Milton Friedman’s Hong Kong Misconceptions

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.

So determined was Friedman to defend his rosy version of Hong Kong’s economy, which he attributed to its 1960s Financial Secretary John Cowperthwaite, that just weeks before his death he claimed to be seeing state intervention that it “would no longer be such a shining example of economic freedom”.

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.

At one time 60 percent of the people lived in subsidized housing, mostly rented cheaply from the government, and some in Home Ownership Scheme flats, provided with cheap land and sold to lower-middle-income households. Even now that public housing has low priority and the home ownership scheme has ended, some 50 percent of the people still benefit from this massive intervention in the marketplace.

The intervention also partly accounts for the low apparent ratio of spending to gross domestic product. If the cost of the subsidized housing land were accounted for at market prices in the government budget, the ratio would be significantly higher.

Hong Kong people have also enjoyed almost free medical treatment at government clinics and hospitals. Friedman was against “free” medicine elsewhere but failed to notice it in Hong Kong. Likewise, education, at least up to the secondary level has long been almost entirely funded by the government.

In the days when Friedman was writing his praises for Hong Kong, the territory also had a relatively youthful workforce compared with western countries and thus less need for spending on pensions and help for the aged. Nor did Hong Kong have to spend anything significant on external security, the responsibility of London and now Beijing.

Friedman could actually have helped Hong Kong if he had criticized rather than ignored the excesses of these interventions in the marketplace. They had originally been spurred by fears of social unrest as the then-colony attempted to absorb waves of migrants from the mainland with nowhere but squatter huts to live.

It was necessary intervention in the marketplace. The government’s lack of ideological commitment to laisser faire was summed up by Cowperthaite’s successor, Philip Haddon-Cave, as “positive non-interventionism.” This bit of semantic gobbledegook essentially meant that it preferred not to intervene but had a paternal duty to do so on occasion.

Hong Kong’s problem now is that policy change has not kept pace with changing economic and social circumstances. It is hooked on high land prices for the private sector as a revenue-raising measure, which leaves a large proportion of the public trapped in the subsidized housing sector.

Likewise the free if basic medical system is stretching the government as the population ages, drug and equipment costs rise and public expectations rise. But it is difficult to push people back to the private sector because that thrives on providing very expensive services to the top 15% or so of the population. Indeed, private medicine in Hong Kong is so expensive that instead of being a money earner for Hong Kong, as it is for Singapore, it is often cheaper to fly to Sydney or Singapore, let alone Bangkok, and get better treatment.

Nor did Friedman pay any attention to the lack of competition in many areas of the domestic economy and the high returns given to competition-free utility companies. Presumably it was oversight rather than a belief in freedom to extort was behind this lapse.

So, Dr Friedman, Hong Kong mourns your passing and appreciates the praise you heaped upon it. But it would be well if warped notions of its realties do not become future textbook examples.