UNDERNEATH the “Hong Kong Miracle”Posted: August 1, 2014
EXCLUSIVE: A few days ago, The Butcher posted a link to a good article about the origins of “the Hong Kong Miracle” – a term that is justifiably used to describe Hong Kong as a near “capitalist paradise” of very limited government intervention into all aspects of the lives of its citizens, very low apparent taxation and nearly wide-open individualism and personal opportunity. I’ve seen pieces like this before and hopefully, people will be writing them in the future (and not discussions about how China “killed the goose that laid the golden eggs”).
“As part of my study, I’ve come to realize that there is a somewhat hidden key to the magic of Hong Kong’s economic, social and political success story.”
As an on-again, off-again resident of Hong Kong (“on” right now and for the next few months), I’m an avid reader of Chinese history in general, and Hong Kong history in particular. Last year I began the grueling process of becoming admitted as a lawyer (solicitor) in Hong Kong, taking the very difficult test administered to foreign lawyers from other Anglosphere jurisdictions as a gateway to that honor. (I’m nearing the end of that long journey now – in two weeks I’ll be in court here for my formal admission before a Chinese judge wearing the white wig and crimson robes that English judges have been wearing for over three hundred years, a wonderfully rich experience of the cultural melting pot that is Hong Kong.)
“And it behooves people who support the political philosophy (free-market capitalism and political liberty) underlying Hong Kong’s wonderfully free and open society to be aware of this key.”
As part of my study, I’ve come to realize that there is a somewhat hidden key to the magic of Hong Kong’s economic, social and political success story. And it behooves people who support the political philosophy (free-market capitalism and political liberty) underlying Hong Kong’s wonderfully free and open society to be aware of this key. Because, while I am as libertarian as they come, there IS a functioning government here that provides essential public goods. The seven million people who live and work here depend on the fantastically well-built and well-maintained physical and social infrastructure: Massive public works (like the great new airport – no one misses the dangerous approach to good old Kai Tak, huge bridges and tunnels), a clean, efficient mass-transit system, pretty darned good public schools, a semi-public health-care system, adequate police and an amazingly open and un-corrupted legal system.
[Also see: The Man Behind the Hong Kong Miracle]
The mystery comes from looking at all of these great elements of the public sphere in Hong Kong, and comparing it with the tax regime. The highest marginal income tax rate here is 18% (only the very highest earners pay this, and most of them figure out a way to avoid the highest rate), there is no capital gains tax, and there are very few other explicit taxes of any kind. Although most government services have associated user fees in the form of some kind of “stamp duty” (an Anglicism Americans understand as a tax), these stamp duties are fairly low – and would come nowhere near raising enough revenue to support the public sector. Likewise, while there are fees for riding on the MTR (the integrated mass transit system that includes subways, above-ground trains, buses, trolleys and ferries) and some tolls (for instance on the main tunnel linking Hong Kong Island with Kowloon and the mainland side), these charges again can’t raise enough revenue to support their overall function, much less the massive improvements in Hong Kong’s physical infrastructure I’ve personally seen in the 35 years since I first came here.
It would be nice if we could say that the Hong Kong government does the generally good job it does by simply being efficient and not trying to do too much. While there’s certainly much truth in the latter point, there’s none in the first. Hong Kong inherited an old-fashioned English colonial administration that wasn’t particularly efficient, and it hasn’t improved since 1997, when the colony was returned to the Chinese “motherland.” In fact, I’d say it’s worse than it was, with a new overlay of Chinese bureaucracy on top of what the Brits left behind. I deal with the Hong Kong government quite a bit and I’m sure it’s LESS efficient in most respects and on average than counterparts I deal with in the US – sometimes grossly so.
So what is it? How is Hong Kong such a low-tax environment, but with such a great public sector (in terms of actual results)? One word: LAND. Although the territory of the whole Hong Kong Special Administrative Region (HKSAR) isn’t tiny (much bigger than Singapore, for instance), the amount of USABLE land is quite small. There’s a LOT of water (as well as the mainland area, there’s Hong Kong Island, Lan Tau Island and dozens of smaller ones, down to the size of house-size rocks poking out of the water). And what land there is is mainly very, very steep – too steep to build on even with modern technology. The usable land in most of the HKSAR consists of interrupted thin strips of flat ground around the edges of very high hills – small mountains, really.
So, an American would quickly jump to the conclusion that it must be real estate taxes that fund the government. Functionally, she’d be right, but the technical legal reality isn’t tax. Instead, it’s the fact that, unlike England’s settlements in places like America or Australia, Hong Kong wasn’t founded as a “settlement colony,” i.e. a place where people relocated from England with the intent to make a new life and never return. Basically, Hong Kong was seen from its inception as an outpost of empire and a trading post – a place where warships could lay anchor and refit and merchants could build wharves and warehouses, but not a place where solid English yeomen would put plow to earth and transplant their lives and culture.
As a result of Hong Kong having been conceived from its inception as a military base and commercial port rather than a place to permanently settle, the Crown decided from the beginning that land would not be granted or sold as a “freehold,” i.e. you couldn’t – and can’t – “buy” land in Hong Kong. What you can do is LEASE land – usually for 99 years – from the government. To Americans, this seems exceedingly strange and quite inconsistent with the fact that private interests have invested billions and billions of dollars to construct the high-rise skyline of Hong Kong. But it’s true and it works. What you buy when you buy a home in Hong Kong (invariably what an American would call a condominium) is buy an interest in a lease. And every year you pay your share of your building’s lease payment on the ground upon which it stands.
FUNCTIONALLY, what you’re paying as a homeowner in Hong Kong when you pay your share of your building’s lease payment to the government is exactly equal to the local real estate property taxes an American homeowner pays. Likewise for the owners of the multitude of majestic office buildings and hotels that crowd against the waterfront here. Renters end up paying the lease payment/property tax in their rent rates. Thus my tiny flat here is incredibly expensive by the standards of anywhere else in the world, and the per-square-foot monthly rent we pay for our office here is far more than the rate we pay for any of our offices anywhere else in the world.
Although it was unseated by Geneva this year for the number one spot, Hong Kong always ranks among the most expensive cities in the world in terms of the cost of living. And, although there are some other elements in it (food’s not cheap, but not horrible in terms of cost), it’s the cost of SPACE that is the main component of Hong Kong’s ranking as one of the world’s priciest cities.
So, while we definitely should sing the praises of Hong Kong as one of the best examples of how economic freedom, political liberty and minimal government create prosperity and human happiness, we shouldn’t think this comes at no cost. TANSTAAFL.
- Hong Kong Curbs Its Currency (online.wsj.com)
- Beijing Paper Warns Hong Kong Democracy Activists: ‘You’ll End Up Like Thailand and Ukraine’ (ibtimes.co.uk)
- Chinese High-Rollers Take Lower Profile (online.wsj.com)
- The Man Behind the Hong Kong Miracle (punditfromanotherplanet.com)
- Comparing Taiwan and Hong Kong is a gross oversimplification (wantchinatimes.com)
- China state-run newspaper says Hong Kong democratic want, will turn Hong Kong into Thailand (thaijournalismwatch.wordpress.com)