Business

Is Hong Kong really the world's freest economy?

Hong Kong's skyline lit up by fireworks

Hong Kong has been ranked as the world's freest economy for the past 18 years, a title bestowed on it by the Heritage Foundation, a conservative Washington think tank.

The city's advocates praise the former British territory's low tax rates, lack of trade tariffs, thriving financial markets and small government.

But Hong Kong's free-market credentials have long masked a more complicated picture than its model economy status suggests and recent moves, such as the introduction of a minimum wage, have renewed debate on whether Hong Kong is abandoning its laissez-faire roots.

"Although we deviate less from the laissez-faire model than other countries, our government is increasingly adopting a nanny state mentality," says Peter Wong, executive director of the Lion Rock Institute, a free-market think tank.

Income disparity

While Hong Kong's gross domestic product per head is high at $32,000 (£20,600) the disparity between rich and poor is wide and has become a political flashpoint.

More than half of the population earn less than HK$11,000 ($1,400; £920) a month and household incomes have barely increased over the past 10 years despite a booming economy.

Image caption Away from the shimmering skyscrapers, many Hong Kongers live in poverty

To help people survive on such low incomes, the government provides public housing to about 50% of the population.

It is a far higher proportion than in the UK where less than 10% live in subsidised housing, but is beaten by Singapore, another supposed bastion of economic liberty, where about 85% of people live in public housing.

In October, Hong Kong's leader announced it would provide more subsidised homes amid widespread discontent over sky-high property prices.

"The people on median incomes are not sharing in the wealth," says Christine Loh, a former legislator who now heads the Civic Exchange think tank.

"To address this the government has come up with the minimum wage and subsidies but these aren't policies that organisations like the Heritage Foundation would say are a good idea," she adds.

The Hong Kong government is also directly involved in other, sometimes surprising, areas of the economy.

The Hong Kong government has a majority stake in Hong Kong Disneyland, which has made a loss each year since opening 2005, and is the major shareholder in MTR Corp, which runs the city's underground and light rail network.

Land

With low corporate and personal tax rates and no capital gains or inheritance tax, the government relies on land sales for revenue.

But this policy has fuelled the belief that the government favours powerful property developers over ordinary people.

A small number of developers, often owned by high-profile tycoons such as Li Ka-shing, have built fortunes from this system and they now dominate many other sectors of the economy.

Image caption Locals say you can't spend a day in Hong Kong without spending money at one of Li Ka-shing's many businesses

Hong Kong has just two supermarket chains and foreign competitors such as Wal-Mart and Carrefour have not had a look-in.

"You can set up a business here extremely easily and that's a very good thing and shouldn't change. But to break into certain types of businesses, it can be very difficult," says Ms Loh at Civic Exchange.

"Property developers have invested hugely in other business such as restaurant chains, mobile phone operators and supermarkets and it's easier for them in terms of providing good locations."

And unlike most other major developed economies, Hong Kong does not have a competition law although the territory is in the process of drafting legislation to prevent anti-competitive behaviour.

Protests

Hong Kong remains an easy place to do business but the ultra free-market policies praised by the Heritage Foundation and compilers of similar surveys are being questioned both by ordinary people and those in power.

In July last year, 200,000 people marched to voice their dissatisfaction over the widening gap between rich and poor and the high property prices.

In the face of these pressures, the government is adopting a more populist stance. Welfare spending has doubled since 1997 and last year's budget included a cash giveaway for each permanent resident of HK$6000.

"We are moving away from a laissez-faire economy way of thinking, but in the process we don't give away Hong Kong's free enterprise economy," Hong Kong's labour and welfare secretary Matthew Cheung has said.

And the front-runners in the race to become Hong Kong's next leader have both vowed to tackle poverty and reach out to the under-privileged.

Since being established by the British in 1842, commerce has always been Hong Kong's lifeblood and a can-do approach to business remains the norm.

But to many in Hong Kong the accolade of being the world's freest economy does not always ring true.

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