www.e-malaysian.org

[casper77]

The Lesson of Hongkong, an economics primer by the late Friedman

*Milton Friedman*

*The Hong Kong Experiment*

*A controlled experiment in the field of economics? The last fifty
years of
history have provided just that. The free economy: Hong Kong. The mixed
economy: the United States. The socialist economies: Great Britain and
Israel. Milton Friedman evaluates the results.*

Economists and social scientists complain that we are at a disadvantage
compared with physical and biological scientists because we cannot
conduct
controlled experiments. However, the experiments that nature throws up
can
be every bit as instructive as deliberately contrived experiments. Take
the
fifty-year experiment in economic policy provided by Hong Kong between
the
end of World War II and this past July, when Hong Kong reverted to
China.

In this experiment, Hong Kong represents the experimental treatment;
Britain, Israel, and the United States serve as controls. Immediately
after
World War II, Hong Kong had a population of about 600,000. A colony of
Britain, it did not receive its freedom after the war as most other
colonies
did. The reason was obvious: China was next door. If Hong Kong had been
set
free, it almost surely would have been taken over by China. Instead,
Britain
retained Hong Kong as a crown colony. After the Communists took control
of
mainland China, a flood of refugees came to Hong Kong. Over the next
fifty
years, the population exploded. Today it is more than six million.

I take Britain as one control because Britain, a benevolent dictator,
imposed different policies on Hong Kong from the ones it pursued at
home. I
take Israel as another control because, like Hong Kong, it had a small
population at the end of the war and was then inundated by refugees. In
both, the population increased by roughly tenfold. In both, the
refugees
were reputed to be intelligent and commercially able. And those two
countries, alike in key respects, adopted very different economic
policies.
I take the United States as a third control because it is the richest
country in the world and reputedly the exemplar of free markets.

*HONG KONG AND BRITAIN*
The difference in the economic policies followed by Hong Kong and
Britain
was a pure accident. The colonial office in Britain happened to send
John
Cowper-thwaite to Hong Kong to serve as its financial secretary.
Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At
the
time, while Britain was moving to a socialist and welfare state,
Cowperthwaite insisted that Hong Kong practice laissez-faire. He
refused to
impose any tariffs. He insisted on keeping taxes down.

I first visited Hong Kong in 1955, shortly after the initial inflow of
refugees. It was a miserable place for most of its inhabitants. The
temporary dwellings that the government had thrown up to house the
refugees
were one-room cells in a multistory building that was open in the
front: one
family, one room. The fact that people would accept such miserable
living
quarters testified to the intensity of their desire to leave Red China.

I met Cowperthwaite in 1963 on my next visit to Hong Kong. I remember
asking
him about the paucity of statistics. He answered, "If I let them
compute
those statistics, they'll want to use them for planning.'' How wise!

Nonetheless, there are some statistics, and in 1960, the earliest date
for
which I have been able to get them, the average per capita income in
Hong
Kong was 28 percent of that in Great Britain; by 1996, it had risen to
137
percent 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 realize their significance. Compare Britain¡Xthe
birthplace of
the Industrial Revolution, the nineteenth-century economic superpower
on
whose empire the sun never set¡Xwith Hong Kong, a spit of land,
overcrowded,
with no resources except for a great harbor. 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.

I believe that the only plausible explanation for the different rates
of
growth is socialism in Britain, free enterprise and free markets in
Hong
Kong. Has anybody got a better explanation? I'd be grateful for any
suggestions.

*HONG KONG AND ISRAEL*
The comparison with Israel is in some ways even more interesting than
that
with Britain. Israel had one major disadvantage and several major
advantages
compared with Hong Kong. Its major disadvantage was that it had to
maintain
strong armed forces to meet the threat from the enemies that surrounded
it,
with whom it fought several wars.

Israel, however, had what would be widely regarded as a major
advantage,
although I don't regard it as such. Israel received much foreign aid
from
the U.S. government and other governments around the world and also
from
Jews living outside Israel¡Xnotably, American, South African, and
British
Jews. According to data that I analyzed during a visit to Israel in
1977,
the bulk of its defense costs was being financed by such contributions.
In
an economist's way of looking at things, military defense is an export
industry for Israel. I estimated that the net cost of defense to Israel
was
something like 10 percent of its national income. That's a substantial
amount. But it's not an intolerable amount.

Beyond this, Israel has a much larger land area¡Xits population density
is
one-twenty-fifth that of Hong Kong¡Xand far richer natural resources.
Corresponding to Hong Kong's great port, it has a Mediterranean port
and a
southern port at Eilat. And yet from 1960 to 1996, its average per
capita
income went from 60 percent more than Hong Kong's to 40 percent less.

Again, the most plausible explanation is that Israel followed a
socialist
policy and Hong Kong a free market policy. Government spending in Hong
Kong
was, at its maximum, about 15 percent of national income. Government
spending in Israel was at times close to 100 percent of national
income.
(That may seem an impossibility, but it isn't because of the mysteries
of
national income accounting.) The socialist policy was Israel's folly,
though
it did less harm than the corresponding policy did in Britain, partly,
in my
opinion, because the British were much more law abiding.

------------------------------
The lesson of Hong Kong for the United States is that we're using our
resources inefficiently. Our government is spending our money both to
subsidize childbearing and to discourage childbearing, both to build
new
housing and to tear down housing, both to subsidize agriculture and to
penalize agriculture, and on and on.
------------------------------

When I returned from my first visit to Israel in 1962, I summarized my
impressions by saying that two traditions were at war in Israel: a
hundred-year-old tradition of belief in paternalistic socialist
government
and of rejection of capitalism and free markets and a
two-thousand-year-old
tradition, developed out of the necessities of the Diaspora, of
self-reliance and voluntary cooperation, of getting around government
controls, of using every ounce of Jewish ingenuity to take advantage of
such
opportunities as escaped the clumsy grasp of government officials. I
concluded that, fortunately for Israel, the older tradition was proving
the
stronger. Unfortunately for Israel, the older tradition has since lost
strength, while the newer tradition has gained. Maybe Benjamin
Netanyahu can
reverse that process, as he appears to want to do.

*HONG KONG AND THE UNITED STATES*
According to the latest figures I have, per capita income in Hong Kong
is
almost identical with that in the United States.

That is close to incredible. Here we are¡Xa country of 260 million
people
that stretches from sea to shining sea, with enormous resources, and a
two-hundred-year background of more or less steady growth, supposedly
the
strongest and richest country in the world, and yet six million people
living on a tiny spit of land with negligible resources manage to
produce as
high a per capita income. How come?

The explanation is the same as for Britain and Israel. Direct
government
spending is less than 15 percent of national income in Hong Kong, more
than
40 percent in the United States. Indirect government spending via
regulations and mandates is negligible in Hong Kong but accounts for
around
10 percent of national income in the United States. In both respects,
the
United States differs from Hong Kong less than either Britain or
Israel,
both of which have even higher government spending as a fraction of
national
income and even more intrusive and extensive regulations and mandates,
which
is presumably why per capita income in the United States is more than a
third higher than that in the United Kingdom and nearly 80 percent
higher
than that in Israel.

We are more productive than Hong Kong. But we have chosen, or been led
by
the vagaries of politics, to devote roughly half of our resources to
activities to which Hong Kong devotes 15 or 20 percent. Our higher
productivity means that we can produce with 50 percent of our resources
the
same per capita income as Hong Kong can produce with 80 to 85 percent
of its
resources.

The real lesson of Hong Kong for the United States is that we're using
our
resources inefficiently. Our government is spending our money to
subsidize
tobacco and to penalize smoking; to subsidize childbearing and to
discourage
childbearing; to build new housing and to tear down housing; to
subsidize
agriculture and to penalize agriculture; and on and on¡Xnot to mention
converting square miles of forests into billions of paper forms and
spending
many man-years of labor filling them out and then filing them.

In the process, government tends to neglect its basic functions: as I
once
put it, "to protect our freedom both from the enemies outside our gates
and
from our fellow citizens: to preserve law and order, to enforce private
contracts, to foster competitive markets.''

------------------------------
* Reprinted from National Review, December 31, 1997, from an article
entitled "TheReal Lesson of Hong Kong." *

------------------------------
* Milton Friedman is a senior research fellow at the Hoover
Institution. He
was awarded the Nobel Prize in economic sciences in 1976.*