What country is this?

1.  Unlike Germany, it now has a legal minimum wage.  Plans to enact legislation limiting working hours.

2.  Much of the property market is controlled by the government

3.  Government bought lots of shares of stock to boost economy during recession.  Still owns many shares.

4. Introduced deposit insurance in 2008.

5.  Stopped accepting foreign doctors in 1997 (unless locally-certified.)

6.  Established anti-trust laws.  As elsewhere, policymakers ignore government-connected monopolies and go after purely private firms.

7.  Government first regulated the 4 stock and derivative exchanges, then forced a merger, then became largest shareholder, then prevented new entrants.

8.  Unlike the Nordic countries, the government is taking over formerly private infrastructure such as tunnels.  Huge new projects are now built and run by the government.

9.  The government is increasingly involved in “industrial policies” despite the ineffectiveness and corruption of its initial forays into planning.

Obviously I’m describing what is almost universally viewed as the most laissez-faire country entity on Earth—Hong Kong.

A few comments:

That’s why I wasn’t impressed a few months back by arguments that Adam Smith did not favor laissez-faire, merely because he favored a few government interventions.  It’s all relative.

Commenters frequently question my assertion that Singapore is the second most neoliberal economy—pointing to all sorts of government intervention.  If Hong Kong is number one despite all the intervention listed above, you can imagine how little laissez-faire is required to come in second.

I’m actually not too concerned about these actions, although I agree with The Economist, which is mostly skeptical of how well the new interventions will work.  Indeed they are even critical of a new food labeling law that I didn’t mention.  But this reflects the increasingly democratic nature of Hong Kong.  In my research on neoliberalism and culture, Hong Kong was somewhat of an outlier—much more free market-oriented than you’d expect given it’s not particularly civic-minded culture.  So it’s merely reverting to its natural position.  And there is a lot of ruin in a nation.  Hong Kong will probably continue to come in number one in the various free market rankings for quite some time.  But I expect it to eventually be overtaken by Denmark.

In the long run the challenge is to change culture so that governments respond to the general interest, not special interest.  And the other challenge is to change economic worldviews so that well-meaning government officials (no, not always an oxymoron) understand that free markets are more effective at promoting the general welfare than most people currently believe.  I’m not going to change cultures, but I’m trying to change worldviews.



15 Responses to “What country is this?”

  1. Gravatar of W. Peden W. Peden
    10. September 2010 at 01:53

    Once again, Hong Kong is going to be a fascinating case-study for the relative effects of policies. However, this time we will be able to compare Hong Kong with itself, rather than Hong Kong and the mainland.

  2. Gravatar of scott sumner scott sumner
    10. September 2010 at 04:27

    W. Peden, Yes, It will be interesting to look at employment levels of low skilled workers after the minimum wage is added.

    Still I’d expect HK to do fairly well, as even with all these changes it will probably remain the most laissez-faire country for at least another decade. So everything’s relative.

  3. Gravatar of OGT OGT
    10. September 2010 at 09:03

    I don’t know if you saw Michael Lewis’s Vanity Fair piece on Greece. It’s more entertainment and anecdotes, but it certainly reinforces the idea of a civic trust is a driving force behind sustainable growth and sustainable policies.

    The Greek social compact is very weak and intra-social trust is very low. This seems like one of those multiple equilibria problems where falling levels of social trust or high can be self reinforcing.

    There seems to be some evidence that periods of economic distress lead to increased distrust, xenophobia and social strife, which could, in theory, lead to a longer term slower growth. So one more arguments for proper monetary policy.


  4. Gravatar of david david
    10. September 2010 at 12:26

    Well, people are bad at knowing how to design policies that produce what they want. So when they want low-paid people to be paid more, they push for minimum wages instead of negative income taxes.

    I recall complaining a lot about your use of Singapore, but the point I was trying to make was not that it’s not laissez-faire – it is very close, despite formal government ownership, because of its small size and open trade – but that countries pay for economic freedom by trading off in other areas. Nordic countries can have less regulation because they have very high tax transfers. Singapore can have less regulation because it is authoritarian and efficient.

    In their absence there is legislative momentum toward either more tax transfers to remove inequality, more authoritarianism or social rigidity to maintain inequality, or more regulation, or possibly more than one of these if the government is exceptionally stupid. And there doesn’t seem to be a way around this.

    The existence of formal regulation thus matters less, we need to consider other areas. Policies have substitutes; for example, China could omit formal private property rights by incentivizing local officials towards growth.

    (oddly enough, it seems to be the case that the democratic impulse is toward regulation and whatever else, even if whatever else alone will do. Singapore got to where it is today by first regulating and steadily building up the state, wage controls and all, then unwinding the regulation. Likewise Northern Europe, which built both the welfare and regulatory states, then dismantled much regulation while maintaining relatively high taxes. The US’s federal foray into dismantling both in the 80s may prove a historical mistake, since regulation is worse than tax transfers.)

  5. Gravatar of david david
    10. September 2010 at 12:33

    @W. Peden

    You’re going to have a hard time dismantling the effects of policy changes with the effects of Beijing exercising power. If Hong Kong goes down, it’s easily claimed that competition with Shanghai did it in. etc.

    I wonder how much the impulse toward regulation stems from Beijing, anyway. The CCCP seems to be backing the minimum wage.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. September 2010 at 16:58

    The US’s federal foray into dismantling both in the 80s may prove a historical mistake, since regulation is worse than tax transfers.
    Interesting claim. In Australia, we privatised and de-regulated but also tightened up targeting of welfare transfers. Which is to say, transfer policy was explicitly part of the reform agenda (under the Hawke-Keating Government, it was referred to as “the social wage”).

    The result is that we are currently rated about as economic free as the US, or a bit more so but have a lower government expenditure to GDP ratio than the US.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. September 2010 at 17:08

    And, I should add, much lower ratio of public debt to GDP. All with a much higher rate of immigration (given our foreign residents are about 24% of population to the US’s about 13%). But we cherry-pick our migrants a bit more ruthlessly than the US does.

  8. Gravatar of scott sumner scott sumner
    10. September 2010 at 18:31

    OGT, No, but I’ll tell you something amusing. I did a study 2 years ago called “The Great Danes” which related culture and economic policy among developed nations. Greece was the least civic-minded and the least neoliberal. But it wasn’t the poorest. Indeed it was only about 15% lower per capita income than Germany. I recall wondering how Greece could do so well with such a low civic trust culture. Looks like that problem has now come back to bite them.

    BTW, Cultures do gradually change over time, and it wouldn’t surprise me if Greece was able to gradually get its act together. They are a very talented people, and I think some tend to write the country off too quickly. (None of this relates to the VF piece, which I haven’t read.)

    The Economist article is worth reading. I believe they mentioned that HK once had a corrupt culture, but that it improved over time.

    David, I agree that there are some of the trade-offs you cite. Another is tort law vs regulation. But don’t be quick to assume that the mainland Chinese way is successful. It’s a mixed economy, and it’s quite possible that the lack of property rights are actually holding them back. It’s still much poorer than Mexico, and arguably might be doing even better with freer markets.

    All the things I like about Singapore are compatible with democracy—I don’t know a single Singapore policy that I like that can’t also be found in at least one democratic country.

    The policies I don’t like–like executing drug dealers, are not found in democratic countries.

    The US increased regulation where it needed to be increased (environment) and cut back where it needed to cut back (entry restrictions and price controls). The high MTRs were a huge mistake, and we are better off without them.

    Lorenzo, Australia might be my favorite country. I’d live there if I had to leave the US. You’ve been very smart with your economic model. One thing Australia disproves is the European view that US levels of taxation necessarily results in “savage inequalities.” Not so, and Australia is a counterexample.

    Of course you are also the Lucky Country, and had that nickname even before you discovered you were perfectly situated to benefit from the Asian super-boom.

  9. Gravatar of david david
    10. September 2010 at 22:28

    @scott sumner

    I’m happy to say that the PRC has introduced formal private property legislation over the past decade. It now has private property (the tricky bit of enforcing it still needs work, though).

    But private property would not have been the best way forward back in the 1980s, even if it is so now. It would have been meaningless to formally recognize it in Beijing; the regional judiciary was even weaker than it is now. So incentivizing regional executives to act instead was the only way.

    Regardless, the point was not about China’s particular policy but rather that policies can have substitutes to meet demands for particular effects.

    On Singapore: the level of means-testing found is not compatible with democracy. Neither is the famously rigid societal management present, yet this is what permits immigration of vast amounts of unskilled labor or prevents the ethnic politics characteristic of Southeast Asia from gaining strength. The extraordinarily high pay the government grants itself, and the performance this high pay can demand, is also not compatible with democracy. I can really go on here, but I don’t know what policies you happen to have in mind. I emphasize that resentment over such policies add up, so I presume you have other countries in mind with many of such policies of such a degree.

    Tangentially, I’ve read that Singapore’s execution of drug offenders is due to US pressure; Singapore could care less – deportation is easier – but the US is finicky over trafficking from the Golden Triangle region.

    I think you will agree that ‘overall’ regulation in the US has decreased, or perhaps I have misread your successes-of-liberaltarianism post. High MTRs were indeed probably a mistake; the US should have opted for introducing a VAT to substitute, though.

    @Lorenzo from Oz – I’m not sure if you are disagreeing with me here, but I from what I’ve read of recent Australian policy, the “social wage” bargain in the 80s improved transfers to employees, albeit by offloading some of the costs to employers instead of the government. Like some Northern European nations, there is collective bargaining in lieu of formal regulation of wages (and it is such bargaining which is enforced by law, thus allowing Sumner to claim that Germany has no minimum wage :P). So I think the policy trade-off concept stands.

  10. Gravatar of david david
    10. September 2010 at 22:52

    The Economist article is worth reading. I believe they mentioned that HK once had a corrupt culture, but that it improved over time.

    Aided considerably by London. The initial campaign to suppress corruption among the police force was done by creating an independent force composed of UK officers.

    And, of course, British power was consolidated in Hong Kong by shooting communists in the streets, so that didn’t come free either.

    Singapore also had a similar problem; in fact its CPIB predates Hong Kong’s ICAC by more than two decades. But for it to work, top-level executives had to back it in the face of resistance from the domestic tools of law enforcement, which required at least a brief period of asserting external strength. Singapore used British forces too.

    There are states that eliminated a corrupt culture through internal reform, but this seems to take much longer. US city machines lasted very, very long.

  11. Gravatar of rob rob
    11. September 2010 at 02:21

    “In the long run the challenge is to change culture so that governments respond to the general interest, not special interest.”

    Your idea that this is even plausible in a large democratic country like America is your most absurd belief.

  12. Gravatar of scott sumner scott sumner
    11. September 2010 at 06:46

    David, Often you say lots of things that you seem to imply are in conflict with what I say (or at least that’s how I read them) but actually agree.

    I agree China has some property rights, which is good, but they tend to lack land ownership rights, which is what I meant.

    I doubt Singapore maintains the death penalty because of pressure from Obama, but I don’t doubt that US pressure might have contributed to it. Still much hunch is that even a Republican president would have been satisfied by life in prison in Singapore, so I doubt it is the only factor. Did we force them to put $500 fines on a cigarette butt tossed on the sidewalk?

    I agree that leaving some of the reforms to local Chinese governments made some sense, it is difficult for a central government to rapidly reform a huge economy.

    I agree that outside pressure helped HK reform, which supports my point, as Greece is now getting massive outside pressure.

    Singapore has low taxes on capital, so do some Nordic countries. They have a flat tax, so do lots of democratic countries. They have HSAs, so do we (although we need much more.) They have fully-funded social security with private accounts, so do a number of democracies. They have road congestion prices so does London and Stockholm. The Stockholm system passed a referendum, you can’t get much more democratic than that. The have almost no national debt . . . ditto for Australia. They have low levels of corruption, . . .ditto for the Nordic countries. They have fairly free trade and investment . . . ditto for the Nordic countries.

    When I talk about the neoliberalism trend, I mean “economic” regulation has decreased. Obviously the total number of rules may be higher, if you include complex rules in employment, the environment, etc. I meant that price controls and entry restrictions have been reduced.

    Rob, You responded to this assertion;

    “”In the long run the challenge is to change culture so that governments respond to the general interest, not special interest.”

    Your idea that this is even plausible in a large democratic country like America is your most absurd belief.”

    It might be absurd if that was my view, but I did an entire blog post advocating breaking up the US into 50 independent countries.

  13. Gravatar of david david
    11. September 2010 at 08:22

    As my earlier comment noted, the Nordic countries do pay their way by dramatically reducing inequality via tax-funded wealth transfers. The highest Nordic Gini coefficient is in the 0.2s. Singapore (and Hong Kong’s) are in the 0.4s.

    Magnitudes matter, too. Singapore also has effectively 100%+ taxes on car ownership (via auctioning ownership certificates), I venture that won’t pass any democratic test. Likewise raising the consumption tax while lowering corporate and income taxes; no matter how good this is for GDP growth, it is a very unpopular change!

    And, fairly obviously, Singapore has lower direct taxes in virtually all areas than the democratic cities or countries you identify, and likewise lower social spending. Don’t get me wrong here, it works very well in Singapore – it contrives to have universal healthcare, education and housing on a shoestring, and of a very high quality at that – but via very aggressive means-testing; this would not work in a democratic state.

    To be more specific about policy tradeoffs: the constraint is bad things (due to luck, market failures, etc.) happening to poor people, which generates resentment and hence policy change; to avoid this, we can make them less poor (Nordic countries), prevent market failures from harming poor people (regulation), or prevent resentment from affecting policy (Singapore).

    Countries can perform ‘below’ the policy possibility frontier, of course, but not above it – so when countries rank very highly on economic freedom rankings, the question is what else they have given up. If you think Scandinavian neoliberalism is great, well, it doesn’t come without 25% VATs.

  14. Gravatar of ssumner ssumner
    12. September 2010 at 06:03

    David, Do you have any evidence that the low Gini’s are due to tax transfers? Brazil also spends a huge amount of tax transfers.

    I agree that a 100% car tax is a bit unlikely in a democratic state. But I would make two comments:

    1. I never said I favored the tax.
    2. It’s not impossible. The Nordic countries have liquor taxes that most people would probably regard as impossible in a democratic state.

    I wouldn’t assume that ideas like HSAs and low taxes are not consistent with democracy. When you meet people from Asia they all seem to have a high opinion of Singapore, many seem to want to move there. If it is so popular amoung Asians, why assume that it is not a feasible policy regime in a democratic state? Here is my basic problem with the type of argument you are making:

    1. It is either a tautology. “What is is what is.”
    2. Or is says change can never occur. Suppose 20 years ago I had proprosed a 100% voucher system for Sweden, even including for-profit schools. I’m sure people would have lectured me that it was impossible, that Sweden had a communitarian culture, blah, blah, blah. Now they have it. Can you imagine Denmark privatizing its fire departments. That’s about as core a government economic activity as you can imagine. But they have.

    Obviously the world is fairly inertial. There are powerful special interests shaping the actual world we have. But things change over time, as new perspectives are developed. And that’s why I blog. 🙂

  15. Gravatar of ssumner ssumner
    12. September 2010 at 06:08

    One other point regarding Ginis. Japan’s Gini has risen sharply in 20 years, but I don’t think there have been any significant reductions in transfers as a share of GDP. And they have done even as much derugulation as the Nordic countries.

    So I’m not convinced Ginis reflect tax/transfers.

Leave a Reply