Economic Freedom and Hong Kong: A Status Report

1
Economic Freedom and Hong KongA Status Report

• November 30, 2006
• Mark Mullins, Executive Director
• The Fraser Institute

2
Economic Freedom of the World Project

• Objective find a way to measure economic freedom
  and explore the connection between it and
  other variables
• 20 year project
• Led by Professor Milton Friedman, Rose Friedman
  and Michael Walker
• Involved 60 of the worlds top scholars

3
What is The Economic Freedom of the World Index?

• An annual compilation of data representing
  factors which make a country economically free
• Authors James Gwartney and Robert Lawson
• A compendium of 38 government policies affecting
  economic freedom based on objective data or
  independent surveys
• A ranking of 130 countries representing 93 of
  the worlds population according to the extent to
  which they permit their citizens to be
  economically free
• Now a collaboration of Institutes in 72 different
  countries

4
Economic Freedom Defined

• Individuals have economic freedom when property
  they acquire without the use of force, fraud, or
  theft is protected from physical invasions by
  others and they are free to use, exchange, or
  give their property as long as their actions do
  not violate the identical rights of others. An
  index of economic freedom should measure the
  extent to which rightly acquired property is
  protected and individuals are engaged in
  voluntary transactions.
• James Gwartney et al. 1996

5
Components of The Economic Freedom of the World
Index

• Size of government and taxation
• Private property and the rule of law
• Soundness of money
• Trade regulation and tariffs
• Regulation of business, labour and capital
  markets
• Based entirely on objective or third party data
  for 130 countries

6
Talk about making a difference
7
Member Institutes of Economic Freedom of the
World Network
Albanian Center for Economic Research,
Albania Fundación Libertad, Argentina Institute
of Public Affairs, Australia TIGRA,
Austria Center for Economic and Political
Research, Azerbaijan The Nassau Institute,
Bahamas Making Our Economy Right (MOER),
Bangladesh Scientific Research Mises Center,
Belarus Centre for the New Europe,
Belgium Fundacion Libertad y Democracia (FULIDE),
Bolivia Instituto Liberal do Rio de Janeiro,
Brazil Institute for Market Economics,
Bulgaria Cambodia Institute of Development Study,
Cambodia The Fraser Institute, Canada Instituto
Libertad y Desarrollo, Chile ILP- Instituto
Libertad y Progreso, Colombia Instituto para la
Libertad y el Análisis de Políticas, Costa
Rica The Institute of Economics,
Croatia Liberální Institut, Czech Republic Center
for Politiske Studier (CEPOS), Denmark Fundación
Economía y Desarrollo Inc., Dominican
Republic Instituto Ecuatoriano de Economía
Política, Ecuador International University
Concordia Audentes, Audentes University,
Estonia Association pour la Liberté Economique et
le Progrès Social (ALEPS), France
Society for Disseminating Economic KnowledgeNew
Economic School Georgia, Georgia Liberales
Institut, Germany The Institute of Economic
Affairs, Ghana Centro de Investigaciones
Económicas Nacionales, Guatemala Institut de
Recherche pour la Liberte Economique et la
Prosperite (IRLEP), Haiti Hong Kong Centre for
Economic Research, Hong Kong Szazadveg
Foundation, Hungary Centre for Social and
Economic Research, Iceland Centre for Civil
Society, India The Institute for Development of
Economics and Finance, Indonesia Open Republic
Institute, Ireland Institute for Advanced
Strategic and Political Studies, Israel Centro
Einaudi, Italy Bureau d'Analyse d'Ingenierie et
de Logiciels (BAILO), Ivory Coast African
Research Center for Public Policy and Market
Process, Kenya Center for Free Enterprise,
Korea Economic Policy Institute-Bishkek
Consensus, Kyrgyz Republic Lithuanian Free Market
Institute, Lithuania D'Letzeburger Land,
Luxembourg Centro de Investigación para el
Desarrollo A.C., Mexico Open Society Forum,
Mongolia The Center for Entrepreneurship and
Economic Development, Montenegro The New Zealand
Business Roundtable, New Zealand Institute of
Public Policy Analysis, Nigeria Civita Center
for Business and Society Incorporated, Norway
Alternate Solutions Institute, Pakistan Fundación
Libertad, Panama Centro de Investigación y
Estudios Legales (CITEL), Peru The Center for
Research and Communication, Philippines Centrum
im. Adama Smitha, Poland Causa Liberal,
Portugal Romania Think Tank, Romania Institute of
Economic Analysis, Russia The F.A. Hayek
Foundation, Slovak Republic The Free Market
Foundation of Southern Africa, South
Africa Pathfinder Foundation , Sri
Lanka International Research Foundation (IRF),
Sultanate of Oman Timbro, Sweden Liberales
Institut, Switzerland Arthur Lok Jack Graduate
School of Business, The University of the West
Indies, Trinidad, W.I. Association for Liberal
Thinking, Turkey The Ukrainian Center for
Independent Political Research, Ukraine The
Institute of Economic Affairs, United
Kingdom CATO Institute, USA The Centre for the
Dissemination of Economic Knowledge (CEDICE),
Venezuela Research Center for Entrepreneurship
and Development Policies, Vietnam Free Market
Center (FMC), Yugoslavia Zambia Institute for
Public Policy Analysis (ZIPPA), Zambia
8
Sample of Press Coverage for Fraser Institute
Economic Freedom of the World 2005
All Africa, Africa Asia Pulse, Australia Australia
n Financial Review, Australia Scoop,
Australia Latin America News Digest,
Brazil Capital Weekly, Bulgaria El Diario de Hoy,
Central America Diario Financiero, Chile El
Financiero, Chile Xinhua News Agency, China South
China Morning Post, China China Daily-Hong Kong
Edition, China Ambiito Juridico,
Colombia Portafolio, Colombia La Prensa Libre,
Costa Rica El Financiero, Costa Rica Hina,
Croatia Hospodarske Noviny, Czech
Republic Borsen, Denmark
Jyllands-Posten, Denmark Baltic Business Weekly,
Estonia BBC Monitoring, Europe Radio Liberty,
Georgia Frankfurter Allgemeine,
Germany Vereinigte, Germany Financial Express,
India Hindustan Times, India Journal of Commerce,
International El Cronista Comercial,
International El Nacional, International Internati
onal Herald Tribune, International Israel
Business Arena, Israel Jerusalem Post,
Israel ItaliaOggi, Italy Il Sole, Italy Il
Giornale, Italy Korea Times, Korea Seoul Daily,
Korea Korea Herald, Korea Noticias
Latinoamericanas, Mexico Agencia Mexicanan De
Noticias, Mexico Republika, Montenegro Financial
Times Deutschland, Netherlands Dominion Post, New
Zealand
Times of Oman, Oman Daily times,
Pakistan Rzeczpospolita, Poland La Tribune,
Canada Montreal Gazette, Canada Rumanian,
Romania St. Petersburg Times, Russia Moscow
Times, Russia Interfax, Russia Russian
Publication, Russia Plenipotentiary,
Russia Republika, Serbia/Montenegro Vijesti,
Serbia/Montenegro Pobjeda, Serbia/Montenegro Strai
ts Times, Singapore Ekonomicka Sloboda,
Slovakia Hodin Daily, Slovakia Pravda Daily,
Slovakia Business Day, South Africa El
Economista, Spain Libertad Digital, Spain L'Agefl
Suisse, Switzerland Bangkok Post,
Thailand Trinidad Guardian, Trinidad
Tobago Financial Times, UK Investor's Business
Daily, US Financial Times, US El Nacional,
Venezuela
9
Economic Freedom Projects
10
Marketization Index of Chinese Provinces
11
Economic Freedom Index of Indian States
12
Economic Freedom of North America
13
Economic Freedom Index of Argentine Provinces
14
Economic Freedom of the Arab World
15
Arab Economic Freedom Project

• International Research Foundation founded in Oman
• Third Annual Economic Freedom of the Arab World
  Report
• Regional economic freedom conferences in the
  Middle East Muscat and Beirut
• Economic Freedom of the Arab World Awards
• Omani and Lebanese Audits
• Documentaries on entrepreneurship and policy

16
(No Transcript)
17
Hong Kongs Relative Success
18
Hong Kongs Relative Success

• Number one ranked since 1970
• Highest ever economic freedom in the world at 9.1
  out of 10 in 1995
• But
• Peaked in 1995
• Tenth worst decline in world in past decade
• Slipping relative to top 10, top 20, and the
  world
• Accelerating decline over time
• Broad decline in many measures

19
Overall Economic Freedom Index and the Top 10
Source The Fraser Institute.
20
Overall Economic Freedom
Source The Fraser Institute.
21
Hong Kongs Relative Success

• Still number one in the 2006 report
• High economic freedom rating at just under 8.7
• But the trend is not Hong Kongs friend
• And what about China where economic freedom is
  rising?
• Here are the warning signs for the five
  components of economic freedom in Hong Kong .

22
Warning SignWrong-Sizing Government
23
Size of Government and the Top 10
Source The Fraser Institute.
24
Size of Government
Source The Fraser Institute.
25
General government consumption spending
Source The Fraser Institute.
26
Transfers and subsidies
Source The Fraser Institute.
27
Wrong-Sizing Government Policies

• New GST will raise the tax burden and increase
  government consumption and transfers
• The tax is not tax neutral
• Industrial subsidies distort investment and
  increase political intervention in economy
• Spending down recently but the government is
  caught in vocal demands for more interventions

28
Warning SignPolitics and the Law
29
Legal System and Property Rights and the Top 10
Source The Fraser Institute.
30
Legal System and Property Rights
Source The Fraser Institute.
31
Judicial independence
Source The Fraser Institute.
32
Impartial courts
Source The Fraser Institute.
33
Integrity of the legal system
Source The Fraser Institute.
34
Politics and the Law Policies

• The weakest component and slipping further
• Perceptual issues regarding politicization of
  judicial and legal systems
• Integration with China may be part of the problem
  producer and intellectual property rights are
  slipping there
• Democratization begets politicization

35
Green LightMoney Remains Sound
36
Sound Money and the Top 10
Source The Fraser Institute.
37
Sound Money
Source The Fraser Institute.
38
Sound Money Policies

• Peg is secure
• System was tested through Asian crisis and
  deflation
• Monetary Authority retains its independence
• Steady progress to renminbi-based trade and
  finance

39
Warning SignTrade Regulations and Capital
40
Freedom to Trade Internationally and the Top 10
Source The Fraser Institute.
41
Freedom to Trade Internationally
Source The Fraser Institute.
42
Regulatory trade barriers
Source The Fraser Institute.
43
International capital market controls
Source The Fraser Institute.
44
Access of citizens to foreign capital
markets/foreign access to domestic capital markets
Source The Fraser Institute.
45
Restrictions on citizens to engage in capital
market exchange with foreigners
Source The Fraser Institute.
46
Trade and Capital Policies

• Watch non-tariff regulatory trade barriers
• Is a non-preferential capital investment policy
  being eroded through industrial subsidies?
• Capital restrictions must be addressed

47
Warning SignTied Up in Red Tape
48
Regulations and the Top 10
Source The Fraser Institute.
49
Regulations
Source The Fraser Institute.
50
Credit Market Regulations and the Top 10
Source The Fraser Institute.
51
Credit Market Regulations
Source The Fraser Institute.
52
Competition domestic banks face competition from
foreign banks
Source The Fraser Institute.
53
Extension of credit percentage of credit
extended to private sector
Source The Fraser Institute.
54
Labor Market Regulations and the Top 10
Source The Fraser Institute.
55
Labor Market Regulations
Source The Fraser Institute.
56
Hiring and firing practices
Source The Fraser Institute.
57
Business Regulations and the Top 10
Source The Fraser Institute.
58
Business Regulations
Source The Fraser Institute.
59
Price controls
Source The Fraser Institute.
60
Time with government bureaucracy
Source The Fraser Institute.
61
Red Tape Policies

• Credit regulation is not improving
• Government is squeezing out private credit
• Labour market is sound but watch out for minimum
  wage
• Business regulations are the key weakness
• Dramatic increase in time management spends with
  bureaucracy
• World Bank Doing Business indicators coming for
  2007 Hong Kong likely to improve

62
Conclusion

• Do not take Hong Kongs number one status for
  granted Singapore is very close at number two
• A declining trend may be in place
• Government interference with markets is growing
• Policy choices matter
• Political developments are the driving factor

63
www.freetheworld.comwww.fraserinstitute.ca
64
Economic Freedom and Hong KongA Status Report

• November 30, 2006
• Mark Mullins, Executive Director
• The Fraser Institute