January 06, 2006

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Somalia tops Hong Kong

Hong Kong is declared again the world's freest economy by the Heritgae Foundation, a group that clearly has never been here. Jake van der Kamp says it best:

Coming right down to it, Somalia is the world's freest economy

According to the Hong Kong Census and Statistics Bureau, the government consumed 9.9 per cent of GDP in 2004, down from the 10.53 per cent reported in the 2005 Index. As a result, Hong Kong's government intervention score is 0.5 point better this year. In the April 2004-March 2005 fiscal year, according to the Economic and Trade Office, Hong Kong received 1.7 per cent of its total revenues from state-owned enterprises and government ownership of property.

And there you have it from the Bible. The Heritage Foundation of the United States is the accepted authority in these matters and it has once again rated Hong Kong as the freest economy in the world with a ranking of 1.28, our best score ever. I am not about to say that Heritage Foundation has it all wrong. Hong Kong deservedly rates well up this index. But by employing a standard cookie-cutter template for its ratings, the foundation has missed a few critical things and they particularly show up in the paragraph I quoted.

Let us deal with a technical one first. Yes, it is true that our government consumed only 9.9 per cent of gross domestic product in 2004, but only if by consumed we mean only what our GDP accounts define as government consumption expenditure. If we include capital expenditure, our government consumed 13.7 per cent of GDP. Oh well, consumed or consumption, it is all just a trivial matter of definition, you know.

And then we get the bit about how our government received only 1.7 per cent of its total revenues from state-owned enterprises and government ownership of property. I now ask you to bear in mind that half of Hong Kong's housing stock is public housing. Bear in mind also the investments and activities of such government entities as Chek Lap Kok airport, Kowloon-Canton Railway Corp, MTR Corp, Cyberport, Science Park, the industrial estates and the list goes on. You probably have the impression from the Heritage Foundation's phrasing that all of these together have a weighting of only 1.7 per cent in our government's budget.

It is possibly true if you do it the foundation's way, which is to say that you include only the money they may remit to government every year after paying all their expenses. This also assumes that they choose to remit it to government rather than keep it in their own accounts. But let us say these are really all government operations and that we should treat their expenditures as government expenditure. It is my guess in this case that you could take the 1.7 per cent in their contribution and at least move the decimal position one digit to the right when assessing how much our government spends.

Look at it another way. The United States builds very little public housing and the money to help the needy cover their housing costs comes out of its direct budgets. This all counts against the US in the score the foundation gives it on government intervention. We in Hong Kong, however, hide it by massive public housing subsidies through a government corporation funded from land grants and land sales. The foundation excludes this from its government intervention score. Would we still rate the world's No1 if it were included? That fact is that we have our advantage largely because all land in Hong Kong is on leasehold, a system of land tenure that the US scorns as an invasion of property rights. The US has gone the freehold route. Our way allows us to hide big slices of government revenue and expenditure. Most other countries cannot do it.

One other country that can do it, however, is Singapore, which has 85 per cent of its population in public housing. And yes, you guessed it, the foundation's choice for the world's No2 is Singapore, the economy that has come closer than all others in the world to achieving communism in the classic Marxist sense.

I shall give you my choice for the world's No1. It is Somalia, which has no government at all and where a very free village-based economy is emerging. It is doing so with no foreign aid, for which Somalia may be grateful. Going by a benchmark measure that staging a one-hour African gun battle costs about US$100,000, and taking into account that Somalia no longer has any foreign money to divert to this pastime, it is also a more peaceful country than it might otherwise be. But Somalia certainly does not fit the foundation's cookie-cutter approach to rating economic freedom and it was not even included in the index.

We have our rating, largely thanks to the approach the foundation has taken, which, whether deliberately or not, happens to emphasise foreign trade and foreign investment over domestic economic considerations. We fit that cookie cutter perfectly.

And this suggests one last question for the foundation. How much of your funding, sirs, comes from Hong Kong donors?

A city largely run by oligarchs doesn't meet most defintions of economic "freedom".

posted by Simon on 01.06.06 at 08:49 AM in the Hong Kong economy category.


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Same oligachy different oligarchs, Hong Kong has never experienced real democracy, Hong Kong now is more or less the same as before 1997 when it was ruled under the appointed British governorship.

posted by: David on 01.06.06 at 11:35 AM [permalink]

David, that seems a rather defensive statement that is rather oblique to Simon's point - I am sure he does not dispute that the British ran Hong Kong in the same way. It just is rather amusing how the Heritage Foundation and Milton Friedman always cite Hong Kong as being so economically 'free' when there really are monopolies and oligopolies and government corporations in Hong Kong everywhere you look.

And in Hong Kong, the government is the greatest land speculator of all...

posted by: HK Dave on 01.06.06 at 04:09 PM [permalink]

i guess the heritage scoring is based on what the govt does (to control economy).
whereas HK's oligopoly is somewhat a result of the market (the small size naturally squeeze out some, and the policy further favors the oilgarchs. the oligarchs are tax collector pretending to be property developers)

but, indeed, real anarchy like somalia should be the freest. favorable economic environement should include both freedom and fair protection of ownership and contract obligation/etc, on top of anarchic laissez faire

posted by: sun bin on 01.06.06 at 05:18 PM [permalink]


Don't get me wrong, I didn't disagree with Simon but during the whole 90S, Hong Kong always scored as the freest economy in the world, even when the government was not really that "free".

I also agree that, "And in Hong Kong, the government is the greatest land speculator of all..." however, the Hong Kong Government always prevaricated that they had nothing to do with the inflated land prices in the 80s and 90s.

posted by: David on 01.07.06 at 01:13 PM [permalink]

Actually, Singapore has not achieved anything near classic communism, as it, like HK, is dominated by government monopolies allied with foreign big business.

And as would probably be frowned on in classic communism, resource allocation in Singapore is highly irrational, controlled as it is by bureaucrats with no idea what they're doing. Also, there is virtually no social security / welfare net in Singapore, despite an extremely high rate of direct, indirect and hidden taxation by the government.

True, there is extensive provision of public housing, but the cost of said housing to Singaporeans is hugely inflated by an extortionate array of government property, land and transaction charges, not to mention the extremely opaque tendering system by which building contracts for public housing estates are awarded.

Public housing in Singapore is not a realisation of Marxist / communist ideals in their purest form; it is merely a salve to keep the populace from rebelling against the status quo established by the coalition of bureaucrats and big business.

posted by: Fat Singapore Talentless Expat on 01.07.06 at 06:22 PM [permalink]

The private sector surely is doing it's part in Somalia: telecommunications, water, electricity even the justice system. All without government.:

"Somalia has lacked a recognized government since 1991—an unusually
long time. In extremely difficult conditions the private sector has
demonstrated its much-vaunted capability to make do. To cope with
the absence of the rule of law, private enterprises have been using
foreign jurisdictions or institutions to help with some tasks,
operating within networks of trust to strengthen property rights, and
simplifying transactions until they require neither. Somalia’s private
sector experience suggests that it may be easier than is commonly
thought for basic systems of finance and some infrastructure services
to function where government is extremely weak or absent."


There is something to be said for putting Somalia high on the index.

posted by: ivan on 01.07.06 at 08:06 PM [permalink]

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