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Economic freedom? It depends where you stand

Philip Bowring

SUNDAY, JANUARY 8, 2006
HONG KONG National league tables make good journalistic copy, which is devoured especially avidly in nations that happen to score near the top of this or that list. But they can equally tell some very tall tales that reflect better the biases of their assessment criteria than facts on the ground.
 
One of the more widely disseminated is the Index of Economic Freedom, published by the Washington-based Heritage Foundation for the past 12 years. This year, as in numerous past years, it has declared Hong Kong the world's freest economy, closely followed by Singapore, with Iceland, Ireland and Luxembourg close behind. (The United States is ninth.)
 
It is clear is that the rankings of Hong Kong and Singapore are based to a significant degree on ignorance of their domestic economies. In its 10-point assessment, the Heritage Foundation puts a high premium on freedoms for foreigners to trade and invest and enjoy low taxes, and remarkably little on the freedoms of the local inhabitants.
 
Both places rightly score highly on free trade. City states that owe their existence to entrepot trade naturally avoid import tariffs or pesky currency regulations. Equally, they both give a more or less free hand to foreign investors in externally oriented industries.
 
A closer look at both economies, however, calls into question the description of their trading and ownership environments as "free."
 
In Hong Kong, a handful of private groups operate domestic monopolies or oligopolies in power, retailing and transport, all linked to a few major property development companies, which also own media and other major domestic enterprises. Foreigners who have tried to enter - as the French group Carrefour did into retailing - have been squeezed out by anti-competitive cartels. The government, meanwhile, in the name of being business-friendly, resists competition or anti-trust laws that might open up these markets.
 
In Singapore, it is the government itself that stands in the way of the unfettered private enterprise that the Heritage Foundation's criteria are supposed to favor. The major real estate, banking, transport, manufacturing and utility companies listed on the stock market are all government-controlled entities. They may be efficient, but is this an economy free of government intervention? The index also claims that "the market sets almost all wages." But actually "wages are based on annual recommendations made by the tripartite National Wages Council."
 
Tax rates and revenue as a percentage of gross domestic product are low in both cities. But governments control land supply and use it not just to raise money but to redistribute income in an off-the-books manner through publicly developed and managed housing provided with low-cost land, in which 83 percent of Singaporeans and 40 percent of Hong Kong citizens live. In Hong Kong, land prices for the rest are kept especially high, with the result that living space per inhabitant remains very low compared with countries with similar income levels. Land in Hong Kong is sometimes used for subsidizing favored industries and in Singapore tax subsidies - which by definition are discriminatory - are common.
 
Tax levels in Singapore look quite low. But how free of official imposts are its citizens when compulsory contributions to its Central Provident Fund take 33 percent of wages and are invested largely as the government sees fit, through nontransparent official vehicles such as the Government Investment Corporation? Compulsory savings help toward the accumulation of foreign-exchange reserves and a very high investment ratio. But the rate of return on those assets has been low.
 
As a social security system, the Central Provident Fund, with links to government housing and medical care, may have many merits, but individual economic freedom is not one of them.
 
There is no space here to go into all 10 of the Heritage Foundation criteria. Hong Kong and Singapore economies should rate quite well by most performance and access measures. But the simplistic bases of these tables, devised from afar, can be dangerously misleading: The Heritage Foundation index also deems India less free than China, places Cambodia ahead of Malaysia and Indonesia below Ethiopia.
 
Nor is this the only baffling table. The Swiss business school IMD has a competitiveness index which puts Hong Kong and Singapore just behind the United States but just ahead of Iceland. IMD has South Korea inferior to Belgium, Malaysia and New Zealand.
 
In the World Economic Forum's version of competitiveness, meanwhile, Taiwan is the leading Asian economy, at No. 5, in a world headed by Finland and the United States, while Hong Kong is down at 28th. Choose your index according to your prejudice.
 
 
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