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Big Market, Small Government

Donald Tsang
Chief Executive, HKSAR

Positive Non-Interventionism in Sir Philip's times

Last Monday, a reporter asked me whether the strategic initiatives resulting from the Economic Summit deviate from the "positive non-interventionism" policy. I replied that "positive non-interventionism" was a term used many years ago by Financial Secretary Sir Philip Haddon-Cave. The description of the Hong Kong's style of capitalism, which the HKSAR Government preferred to use in recent years was "Big Market, Small Government." This means that we respond to the needs of the market and do our best to support and promote economic development within the limits of a small government. And the Government should not intervene into any sector of the market, which the private sector can sustain on its own. I also said that our work should not be bound by a simple watchword or slogan.

 "Positive non-interventionism" from the outset has been an ambiguous term. In 1980, Sir Philip Haddon-Cave said, "I have frequently described the Government's economic policy stance as being one of ‘positive non-interventionism'. Some have claimed that this is just a fancy term for laissez-faire. Others have equated it to a ‘do-nothing' approach. This is simply not so: positive non-interventionism involves taking the view that it is normally futile and damaging to the growth rate of an economy, particularly an open economy, for the Government to attempt to plan the allocation of resources available to the private sector and to frustrate the operation of market forces". He went on to say, "I do qualify the term ‘non-interventionism' with the adjective ‘positive'. ... What it means is this: that the Government, when faced with an interventionist proposal, does not simply respond that such a proposal must, by definition, be incorrect. … 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", even though "it is true that, more often than not, we come to the conclusion that the balance of advantage lies in not intervening".

Sir Philip was Financial Secretary from 1971 – 1981, a time when global economic thoughts were very much influenced by the ideas of the welfare state and socialist planning. Public policy debates in many countries were still dominated by Keynesian economists as many people believed in big government, welfarism, nationalization and government intervention.

Locally, Hong Kong's economic performance was very volatile in the 1970s. The bursting of a stock market bubble in 1973 was, in relative terms, the most serious in Hong Kong's history. The economy went into recession in 1974/75 and then grew very strongly with inflationary consequences. There were two oil shocks (1973-74 and 1979-80). The Hong Kong dollar was floated in 1974 and that in turn led to sharper shifts and a higher degree of uncertainty for the economy.

Sir Philip believed that allowing market forces to work their way through the economy was important for Hong Kong to absorb and adjust to all these challenges. His "positive non-interventionism" was used at the time to withstand the incessant pressure for government intervention.

The world has changed and so has Hong Kong

The world has changed a lot since the 1970s. Deng Xiaoping started economic reform in 1978. Margaret Thatcher and Ronald Reagan brought revolutionary economic changes to their countries in the 1980s. The fall of the Berlin Wall in 1989 signified the end of economic seclusion and the dawn of the globalization era. Milton Friedman became better known than John Maynard Keynes. Today, ideas of free trade, market liberalization and open competition are much more widely accepted as the recipe for economic success.

Hong Kong's economic structure has also changed a lot since the 1970s. From a vibrant manufacturing and exporting economy, we have transformed into a services hub. Instead of selling "Made in Hong Kong" products that competed on low cost and value for money, we turn to providing financial, professional, trade, logistics and other services.

There is general consensus in Hong Kong that the basic role of the government in the economy is to provide the framework for markets to operate effectively, and to act when there are obvious imperfections in the operation of the market mechanism.

But as Hong Kong's economy develops, the needs of the economy change and the government has to adapt its work to suit such changing needs. Back in the 1960s and 1970s when we had a manufacturing-based economy, a crucial job for the Government was to invest in Hong Kong's hardware infrastructure, including the port and industrial estates. But as we evolve into a services economy selling our service quality, reputation and creativity, we need to put more efforts into building the software infrastructure and our regulatory regimes as well.

For example, the government learnt from the financial crises of the early-1980s and established sound currency and banking frameworks. In the wake of the events in 1987, we also reformed our securities markets. These laid a solid foundation for Hong Kong's international financial centre development for the two decades that followed. During the financial and economic crisis post-1997, we liberalized further our financial sectors and opened up our telecom, IT and broadcasting markets. In more recent years, we listed the MTRC and Link REIT. Last year, we modified our tax rules to facilitate the further development of Hong Kong as an asset management centre. We now seek to strengthen our competition policy framework and we are consulting the public on the need to broaden our tax base.

Discussions among governments are another task that cannot be left to the market. We have participated actively in GATT and WTO negotiations and we are widely respected by our trade partners as a champion of free trade. But as our economic links with the Mainland grow, we took the initiative to discuss with the Central Government how to better develop such links. CEPA was thus introduced in 2003.

In an era of globalization, the ability to attract and retain talents has become a defining factor in our global competitiveness. We have been proactively liberalizing our talent importation regime and further developing our education and training systems. Technological innovation and creativity are vital for a knowledge economy, and thus we are working on various initiatives such as the Science Park and the InnoCentre. Environmental issues were economic "externalities" that did not take up much of our attention in the past, but we must address them today with gusto.

Commitment to "Small Government"

Responding to market developments aside, another dimension of our economic policy is to have a small government. Today we are using the ratio of public sector expenditure to GDP as a macro measure to monitor the size of the government. This has been used for over three decades. It is instructive to read what Sir Philip said in his 1981 Budget, "the relative size of the public sector in Hong Kong has increased from 16.2% in 1975 to 21.2% in 1980 ... There can be no question of the public sector being allowed to command an ever increasing proportion of the community's resources ... for the direct consequence would be that the private sector would be less able to cope with rapid changes in the world economic environment". How little difference there is between our stand on this issue today and that of Sir Philip's in 1981.

Different Financial Secretaries have used different labels for their economic principles. Sir John Bremridge (Financial Secretary during 1981–86) said, "your Government remains committed to support of the free market economy". Sir Piers Jacobs (1986 – 1991) said, "the economy will normally be most efficient if market forces are relied on and government intervention in the private sector is kept to a minimum". Sir Hamish Macleod (1991 –95) said, "Hong Kong's economic philosophy is not difficult to describe. It is a commitment to enterprises, a commitment to low taxation and a commitment to free markets and free trade" and he described this commitment as "what might be called consensus capitalism". When I was Financial Secretary (1995 – 2001), I emphasized "maximum support, minimum intervention and fiscal prudence". Antony Leung (2001– 03) saw the government's role as "a proactive market enabler". Our current Financial Secretary Henry Tang upholds the principle of "market leads, government facilitates".

The changes in the sayings or wordings of different Financial Secretaries over the years reflect the gradual change in the government's response to the evolving demands of the economy. This is necessary because of the importance to communicate to the people of Hong Kong effectively and precisely using prevailing vernacular. If you study Hong Kong's economic policies closely and long enough, you will find that there is a very consistent theme throughout the past 50 years from one Financial Secretary to another. We have never deviated from our long-cherished free market philosophy. But, in Sir Philip's words, "as the economy grows and evolves, the way in which the mechanism operates also changes and the framework provided by the Government must also change if it is to remain appropriate".

In my first Budget as Financial Secretary in 1996-97, I stressed that the Government's contribution to the economy was "to provide the legal and regulatory infrastructure which underpins free and fair markets", "to encourage enterprise through small government and low, stable and predictable taxation", and "to manage our public finances to meet the community's priorities for a modern infrastructure, better homes and health care, better schools and social welfare". In my first Policy Address as Chief Executive last year, I said that one of my key economic strategies is "to encourage entrepreneurship and fair competition under the principle of ‘Big Market, Small Government'".

Both Sir Philip and I are committed to open competition, free market and small government. Hong Kong has indeed been a shining example of free market all through these years. In the past 12 years, Hong Kong is ranked by the Heritage Foundation and the Fraser Institute as the world's freest economy.

The very externally oriented nature of Hong Kong's economy dictates that we must adapt to global market forces. Our need to maintain a capitalist economy and free markets in trade and financial services is also enshrined in the Basic Law. However, our firm belief in market competition does not mean that the Government does nothing or takes a passive role. In the face of rapid changes in the world and on the Mainland, we must take a proactive but at the same time pro-market approach and see how we could provide a platform and foster an environment that would best support economic development. This is what we had in mind when we organized the Economic Summit a week ago.

Our "Big Market, Small Government" policy purports to enhance Hong Kong's competitiveness and underscores the economic freedom that Hong Kong needs to sustain its prosperity. I am certain that citizens in Hong Kong will endorse this policy.