(This essay was published in Hong Kong Economic Journal on 4 November 2015.)

 

Positive non-interventionism, a policy implemented by Hong Kong in the 1970s under the financial secretary Philip Haddon-Cave, should be understood as a statement of both economic policy and governance strategy (or philosophy).

 

As economic policy, it upholds free market capitalism as official government policy. Hong Kong is known to the world as the freest economy and one of the great miracles of the second half of the 20th century.

 

But this is not to say that the government limits itself only to upholding the rule of law, protecting private property rights, maintaining open competitive markets, low taxes, and free trade.

 

There is a phenomenal amount of government intervention in the market that makes you wonder if Hong Kong’s reputation as a champion of free market capitalism is well deserved. However, while this champion is less than perfect, and maybe even far from it, this does not seem to have diminished its free market status.

 

The proposition that free or less restrained markets are the proven way of fostering economic prosperity is not in doubt today, after 25 years of rapid globalization from 1980 to 2005 ushered in unprecedented prosperity. Critics of globalization challenge only whether the wealth could have been more broadly shared, the losers could have been better cared for, and economic growth could have produced other costs that need to be mitigated.

 

China’s unprecedented double-digit growth for three decades is the most potent evidence of the powers of market forces in fostering prosperity. Positive interventionism has been a resounding success judging by the experiences of Hong Kong, China and most of the world’s nations in the past half century.

 

Yet it does not lack critics. Its true meaning and purpose have become obscured, perhaps deliberately misunderstood by those with their own agenda to push.

 

There are two broad groups of detractors. The first group faults capitalism for failing to share prosperity more equally than they would like to see. These are the socialists, meaning anyone who does not like capitalism, and they come in many different varieties.

 

Karl Marx, the original scientific critic, affirmed capitalism’s ability to create wealth but asserted, incorrectly, that its exploitation of workers would eventually bring about its own collapse. John Rawls the philosopher valued capitalism’s powers to set proper incentives for prosperity, but preferred income redistribution to help the poorest.

 

Advocates of all kinds of minority and community interests (including women, children, elderly, ethnic groups, the disabled, the disadvantaged, animals, biodiversity, heritage, and countless others) have faulted capitalism for its level playing field and failure to adequately serve specific worthy causes. These advocates want government to discriminate in their favor – they obviously believe positive discrimination is a good thing. But positive discrimination in favor of one group always implies negative discrimination against all others, an effect that is too often conveniently forgotten.

 

The second group of critics is the capitalists themselves. While market competition brings prosperity to all capitalists, the interests of the individual capitalist are best served when he does not have to compete in the market and receives the helping hand of government. Like everyone else, the capitalist wants a free lunch paid by government. Capitalists prefer to become rent seekers if they can earn more by lobbying government rather than competing against each other in the market.

 

For this reason, positive non-interventionism is not merely an economic policy position, but also a governance strategy that says no to socialist and capitalist rent-seekers and lobbyists alike.

 

During colonial times, saying no was easier because the government did not have to fight at the ballot box to stay in power. But political changes in the last three decades have made government more accountable to many socialist and capitalist lobbies.

 

It is not surprising that financial secretaries from Hamish Macleod to John Tsang have found it necessary to defend positive non-interventionism with pro-active rhetoric.

 

Macleod (1991-1995) characterized the Hong Kong model as consensus capitalism. Consensus has to be actively cultivated through consultation so he initiated consultation rounds with legislators after elections were introduced for certain Legislative Council seats.

 

Donald Tsang (1995-2001) emphasized “maximum support, minimum intervention and fiscal prudence”. Antony Leung (2001-03) saw the government’s role as “a pro-active market enabler”. Henry Tang (2003-07) hoisted the flag of “market leads, government facilitates”. The current financial secretary, John Tsang, speaks of a “big market, small government” approach even though he is setting aside increasingly large sums to back up activist government measures. The commitment to market capitalism is clearly still present in Hong Kong, but the tone is progressively shifting from saying no to saying yes.

 

I suspect Haddon-Cave’s (1971-1981) original formulation of positive non-interventionism had an obvious political purpose. Alvin Rabushka’s 1976 study of Hong Kong’s budget process inferred that the financial secretary was the bulwark against governor Murray MacLehose’s far more pro-active ambitions. It is plausible that Haddon-Cave was trying to draw a bright line to limit government encroachments upon the free market capitalist order initiated by MacLehose. But in doing so he also had to legitimize the governor’s interventions.

 

The articulated position of positive non-interventionism is not to rule out all state interventions, but to accept only those for which an overwhelming deep market failure case could convincingly be made. For Haddon-Cave, housing, health care, education, and modest amounts of social welfare were things that could be justified according to the logic of positive non-interventionism. These were the areas where MacLehose had wanted the state to intervene.

 

Positive non-interventionism thus provided legitimacy for interventionist public policies. Such legitimacy was important because consistency and coherence in policy provides an unelected colonial government with demonstrable transparency. This was not accountability to the electorate, but ideological coherence and consistency of a higher order – a free market capitalist order – that the people could in time be persuaded to embrace and respect, especially if it delivered prosperity to most if not all. Not surprisingly, committed socialists were always critical of positive non-interventionism, but as long as the broad public continued to accept a free market capitalist order, the socialists could be ignored.

 

A very senior retired government official in the pre-1997 Hong Kong administration told me Haddon-Cave was far more rigid and unyielding than his predecessor Cowperthwaite (1961-1971) when it came to policy proposals requiring government support. While this observation was meant to be a comment on personality differences, I wonder to what extent it might also have reflected the changing political circumstances the two men found themselves in.

 

British policymakers at the end of the Second World War were keen that Hong Kong’s public finance would not become a burden for Her Majesty’s government. Cowperthwaite was therefore under less political pressure from socialist lobbyists to spend government money and could focus on keeping the capitalist lobby at bay. But by the late 1960s, the world was seriously warming to the idea that government central planning was not only a viable solution for promoting economic growth, but also a better one. This was not Cowperthwaite’s belief and he steered Hong Kong onto a totally different path.

 

When Haddon-Cave took office as financial secretary in 1971, low-skill export-oriented industrialization was in full ascendancy and capital-labor relations had become tense. MacLehose had arrived to rebuild society’s broken fabric in the aftermath of the 1967 disturbances. The state was soon spearheading socialist spending. Haddon-Cave had to deal with political pressure from both capitalist and socialist rent-seekers and lobbies. In a letter I received from Cowperthwaite in the 1990s, he remarked how he had kept the skies free for aviation while in office, but his successors had not been able to do so. I suspect in yielding ground to the socialist lobby, the financial secretary also became vulnerable to the pressures of the capitalist lobby.

 

Financial secretaries are not scholars or philosophers keen on articulating the logic of economic theory as academics do, even if they are intellectually bent. Their policy statements have a political purpose. And they are almost always focused on the political forces they have to rally or contend with.

 

From this perspective, the statements of the financial secretaries are clues to how they saw their political environment. Haddon-Cave’s positive non-interventionism has survived for four decades. It provided a higher order ideological justification for government policies to which the administration was held accountable. The acceptance by the public of such an ideology is not permanent, and could be eroded if society’s contradictions are not resolved and if government appears to be abandoning them.

 

In the past two decades, the powers of the socialist and capitalist lobbies have grown considerably in Hong Kong. Our political system literally ensures all minority interests have powerful voices. Political agendas are fragmented. Positive non-interventionism as an economic policy position and a governance strategy is under attack from both sides.

 

But if positive non-interventionism ceases to represent government’s economic and social policy position, then public policy choices could become the arbitrary outcomes of political horse-trading for which there will be neither logic nor moral purpose or value.

 

The perception that political alignments are based on a political division into the pro-government establishment camp and the opposition pan-democrat camp is correct only in a very loose sense. These are mostly coalitions limited to political matters. The establishment camp does not stand solidly behind government policies on most economic and social issues. And the pan-democratic camp cannot agree among itself on basic strategies that irritate the public, such as filibusters in the legislature.

 

Under the Basic Law, the government administration has the primary responsibility to come up with policy initiatives. But if public opinion is fragmented by a political system that gives disproportionate power to minority interests, and where policy differences cannot be resolved at the ballot box through popular elections by universal suffrage, then the only institution that confers credibility for government policies is the ideological coherence and consistency of positive non-interventionism.

 

If the government loses its ideological credibility, then governance becomes too naked for comfort. It becomes vulnerable as friends can no longer rally to its cause and everyone is a lobbyist and a rent-seeker. It is a political nightmare where government is beholden to a hundred populist causes that it cannot all please and everyone is frustrated. Without policy accountability to an electorate or credibility before a higher ideology, government loses authority much faster and ultimately its legitimacy as well. This is not good news for either defending free market capitalism or for effective political governance.

 

Reference

 

Alvin Rabushka, Value for Money: The Hong Kong Budgetary Process, Hoover Institution Press, Stanford, 1976

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