EUSTACE DAVIE: SA’s economy would be far healthier with a light touch

The world’s most successful economic systems are, without exception, governed with a light hand. We find in them deliberate efforts to remove any government heavy-handedness from economic activity. This allows entrepreneurs to innovate and employ the country’s human and material resources to the advantage of all concerned. The results have been spectacularly successful and worthy of emulation by all politicians who care about the health, welfare and happiness of the people who have elected them. 

SA should seriously consider a Hong Kong-style “hands-off” policy. Hong Kong resolved a greater unemployment problem than the one facing SA, and simultaneously grew its economy at an astonishing rate. In four decades that tiny territory was transformed from a poverty-stricken British colony into an economic powerhouse with 37% higher per capita income than the citizens of Britain. 

The British administration of Hong Kong adopted an economic “doctrine of positive non-interventionism”, which allowed the citizens to prosper as they never would had British taxes, labour laws and other legislation been applied in the territory.

Hong Kong maintained a low, flat-rate tax (15% and now 10%) on business profits and income from employment (after generous deductions). It declined to implement the PAYE system of upfront taxes, and excluded dividends and foreign earnings from taxable income. There was no capital gains tax, and import and export duties were abolished. A currency board issued the Hong Kong dollar and maintained a fixed rate of exchange with the US dollar, backed by 100% foreign currency reserves. 

Positive non-interventionism meant keeping government out of people’s wallets and lives as far as possible. Returning deportees who had fled Hong Kong during the Japanese occupation, refugees and immigrants flooded back, increasing the population from 600,000 to 3.2-million between 1945 and 1961.

Many of these people were poverty stricken, housed in shacks, on boats in the harbour or in cramped, one-room apartments in high-rise buildings hastily erected by the government. All and sundry urged the government to halt the immigration and even to send refugees back to the countries from which they had fled, but the government refused. 

Labour shortage

There were no jobs in the colony for these additional people, but enterprising entrepreneurs soon looked for ways to employ all available labour. Observers considered what resulted to be “exploitation” and were appalled. Hong Kong became famous for the low-cost goods the refugees made in their homes, churning out millions of items such as miniature trinkets and toys made with moulds and molten plastic. 

The administration again applied the positive non-intervention policy, leaving labour relations to employers and employees, instituting no minimum wage laws and no government job creation projects. Instead, trinkets and toys for export to the rest of the world gradually made way for high-value goods produced in modern factories by an increasingly skilful and well-paid labour force. The resulting “economic miracle” of high growth and development absorbed the huge number of unemployed at such a rapid rate that by the 1980s employers were complaining of a shortage of labour. 

In an article on Hong Kong, US free market economist Milton Friedman pointed out that in 1960 the average per capita income in Hong Kong was 28% of that in Britain, and by 1996 it had risen to 137%. He ascribed the difference in outcomes to socialism in Britain, and free enterprise and free markets in Hong Kong.

In free economies planning is carried out by myriad private entrepreneurs who risk their capital on the implementation of their plans and suffer losses if they miscalculate. In free economies the chances of success are far greater than in highly politically controlled economies. 

Huge difference

According to the World Bank, SA’s 1960 GDP per capita (in constant 2015 dollars) was $3,974 and Hong Kong’s $3,956. The comparable figures in 2020 (60 years later) were $5,725 and $41,448, respectively.

In 2020 SA’s GDP per capita had increased by $1,751, and Hong Kong’s by $37,492. In the 60 years from 1960 to 2020 SA’s GDP per capita (measured in constant 2000 dollars) increased about 44%. In the same period, by the same measure, Hong Kong’s per capita GDP increased 948%. 

What accounts for such a huge difference in the economic outcomes? The simple answer would be that Hong Kong has, consistently since at least 1980, been rated in the Economic Freedom of the World reports as having the world’s freest economy, with a top marginal tax rate of 17%.

SA is ranked 99th, with a top marginal tax rate of 45%, and is reported as having the world’s highest unemployment rate. The figures indicate that it is the nature of the government and the policies it follows that determine success or failure and economic outcomes.  

• Davie is a director of the Free Market Foundation. He writes in his personal capacity.