Benefits of economic freedom

Roger Kerr has an article (pdf) in the Otago Daily Times today on the benefits of economic freedom using Hong Kong as an example. Kerr makes the point that

At the end of World War II Hong Kong was a small fishing port with a dirt-poor population of 600,000 – its per capita income was about one-quarter that of Britain.

Today, with a population of around 7 million, Hong Kong enjoys a per capita gross national income (purchasing power parity basis) of US$38,200, above that of Britain and Australia and 40% higher than New Zealand, according to World Bank figures.

An interesting point of comparison is that in 1958 Cuba's per capita GDP was $3,170 while Hong Kong had a per capita GDP of $2,924. Since then these two countries have followed very different development paths in terms of economic freedom . Today Cuba is one of the poorest countries in Latin America, very different from today's Hong Kong.

In addition it is noted that

... Hong Kong continues to get richer. Over the 10 years 1999-2008, Hong Kong’s real GDP grew by an average of 5.3% a year, compared with New Zealand’s average growth rate of 3.3% in that period, according to the International Monetary Fund.

While it is true that Hong Kong’s proximity to mainland China has been a factor in its recent development, it must also be noted that Hong Kong became wealthy before China's rapid increase in economic growth.

Kerr goes on to make the interesting observation

As the Financial Secretary said in the 2008/09 budget in February, Hong Kong upholds “the principle of ‘Big Market, Small Government’, so that the share of public expenditure will be maintained at 20 percent or below of GDP.”

As a comparison, according to the OECD New Zealand's total government spending 42%.

Kerr continues

The Financial Secretary went on to say, “A big market can increase the share of the private sector in the economy and allow market forces to allocate our limited resources in the most efficient way for the maximum benefit of the community as a whole. A small government can prevent the public sector from acquiring excessive resources and thus reducing efficiency in the allocation and use of resources.

The way Hong Kong got a "big market", given its small internal market, was international trade. The ratio of trade (imports plus exports) to gross domestic product (GDP) is usually larger than 2. For instance, in 2001, the ratio of trade to GDP is pegged at 2.825, the exports to GDP ratio is 1.439, and the imports to GDP ratio is 1.386. For New Zealand, in 2001 the trade to GDP ratio was about 0.7, by 2004 it had fallen to around 0.6.

Hong Kong has essentially a flat income tax regime and as Kerr explains

... the government’s view is that it “should not attempt to narrow the wealth gap by redistributing wealth through high levels of tax and welfare. Such a measure would only inhibit people’s incentive to work hard and, in turn, undermine the productivity and competitiveness of the
community as a whole.”

Hong Kong also has an very open labour market with has no statutory minimum wage. Interestingly, it does not have a general competition law regulator, that is there is not Commerce Commission in Hong Kong. Rather it relies on competition in opens markets to control market abuses.

Kerr ends his article by noting that

As with other countries, it is not hard to find aspects of Hong Kong’s economic arrangements to cavil at.

But also notes, correctly, that

... for countries aspiring to prosperity (getting into the top half of the OECD?) it is a model well worth studying.

Not that there are too many politicians in New Zealand who would want to do so.