COUNTRY COMPARISONS     

 

Hong Kong
and Singapore


by Kenneth Tan, May 2002

 

 

 

SINGAPORE

HONG -  KONG

 

 

This paper examines the differences between the economic systems of Hong Kong and Singapore, differences that are believed to be the direct result of the contrasting levels of government intervention in these two economies.  The ensuing comparison will focus mainly on industrial development, savings, investment, and wage determination and in a

ddition, the overall effects that these differences have on economic performance.  The timeframe of this comparison will be largely confined to the period of 1950 to the early 1990s due to the convergence of government policy in recent years. 

At first glance, Hong Kong and Singapore are undeniably similar.  Both are small densely populated city-states with a predominantly Chinese population of immigrant stock.  Despite having virtually no natural resources, their strategic locations and excellent harbors led the British to acquire them in the early nineteenth century for the primary purpose of trading; Hong Kong was to become a center for the China trade while Singapore was founded to counter the Dutch monopoly in South-East Asian maritime commerce.  In their roles as British free ports, both economies prospered from entrepôt trade and later “diversified … into the production of labor-intensive manufactures for the world markets.  Hong Kong did so in the early 1950s when its entrepôt trade with China was closed off by trade embargoes following China’s involvement in the Korean War. Singapore’s export-oriented industrialization took off only after its separation from Malaysia in 1965.  In the 1970s, both city-states moved into services, including finance, transport and communications, and tourism.  In both places, export-led growth, accompanied by slowing population growth, brought full employment and rapidly rising standards of living.  They’re also among the few countries in the world whose foreign trade exceeds their GDP.  Real per capita income in both cities has risen five percent per year since the mid 1960s.”[1]; in 2000,

 

 

Singapore GDP per capita at Purchasing Power Parity stood at USD 26,500 while Hong Kong’s stood at USD 25,400, both above their former colonial master, Britain’s USD 22,800.[2]“There is, however, a great difference in the political evolution of the two cities, a difference that accounts for their strikingly dissimilar perspectives on the role of the government in the economy and society.”[3]  Nationalist sentiments never seriously took root in Hong Kong and for most of her history as an industrialized economy, the Hong Kong Colonial Governors or more specifically, the Hong Kong Financial Secretaries have shaped economic policy.[4]  Two of these Financial Secretaries, Sir John Cowperthwaite (1961-71) and Sir Philip Haddon-Cave (1971-81) have had over the course of two decades formed the basis of a policy of positive non-interventionism in the economy.[5]  Alluding to the role of the state in the economy, Sir John Cowperthwaite expressed: ‘… I should have thought that a desirable industry was … one that could establish itself and thrive without special assistance in ordinary market conditions’.[6]  In turn, Sir Philip Haddon-Cave who formulated the idea of positive non-interventionism; said: ‘I have frequently described the government’s policy stance as being that of “positive non-interventionism” … some have claimed that this is really just a fancy term for laissez-faire …  This is simply not so: positive non-interventionism involves taking the view that it is normally futile and damaging to the growth rate of an economy, particularly an open-economy, for the Government to attempt to plan the allocation of resources available to the private sector and to frustrate the operation of market forces, no matter how uncomfortable may be their short term consequences.’ [7]  It is important to reiterate the point made by Sir Philip Haddon-Cave that Hong Kong does not have a laissez-faire economic system.  The government is the largest owner of land in Hong Kong and through land sales it has influenced land prices to improve the competitiveness of manufacturers.[8]  Moreover, the public housing program has accommodated approximately half of the population for the past decade; there are arguments that the public housing program functions as a form of subsidy for low-wage workers and provides a safety net for small entrepreneurs who are risking their savings in starting new businesses.[9]  Land revenues have also allowed the delivery of a relatively extensive welfare system under which healthcare and education are subsidized[10] while maintaining low levels of taxation.[11]   

Although Hong Kong’s economic system does not strictly adhere to the laissez-faire doctrine, it is, by most standards, free of governmental controls; the government has long supported the predominance of the private sector and there are virtually no restrictions on capital, labor and enterprise.[12]  No distinctions are made between foreign and local firms, there are no official restrictions on foreign ownership except in sensitive areas like telecommunications and a limited company can be started by almost anyone in a matter of days simply by paying a small registration fee to the Company Registry; in 1990, the first-time registration fee was equivalent to a week’s pay for an unskilled worker.[13]  There are also no specific incentives like tax concessions to attract foreign investors and the government does not own or subsidize any industries; Hong Kong is the only East Asian economy that has not used state equity holding as part of a general development strategy.”[14]  A 1993 International Monetary Fund Report states that Hong Kong has “arguably the simplest income tax structure and the lowest tax rates of any industrial economy”[15], the government has no general tariff on imports and exports and there are no exchange controls, no sales taxes and no taxes on capitals gains and corporate capital.[16]  In 1990, profits of unincorporated and corporate businesses were taxed at a flat rate of 15% and 16.5% respectively; the government has generally refused to make taxes more progressive on the grounds that they erode the incentive to invest.[17]  

Another distinctive feature of Hong Kong’s economic system is the extremely flexible wage/price structure and self-regulating labor market, for example, in response to a world recession in 1974-5, output and employment in Hong Kong fell and was followed by a swift decrease in real wages and prices as predicted by the classical macroeconomic model; this wage/price flexibility played an important role in speeding up the subsequent recovery in 1976.[18]  Hong Kong’s self-regulating labor market has been largely attributed to the absence of regulatory agencies like the Federal Trade Commission or Antitrust Authority (USA) that restrict price adjustments and the fact that labor movements in Hong Kong have never been strong due to a lack of labor legislation and ideological differences between the left-wing and right wing trade unions; the annual loss through labor disputes averaged 6.4 working days per 1000 employee from 1978-87, one of the lowest among industrialized economies.[19]

 Thus, {‘}positive non-interventionism’ has clearly been an integral part of Hong Kong’s economic system.  On the other hand, Singapore’s government while committed to free trade, has long believed that it has a large role to play in the economy, a set of beliefs resulting from the pro-interventionist instincts of the ruling People’s Action Party (PAP) and the lack of a large local industrial class in the early years of independence.[20]  In reference to their general belief in the effectiveness of planning, Singapore’s former Deputy Prime Minister, Dr Goh Keng Swee said: ‘The government has to be the planner and the mobilizer of the economic effort [but] the free enterprise system, correctly nurtured and adroitly handled can serve as a powerful and versatile instrument of economic growth.’[21]   Since 1959 when Singapore was granted self-governance, Lee Kuan Yew, the country’s former prime minister has followed through on a combination of repression and achievement-based policies, thus ensuring the political supremacy of the PAP.[22]  Singapore’s ambassador to the United States, Chan Heng Chee described the situation as follows: ‘Politics disappeared [and Singapore became] an administrative state.’[23]  Consequently, the PAP politicians and bureaucrats were given a free rein in directing economic policy.  As part of its development strategy, Singapore formed a quasi-governmental agency known as the Economic Development Board (EDB), which over time {“}evolved into a super-hospitality agency for Multinational Corporations, a promotion agency for local enterprises as well as an agency devoted to economic development{”}[24] with overseas offices in major cities including New York, San Francisco, Los Angeles, Chicago, Washington, Boston, London, Paris, Frankfurt, Milan, Stockholm, Hong Kong, Tokyo, Osaka and Jakarta.[25]  Helped by intelligence from their overseas offices, the EDB closely monitored world markets, companies deemed beneficial to Singapore based on criteria like commitment, value added, skill content and capital intensity were identified and initiatives were then made to get them to invest in Singapore {[26]}; in a testament to the importance of the EDB, Alan Murray, former chairman and CEO of Mobil Corporation said: ‘… it was really the EDB that created the specific economic incentives … that made us choose Singapore as a place to make these big investments rather than some of the other countries in the region.’.[27]    In contrast, the only Hong Kong agencies that are even remotely similar to Singapore’s EDB are the Hong Kong Productivity Center and the Trade Development Council which offer only consultancy facilities.[28]  Rolling five-years plans were also drafted to coordinate the development of infrastructure to suit the needs of foreign investors; in addition, the Singapore government has also involved itself in direct production through multi-billion corporations like Singapore International Airlines (SIA), PSA, and Singapore Telecommunications (SingTel).[29]  In 2001, Singapore’s Ministry of Trade and Industry reported that Government-Linked Companies (GLCs) accounted for 12.9% of GDP[30].   

Apart from industrial planning, the Singapore government’s influence also extends to saving rates and the labor market.  Through a social security scheme known as the Central Provident Fund (CPF), the government has been able to impose compulsory abstinence reminiscent of the Soviet Union; this is made possible by the fact that on retirement, workers were paid benefits from their individual accounts determined by total past mandatory contributions paid in equal part from themselves and their employers plus interest.[31]  These contributions have risen from 5 percent of labor income each from employees and employers in the 1960s to a peak of 25% each from employees and employers.[32]  “Through borrowing from the CPF at below-market interest rates, the government was able to obtain a cheap, non-inflationary source of finance and relied extensively on it to provide infrastructure and public goods.{”}[33]  In addition, the government has also through the Post Office Savings Bank (POSB) increased voluntary private savings by exempting the tax on interest earned through accounts with POSB, most of the money deposited was required to be used to buy government securities; by the 1980s purely savings deposits with the POSB exceeded those of all Singapore’s commercial banks combined.[34]  These measures together with a high level of public savings have made Singapore the thriftiest nation in the world; from 1980-4, Singapore’s average saving rate in percent of GNP averaged 42.2% versus 32.4% for Hong Kong, from 1985-9, it averaged 39.7% versus 35% for Hong Kong and from 1990-1, it averaged 43.6% against Hong Kong’s 35.5%.[35]

Through the National Wages Council (NWC), the Singapore government has also been able to exercise some control over wages.  Since 1972, the NWC, a tripartite council consisting of the government, employers and labor unions has convened yearly to make recommendations on wage increases, although its recommendations are technically not binding, most firms have abided by them.[36]  It, however, is not clear how independent the NWC is from Singapore’s government given that the leading union body, the National Trade Union Congress (NTUC) has strong ties with the PAP: since 1980, the secretary-general of the NTUC has been a minister without portfolio in the PAP government.[37]  “Moreover, Singapore has been virtually strike-free since 1967; the fact that there were a total of two work stoppages involving 159 workers from 1978-90 cannot have reflected a free labor market.{”}[38]

Despite the strong government presence in her economy, it is important to note that Singapore, like Hong Kong, has never waived from its commitment to free trade and open competition nor has it protected inefficient industries, the rationale for intervention was to expand industrial capacity and to improve economic performance and the Singapore government’s involvement in direct production has been justified on the grounds that the state-owned companies have always been viable and in full competition with the private sector without receiving any special concessions.[39]  However, the Singapore government’s control of savings and promotion of a high rate of investment may have led to wasteful overinvestment, A. Young in his paper, ‘The Tyranny of Numbers’ pointed out that Total Factor Productivity Growth for Singapore averaged –0.3% per annum from 1966-90; on the other hand, Hong Kong, where investments and savings have been left to the private sector, showed a Total Factor Productivity Growth Rate of over 2% from 1966-60.[40]  While Singapore’s dismal Total Factor Productivity Growth Rate does indicate that her phenomenal growth was more a result of extraordinary growth in inputs like labor and capital than increased productivity[41], it might not be accurate to dismiss its high rate of savings and investments as wasteful since the high level of savings may be justified on grounds of decreasing inflation and increasing external security through foreign reserve accumulation and that her overly high investment rates could simply be reinterpreted in terms of socialist economics that optimal investment is that which maximizes economic growth.[42] 

However, it is clear that if Singapore is to repeat her past economic performance, she has to increase her Total Factor Productivity Growth Rate since she cannot indefinitely increase factor inputs to foster economic growth.  Conversely, Hong Kong has become increasingly aware of the failings of entrepreneurial capitalism, firms have been excessively preoccupied with short-term maximization, insufficient attention has been paid to research and development and there has been inadequate investments in training and capital equipment; deficiencies that large organizations with their characteristic longer planning horizons can help to remedy as they did in the case of Singapore.[43]

Due to their different economic systems, the populations of Hong Kong and Singapore have developed distinct characteristics over the years.  In Singapore, years of growth led by MNCs and a paternalistic government have created a somewhat sedate and risk-averse people.  Conversely, in Hong Kong where the government has taken a backseat and private enterprise has led the way in the economy, a highly entrepreneurial culture has evolved.  As to whether Singapore’s leaders were mistaken in having too little faith in their own capitalists or had, in the course of their economic planning, inadvertently stifled a potential generation of entrepreneurs, is unclear.  However, the development of an entrepreneurial culture is now clearly a priority in Singapore and as with most matters in Singapore, the government is leading the way; there has been an ongoing process of the privatization of government firms, promotion of local enterprises and even the revamping of the education system in order to foster creativity in future generations of Singaporeans.  On the hand, Hong Kong is likely to see a greater governmental presence but the causes are more of a political nature.  With the reinstatement of Chinese rule in Hong Kong, the expectations of Hong Kongers had changed; under a foreign colonial government they fended for themselves, expecting nothing but protection from the Chinese communist, under a Chinese government they expected to be protected from the uncertainties of life; for example after the bird flu devastated the poultry industry, affected parties demanded compensation and actually got it, when red algae adversely affected the stock of fish farmer, they too demanded and were given compensation.[44]  Thus, the new political realities in Hong Kong coupled with the problems of entrepreneurial capitalism as mentioned earlier will likely lead to a permanent softening of the government policy of ‘positive non-interventionism’.  Therefore, with Singapore moving towards a less-interventionist government and Hong Kong’s softening of its positive non-interventionism policy, we can expect to continue seeing the convergence of government policy in both city-states.        

[1] Pang, P221

[2] World Fact Book

[3] Pang, P220

[4] Youngson, P58

[5] Youngson, P58-9

[6] Balassa, P32

[7] Yam, P2

[8] Chen, P37-9

[9] Fu, P161

[10] Youngson, P132-6

 [11] Yu, P161

[12] Yu, P161

[13] Yu, P59

[14] Yu, P161

[15] IMF, Occasional Paper 152, P26

[16] Yu, P58

[17] Yu, P58

[18] Chen, P40

[19] Fu, P60

[20] Pang, P228

[21] Huff, P330-40

[22] Huff, P345-50

[23] Vogel, P77

[24] Schein, P45

[25] Schein, P9

[26] Huff, P315-30

[27] Schein, P22

[28] Fu, P162

[29] Pang, P227

[30] Heritage Foundation

[31] Huff, P 335-45

[32] IMF, Occasional Paper 119, P43

[33] Huff, 330-50

[34] Huff, 335-45

[35] IMF, Occasional Paper 119, P45

[36] Huff, P330-50

[37] IMF, Occasional Paper 119, P32

[38] Huff, P320-5

[39] Pang, P228

[40] Young, P15-8

[41] Krugman

[42] Huff, 340-50

[43] Pang, P231

[44] Lee, P614-6

Bibliography

1)      Balassa Bela, “Economic Policies in the Pacific Area Developing Countries” (Macmillan Academic and Professional Ltd 1991)

2)      Chen, Edward K Y: “The Economic Setting” in “The Business environment in Hong Kong” edited by David G. Lethbridge (Oxford University Press 1984)

3)      Heritage Foundation,  “Index Of Economic Freedom 2002” – www.heritage.org/index

4)      Huff W G, The Economic Growth of Singapore: Trade and Development

5)      International Monetary Fund, Occasional Paper 152, “Hong Kong, China, Growth, Structural Change, and Economic Stability During the Transition”, August 1997

6)      International Monetary Fund, Occasional Paper 113, “Singapore, A Case Study in Rapid Development”, February 1995

7)      Krugman, Paul, “The Myth of Asia’s Miracle”

8)      Lee Kuan Yew, “From Third World to First: The Singapore Story: 1965-2000” (SPH 2000)

9)      Pang Eng Fong,  “The Distinctive Features of City States’ Development: Hong Kong and Singapore” in “In search of an East Asian Development Model” edited by Peter L. Berger and Hsin-Huang Michael Hsiao

10)  Schein Edgar H, “Strategic Pragmatism: The Culture of Singapore’s Economic Development Board (MIT Press 1996)

11)  Vogel Ezra F, “The Four Little Dragons” (Harvard University Press, 1991)

12)  The World Fact Book, 2001 - http://www.odci.gov/cia/publications/factbook/index.html

13)  Yam, Joseph, “Mr. Yam Discusses “Intervention true to guiding policy” – www.bis.org/review/r980904b.pdf

14)  Young Alwyn, “The Tyranny of Number: Confronting the Statistical Realities of the East Asian Growth Experience” (National Bureau of Economic Research, Working Paper No. 4680, March 1994)

15)  Youngson A J, “Hong Kong: Economic Growth and Policy” (Oxford University Press 1982)

16)  Yu Fu-Lai, Tony, “Entrepreneurship and Economic Development in Hong Kong” (New York, Routledge 1997)

 

 

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