What has been the fundamental economic policy of Hong Kong? The answers might vary. But most would mention “positive noninterventionism”, which was officially implemented in 1971 by then-financial secretary John Cowperthwaite, and was continued by subsequent financial secretaries, including Philip Haddon-Cave in the 1980s.
This economic philosophy was also called “big market, small government” by then-chief executive Donald Tsang Yam-kuen, which means the government will respond in earnest to the needs of the market for economic development so long as the ratio of the public sector to the GDP is kept below 20 percent.
While the two designations are not identical, they are not much different from each other; both are essentially laissez faire by another name, a policy of minimum governmental interference in the economic affairs of individuals and society, which received strong support in classical economics under the influence of Adam Smith. Hong Kong’s “positive noninterventionism” was once cited by American economist Milton Friedman as a fairly comprehensive implementation of laissez-faire policy. And the Heritage Foundation has repeatedly ranked Hong Kong as the freest economy in the world since its return to China.
The doctrine of laissez faire has however become outdated. As early as 1924, British economist John Maynard Keynes criticized this doctrine. In 1926, he published his famous essay The End of Laissez Faire; made his points including, inter alia, the criticism of the doctrines of laissez faire as being dependent on improper deductive reasoning; and concluded that whether a market solution or state intervention would be better ought to be determined on a case-by-case basis.
During the 1930s, Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of an economic recession and depression; his theories were adopted by the then-US president Franklin Roosevelt in fighting the Great Depression, and since then, Western economies have adopted his theories, which are expounded in his book The General Theory of Employment, Interest and Money, published in 1936. To generalize, in cases of economic recession and financial crisis, the Keynesian theories always work, whereas the doctrines of laissez faire always fail. In case of inflation, Friedman’s theories of money supply might help. But in cases of technological breakthroughs, rapid economic development and industrial transfer, the above theories and doctrines might be useless, whereas China’s reform and opening-up policies based on the socialist market economy theories might be of reference.
Many people in Hong Kong believe that the laissez-faire policy should be maintained in conformity with Article 5 of the Basic Law, which stipulates “the previous capitalist system and way of life shall remain unchanged for 50 years.” However, the “50 years no change” mantra does not necessarily mean that the SAR government shall do nothing to further economic development. The Basic Law sets out the basic principles on the SAR’s public finance, monetary affairs, trade, industry and commerce in Section 1 of Chapter V under the headline “Economy”.
Two of the articles under Section 1 stipulate that the HKSAR government has the obligation to “provide an economic and legal environment for encouraging investments, technological progress and the development of new industries” (Article 118); and to formulate appropriate policies (other than laissez faire) to “promote and coordinate the development of various trades such as manufacturing, commerce, tourism, real estate, transport, public utilities, services, agriculture and fisheries, and pay regard to the protection of the environment” (Article 119).
Hong Kong’s manufacturing sector grew rapidly in the 1960s and became one of Four Asian Tigers. During the 1980s, Hong Kong’s manufacturing sector accounted for more than 30 percent of its GDP and contributed more than 40 percent of its employment. But industrial transfer (offshoring) started in the early 1990s and accelerated after the 1997 handover. Without the support of appropriate government policies as required in Articles 118-119, the local manufacturing sector failed to upgrade and transform. As a result, it gradually withered along with time, with its share in the GDP falling to below 1.5 percent and its share in employment declining to about 2.2 percent in 2021.
In contrast, the SAR government departed from the “positive noninterventionism” philosophy when the city’s real estate market plunged to its lowest level since the handover in 2003, and implemented strict control on the supply of land while slowing down the construction of public housing projects. As a result, home prices increased 550 percent in 18 years to a record high in 2022.
Compared with other cosmopolitan cities in the world, and many coastal cities on the Chinese mainland, Hong Kong has the most affluent land reserve. But Hong Kong has used only 25 percent of its 1,100 square kilometers of land for development, with the smallest per capita living area among all coastal cities in China.
With the biggest water territories of 1,600 sq km among most coastal cities in China, Hong Kong barely has a coastal fishery. What a waste! According to Article 119 of the Basic Law, the SAR government is required to promote and coordinate the development of modern agriculture and a fishery with appropriate policies. But the SAR government has failed to do so.
Hong Kong needs to swiftly shift to a proactive economic policy; otherwise, the city can only sell swimsuits to Alaska and bring woolens to Hawaii for sale.
The author is a former professor at the Research Center for Hong Kong and Macao Basic Law, Shenzhen University.
The views do not necessarily reflect those of China Daily.