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2 Contradictions in the Policy Environment The annual budget speech is the most authoritative statement of the government ’s economic policy framework. Our administration has stated its commitment to a limited government and to allowing markets to guide economic activities. This commitment was reaffirmed in the budget delivered on February 23, 2011 by Financial Secretary John Tsang. All activities—whether business-or non-business-related—require decisions that satisfy multiple demands with limited resources. From this perspective , every decision incurs an opportunity cost, including those choices related to social, health, education, housing, and environmental issues. They are all economic in nature as they are subject to the laws of scarcity in meeting competing ends. For this reason, the provision of many non-business activities can be met in the same way as those for business activities, that is, through the marketplace. But in Hong Kong, many non-business activities are arranged and organized outside the “small government, big market” framework. Understanding Economic Policy in a Transforming Economy Under the “small government, big market” approach, the provision of non-business activities such as health, education, social welfare, and housing services, would be supplied, often with greater efficiency, by the private sector through a market mechanism. Any undesirable social distribution consequences could then be corrected with subsidized vouchers to help disadvantaged individuals and households. A more equitable outcome can therefore be achieved without sacrificing efficiency. The role of government would be limited to correcting market failures, rather than to direct provision and extensive regulation as it is now. Unfortunately, Hong Kong failed to adopt this “small government, big market’” approach during the governorship of Murray MacLehose (1971–82). 26 Introduction Since that period, Hong Kong’s policy environment has been characterized by two conflicting frameworks. In business activities, the limited government policy framework of two financial secretaries, John Cowperthwaite (1961–71) and Philip Haddon-Cave (1971–81), prevailed and it existed not only to promote efficiency and growth, but also to fend off business lobbies looking for advantages from government. In other words, it was a mechanism to keep a level playing field. The most important factor for maintaining competition in the market is the government’s refusal to hand out advantages to firms—an advantage that is also extended to potential entrants. Limited government is not restricted to the size of government in an economy, but also encompasses the way in which it conducts its affairs to uphold equality of opportunity for all. However, in non-business activities a second framework was adopted based on British social welfare policies. The massive direct provision of health, education , and housing by the government is the consequence of this alternate policy framework. The tension between the two frameworks would give rise to one of Hong Kong’s deep contradictions and have serious financial implications for Hong Kong. To understand this contradiction, it helps to consider what was happening in the economy. While many commentators are of the view that British firms were favored under the colonial government, official documents, recently declassified , suggest that the government had a conscious and deliberate policy to distance itself from most business lobbies, especially British ones. Nonetheless, close government and business working relationships were common in obligatory areas involving regulatory issues in foreign countries, for example as practiced in the negotiation and allocation of US textiles and garment quotas under the former Multi-Fiber Agreements. As a general rule, governments everywhere often support declining industries and have demonstrated a vulnerability to their lobbying efforts. (It is no secret that agriculture is often the most heavily protected sector in rich countries .) In Hong Kong, lobbying efforts by manufacturers grew during the 1970s as our competitiveness in exported manufactured goods declined. Fears of being hollowed out intensified lobbying efforts. The figures bear out the fact that they were becoming marginal to the economy. Manufacturing’s share in nominal GDP was 30.9% in 1970, and declined to 22.8% in 1980, 16.7% in 1990, 4.8% in 2000 and 1.8% in 2010 (see Table 2.1). The decline is less pronounced when we compare changes in manufacturing’s share in real GDP. In 1980, the share of manufacturing in nominal terms was Contradictions in the Policy Environment 27 22.8% but only 17.1% in real terms. This is because the prices of services rose faster than the prices of manufactured goods. The rise of service prices was actually a sign of an improving living standard in Hong Kong...


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