Liberalisation

It has been observed more than once that liberalisation is like chastity -- desirable in principle. So there was always going to be a danger that the tripartite meeting would be full of resounding phrases but short on practical proposals. But if that proved partly the case, no blame could be attached to Financial Secretary Donald Tsang.

In his opening remarks to the forum, Tsang urged participants not only to talk freely and frankly, but to challenge assumptions and develop ideas which could “make things happen”. Tsang at least was true to his word at the pre-dinner session, where his sharp comments helped give a focus to the rather tentative discussions which had characterised the session on Liberalisation.

Tsang urged examination of the near monopolistic role of Government itself in the non-traded sector of service industries. He noted the dominance of Government in the provision of health and education according to a structure laid down by the bureaucracy. He suggested that it would be desirable to look at shifting some of the tax-financed subsidies to them away from institutions towards the users of services, such as parents. This would be a difficult task as it would mean confronting the organised self-interests of teachers, doctors, lawyers etc, as well as the institutions and Government bureaucracies. But moves in this direction in the US should be studied as market mechanisms could enhance freedom of choice as well as efficiency and competition.

Tsang was zeroing in on issues first raised by Dr Ho Lok Sang who outlined what he saw as essentially political threats to the process of liberalisation which he saw as essential to compete in an increasingly globalised world. This Darwinian environment would push down prices and profits and only the fittest would survive. Hong Kong could not afford not to ensure maximum competition.

Threats to efficiency, said Dr Ho, ranged from equal opportunity laws to professional restrictive practices. Equal opportunity laws were unnecessary because market forces alone, the need to attract and reward labour regardless of gender, was the best promoter of equal opportunity. Likewise, bans on advertising among doctors and lawyers were anti-competitive and efforts to impose mother tongue education were driven by politics not the market. Schools and parents should make their own decisions on this.

Dr Ho's remarks led on, naturally, to the issue raised from the floor of the needed for liberalisation of non-traded services in general, not just those provided by the Government. Speakers from the floor characterized many of these as quasi-monopolistic, noting that prices of domestic services had for many years been rising much faster than the general price level while service sector productivity had been lagging. In other words, this domestic sector bore much of the blame for any erosion that may have taken place in Hong Kong's international competitiveness.

However, there was little follow up on the question of which non-traded services might be to blame and why. There was brief reference to property costs -- a matter now being dealt with by the administration and more brutally by the market - but there was no discussion of other specific areas such as utilities. Ms Yue noted the high level of access and contestability in most non-traded services provided by the private sector eg haircuts. But there was no discussion of important areas of contention such as utility charges, retail price fixing, interest rates, lawyers fees.

However, the importance of health and education services did arise. These have been and are likely to remain high growth sectors, but are not ones in which commercial pressures have been brought to bear. Yet for both quality was important not only for its own sake but to attract customers from overseas -- for instance as Singapore did with health and Australia with education. They were important too in retaining Hong Kong's attractions as an international and China business centre. Many services in Shanghai were improving rapidly, albeit from a low base, and Hong Kong needed to work hard to stay well ahead. Education and medicine were both areas where quality was an end in itself and could have direct economic benefits as well.

There was however considerable debate on the desirability of totally open competition generally. It could threaten stability said Dr Y.C. Jao who noted that since the mid-60s the banking sector had enjoyed a measure of protection in the interests of stability. Liberalisation was not an unqualified benefit and Hong Kong should think twice before opening everything to market forces (or the “law of the jungle”). Some others took up this theme. The volatility of portfolio capital flows was alleged to upset more stable foreign direct investment flows. Too much rather than too little liberalisation could have been the cause of Asian market turmoil. There was also a need to protect local enterprise from the “like Tysons” of the world.

However, others argued that Hong Kong had not been as hard hit as neighbours because it was more liberalised. Liberalisation should not be confined to external sectors and trade. All would benefit directly or indirectly from competition. Access to venues was mentioned as a form of liberalisation which would help service activities such as the performing arts, conventions, etc.

Remarks of Victor Fung summed up what seemed the broader opinion that liberalisation and globalisation were happening anyway. They should be especially beneficial to Hong Kong with its already strong services sector, particularly in areas such as finance which was now subject to a WTO liberalisation accord. Competition was needed to make local companies strong and thus able to take advantage of new opportunities, both in China and the rest of the world.

The problem of Hong Kong's relatively high costs was seen by most participants as requiring greater value added rather than reducing costs or engaging in competitive devaluation. There was a difference of opinion on whether the UK's forced exit from the European Exchange Rate mechanism had been good or bad. No direct calls for abolishing the peg (a holy cow?) were made.

Cutting salaries was mentioned as another way of improving competitiveness. Tsang said that if the private sector took the lead, the Government, which was guided by the pay trends survey, would follow suit.

Yue tempered the rush to bring down barriers by noting the need for strict timetables. They would ensure that change was not so fast as to destabilise but not so slow -- as in the case of many trade issues -- as to be almost meaningless.

Yue and Fung devoted much of their formal presentations to outlining the good things their organisations were doing to promote Hong Kong. Yue dealt at length with Hong Kong's “punch above its weight” contribution to WTO. With its free trade principles it was the “conscience” of the WTO. Hong Kong could especially benefit from Uruguay Round service liberalisation and the subsequent information technology and financial service accords. The Asia Pacific Economic Cooperation (APEC) group was another forum where Hong Kong was pushing liberal principles. The Government was being pro-active, looking to the business sector to bring issues to its attention which it could pursue at these bodies. Hong Kong also now had observer status at the OECD.

Hong Kong was also active in promoting China's membership of WTO. However there were no bilateral discussions with China and a “sizeable gap” existed between China and the US and EU, especially on services. It was not thought there was much Hong Kong could do to persuade China towards faster service liberalisation -- though it would be the major beneficiary.

All this was worthy stuff and no one criticised the efforts. However, in informal discussions over coffee, a couple of participants complained that neither Yue nor Fung brought any fresh ideas to the meeting. Bodies like WTO were important to Hong Kong, but Hong Kong's influence in them should not be exaggerated. Preaching liberalisation overseas was fine but what was needed was more real local liberalisation. The forum should focus more on what Hong Kong could unilaterally do to help itself by improving policies and practices at home.

The bottom line? The need to look at efficiency of the non-traded service sector, public and private to keep overall costs under control and make it easier for new industries to develop free of outmoded restrictions.