Hong Kong — Beyond the intricate Chinese pictograms rendered in iridescent neon and the incense spirals that smolder in the Man Mo Taoist temple on Hollywood Road, Hong Kong’s most exotic gift to a visiting American is a reminder of how economic dynamism looks.
Unemployment is just 3.2 percent here (versus 8.5 percent in the U.S.), and it shows. Around the clock, “Hong Kong people” (as they call themselves) buy, sell, produce, and deliver. Everyone seems to be running somewhere. Workers rush handtrucks in every direction, laden with raw materials, finished goods, and sometimes just Styrofoam boxes.
Stores overflow with consumers and merchandise. A riot of street signs, in both English and Chinese, scream the names of companies, stores, and sole proprietors. There often is neither rhyme nor reason to how these displays are presented beside buildings. But the disorder that would set a central planner’s hair on fire creates a commercial cacophony that is music compared to the dull, static groan that defines today’s U.S. economy.
While Hong Kong is sleek and modern in most places, its vibrant free market is delightfully chaotic in others.
At 11:50 on a Wednesday night, rather than prepare for bed, 20 or so eager consumers huddle around a small table and pick through a packed, informal table of cellphone covers. They sell for 25 to 40 Hong Kong dollars, or about 3 to 5 bucks. (All subsequent sums are in U.S. dollars.)
“Super cheap!” one man grins through his Chinese-accented English.
Just a few feet away, an old man wearing a surgical face mask sweeps the pavement of the Mong Kok district’s Sai Yeung Choi Street, which is clean and spotless, like many thoroughfares here. The subway system’s immaculate floors are polished to a warm glow.
There seem to be no graffiti on subway cars, platforms, and stations, or anywhere else. Hong Kong people possess enough civic pride, self-respect, and decency to keep their spray paint to themselves. One suspects that they decry graffiti as criminal filth, not celebrate it as “art” — as do too many Americans. (Manhattan Institute scholar Heather Mac Donald colorfully chronicled this enraging fact in last spring’s City Journal.)
After walking and riding through Central, Diamond Hill, Mong Kok, Sheung Wan, and other Hong Kong neighborhoods for six days in late November, I counted a grand total of four street-level retail vacancies for rent or lease. In contrast, I found 16 such spaces within a five-minute radius of my apartment in Manhattan’s lively East Village.
Abandoned storefronts are rare enough in Hong Kong to grab attention. Other spaces are empty, but only while laborers craft them into new or improved enterprises eager to prosper. And Hong Kong’s indefatigable, largely non-union workers occupy themselves with construction, repairs, and decoration — even at 1:00 a.m.
Those four retail vacancies in Hong Kong were small spaces, not the huge, hollow storefronts that haunt too many American communities. Everywhere else here, commercial storefronts thrive. Products cascade from every shelf. Along narrow alleyways and steep, outdoor stairways that double as streets, small, one-man operations sell bespoke shirts, custom suits, electronic gear, fish, printing services, lumber, crabs, antiques — you name it. Many of these are tiny shops, each literally about the size of a spacious phone booth. This is pure entrepreneurship.
Hong Kong’s glistening skyscrapers are packed, too. According to CB Richard Ellis, a global real-estate firm, Hong Kong’s average office-vacancy rate is 3.6 percent. Such voids stand at 10 percent in Midtown Manhattan and average 17.1 percent for the U.S. in the third quarter of 2011, Cushman & Wakefield calculates.
Retail vacancies, ubiquitous in America today, are unusual enough
in Hong Kong to merit being photographed.
Just as real estate is almost fully occupied, so is Hong Kong’s population. Almost no one sits still for long. In 2012, people here deserve the compliments that the late British development economist Lord Peter Bauer paid them a generation ago: “Enterprise, hard work, ability to spot and utilize economic opportunities, are widespread in a population 98 percent Chinese, engaged in single-minded pursuit of making money day and night,” Bauer wrote in the April 19, 1980, London Spectator (reprinted in Princeton University Press’s From Subsistence to Exchange and Other Essays). Bauer added: “Hong Kong bears out that population increase is not an obstacle to progress, that suitably motivated people are assets not liabilities, agents of progress as well as its beneficiaries.”
So, what are the secrets of Hong Kong’s success? And, most important, what can the 7.1 million residents of this Special Administrative Region of the People’s Republic of China prove to a vast superpower of 312 million?
First and foremost, Hong Kong is the Vatican of economic liberty. Since it began 18 years ago, Hong Kong always has been number one in the Heritage Foundation/Wall Street Journal Index of Economic Freedom.
Why did Hong Kong sprint at 5 percent GDP growth for 2011, while America slouched at 1.8 percent? As the Index explains, Hong Kong’s “effective legal and regulatory frameworks and openness to global commerce strongly support entrepreneurial dynamism, while overall macroeconomic stability minimizes uncertainty.”
Some Hong Kong businesses are literally no larger than phone booths.
Meanwhile, the Index thus describes today’s U.S. economy:
The government’s recent spending spree has led to fragile business confidence and crushing public debt. Interventionist responses to the economic slowdown have eroded economic freedom and long-term competitiveness. Drastic legislative changes in health care and financial regulations have retarded job creation and injected substantial uncertainty into business investment planning.
Ongoing regulatory changes, coupled with fading confidence in the direction of government policies, discourage entrepreneurship and dynamic investment within the private sector.
(Click here for a detailed snapshot of key economic indicators on Hong Kong and the U.S.)
American individuals and corporations pay top income-tax rates of 35 percent, in addition to taxes on capital gains, dividends, overseas profits, and even death. An unfathomable tax code spans 72,536 pages, according to CCH, a publishing company. Just determining the size of the U.S. Internal Revenue Code is an accounting exercise. As the National Taxpayer Advocate reported to Congress in 2010: “The tax code has grown so long that it has become challenging even to figure out how long it is.” Moreover, “to determine the length of the Code,” the NTA admits, “there is no clearly correct methodology to use.”
In Hong Kong, the top tax rate on salaries is either 17 percent (minus deductions) or 15 percent of gross income, whichever is lower. The tax rate on capital gains, dividends, overseas profits, and death is zero. There is no sales tax. Hong Kong’s Inland Revenue Ordinance stretches to 183 pages.
“Hong Kong accountants probably spend less time on tax matters compared to the U.S.,” says Jing Nealis, U.S.-tax desk manager of Deloitte’s Asia Pacific International Core of Excellence. Having worked in the U.S. and now in Hong Kong, she adds: “U.S. and Hong Kong companies both treat commercial feasibility as an important factor for decision making. The difference is that U.S. companies spend more time and pay more attention to the tax implications, as sometimes tax factors could kill a deal.”
Hong Kong satisfies individual taxpayers as well.
“Unlike the hefty volume that shows up from the IRS in the United States, the form I use to file my income taxes in Hong Kong is a very manageable four pages. I only spend about ten minutes completing it,” American-born Time magazine correspondent Michael Schuman wrote in October 2010. “The revenue department here in Hong Kong then calculates what you owe. No need even to do the math yourself. Compare that to the arduous nightmare of filing U.S. taxes. . . . That’s an extra expense of $1,000 each year. Completing my Hong Kong taxes costs me zero.”
A local fishmonger busies herself on Hong Kong’s Gage Street.
Brett A. Shisler
Hong Kong’s leaders also are vigilant about spending.
“The administration deliberately self-imposes on itself that we do not take up more than 20 percent of the GDP,” Hong Kong’s chief executive Donald Tsang told the Council on Foreign Relations in New York City last November 7. “In other words, you have to be a reasonably small and compact and efficient administration. And taxation is also maxed out at 20 percent, roughly, of the GDP. So we balance our books every year.”
The actual numbers behind Tsang’s remarks epitomize why Hong Kong thrives as America wheezes: According to Heritage’s Index, total government spending as a share of GDP in 2010 was 18.6 percent in Hong Kong versus 38.9 percent in the U.S. Tax revenue that year was 13 percent of GDP in Hong Kong and 26.9 percent of GDP in America.
Hong Kong’s “national” debt is just $5.8 billion, totaling 2 percent of GDP. Local free-marketeers trivialize this as a frivolous public project designed to promote a local government-bond market. Regardless, Hong Kong’s few government bonds are overshadowed by its $76.4 billion in foreign-exchange reserves, equal to 32 percent of GDP and 19 months of government expenditures. Hong Kong’s $500 million surplus equals 1.05 percent of its budget — a small but solid confirmation of its fiscal discipline.
U.S. national debt, in contrast, is morbidly obese at $15 trillion. That equals a frightful 101 percent of GDP. There is no cash reserve, nor a “rainy-day fund” — just $116.9 trillion in long-term, unfunded liabilities, according to USDebtClock.org. In contrast to Hong Kong’s modest surplus, the 2012 U.S. federal budget deficit is forecast to be $1.3 trillion. This will be America’s fourth consecutive year of trillion-dollar red ink.
Sound money is another ingredient in Hong Kong’s magic potion.
Imagine U.S. dollar bills engraved with the names of Bank of America, JPMorgan Chase, and Wells Fargo. While not even Hong Kong enjoys free banking, it employs three different sets of paper currency. The Bank of China, Standard Chartered Bank, and HSBC (the Hong Kong and Shanghai Banking Corporation) all print cash. The Hong Kong Monetary Authority (HKMA), however, does not let these banks create as much money as they desire. Instead, they may produce only such currency as they back up with U.S. dollars.
Since Oct. 15, 1983 — beginning under the well-grounded Federal Reserve chairman Paul Volcker, rather than “Helicopter Ben” Bernanke — the Hong Kong dollar has been pegged to the U.S. dollar at a fixed 7.8-to-1 exchange rate. This link leaves the Hong Kong dollar at the mercy of the greenback’s fluctuating value. But Hong Kong people need not fret about their money being diluted by a “printer-in-chief” like Bernanke.
“Quantitative easing is impossible under the current framework,” says Peter Wong of the Lion Rock Institute, a local free-market think tank. “Because the big three, like the Bank of China, certainly cannot print U.S. dollars, and the issuance of Hong Kong dollars is 100 percent backed by U.S. dollars, that means the big three cannot issue money or control the money supply as they wish.” Wong adds: “More important, our money supply is entirely market-driven [by the means of capital flowing into and out of Hong Kong]. Thus, HKMA can do little to control the money supply.”
These rules, and the banks’ vested financial interests in not debasing their own vault-loads of custom-made money, prevent Hong Kong’s leaders from churning out sheets of currency like wallpaper, as the Fed does. While its peg to the buck ultimately may weaken Hong Kong’s currency relative to others, that would be due to its official link to the Fed’s foolish policies, not because of Hong Kong’s enviable monetary integrity.
Hong Kong also practices “open, free trade,” says Dr. Y. C. Richard Wong of the Hong Kong Center for Economic Research. “So, the only things that are taxed now are tobacco and first registrations on cars. The latter is largely a congestion-control measure.”
Hong Kong’s weighted-average tariff rate is 0 percent. Beyond sparing buyers the import duties that others pay around the world, Hong Kong people, Wong says, “purchase from the cheapest sources in the world and also enjoy the lower cost of not managing all kinds of regulations, quotas, tariffs, country-of-origin certificates, etc.”
Another slice of good fortune is that Beijing largely has kept its hands off of Hong Kong since it reverted from British to Chinese rule on July 1, 1997.
“The handover was a big anticlimax,” says Lion Rock Institute co-founder G. Andrew Work. “In terms of the Chinese presence in Hong Kong, the People’s Liberation Army arrived, went into their barracks, and they haven’t come out since.”
Richard Wong offers three rationales for China’s laissez-faire approach to Hong Kong.
“One is the casual reason,” Wong explains. “A lot of the Chinese folks really like to come to Hong Kong to shop, relax, and breathe some fresh air. The other more significant reason is that this is a place where they could put their money in safely and have access to it. The third is that if Hong Kong goes down, then there is actually very little that the Mainland could do to entice Taiwan to consider some form of an agreement on reunification.”
Snaking through all of this is the parade of mainland Chinese tourists who keep cash registers humming in Hong Kong’s hotels, shops, and dining spots. According to Jones Lang LaSalle, total arrivals increased 16.2 percent in 2011, reaching 4 million visitors last August alone — a new one-month record.
Two of Hong Kong’s positive attributes are difficult to measure, or even notice, from afar.
One is the spectacular work ethic of Hong Kong people. The “I’m on break”/entitlement attitude that possesses too many Americans is hard to detect here. Also, Hong Kong people, so far, seem immune to the class-warfare/envy virus that has consumed the U.S. Democrat party and infected a growing number of Americans.
Appreciation and respect for the wealthy and their assets also seem ingrained in this culture; Hong Kong people hope to grow rich. A tiny example of this is a promotion for Madame Tussaud’s at the base of the Victoria Peak tram. Rather than an actor, athlete, or “reality”-TV personality, the wax museum lures visitors by displaying a beaming likeness of Li Ka-shing, the 83-year-old chairman of Hutchison Whampoa Limited. Nicknamed “Superman” for his business acumen, the high-school dropout is now worth $26 billion, making him the richest of all Hong Kong people.
“So what?” critics snap. Hong Kong is a tiny territory of homogeneous people on the other side of the planet. Why on Earth should America’s enormous and diverse population emulate anything that transpires here?
“Just try it in one city,” Richard Wong suggests. “See whether the rest of America will all move there.” Wong adds: Hong Kong people have “the freedom to do things that they prefer to do. Economic choice works miracles because it allows people to make the best use of their talents in activities that they prefer, which is incredibly valuable.”
“Of all the places I’ve been to,” Wong concludes, “people in Hong Kong seem to be busy all the time because there is no lack of things to do — whether it is work or fun. And they seem to have a fairly long life expectancy. So, it doesn’t seem to hurt their health, either.”
Hong Kong’s rulers do a few things well and cheaply, while Washington considers a $15 trillion national debt an invitation to spend more. They will not even let Americans screw in light bulbs in peace. Hong Kong’s limited government and expanding market have plenty to teach the U.S. Will America ever learn?
— New York commentator Deroy Murdock is a nationally syndicated columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University. Manhattan financier Brett A. Shisler contributed research to this piece; he is pursuing a master of science in global finance at the Hong Kong University of Science and Technology, in conjunction with NYU’s Stern School of Business. (Photos by Deroy Murdock, except as otherwise noted.)