Thomas White Global Investing
Hong Kong
Hong Kong Stamp
January 30, 2009
A Postcard from Asia
Hong Kong: The World’s Freest Economy – for the 15th Year in a Row

View from Hong Kong harbor

Hong Kong ranked first in trade freedom, investment freedom and financial freedom in the Heritage International Index of Economic Freedom 2009. It also came in the top ten in three other areas relating to business and monetary freedom and property rights.

In these recessionary times, it is hard to find a news item that paints a country in a positive light. Hong Kong in the past year has dealt with a drastic fall in its stock market, weak exports, slumping domestic demand, a drop in tourism, plunging retail sales, and yes, the economy is officially in a recession. In the midst of this gloom, there emerges one nugget of hope – Hong Kong has once again been ranked the world’s freest economy for the 15th straight year by the U.S.-based Heritage International’s 2009 Index of Economic Freedom.

That is a staggering fact for a small city of 6.9 million. For 15 consecutive years, even bettering its score this year, Hong Kong has managed to beat the likes of the U.S., Canada, or Japan and 176 other economies in offering what the Wall Street Journal termed as ‘its commitment to free-market capitalism.’

And what exactly is Hong Kong’s commitment? The Index measures an economy’s freedom on different parameters ranging from business, trade, and fiscal freedom to government size and monetary, investment and financial freedom. Hong Kong scores on all these. Interestingly, the city’s tax rates are the lowest in the world with even corporate tax rates being extremely competitive. Property rights are well protected by a corruption-free judiciary, and Hong Kong is one of the world’s leading financial centers with transparency in the regulation of banking and financial services.

Could doubts be cast on such a flawless reputation? Hong Kong is designated a Special Administrative Region by China – a complex relationship. And, China has not interfered in Hong Kong’s business – at least not yet. Hong Kong residents have limited democracy – and it is doubtful if universal suffrage will ever be granted. Beijing’s influence is limited in Hong Kong’s financial nerve centers but the interlinking is deep with much of Hong Kong’s manufacturing now shifted to the mainland. Doubters also criticize Hong Kong for allowing its economy to be dominated and controlled by family-operated monopolies and cartels. The government too has been censured for not doing more to protect investors who lost their money in Lehman Brothers-backed bonds last year.

Much of the data for the ranking was collected from July 2007 – June 2008, and hence does not reflect the carnage that shook financial markets around the world after the fall of Lehman Brothers. The U.S. dropped a spot to sixth position due to increases in government spending and tax revenues as a percentage of GDP – and it appears likely that it will drop further in next year’s ranking. Singapore, Australia, Ireland and New Zealand make up the top five.

So, will the mirror still shine for Hong Kong? The answer is a resounding yes. Heritage International certainly paid homage to Hong Kong’s enduring free market principles, placing the city of dazzling lights on top of its shrine to capitalism. But as 2009 lurches forward in uncertainly, Hong Kong’s commitment will be put to the test, now more than ever.

 

Image Credit: Kullez  under a Creative Commons License

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