By Candice Chau and Wilson Chan
Hong Kong was once praised by Milton Friedman as an “example of the free market system.” When the city’s 25-year run as the world’s “freest economy” came to an end this year, according to the Heritage Foundation, the government was quick to assure the international community that Hong Kong still had a free market.
While many in society blame the social and political unrest caused by the anti-extradition bill protests, which started last June, for the city’s now tarnished reputation, we should further examine the notion of “the freest economy” and its impact on society.
The Heritage Foundation and Hong Kong’s insistence on the city as a free market economy is no doubt a result of neoliberal influence. Neoliberalism gained popularity in the late 1970s as a response to urgent economic problems in the United Kingdom and the United States.
After the war, both states turned to Keynesianism as their primary economic principle in an attempt to rebuild their countries. Keynesianism’s emphasis on maintaining full employment levels and providing a comprehensive welfare system meant that countries were running deficits to keep their economies running.
By the 1970s, budget deficits and stagnation became common problems. Neoliberalism provided a convenient way out for elected governments at the end of the decade.
Deregulation, privatisation and “the rolling back of the state” became the new norms, especially under Margaret Thatcher’s government in the UK and the Ronald Reagan administration in the US.
Furthermore, monetarism, as theorised by Friedman, gave governments a theoretical reason to depoliticise fiscal policy and central banks, hence making it more difficult to put financial policies under public scrutiny.
Neoliberalism does not represent the withdrawal of government influence from the market but, rather, the active decision of governments to act in favour of the market.
Apart from policies to relax limits on corporations, the power of labour unions has also been severely weakened since the 1980s. As the developed world adopted neoliberalism, it has also become the leading ideology in developing countries.
Global organisations such as the International Monetary Fund (IMF) and the World Bank, as well as renowned economists, saw market liberalisation as the one-size-fits-all answer to economic development.
In reality, neoliberal policies often caused more harm than good. The shock therapy programme prescribed to the Russian Boris Yeltsin government by economist Jeffrey Sachs at the turn of the 1990s caused massive and long-lasting economic depression in the country.
The rescue package provided by the IMF to South Korea during the Asian Financial Crisis further deepened the country’s problem of inequality, from which it is still suffering.
Problems with neoliberalism are not unique to the developing economies. Developed countries found themselves in hot water during the 2008 financial crisis.
The crisis showed that unlimited growth in the stock market and the economy is simply unattainable, and the problem was more than just greedy bankers and corporations. It was a deeply entrenched debt issue caused by stagnant wages, rising asset prices, and financialisation of the economy.
The collapse of the world economy gave rise to the popularity of socialist ideas across the Atlantic. The rise of politicians such as Bernie Sanders in the US and Jeremy Corbyn in the UK, and socialist governments in Spain and Greece indicated a reconsideration of the merits and perils of neoliberalism.
Hong Kong’s economic development model
While Hong Kong’s economic policies mirror those favoured by neoliberalism, the city started to become a free economy early in the 1960s, when the term “positive non-intervention” was coined by then-financial secretary Sir John Cowperthwaite and his successor, Sir Philip Haddon-Cave.
Since then, Hong Kong has been determined to maintain the smooth functioning of its market mechanism. The government would only consider intervening if the market mechanism fails. Furthermore, the city completely rejected Keynesian economics in its insistence on maintaining a low tax rate, a budget surplus and notably sizable fiscal reserves.
Hong Kong’s development as an international financial centre was further aided by efforts to expand financial markets elsewhere. Since the collapse of the Bretton Woods system, the world no longer treats speculative capital as something to be wary of.
In fact, ever-expanding financial markets and the invention of more financial instruments only fuelled the dominance of the financial sector.
In becoming a free economy open to the world, Hong Kong has suffered from its own fair share of problems. Growing inequality, unaffordable housing and living costs, a strained welfare system are some examples.
After the handover, the government has not diverged much from its neoliberal principles. As a response to the multiple economic turmoils the city has faced, the government privatised its railway network and set up the Link, a real estate management trust to which it entrusted the malls and parking facilities in social housing estates in Hong Kong.
Apart from its reliance on private corporate management, the government has also increased its investment in infrastructure in an attempt to boost the economy. However, projects such as the Hong Kong-Zhuhai-Macao Bridge and the Kai Tak Cruise Terminal have been criticised as white elephants.
Future of Hong Kong and the global economy
In the face of growing political tensions and the current coronavirus pandemic, there is not only a need to rethink Hong Kong’s immediate economic response but also its long-term economic planning.
Hong Kong’s almost religious pursuit of the neoliberal model has left the provision of labour protection relatively lacking. Aside from improvements to the minimum wage and the legislative limit to working hours, the collective bargaining power of labour unions should also be discussed.
As shown during the protests and the early stages of the pandemic, a massive labour movement failed to galvanise as workers’ right to strike was not protected. Perhaps more importantly, many lacked the concept of union power as a form of political struggle.
The latest attempts of some activists to promote the formation of new labour unions for the upcoming legislative council election are a promising continuation of the effort to instil the idea of better labour rights and power. However, for the culture to take root, labour unions must be further included in the economic structure through legislation.
Hong Kong should also more carefully reconsider the sustainability of its economic model. Currently the government still holds one of the biggest fiscal reserves in the world, so that structural problems in the economy can be covered up. But in the long run it is neither realistic nor sustainable for the economy to have a lop-sided reliance on the Chinese market, or to focus on certain sectors.
The pandemic has revealed the rather hostile business environment and the lack of expertise in the government’s response.
Additionally, Hong Kong needs to provide a better social safety net to its citizens. The government is rather unprepared for the city’s ageing population. Further stress on the welfare system without any attempts to provide substantial support would only fuel public anger.
Some critics see the pandemic as a possible “end of globalisation as we know it”. There will undoubtedly be a new approach to open borders and global supply chains.
The pandemic has not only exposed how ill-equipped the world is to face new threats, but also how fragile the world economy is due to its reliance on a handful of countries for most of its manufacturing needs.
Realistically, Hong Kong has to rethink its open economy status, not to revolutionise its nature completely but to be better prepared for a world more concerned about global business integration than ever.
The government tends to respond reactively rather than proactively, which means that it has a tendency to shy away from problems. However, with its economic status and unique political position, Hong Kong has the ability and need to take a more active role in solving global issues.
Ultimately, it is not economic commitments but political ambition that will enable Hong Kong to build a better society. The local community’s response to the pandemic has shown the city’s more than ample capacity to tackle tough situations. The government needs to show the same ability.
Wilson Chan and Candice Chau are part of the Global Studies Institute in Hong Kong – a bipartisan think-tank and intellectual network which aims to provide an in-depth analysis of Hong Kong’s past, present, and future.