Tax may help trickle-down effect in HK

The important role that the city of Hong Kong has played in the economic development of the mainland in the past 30 years or so has been widely attributed to the city government's guiding economic principle of positive non-interventionism - or small government, big market.

This principle has established a free-market economy distinguished by a low and simple tax regime and the authorities' disciplined maintaining of a balanced fiscal budget. Recurrent expenditure, including spending on social services, has been kept at levels below estimated recurrent income, usually with a wide safety margin. Under this guiding principle any form of pension scheme has been ruled out because it has been deemed more appropriate for people to keep their own money and use it in whatever way they see fit.

What's more, the city's leaders have made it a point never to subsidize any particular industry in the belief that private-sector business people know their sectors better than career bureaucrats. They have also abstained themselves with almost religious fervor from any role in the distribution of wealth, putting their faith in the trickle-down effect of the free market.

Although such a basic form of capitalism has failed in many Western economies, it seemed to be working in Hong Kong. Relying almost entirely on their own wits and initiative, Hong Kong entrepreneurs built a thriving low-cost manufacturing-based economy in the 1960s and 1970s. The trickle-down effect was real because demand for workers was high, especially during the busy seasons.

But since then, Hong Kong has made the successful transition to a service-based economy, supported mainly by the capital-intensive, rather than labor-intensive, property and financial sectors. As a result, the people in control of large capital assets have got richer while the majority of residents have been denied their fair share of the economic fruit. As the trickle-down of wealth is largely blocked, more and more people in the Hong Kong special administrative region are now feeling betrayed by the principle of small government, big market.

The growing public discontent is being further fuelled by the escalating property prices in the SAR, which are denying many middle-class families a chance to buy a home. Although Chief Executive Leung Chun-ying has proposed a plan to increase the supply of affordable housing and introduced various market cooling measures, his administration has yet to win public confidence in its determination and ability to address the core issues.

Many politicians and economists have branded the existing economic policy as archaic and called for greater government intervention in, among other things, the redistribution of wealth. However, nobody in the city seems able to produce a new policy that is theoretically sound and realistically applicable to replace the traditional non-interventionist approach. They are worried that a policy departure from the administration's traditional role would destroy the very foundation of the SAR's economy by raising taxes.

But there are a few alternatives that can be considered, such as the introduction of some form of consumption tax to help pay for an increase in social services expenditure, and revamping the labor law to better protect workers' rights. Although it can be expected that any such measures would be vigorously opposed by the business sector on the grounds they would increase costs.

We have heard these complaints many times before, but they sound less and less convincing because the trickle-down effect of the free market is clearly not happening. The administration will need to provide a guiding hand to ensure that more residents benefit from the SAR's continuing prosperity.

(China Daily 11/06/2012 page8)