Wise Words on Minimum Wage, Jim Buchanan edition

While the ignorant and those with their own hidden agenda are out celebrating the imminent introduction of minimum wage in Hong Kong starting this May, I dig out this reader's opinion by my former teacher Jim Buchanan to share with you to celerbrate (?!) the occasion:


"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

James Buchanan Wall Street Journal 1996

Here is a story on HK's minimum wage:

http://economictimes.indiatimes.com/news/international-business/Hong-Kong-OKs-minimum-wage-law/articleshow/6180516.cms

Hong Kong = Rent-seeking Paradise

"Social welfare expenditure [in Hong Kong] had increased by 80% from $20 billion in 1997-98 to $36 billion in 2007-08, representing the second largest share of government recurrent resource allocation"

And No, I do not make this up, it is from the Secretary for Labour and Welfare, Mr Matthew Cheung Kin-chung. More here.

So please repeat after me: Good bye Capitalism, Welcome Welfare State.

My sense is that this is going to get worse as the global financial crisis unfolds. Stay tuned.

Professor Steven Cheung on Hong Kong vs Shenzhen

今天，深圳的人口刚好高于香港的一倍，但政府的支出却倒转过来，香港不知高出多少倍。只看这一点，不用看其它，中国大事开放——像香港那样放，或港深一体化，香港要大事调整的项目实在多，而在这调整期间，香港人会苦不堪言。

That is from Professor Steven Cheung's blog, more here.

四代香港人

四代香港人是中大社會學糸呂大樂教授的新作。所有關心香港社會的人必看。

Professor Lui is certainly one of the best minds in this town.

A Free Marketeer Leads Shanghai

According to a NYT story:

"The ruling Communist Party appointed Xi Jinping as the top leader of Shanghai...Mr. Xi, 53, was the party boss of neighboring Zhejiang Province and is regarded by political analysts in China as favoring deeper market-oriented reforms."

Read more here. Here is more from WSJ.

What's the likely impact of picking Xi to lead Shangahi?

My take is that, barring a heavy hand extending from Beijing to slow Shanghai's explosive development in order to preserve HK's status as China's financial hub, the appointment of Xi might help speed up the development of market infrastructure in Shanghai. Legal infrastructure and other norms of behaviour which are prerequisites in a market economy are what I have in mind here. Growth rates of Shanghai would inevitably rise as a consquence.

The ironic of all this is that just as we have just picked a Chief Executive here in HK who tries extremely hard to make sure that the development of this ex-colony fits in with China's five-year plan and slow Shanghai's growth in order to protect HK's position China's financial center, Beijing has picked a market reformer to lead Shanghai.

**Picture above shows US Treasury Secretary Henry Paulson and Xi walking together during the former's trip to China last year.

Avoid Marginalization Through Competition

Today's edition of The Standard reported on the warnings sounded out by National People's Congress vice chairman Cheng Siwei:

"Like the fabled hare being overtaken by a tortoise, Hong Kong risks losing its position as a international financial center if it sticks to its "old ways," National People's Congress vice chairman Cheng Siwei warned Tuesday in Beijing...

"If Hong Kong people focus on internal political rows but not economic development, they will be marginalized," Cheng told a media briefing less than two weeks before the SAR's March 25 chief executive election."

Read more here.

It is ultimately a time allocation problem, isn't it? If you devote more time to work on political matters, you have less time left to deal with economic issues. But then in economics, we talk about choice at the margin. That is, every one in HK is calculating whether spending one more unit of time in political activities brings higher benefit than other activities. Throw in different preferences, different opportunities confronting different people, it seems unlikely most of HK's working population would devote most of their time to political activities. Therefore, the outcome Mr. Cheng talked about would be an unlikely one.

If one were to worry about HK being marginalized, there is another consideration which is far, far more important in my opinion. That is Beijing's attempt to limit the growth opportunities of mainland cities in order to "enhance" HK's role as our country's premier interntational financial center.

In a market economy, you don't get assigned to such role, you earn it through beating your rivals in the market place. Horning HK's competitive edge through vigorous competition with other mainland cities and other global ones is the only route for HK to stay ahead. However, this is not happening, as I talked about in a previous post.

Shanghai Deserves Equal Treatment

Today's SCMP reports:

"The central government aims to take further steps to reinforce Hong Kong's role as an international financial centre, signalling its intention to highlight the city's importance to China's economy ahead of the 10th anniversary of the handover.

Analysts saw Beijing's efforts to promote Hong Kong's role as a setback for Shanghai, whose leadership has been hit by a series of corruption scandals culminating in the sacking of its former party secretary, Chen Liangyu ...

It is expected to announce more favourable policies soon, probably before the July 1 handover anniversary...

"The conclusion to the decade-long debate on the role between the twin cities has become clear now. Hong Kong, with its existing advantages, should serve China internationally, while Shanghai, with its limitations, should focus on serving the domestic market," Professor Zhong said. "

Read more here.

My response is, why shouldn't Shanghai be allowed to compete with HK? If Shanghai's legal framework and other institutions are inadequate to serve as China's international financial centre at this point in time, wouldn't it be more productive to speed up their development rather than condemn it to an insignificant role.

Why HK's is so worry about Shanghai? Afterall, it competes quite successfully with world gaints like London and New York, why it fears to compete with Shanghai?

Actually it is not correct to say HK is competing with Shanghai. As long as China has the ability to grant favorable policies to HK but not to Shanghai, the playing field is tilted even before the game begins.

Bidding Farewell to Laissze Faire in HK

In the HK Standard today:

" In an unprecedented move, the government announced Wednesday it will invest directly in movie productions to back Hong Kong's ailing film industry. Officials hope direct investment from the HK$300 million film development fund announced by Financial Secretary Henry Tang Ying-yen in his budget speech last week will bring about a revival to the industry that a senior official has described as "very important."..."

Rationale for the policy, according to Secretary for Commerce, Industry and Technology Joseph Wong:

"First of all, the film industry, is a very important creative industry in Hong Kong and [its] revival will have a lot of spill-over effects." Secondly, he argued, there are also many examples of governments playing a "more active part" in supporting film industries in France, the United Kingdom, Singapore and South Korea."

Read more here.

Yo Joe, please name one industry which does not generate spillover effects, externalities, third-party effects...or whatever fancy name you can come up with?

Oh yeah, Joe, on your second point, would you please explain to me why whatever policies other countries have implemented must be a good thing? Could they all be wrong at the same time? They might not, but we, as taxpayers who pay for the final bill, deserve an explanation not an assertion. Wouldn't you agree?

And would you please also info us Joe, what criteria you would use when deciding which movie deserves government dole ? And who has the final say when picking a particular set of criteria for such purpose in the first place?

Puzzle of the Day: Accountants' Interests in HK's Fiscal Matters

The Hong Kong government has just announced its latest budget for 2007-2008, read more here.

The HK Standard reported today that:

"Auditing firm Ernst & Young said Thursday: "It was perhaps a little disappointing the financial secretary did not say much on the subject of Hong Kong's narrow tax base, nor the wide proposals for reform which have been put to him throughout 12 months by various professional bodies, the public and industry."...

"Over the years, much has been said and written about Hong Kong's narrow tax base and the possible need for tax reform. But in his 2007-08 budget, Tang only devoted one paragraph to the topic," said accounting firm PricewaterhouseCoopers."

Read more here.

The million dollar question is of course why accountants have so much interests in HK's tax system at all? Their self-interests are behind this, an economist like me would argue.

But then why only accountants, why tax lawyers and other professionals who might get something from steering the tax system their way have not exhibited similar enthusiasm?

You foreign readers out there, would you please let me know whether accountants in your place of residence are as interested in the tax system as those we have here, thanks!

Fuzzy Logic

From a story in the HK Standard:

Legislator Ronny Tong Ka-wah said despite suspected cartel behavior locally among supermarkets, property markets, fresh pork suppliers, ports and exhibition services, the lack of any independent and neutral body charged with adequate investigative powers to detect and substantiate claims would make enforcement of fair competition difficult, if not impossible...

Although there exist few barriers to entry into Hong Kong markets, Tong believed existing business conduct that impeded competition was particularly worrisome for foreign investors who were new to the market."

Read more here.

Wouldn't one expect Mr Tong to at least understand the contradictory nature of his own argument highlighted above?

Anti-competitive behaviour means returns for incumbents higher than the interest rate;

If barriers entry are few, competitors who want a cut of the higher return would jump into the fray;

Returns would return to normal as competition intensifies.

Why worry, Mr Tong?

HK's Economy, Not as Free as it Seems?

"The late economist saw what he wanted to see and ignored some fundamental accommodations in Hong Kong’s laisser-faire economy.

Milton Friedman was without doubt a great economist and, more important, one who, for good or ill, influenced politicians including Ronald Reagan, Margaret Thatcher and Augusto Pinochet. But his much quoted praise for Hong Kong was based on brief visits and a tendency, the norm among economists as most other humans, to see only what he wanted to see.

So Friedman saw low taxes, private ownership of most utilities, no tariffs, no foreign exchange controls, no government intervention in industry. The low ratio of government spending to GDP in Hong Kong contrasted with that of its then-sovereign power, Britain, and explained much about the divergent economic performances of “socialist” Britain and “free” Hong Kong...

What Friedman cared not to notice about the Hong Kong of the era of Cowperthwaite and later was that in three key areas of policy affecting the people the government was more socialist than its UK counterpart."

Read more here.

Back to the Basic

Singapore has just announced that it will slash corporate income tax (though it plans also to raise GST). Recently Singapore has done the right things to give its economy a boost. It has just deregulated the mail business and allowed gambling (in fact a few casinos are in the works)

No more new industrial policy initiatives, no more grand plans, no more visions.

The principle behind their recent spate of new economic policies is simple: Deregulation and Let the Market do the Work.

My sense is that with continual gobal competition, Singapore will be forced towards further opening up its already quite liberalized economy. There is simply no other options to it and there is nobody else (or nothing else to count on as it is not resource-rich) it can count on except by relying on market forces.

What about HK? Well, look north and there is somebody whom we can always count on. Deregulation, what's the rush?

My Take on Competition Law in HK

Readers seem to have an interest in some of my previous posts on competition law. Guess it is time to clarify my position.

I look at the topic mainly from a comparative institutional perspective.

Scenario I, no competition law:

Imagine there is no competition law, which is now the case in HK. Yes, you might have some collusion in price setting, and yes you might have some "unfair" business practices here and there. And these "anti-competitive" acts cost the economy.

Short of government barriers, I do believe that most if not all of these "anti-competitive" acts would be wiped out in time. That is I believe that most if not all, short of government imposed barriers to entry, so called "anti-competitive acts" would not exist for long. The reason why I believe this to happen is simple: profit.

Supposedly "anti-competitive" acts bring profits, and plenty of them. That will send a signal to businessmen to divert their energy and resources from other uses to the one in question. Profits will revert back to the normal rate of return before long.

Hence it is expected that the costs imposed on the economy as a result of the remaining "anti-competitive" acts (i.e. those acts that would not be wiped by competitive forces) would be low.

Scenario II, with competition law

With competition law, some of the "anti-competitiveness acts" might be eliminated sooner than they would be without the law. These are the pluses for the law.

But enforcement is not a free lunch. Several costs to society are involved.

a) Direct costs of staffing the enforcement agency, costs of investigation, and the costs of operation of the judicial system;

b) Indirect costs imposed on society when a beneign act of business is found guilty;

c) Indirect costs imposed on society when businessess fail to defeat their rival in the market and try to get rid of their opponents through complaining their rivals for engaging in "anti-competitive" acts (the microsoft case comes to mind)

Bottom Line:

I do not have any numbers in hand. But my inclination is to believe that net cost to soceity would be lower in scenario I. Wish somebody would be able to conduct empirical research on this topic sometime soon.

Oh Oh !

"It is difficult to imagine Hong Kong not introducing a competition law soon as the city is lagging behind even places such as Papua New Guinea, one of England's foremost experts in the field says. Nicholas Green QC yesterday told a seminar organised by the Asian Competition Forum and the Civic Party that various forms of competition law had been in place for years in countries such as India and South Korea...

Even Papua New Guinea had had the legislation in place since 2002, Mr Green said. He believed Hong Kong, which this month ended a three-month consultation on a competition policy, would follow the international trend."

That is from a story in today's edition of SCMP, read more here.

In the 1950s and 1960s, it was fashionable for a lot of developing countries to pursue absurd economic policies like import substitution, industrial policies and economic planning, would Mr Green consider it a mistake that HK did not follow that "international trend" back then?

When protectionism was in vogue, would Mr Green advise HK to follow that "international trend" as well?

Say No to Vision

HK's Chief Executive contender Alan Leong recently said:

"Mr. Tsang stands for 40 years of administrative experience as a civil servant. Administrative officiers do not need a vision. They only need to carry out the policies of the Governor and British rulers. It is administration with an elitist mindset.”

Read more here.

Indeed, one popular criticism of Donald Tsang (that is the same Tsang in the quote above), another contender's campagin slogan "I'll get the job done" is that it lacks vision.

I assume what both critics who attack Donald for his lack of vision and Alan Leong mean by the word vision is this: the "[u] nusual competence in discernment or perception; intelligent foresight". (Source)

According to this definition, I consider it a good thing that Donald lacks vision because I believe that neither Donald nor Alan has unusual competence in discernment or percetion nor do I believe that they have intelligent foresight.

BTW Mr Leong, isn't the whole point of having democracy is NOT to rely on particular attributes and characters of the person in charge of the government but rather on the institutions and procedures of the political system instead? If so, why do you want us to support you because you have vision? A vision which prompts you to try to force competition law, minimum wage, maximum working and similar visionary policies down our throat?

F. Hayek has repeatedly argued in his works that our primitive yearning for some wiseman to lead us has time and again resulted in the infringement of personal liberty and freedom.