Government
by businessmen: Hongkong's problem
Text (with some variations as delivered) of speech to
the Hongkong Democratic Foundation, July 16, 2002
Government by business? We are repeatedly told that Hongkong
has a business-friendly government, as though that were some kind of
virtue which improved prospects for the economy and for the general
well-being. I get the feeling that Tung Chee-hwa and many around him
regards the being "business-friendly" as being next to motherhood and
Confucian values as meritorious.
There is an even wider-spread assumption that Hongkong's
success is due to being an open, laisser-faire economy in tune with
Adam Smith's principles of freedom, competition and minimal government
interference in the functioning of the market. That may well be true.
But we should ask how far present problems relate to erosion of Smithian
principles in pursuit of "business friendly" decision making.
Smith's bold vision of what contributed to the Wealth
of Nations assumed that there was what he called an Invisible Hand which
caused individual, private greed and endeavour to result in the overall
public good. Your and my efforts to advance or enrich ourselves were
good for everyone. That sounds good for business ethic.
But Smith was also an acute observer of human behaviour
who couched his economic theory in a moral context. So let me read you
three quotes from Smith and see how they fit with current concepts of
business-friendly government in Hongkong.
1. "Consumption is the sole end and purpose of production
and the interest of the producer ought to be attended to only so far
as it may be necessary for promoting that of the consumer".
2. " People of the same trade seldom meet together, even
for merriment and diversion, but the conversation ends in a conspiracy
against the public or in some contrivance to raise prices".
3. "To widen the market and narrow the competition is
always in the interests of the dealers".
The problem of setting out to be "business friendly"
is that the question is seldom asked: Who's business? Unlike Marx, Smith
did not think in terms of a conflict between capital and labour. But
by the same token he did not think of business as a class to be accorded
advantage. His goal was the common weal - everybody's business.
Even with a narrower definition of business - people
who are self-employed or employ others the question of defining "Who's
business interest" is difficult. That is especially apparent in an economy
such as Hongkong which has an unusually large number of small businesses.
Though some have direct representation on the Legislative Council, they
are too numerous and diverse to have much political voice.
There is also an unusually small number of large-scale
businesses. Most of the latter are in practice, if not in name, conglomerates
encompassing several key activities. Because they are small in number
they find it easy to have the ear of a government which barely pretends
to be representative.
Hongkong is also unusual because it has a large number
of foreign businesses. Necessarily these are not significantly represented
through the political process - feeble though that process is at the
best of times. I am not suggesting that they ought to be. But clearly
foreign business has an interest in low operating costs as well as low
taxation, and in maximum opportunity to compete on a level playing field
with local businesses. Are its interests being sacrificed to local vested
interests?
In practice the "business friendly" government accords
secondary status to the interests of the foreign businessmen who created
Hongkong as a trading centre and remain the most important factor which
differentiates Hongkong from Shanghai or Guangzhou.
But back to Adam Smith. In practice how does Hongkong
measure up against the three above quotes. Firstly, Smith identified
the pre-eminence of the consumer - which is interesting given the assumption
often made that savings and investment are good but consumption is not.
But what do we find in Hongkong? The Consumer Council is a worthy but
toothless body which makes recommendations which are mostly ignored.
The consequences of ignoring consumer interests is apparent
not just to consumers but to any observation of the current parlous
state of the economy. Although some prices have fallen in the past few
years due to the end of the property bubble and the strong dollar, they
have clearly not fallen far enough to revive consumption at the expense
of savings. Why is this? There are several. But one reason is clear:
the refusal of the government to countenance any kind of realistic competition
policy.
The US has had its anti-trust law for decades. It is
widely seen as a major contributor to innovation and competition. Europe
has competition rules. Australia's success in recent years has been
partly attributed to a very vigorous competition policy which has kept
down prices and spurred productivity. Korea now has a competition policy.
But Hongkong? It does nothing pretending that to do nothing is laisser
faire.
In practice the government has become a silent partner
in the plot to "widen the market and narrow the competition" - to quote
Smith. Conspiracy to raise prices against the public interest is a natural
objective of businessmen. Price competition is uncomfortable. The closer
the government - which exists to maintain law and a level playing field
- comes to such businessmen, the greater the danger that their sectional
interests will dominate at public expense.
The chaebol-like structures have an especially inhibitive
impact on Hongkong. It is bad enough that there is a supermarket duopoly
- two firms which have proved incapable of competing overseas. It is
far worse that the attempt of one of the most efficient global firms,
Carrefour, was forced to withdraw because of what amounted to a conspiracy
by local interests to deprive it of prime sites and by suppliers with
monopolies protected by laws against parallel imports.In many countries
the behaviour of some of Hongkong's leading businesses would be criminal
offences.
Its perhaps worth reminding ourselves how much the domestic
economy is in the hands of oligopolies, formal or informal. There is
the power duopoly resulting in excess capacity, zero price competition,
high prices and assured return on capital. There is the port situation,
whereby existing operators campaign against local expansion but expand
on the mainland, thus protecting high margins here while finding growth
elsewhere.
Perhaps it is not surprising if Tung Chee-hwa is in favour
of "business-friendly" environment for cartels. After all the container
shipping business in which his family firm OOCL operates is the most
cartelised global industry. Indeed in the 1990s, when CH Tung was chairman
it was fined by the European Commission for price fixing. Then there
is Cathay Pacific whose interests are limiting Hongkong's hub role.
(Where do you buy your tickets? I live in HK but arrange for most of
my long distance travel to start in Bangkok, London or Sydney. Indeed,
almost anywhere but Hongkong.)
I won't bore you with a long lecture on the property
cartel. Its depredations are notorious. But it is worth noting not just
the cartel-like behaviour of the big developers but the unnatural linkages
between them and the banks. The difference between mortgages available
on new as compared with, say, 15-year-old flats is a disgraceful mutual
back-scratching exercise which has nothing to do with sound banking
and a lot to do with corporate cronyism.
If that's possible, developers seems to have become even
more influential since 1997. The proximity of government figures to
one or two developers in particular has meant that being friendly to
this business has taken precedence over most others as the twists and
turns in public housing, land sales and tax policy indicate. The proximity
of Mr Li Ka-shing and family is clearly in a class of its own. Cyberport
was a particularly egregious example of cronyism which has done Hongkong
immense damage.
But there have been plenty of others. The waivers of
GEM rules for Tom.com allowing all kinds of insiders to reap huge profits
from a pie in the sky scheme. Then there was PCCW which was another
example of how shares could be boosted to give huge profits to the insiders,
and land huge losses on almost the whole of the rest of the Hongkong
investing public, and the government itself which agreed to take PCCW's
dubious paper in return for its Cable & Wireless stake. Now we Mr Li's
latest successful effort to extract cash from the public: CK Life Sciences.
The linkages between established businesses, anxious
to protect their positions, and the government are much greater than
is usually acknowledged - and have been getting closer. I don't whether
anyone has kept an account of the number of middle to upper level bureaucrats
who have moved into the private sector, whether before or after retirement.
In theory such cross fertilisation might sound beneficial to both. In
practice, how much of it has been payment for services previously rendered?
To land or buildings officials for generous interpretations of plot
ratios or development guidelines? To policemen or fire officers for
providing special services. This is an old problem of "business
friendly" government but badly needs to be addressed.
More recently a different link between government and
private sector has been established: management of quasi-public enterprises.
Most notorious was the shift of a senior bureaucrat to an even bigger
salary as chief executive of Hongkong Exchanges and Clearing. This company
is itself a monopoly which has done scant good to Hongkong's financial
services sector by maintaining minimum commissions and making a miserable
job of policing listed companies and new listings.
The policing job ought to be in the hands of the SFC
but it doesn't seem too keen to take on a job which if done well would
make it unpopular with the business figures who have grown richer than
ever by abusing minority shareholders' rights. The SFC itself is in
the hands of a bureaucrat who apparently did not see anything inappropriate
in contributing to Tung Chee-hwa's re-selection campaign. So much for
politically independent civil servants.
Likewise we find other quango jobs taken up by members
of the business elite. Michael Tien at the KCR. Peter Woo at the Trade
Development Council, K.S. Lo at the Hospital Authority - after presiding
over the disgraceful GEM rule waivers which enriched cronies of the
elite at the expense of the public. I am not criticising these people
personally. Some are competent. However, they are testimony to the ever
closer links between government and established, locally oriented big
business. The offspring of entrepreneurs who built Hongkong's shipping
and textile empires may be well educated but they are not necessarily
good businessmen and their entry into government jobs is stifling the
rise of new talent.
The bureaucracy has in the past been an effective ladder
for talented people from modest backgrounds. Now with the so-called
responsibility system with ministers and a few Legco members in Exco
we have yet another shift of power towards the interests of established
business groups. They may not be bureaucrats but the newcomers, capable
or not, hardly represent new blood. Again we find sons of entrepreneurs,
scions of famous families, and of course a graduate (really!) from the
PCCW business school.
Given the enormous expansion of the professional middle
class over the past 20 years, the pool of educated talent is now quite
large. But this class is not only deprived of political power but is
being kept out of senior jobs by cronies. This is all the more alarming
when the government seems to want to do more not less to use public
money to spur new industries. On top of the outrageous government subsidisation
of Cyberport and Disney, and the construction of buildings to house
favoured supposedly high tech industries there is now talk of yet more
intervention on Singapore lines.
Singapore has been a success - but in fact less so than
Hongkong if measured by GDP growth since 1959 - the year Lee Kuan Yew
came to power. For both historical and local political reasons, Singapore's
development diverged from that of Hongkong. It did not have Shanghainese
factory owners to create industries. Lee Kuan Yew anyway distrusted
business people, preferring a Confucian elite of highly educated and
politically trustworthy people to run the country under his leadership.
Singapore turned on the one hand to foreign companies,
who were given huge tax breaks, and to newly created government enterprises.
The latter didn't just go where private capital dared not tread. They
went into areas like banking where local capital was already well established.
To this day, local capital in Singapore is disadvantaged
vis a vis state capital, with cheap money and government ministries
behind it, and foreign capital which continues to be attracted by tax
concessions. Local private capital - not to mention the man in the street
who get almost zero return from the CPF --has been a huge loser in SingaporeDo
Tung and his acolytes know anything about the Singapore they say they
admire?
Is that what Hongkong wants?
It may get it if politics and government relationships
drive future business even more than in the past. I would not want to
suggest that things are worse in Hongkong because of the 1997 handover.
Even Li Ka-shing may have no more power than Jardines or the Hongkong
Bank had in the past. But we have to recognise that the situation has
changed.
The colonial system involved a balance, often uneasy,
between colonial bureaucrats and local business interests, whether foreign
or locally owned. It had always been thus. My own relative, 1850s governor
Sir John Bowring, who believed in education and local representative
was at constant loggerheads with the Jardines and Mathesons. The colonial
business community viewed him as a dangerous radical. But I digress.
The colonial bureaucracy was self-renewing. Once they
reached retirement age (55 or 60) they were required to go home to UK,
or wherever. Philip Haddon-Cave was very insistent on the importance
of this principal. Unfortunately David Akers-Jones hung around trying
to be influential - and reminding his critics of his career in the New
Territories. Meanwhile local bureaucrats were chosen by exam not family
connections. The system meant that there was a real personnel disconnect
between bureaucracy and business. Business interests may have had the
upper hand much of the time, but there was often a healthy tension.
I am not a believer in democracy for its own sake. It
can on occasion lead to tyranny or rampant corruption as quickly as
other systems. But the past five years has shown that the lack of democracy
in Hongkong has enabled the rapid growth of unhealthy links between
government and an unelected, undynamic, quasi-hereditary business elite.
Korea renewed itself by a democracy-based crushing of
the chaebol, the rise of middle class power, of expertise over government
linkages and inherited wealth. Taiwan's democratisation saw the end
not only of the KMT political system but the withering of its business
conglomerates, overtaken by the new entrepreneurs who brought Silicon
Valley attitudes as well as technological prowess. And what does Hongkong
now have? A government led by a man who seems to think that business
should be run on Confucian lines of order, hierarchy, loyalty to state
and family.
Mr Tung may be a good Confucian. But Confucius did not
live in an era of capitalism and entrepreneurship. Government is about
law, order, continuity, honesty, the protection of the weak against
the powerful, rule based processes. Successful and dynamic business
is about creation, destruction, opportunism, self-interest, risk taking,
relations-based processes.
Business-friendly government in practice has become an
invitation to additional sleaze, cronyism, hereditary values, cartels,
stockmarket scams and officially sanctioned rip-off of the general public.
Worst of all, it is economically inefficient. Thank you for your patience.
ends