates have been the envy of the world since the early 1960s. Much of this growth is driven by small and medium-sized businesses, the majority of them family-owned and controlled.

While the average family business might not be able to compete in the property market with Cheung Kong or Hong Kong Land, or bid alongside Kowloon Motorbus Company, or Wharf Cable for Government-awarded franchises, there are few barriers to their success outside of these artificially-created monopolies and oligopolies. It is this lack of barriers to the efforts of ordinary people to get ahead that most dramatically separates Hong Kong’s environment from that of the U.S..

There is certainly no shortage of government-created monopolies in the U.S.. More than just granting franchises to “public goods” suppliers and others, however, the Federal, state, and local governments in the U.S. often subsidize and even operate these services.

The U.S. government does something else the Hong Kong government does not do. It provides subsidies to American corporations. The federal government spends $75 billion a year to subsidize some of the most powerful corporations in the country. Companies like Sunkist, M&M Mars and Ernest & Julio Gallo receive millions of dollars annually under the USDA’s Market Promotion Program, to help pay for overseas advertising. Other industry leaders such as General Electric, IBM and Xerox receive millions of dollars in R&D and technical enhancement support. The agricultural industry receives some $30 billion in annual subsidies, of which some $1,743 million goes to pay farmers to not grow crops on their land.

Nor does the Hong Kong government intervene in the economy for the purpose of “protecting domestic industry” or to ward off the effects of unpredictable ups and downs in the world economy. If protectionist arguments are correct, then this policy is all the more dangerous, given Hong Kong’s vulnerable position as an international trading partner: The city has virtually no natural resources, other than one of the best shipping ports in the region, and an industrious and highly-motivated population. Even before the handover, Hong Kong had depended for decades on Guangdong province for food and water supplies. In addition, the territory is frequently rocked by fluctuations in the economies of its neighbors (the South-East-Asian currency crises late last year, for instance, led to the most serious stock market crash in years.)

If it is true that leaving an economy open to the effects of international trade is a dangerous proposition, then the Hong Kong Government must be foolish not to take some kind of action. Yet for over a century, it has allowed Hong Kong’s economy to rise and fall with the unpredictable tides of world trade, and the territory has been remarkably successful.



Hong Kong is unique in that, for 150 years, it has been neither dictatorship nor democracy. Until 1985, no popularly-elected legislators sat on the then-56-seat Legislative Council (Legco). Although Legco is purely an advisory body, and its recommendations and even the laws it passes can be overridden by the Chief Executive, it is the territory’s lawmaking body. By 1996, 20 of the 60 Legco members were directly-elected, and although this Legco was thrown out by incoming Chief Executive Tung Chee Hwa in 1997, Tung’s government has promised fair and open elections for Legco seats in the spring of 1998.

What is remarkable is that, in this non-democratic system, people’s rights and freedoms have been well protected – arguably more so than anywhere else on earth. The worst example of government abuse in Hong Kong’s history was the high level of official corruption in the 1960s and early 1970s, which was successfully halted with the creation of the Independent Commission Against Corruption (ICAC.)

This system, combined with the British administration’s policy of “benevolent neglect,” has led to an environment that, like the system itself, is unique in the world.
For someone who has grown up in the U.S., gone to American public schools, and taken part in debates about how the country should be run, it is probably impossible to imagine living in an “apolitical” culture. Although Hong Kong people are much more politically involved now than they were a decade ago, the basic structure of the society has not changed much. The most compelling incentives are for economic activity, not for political activity.

This is quite different from many of Hong Kong’s regional neighbors – not the least of which is mainland China itself. Local businessman Jimmy Lai once described the changes taking place in China as follows:

“I don’t think politics is going to be very important in the coming era,” he said, “it was important to China because there was no other way you could gain any recognition, except power. Now, you have a lot of people who have made money, they have a good life, they have recognition, they have psychological satisfaction, which before people could only get from political channels.”
The “system” in Hong Kong could be said to be diametrically opposed to the old system in China Lai describes: Nearly anyone here can make money, have a good life, gain recognition and have psychological satisfaction through economic activity. Going into politics, or seeking political representation, however, has never been as attractive. Most parents in Hong Kong would probably rather see their children grow up to be like tycoon Li Ka Shing than outspoken democrat Martin Lee.

The reason for this is simple: there is not as much to be gained through the political structure as there is from doing business. Unlike China, where buying political favors can be a necessity of doing business, in Hong Kong there is only so much for sale.

Even in the U.S., there is a lot to be gained from political lobbying. Government control over such things as zoning, subsidies for various business activities, restrictions on imports, and even prices of goods means that businessmen stand to gain a great deal by getting politicians on their side.

Unlike the U.S., there is not a “political industry” in Hong Kong. No-one is paid a full-time salary to do nothing but lobby politicians. In the U.S., there are over 40,000 full-time lobbyists – fifteen for every 100,000 U.S. citizens.

The significance of this cannot only be measured in dollars wasted or even in the unfairness dealt to those who cannot afford to pay for lobbyists. The real significance is in the effect of the “political industry” on the incentives that drive people’s lives. For, added to a barrage of disincentives to be productive, in the form of high taxes and regulation of every aspect of the workplace, there is now an equally powerful incentive to seek political favors. The system becomes one in which engaging in politics becomes more attractive, and engaging in business less so.
Because the Hong Kong Government has maintained a “hands off” policy toward the economy, the kinds of political “favors” that are available to be bought in many other countries are simply not for sale in Hong Kong. This is not because Hong Kong lawmakers are any more scrupulous than lawmakers elsewhere, but simply because they do not have the power to make the kinds of policy decisions or to grant valuable favors that lawmakers in other countries do. And since permission is not required to perform the minutest of actions, as it is in the U.S. and elsewhere, there is much less of a market for such permissions.

There are signs that this may all change. In the years approaching the handover, and as Hong Kong has become increasingly politicized with the advent of direct elections for Legislative Councillors, there have been more and more calls for increased government intervention. These calls come from groups representing such varied interests as the elderly, the unemployed, and local industrialists. What they have in common is that they all want some kind of benefit from the government – usually the kind that costs money.

Those who call for increased welfare for the poor and the elderly are always quick to say that they have no intention of turning Hong Kong into a welfare state. The people of Hong Kong are very internationally aware, and many of them are intimately familiar with the nature of the “cradle to grave” welfare in mainland China – others are more familiar with the ineffectual welfare states of the U.S. and Europe. Neither one is an attractive prospect to people in Hong Kong. Still, demands by various interest groups have put enough pressure on Government to increase welfare spending in recent years, and there is a very real danger that Hong Kong could be headed towards the kind of burdensome and dependence-generating systems western nations are now trying desperately to reform.

Even more menacing, however, are calls for what amounts to corporate welfare and preferential policies for certain industries. Throughout Hong Kong’s history, the government has eschewed any kind of industrial policy.

Financial Secretary Sir John Cowperthwaite, who served from 1961 to 1971, articulated his government’s philosophy on government involvement in the economy as follows:
“…in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgement in a free economy, even if often mistaken, is likely to do less harm than the centralised decisions of a Government; and certainly the harm is likely to be counteracted faster…”

In his maiden policy address, Hong Kong’s post-handover Chief Executive Tung Chee Hwa said that the territory had finally “broken free from the psychological constraints of the colonial era,” and declared that the Hong Kong people “should have the courage to set aside past modes of thought and plan Hong Kong’s future with a vision.” For Tung, this means working to build a Hong Kong that is “civilised, prosperous, stable and democratic, filled with new vitality.”

It is hard to imagine any place on earth with more vitality than Hong Kong. And with the possible exception (due to Tung’s own eviction of the popularly-elected Legislative Council) of “democratic,” all of the adjectives Tung used to describe his vision of Hong Kong in the future already describe the Hong Kong of the present. Most significantly, this Hong Kong was built under a system that adhered stringently to the “psychological constraints” of minimal government intervention in the economy and fiscal conservatism. Yet these would appear to be the first vestiges of colonialism Tung wishes to eliminate.

In his address, Tung announced plans to increase government spending by HK$18.6 billion (US$2.4 billion) annually, an increase of nearly 10% over current spending. Tung also said that Government would inject HK$88 billion (US$11.4 billion) into capital expenditure over the next five years. Current government reserves are under HK$150 billion (US$19.4 billion.)
Tung also laid out plans to boost Hong Kong’s competitiveness by actively promoting the development of hi-tech industry. While Tung and his supporters are careful to avoid such words as “intervention” and “industrial policy,” this is essentially what his proposals amount to.

The plan includes the re-vamping of six government bureaux to assist in transforming Hong Kong into a world-class hi-tech center, and the appointment of a secretary to oversee the changes; building a world-class science park, as well as a second technology center (Hong Kong already has one government-sponsored technology center that houses facilities for both hi-tech start-up firms and major multinational technology companies); and spending HK$130 million (US$16.8 million) in research funding and loan guarantees for hi-tech companies. The Hong Kong Government is also considering putting HK$500 million (U.S.$64.8 million) toward a credit guarantee scheme for small and medium enterprises to obtain export financing, and may make another grant of HK$500 million towards research in information technology and other hi-tech areas.

Supporters of Tung’s plan argue that rising costs in Hong Kong and southern China are hurting the territory’s competitive edge. They argue that the only way Hong Kong can remain competetive is to move into higher-value-added manufacturing. Supporters say that the market will not produce the investment necessary for Hong Kong to make this change, and that the government must therefore play a more active role.

“I think there is a gathering consensus that we should develop new economic activities that are technology-oriented,” Chairman of the Hong Kong Industrial Technology Centre Raymond Ch’ien told the Far Eastern Economic Review, “and that now government policy is going to be supportive.”

Supporters of what amounts to government subsidy of hi-tech industry in Hong Kong point to the example of Singapore, where the government forces its citizens to save 25% of their wages, in addition to levying high taxes, in order to finance its industrial development program. The government has also made a concerted effort to attract foreign investment, and has been remarkably successful in doing so. By 1990, nearly 40% of Singapore’s GDP went to resident foreigners and foreign companies. Singapore has also far surpassed Hong Kong in the production of hi-tech goods.

There are good reasons to avoid emulating Singapore’s experience, however. Among them, the nation’s poor performance in terms of productivity and efficiency.
Some liken Singapore’s growth and impressive technological development to the increases in Soviet output in the 1950s and 1960s, all of which came from increasing labor and capital inputs, rather than from increased productivity. Such growth can only continue as long as more resources can be pumped into the economy.

“Why Singapore is regarded as such a great place to be is quite unclear to me,” says Howard Davies, professor of Business Studies at the Hong Kong Polytechnic University. “Because, apart from this …passion for bright shiny things, …this place (Hong Kong) has a much more rapid growth of efficiency than does Singapore.”

Likewise, the Hong Kong Centre for Economic Research points out that, in Singapore, “all of the growth in output is a result of the utilization of labor and capital. Indeed, productivity growth does not contribute positively to output growth. In Hong Kong… productivity growth contributes to 17% of output growth.”

In fact, Singapore’s rate of technical efficiency change in 1993, according to the World Bank, was a negative value (-3.45) as opposed to Hong Kong’s +1.97. Singapore’s annual growth in output per capita, and output per worker is also lower than Hong Kong’s. According to MIT’s Alwyn Young, technical change contributed to 35% of Hong Kong’s output growth between 1971 and 1990, while it contributed to a -1% in Singapore between 1970 and 1990.

Hong Kong Polytechnic’s Davies also questions the assertion that Hong Kong needs to have manufacturing activity within its borders. He points out that while Hong Kong’s manufacturing efficiency has declined drastically in recent years, overall efficiency of the economy as a whole has risen just as dramatically, indicating that productivity in the service sector has increased enough to make up for the decline in productivity in manufacturing.

“The attachment to manufacturing is irrational,” says Davies. It is not true that manufacturing has higher productivity growth than services, nor is it true that services cannot be exported.”
The territory’s manufacturing has not disappeared, says Davies, but has simply moved across the border.

“If the economy is left to itself,” he says, “Hong Kong manufacturing firms will continue in their current approach, gradually moving further and further into China.”

The bulk of Hong Kong’s manufacturing firms now have facilities in southern China, where wages are as low as one-third of wages in other Asian manufacturing locations. Davies disagrees that these manufacturers need to move up-market in order to stay competetive.

“The market segments which are growing the most rapidly are those for decent quality, low-price products,” he says.

“The bottom line,” says Davies, “is that innovation is a risky and expensive business. Have Hong Kong’s billionaires put any of their money into these types of activity? If not, why not? Are they really as short-sighted as the techno-junkies would suggest?”

In fact, some Hong Kong businesses have invested in hi-tech production – just not to the extent that foreign academics believe is appropriate. The highly successful Varitronix, which makes custom-designed liquid crystal displays (LCDs) is a good example. In addition, Hong Kong leads the world in the production of Chinese-language pagers. Both Hutchison Whampoa and HACTL (Hong Kong Air Cargo Terminals Ltd.) have developed their own software for managing cargo flows. In addition, the territory has over 100 internet service providers. It would appear that, when there is a compelling reason for such investment – such as an identifiable demand, or problems requiring technological solutions – Hong Kong companies do not hesitate to go hi-tech.

While those in the hi-tech lobby point to the higher levels of government spending on technology in more developed countries, the results of such spending are certainly up for debate. According to the CATO Institute’s Michael Gough, for instance, the U.S. government’s greatly increased spending on science and technology following World War II, has had no positive impact on GDP growth. “GDP has chugged along at a growth rate of about 1.6 percent since 1820,” says Gough. “The infrastructure for that progress predated major Federal involvement in R&D, and that involvement has had no discernible effect on economic growth.”

Gough goes on to point out that the “globalization of technology” has meant that the developer of a technology is not always the one to reap the commercial benefits. The success of Chinese paging services in Hong Kong is a good example of this. The technology was developed in Beijing, yet Motorola in Hong Kong has profited from it by turning it into a commercial success.

Perhaps the best example of the folly of government promotion of hi-tech industries is that of Hi-Definition TV (HDTV) in Japan. Through MITI, Japan’s ministry for technology planning and development, Japanese companies were given $1 billion in subsidies to develop what was to be the newest standard in television technology – HDTV. A French company was also given close to the same amount by the French government to develop this same technology. Although U.S. companies lobbied for government subsidy so that they would not be left behind by foreign developers, they were unsuccessful. Deprived of government subsidy, American companies ended up producing a much more efficient and successful form of HDTV.

Inevitably, such a policy leads to the politicization of industry, and creates an environment ripe for graft. By putting itself in the position of handing out money, the government opens up the opportunity for both blatant and subtle forms of corruption. And, Gough points out, the recipients of government subsidy for technological development include such giants as IBM, DuPont, 3M, Texas Instruments, and other corporations that could hardly be described as being desperate for funding.

Many of Hong Kong’s business elite have long argued the necessity of government support for industry in order to help maintain the territory’s competetive edge. Academics and journalists have also called for Hong Kong to upgrade its production. For years, the Hong Kong Government has ignored these calls, and the territory is one of the most successful economies in the world.
Should Hong Kong continue with Tung’s plan of favoring hi-tech industries over all other players in the marketplace, the beneficiaries will not be the Hong Kong people, or even “Hong Kong Industry.” The beneficiaries will be certain industries, and more to the point, certain companies within those industries, who will be subsidized at the taxpayers’ expense.

“If the government starts to intervene on behalf of the hi-tech lobby, it will fail,” says Davies. If the funding involved is small, he says, nothing much will be achieved by it. However he warns, “if the funding involved is large enough to raise taxes, it could cripple the Hong Kong economy.”

Tung and his supporters present the territory’s current economic challenges as if they represent a significant departure from situations Hong Kong has faced in the past. These circumstances, they argue, combined with the changing nature of Hong Kong’s economy, are significant enough to require a departure from the traditional policy of “laissez faire.”

In fact, Hong Kong has faced equally daunting circumstances, with equally uncertain prognoses for success, in its past. Nor is industrial transformation new to the territory, which has moved from a trading outpost, to a major manufacturing center, and to a service-oriented economy all in the space of 150 years – with the most dramatic changes occurring in the last fifty years.

With the Communist victory on the mainland in 1949, over a million Chinese refugees flooded into Hong Kong, practically doubling the population overnight. At the same time, the UN and U.S. embargoes against China was the death knell for Hong Kong as an entrepot trading center. While it would be easy to see this as a disastrous combination of events for the territory, these seemingly catastrophic circumstances actually propelled Hong Kong into its next phase of development. Industrialists from Shanghai were among the refugees who sought safe haven in the then colony. These industrialists brought their capital to Hong Kong and set about building export-oriented production facilities in the territory. Between 1950 and 1964, it is estimated that Hong Kong’s industrial production grew at a rate of 30% per year, and incomes in Hong Kong during this period were the fastest-growing in Asia.

Had today’s economists been around at this time, they would probably not have predicted Hong Kong’s dramatic recovery at the hands of Chinese industrialists fleeing Communist rule. Indeed, in the early 1950s, Hong Kong’s very survival was in serious doubt, and the 1951 government review said that the territory was “in an economically impossible position.” Government-directed industrial policy at this time would likely have proven fatal for Hong Kong, as it was the very freedom of capital and labor movement that allowed the Shanghai industrialists to invest in production they believed would be the most profitable. Had government taken it upon itself to make these decisions, through “guided” industrial policy – or worse still, insisted that Hong Kong maintain its role as an entrepot trading center – Hong Kong’s recovery would have been much slower, if indeed it had been able to recover at all.

More recently, Hong Kong faced a serious recession in the 1970s, when oil prices soared, leading to a global economic slump and a severe downturn in foreign demand for Hong Kong’s products. This came on top of growing inflation within Hong Kong. Production slowed, and employment was cut back. Unemployment rose to 9.1 percent by 1975, and real wages fell as well. When wages dropped, so did local demand, and prices began to fall. Inflation, which had been running at 18% in 1973, dropped to only 1% by 1975. By early 1976, unemployment had fallen to 5.6%, and exports rose 51% in the first half of 1976 over the previous year.

Because wages and prices were free to rise and fall, both adjusted quickly to the crisis. There were no import restrictions, no price controls, no restrictions on wages or craft demarcations to obstruct the movement of labor. Nor did the British administration attempt to spend its way out of the recession.

Tung’s policy of favoring hi-tech industry in Hong Kong is a radical departure from the territory’s “laissez faire” tradition, which consciously steered clear of any industrial policy. To abandon the policy that has allowed Hong Kong to prosper in the face of daunting odds, decade after decade, in favor of one which has yet to have proven its value, let alone produced anything resembling the economic success seen in Hong Kong, could be a mistake of tragic proportions.



As the world watched the celebrations surrounding Hong Kong’s handover to Chinese rule last summer, the greatest fears were of undue intervention from mainland authorities, breaching Hong Kong’s promised autonomy. International monitoring groups sent representatives to monitor public demonstrations on the night of the handover, and foreign journalists were on the lookout for censorship of the local press.

Five months after the handover, the flow of information is still free in Hong Kong. While tales of self-censorship abound, so do examples of journalism that is highly critical of Beijing and of the new Government of Hong Kong. There has been no massive crackdown on the media, no gross abuses of human rights, no more suppression of public demonstrations than there was before the handover. In fact, the real changes have come not via pressure from Beijing, but from within Hong Kong itself.

The story of the handover to Chinese rule has been riddled with irony, not the least of which being that of Beijing’s role in preserving the territory’s tradition of fiscal conservatism. At the heart of the story is Chung Shui-Ming, top financial advisor to Chief Executive Tung. A member of the “pro-Beijing” party, the Hong Kong Progressive Alliance, Chung is widely seen as owing his present position to his political connections, and to the fact that the leadership in Beijing can trust him to defend their interests in Hong Kong.

And what are those interests? According to the Far Eastern Economic Review, “Chung is expected to play a key role in combating legislative calls for more spending and lower taxes…” In other words, Chung is a fiscal conservative, guarding the territory’s public funds from being spent by its own local politicians.

As Hong Kong enters yet another era in its rapidly unfolding and tumultuous history, it is tempting to think that the old rules need no longer apply, that the territory should “break free” from past constraints, and “have the courage to set aside past modes of thought,” as Tung suggests. The Hong Kong government, however, should be very selective in choosing which modes of thought it abandons — particularly when it comes to those modes of thought that have been instrumental to Hong Kong’s success in all periods of its history, regardless of the circumstances of the times.

This point is all the more relevant given the experience of other countries who have abandoned free market policies to a large degree. Does more government spending on welfare programs mean that the poor are better off in those countries? Does government regulation of the workplace make for better working conditions? Do corporate subsidies and government-led industrial policies make a nation’s industry more competitive?

The U.S. experience suggests that they do not. And it becomes very difficult to defend the current levels of taxation to support such policies in light of an example like Hong Kong, where the government is able to provide infrastructure and services that are in many cases superior to those in the U.S., in addition to running budget surpluses 9 years out of 10 — and all without ever taking as much as 20% of the territory’s GDP.

It is also difficult to argue that the vast array of regulations and restrictions on economic activity in the U.S. are necessary. While proponents defend economic regulation as being in the “public” interest, protecting the “little guy,” or helping to ensure stability, it is hard to see that they do any of this. Not only are people in Hong Kong free to act and interact as they choose, they are also economically well-off.

In the U.S., we have slowly grown accustomed to giving more of our earnings and more of our freedom over to the government, all the while tolerating poor government performance in such areas as crime prevention, education, and unemployment, to name a few. Meanwhile, Hong Kong’s experience suggests that not only is this level of government involvement and expense unnecessary, but that we would probably be much better off without it. Of all the ironies surrounding Hong Kong’s handover to Chinese rule, perhaps the greatest is this: That the worst danger facing the territory is not that it will become more like China in the years following the handover, but that it may become more like us.




1. Sources for “Government Spending as a Percentage of GDP” graph: Tax Foundation, “Facts and Figures on Government Finance,” various years; and Budget of the U.S., Historical Tables, 1994. Quoted in the Institute for Policy Innovation ‘s “Government: America’s #1 Growth Industry,” by Stephen Moore, 1995, pp. 43-44; and Bob Howlett, ed., “Hong Kong 1997,” published by Information Services Department, Hong Kong, 1997.

2. Sources for “Crime” table: US Justice Department (website) and the New York State Division of Criminal Justice Services, Bureau of Statistical Services, 1997; Police Public Relations Branch, “Crime in Hong Kong – 1996,” Hong Kong, 1997.


Footnotes: TO COME.