Economic Freedom and Hong Kong: A Status Report November 30, 2006 Mark Mullins, Executive Director The Fraser Institute 1 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 world’s top scholars 2 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 world’s population according to the extent to which they permit their citizens to be economically free Now a collaboration of Institutes in 72 different countries 3 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 4 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 5 Talk about making a difference … 6 Member Institutes of Economic Freedom of the World Albanian Center for Economic Network 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 Knowledge:“New 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 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 7 Zambia Institute for Public Policy Analysis (ZIPPA), Zambia Sample of Press Coverage for Fraser Institute’ Economic Freedom of the World 2005 All Africa, Africa Asia Pulse, Australia Australian 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 International 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 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 Straits 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 8 Financial Times, US Economic Freedom Projects 9 Marketization Index of Chinese Provinces 10 Economic Freedom Index of Indian States 11 Economic Freedom of North America 12 Economic Freedom Index of Argentine Provinces 13 Economic Freedom of the Arab World 14 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 15 16 Hong Kong’s Relative Success 17 Hong Kong’s 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 18 Overall Economic Freedom Index and the Top 10 Hong Kong Singapore United States Switzerland New Zealand Average of Top 10 United Kingdom Ireland Canada Luxembourg Iceland 0 2 4 6 Score (out of 10) Source: The Fraser Institute. 8 10 19 Overall Economic Freedom 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 20 Source: The Fraser Institute. Hong Kong’s Relative Success Still number one in the 2006 report High economic freedom rating at just under 8.7 But the trend is not Hong Kong’s 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 …. 21 Warning Sign: Wrong-Sizing Government 22 Size of Government and the Top 10 Hong Kong Singapore United States Switzerland Average of Top 10 Iceland New Zealand United Kingdom Canada Ireland Luxembourg 0 2 4 6 Score (out of 10) Source: The Fraser Institute. 8 10 23 Size of Government 10 1995 8 6 2000 4 2004 2 0 World Top Ten Hong Kong 24 Source: The Fraser Institute. General government consumption spending 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 25 Source: The Fraser Institute. Transfers and subsidies 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 26 Source: The Fraser Institute. 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 27 Warning Sign: Politics and the Law 28 Legal System and Property Rights and the Top 10 New Zealand Iceland United Kingdom Ireland Switzerland Luxembourg Average of Top 10 Canada Singapore United States Hong Kong 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 29 Legal System and Property Rights 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 30 Source: The Fraser Institute. Judicial independence 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 31 Source: The Fraser Institute. Impartial courts 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 32 Source: The Fraser Institute. Integrity of the legal system 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 33 Source: The Fraser Institute. 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 34 Green Light: Money Remains Sound 35 Sound Money and the Top 10 United States Ireland Switzerland Luxembourg Singapore Canada New Zealand Average of Top 10 United Kingdom Hong Kong Iceland 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 36 Sound Money 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 37 Source: The Fraser Institute. 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 38 Warning Sign: Trade Regulations and Capital 39 Freedom to Trade Internationally and the Top 10 Hong Kong Singapore Luxembourg Ireland Average of Top 10 New Zealand United Kingdom Canada Switzerland United States Iceland 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 40 Freedom to Trade Internationally 10 8 1995 6 2000 4 2004 2 0 World Average of Top Ten Hong Kong 41 Source: The Fraser Institute. Regulatory trade barriers 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 42 Source: The Fraser Institute. International capital market controls 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 43 Source: The Fraser Institute. Access of citizens to foreign capital markets/foreign access to domestic capital markets 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 44 Source: The Fraser Institute. Restrictions on citizens to engage in capital market exchange with foreigners 10 1995 8 6 2000 4 2004 2 0 World Top Ten Hong Kong 45 Source: The Fraser Institute. 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 46 Warning Sign: Tied Up in Red Tape 47 Regulations and the Top 10 Iceland Hong Kong United States New Zealand Canada Average of Top 10 Switzerland United Kingdom Singapore Luxembourg Ireland 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 48 Regulations 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 49 Source: The Fraser Institute. Credit Market Regulations and the Top 10 New Zealand United States United Kingdom Iceland Luxembourg Canada Average of Top 10 Hong Kong Switzerland Ireland Singapore 0 2 4 6 8 10 Score (out of 10) 50 Source: The Fraser Institute. Credit Market Regulations 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 51 Source: The Fraser Institute. Competition: domestic banks face competition from foreign banks 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 52 Source: The Fraser Institute. Extension of credit: percentage of credit extended to private sector 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 53 Source: The Fraser Institute. Labor Market Regulations and the Top 10 Hong Kong Iceland United States Switzerland Average of Top 10 Canada United Kingdom Singapore New Zealand Ireland Luxembourg 0 2 4 6 8 10 Score (out of 10) 54 Source: The Fraser Institute. Labor Market Regulations 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 55 Source: The Fraser Institute. Hiring and firing practices 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 56 Source: The Fraser Institute. Business Regulations and the Top 10 Iceland Singapore New Zealand Hong Kong Average of Top 10 Canada Ireland Luxembourg Switzerland United States United Kingdom 0 2 Source: The Fraser Institute. 4 6 Score (out of 10) 8 10 57 Business Regulations 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 58 Source: The Fraser Institute. Price controls 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 59 Source: The Fraser Institute. Time with government bureaucracy 10 8 1995 6 2000 4 2004 2 0 World Top Ten Hong Kong 60 Source: The Fraser Institute. 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 61 Conclusion Do not take Hong Kong’s 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 62 www.freetheworld.com www.fraserinstitute.ca 63 Economic Freedom and Hong Kong: A Status Report November 30, 2006 Mark Mullins, Executive Director The Fraser Institute 64