South Africa should emulate Hong Kong and govern with a light hand

Reflected in the surveys of the economic system in operation in Hong Kong, are many years of governance with a light hand. We find a deliberate effort to remove any government heavy handedness from economic activity so as to allow 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 do 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 this country and simultaneously 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.

Doctrine of positive non-interventionism
Hong Kong is a rocky island off Mainland China with a small piece of the mainland attached to it. Back in 1961, the British government appointed John Cowperthwaite, an astute Scottish economist, as Financial Secretary. In this position, he influenced Hong Kong’s economic policy and a hands-off or “doctrine of positive non-interventionism” was adopted under his guidance. This allowed the citizens to prosper, as they never would have done if British taxes, labour laws, and other legislation had been applied in Hong Kong.

Cowperthwaite played an important role in having Hong Kong maintain a low flat rate tax (15 per cent) on business profits and income from employment (after generous deductions). He 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 100 per cent foreign currency reserves backing the HK$.

Positive non-interventionism meant keeping government out of people’s wallets and lives as far as possible. Returning deportees, 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 and housed in shacks, or on boats in the harbour, or 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 and its Financial Secretary refused.

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 of 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.

Cowperthwaite once again applied the positive non-intervention policy. He 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.
Friedman: Socialism in Britain, free enterprise and free markets in Hong Kong
In a 1998 article published by the Hoover Institution, renowned economist Milton Friedman reported that “in 1960 ... 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. It’s easy to state these figures. It is more difficult to realise their significance. Compare Britain—the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set—with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbour. Yet within four decades the residents of this spit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.”

Friedman’s conclusion was that “the only plausible explanation for the different rates of growth is socialism in Britain, free enterprise and free markets in Hong Kong”. When Friedman asked why the Hong Kong government appeared to have no available statistics, John Cowperthwaite’s answer was “If I let them compute those statistics, they’ll want to use them for planning”.’ 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.

AUTHOR Eustace Davie is a director of the Free Market Foundation. The above bulletin is an excerpt from one of the chapters in the new FMF book Jobs Jobs Jobs, in which fourteen authors discuss various aspects of South Africa’s mass unemployment and put forward proposals for addressing the country’s most serious socio-economic problem.

FMF Policy Bulletin / 17 January 2012

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