This article was first published by Business Day on 4 May 2023
For success South Africa must be governed with a light hand
Reflected in the surveys of the world’s most successful economic systems we find that, without fail, their economies are governed with a light hand. We find in them deliberate efforts to remove any government heavy-handedness from economic activity. The purpose is to allow enterprising entrepreneurs to innovate and employ the country’s human and material resources to the best advantage of all concerned. The results have been spectacularly successful and worthy of emulation by all politicians who care about the health, welfare and happiness of the people who have elected them.
South Africa should seriously consider a Hong Kong-style “hands-off” policy. Hong Kong resolved a greater unemployment problem than the one that now faces South Africa and at the same time grew its economy at an astonishing rate. In four decades, that tiny territory was transformed from a poverty-stricken British colony into an economic powerhouse with 37 per cent higher per capita incomes than the citizens of Britain.
A policy of “positive non-interventionism”!
The British administration of Hong Kong adopted an economic “doctrine of positive non-interventionism” which allowed the citizens to prosper, as they never would have done if British taxes, labour laws, and other legislation had been applied in the territory.
Hong Kong maintained a low flat rate tax (15% and now 10%) on business profits and income from employment (after generous deductions). They declined to implement the PAYE system of upfront taxes, and excluded dividends and foreign earnings from taxable income. There was no capital gains tax and import and export duties were abolished. A currency board issued the Hong Kong dollar, maintaining a fixed rate of exchange with the US dollar, with one hundred per cent foreign currency reserves backing the Hong Kong dollar.
Positive non-interventionism meant keeping government out of people’s wallets and lives as far as possible. Returning deportees who had fled Hong Kong during the Japanese occupation, refugees and immigrants flooded into Hong Kong and increased the population from 600,000 to 3.2 million between 1945 and 1961. Many of these people were poverty-stricken, housed in shacks, or on boats in the harbour, or otherwise in cramped one-room apartments in high-rise buildings erected by the government. All and sundry urged the government to halt the immigration and even to send refugees back to the countries from which they had fled, but the government refused to do so.
From mass unemployment to labour shortages!
There were no jobs in the colony for these additional people, but enterprising entrepreneurs soon looked for ways to employ all this available labour. Observers considered what resulted to be “exploitation” and were appalled. Hong Kong became famous for the low-cost goods the refugees made in their homes, churning out millions of items such as miniature trinkets and toys made with moulds and molten plastic.
No interference in relations between employers and employees!
The administration once again applied the positive non-intervention policy. They left labour relations to employers and employees, instituted no minimum wage laws, and no government job creation projects. Instead, trinkets and toys for export to the rest of the world gradually made way for high value goods produced in modern factories by an increasingly skilful and well-paid labour force. The resulting “economic miracle” of high growth and development absorbed the huge number of unemployed at such a rapid rate that, by the 1980s, employers were complaining of a shortage of labour.
Milton Friedman’s assessment of Hong Kong success
In an article he wrote on Hong Kong, Professor Friedman described the success of the island economy, and reflected on the fact that its GDP per capita had overtaken that of Britain. He ascribed the difference in outcomes to socialism in Britain, free enterprise, and free markets in Hong Kong. “In 1960, he said ... the average per capita income in Hong Kong was 28 per cent of that in Great Britain; by 1996, it had risen to 137 per cent of that in Britain. In short, from 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger than Britain’s.”
Friedman’s conclusion was that “the only plausible explanation for the different rates of growth was socialism in Britain, free enterprise and free markets in Hong Kong”. In free economies, such as that of Hong Kong, the planning is carried out by myriad private entrepreneurs who risk their capital on the implementation of their plans and suffer losses if they miscalculate. In free economies the chances of success are much greater than in highly politically controlled economies.
Comparing South Africa and Hong Kong economies
According to the World Bank, South Africa’s 1960 GDP per capita (in constant 2015 US$) was $3,974; Hong Kong’s was $3,956. The comparable figures in 2020 (60 years later) were South Africa $5,725, and Hong Kong $41,448. In 2020 South Africa’s GDP per capita had increased by ,751, and Hong Kong’s by $37,492. In the 60 years from 1960 to 2020 South Africa’s GDP per capita (measured in constant 2000 US$) increased by 44.46%. In the same period, by the same measure, Hong Kong’s per capita GDP increased by 947.96%.
What accounts for such a huge difference in the economic outcomes of the two economic entities? A simple answer to the question would be that Hong Kong has, consistently, since at least 1980 been rated in the Economic Freedom of the World reports as having the world’s freest economy with a top marginal tax rate of 17%. South Africa is currently ranked 99th with a top marginal tax rate of 45% and is reported as having the highest unemployment rate in the world. The figures indicate that it is the nature of the government and the policies it follows that determine the success or failure of the economic outcomes.