11 February 2016 – Beset by political troubles, Hong Kong Chief Executive Leung Chun-ying must have been happy to receive positive news. At the end of January, the Heritage Foundation, one of the most prominent American conservative think tanks, released its 2016 Index of Economic Freedom. Once again, Hong Kong tops the list.
Under the headline score of 88.6 out of 100 is an even more impressive rating of 97.4 for “Business Freedom”, a category that suggests few government constraints on an individual’s right to establish and run an enterprise. Heritage’s explanation of Business Freedom also points out that licensing regulations for new businesses are “the most inhibiting to entrepreneurship”.
Licensing is a hot topic at the moment. The Hong Kong localist rioters who took to the streets of Mong Kok during the Lunar New Year holiday have claimed they were out in force to support food hawkers. Many Hongkongers have been so distracted by protesters’ violent tactics that they have failed to recognize the genuine licensing issue at play.
As a 2012 Food and Environmental Hygiene Department public consultation document states, the number of licensed hawkers in Hong Kong has declined from around 20,000 in 1980 to about 7,000 in the consultation year. Other reports put the number of licensed hawkers at 50,000 in 1974, around the time the former Urban Council stopped issuing licenses due to their perceived environmental drawbacks and street obstruction.
While talking heads may croon about some new ideas for hawker bazaars, the fact remains that official policy has long discouraged a pragmatic way for low-income Hongkongers to make ends meet, rather than seeking workable solutions that preserve hawker livelihoods. So, despite the Heritage Foundation’s positive grade, one can see that the government does intervene in the market in ways that negatively impact freedom to work, produce, consume and invest.
Allegations of intervention are not controversial in themselves. On the one hand, all governments intervene in the market to some extent. Such state action may even be beneficial when it addresses market failures. On the other, Hong Kong officials have gradually built up tolerance among the public for some degree of interference through clever euphemisms that describe the long arm of the state in a non-threatening way.
“official policy has long discouraged a pragmatic way for low-income Hongkongers to make ends meet, rather than seeking workable solutions
For former Financial Secretary Philip Haddon-Cave, it was “positive non-interventionism”, which suggests that “the Government weighs up carefully the arguments for and against an act of intervention … and … comes to a positive decision as to where the balance of advantages lies”.
For Hamish McLeod, one of Haddon-Cave’s later successors, it was “consensus capitalism”, a small-government policy concept that admits intervention in the formulation of social policies.
And, for former Chief Executive Donald Tsang Yam-kuen (曾蔭權), it was “progressive development”, part of which involves active efforts to stimulate the economy through infrastructure investment, including in some of 2016’s most contentious projects.
Controversies only arise when officials’ justifications for “picking winners” – whether industries, projects, or individual companies – are found to be deficient, especially when the outcomes are negative.
A Free-TV Fiasco
The early February implosion of Asia Television (ATV) – another licensing issue – is case in point. The station that fought tirelessly to keep new entrants out of the free-to-air TV market has finally gone off the air under the weight of years of financial difficulties and shoddy corporate governance practices. Unable to find the white knight savior he was seeking, principal investor Wong Ching himself filed an application to liquidate the station.
“ATV: Reportedly, the station was losing HK$2 million per day in 2009
By now, the ATV story is tragically familiar. Having decided to open up the free-to-air TV market, the government succeeded in attracting three applicants, all of which were recommended for approval by a July 2011 Broadcasting Authority report. After at least one applicant waited 34 months for a response, in October 2013, the Chief Executive in Council announced his decision.
Apparently, a consultancy report had claimed the market could hardly support five operators, might support four under favorable market conditions, and could support three. To maintain the “sustainable and steady development of the free TV market”, the Executive Council would allow two new operators. Loser HKTV was left out in the cold.
ATV’s ultimate collapse has proven the folly of this approach. The government has not ended up with four licensees but three, just one more than originally existed. A cynical mind might be tempted to speculate that this outcome was deemed acceptable from the start. After all, “three” was ruled to be a safe number by the consultancy, which likewise pointed out that ATV, not HKTV, might be pushed out of business by competition.
Moreover, ATV’s many problems had long been clear to the government. Reportedly, the station was losing HK$2 million per day when minority shareholder Tsai Eng-meng entered the scene in February 2009.
And ATV’s many corporate governance problems were apparent almost from the moment Wong Ching (王征) arrived on the scene in 2010. As Baptist University professor Cheuk Pak-tong (卓伯棠) said after the Broadcasting Authority launched its inquiry into Wong’s improper control of the station in August 2011, “The authority should have had a clear idea of the kind of role that Wong Ching [would] play … from day one. Why conduct an investigation now?”
“the government has been caught with its pants down while intervening in the market in a harmful way
Speculation aside, the government has been caught with its pants down while intervening in the market in a harmful way. This did not stop a government spokesperson from stating, upon the release of the favorable Heritage Foundation score, that Hong Kong would continue to uphold “traditions” of “a level playing field” and an “efficient public sector”.
More Accountability Needed
That spokesperson also claimed the Heritage index had “reaffirmed” the government’s efforts to maintain Hong Kong’s economic freedom. But just what has the index “reaffirmed”? A dive into the foundation’s methodology is instructive.
“Unwise decisions that harm economic liberties can easily get lost in the aggregate
The Business Freedom component of the Heritage index draws on several sources, the most important of which is the World Bank’s Doing Business report. That report’s 2016 Hong Kong Economy Profile lists assumptions that guide the bank’s conclusions on the ease of starting a business in the territory. Assumptions include 100 percent domestic ownership by natural persons, a scale of between 10 and 50 employees, and the performance of “general commercial or industrial activities”. Neither hawker stands nor free TV broadcasters would make the cut.
In other words, an economy in which the masses generally enjoy economic freedom may contain glaring restrictions on free enterprise and still be deemed economically “free” by Heritage Foundation’s index.
Moreover, such publications are poor indicators of the quality of short-term government decision-making because they provide snapshots of institutional environments forged over the long term. Unwise decisions that harm economic liberties can easily get lost in the aggregate.
So while we can take solace in our belief that Hong Kong is not abandoning free-market principles any time soon, we should not allow sunny indexes and reports to lull us into complacency. At times, Hong Kong’s government does intervene in markets in ways that are hard to justify – all the more reason to strive for greater public sector accountability.
Mr Patterson has recently launched http://fragrantdelta.com where you can read more of his ideas and analysis on Hong Kong and regional politics and policy.
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