Next Magazine (Second opinion A002, 2012.7.12)

The United States is developing the characteristics of Italian style crony capitalism according to a new book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity by Luigi Zingales, an Italian born finance professor at the University of Chicago.

He argues that “Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both”. He says it is a country where “there is virtually no meritocracy and competition is considered a sin”, and “the best way to get rich is to be politically connected and receive a government contract”.

The US is moving away from its tradition of free markets, open competition and meritocracy. Competition “limits the possibility of earning extraordinary profits – and thus limits income inequality as well. Competition ensures that consumers enjoy the benefits of innovation. Competition creates pressure towards efficiency and hence meritocracy”. However, the threat comes about “when a business gains both market and political power”.

Zingales argues, that “without competition, economic life becomes unfair, favoring the connected insider.” He makes a strong case that this is happening in the United States as some businesses (including finance, law, academia, medicine and education) become more powerful, the role of government expands, competition is more constrained and rent-seeking lobbying to divide the pie dominates growing the pie. Monopoly power is corrosive and the state “has the ultimate monopoly”.

As confidence in the market is eroded, many see redistribution as a solution to the problems that emerging from the narrower operation of markets, but “redistribution reduces incentives to work, to invest, to excel.”

Hong Kong has been a highly competitive and relatively free economy. There is much in Hong Kong that anticipates recommendations of Zingales. We have low, simple taxes with few exemptions. Our laws are usually crafted in fairly simple language. Lobbying is not the institution in Upper Albert Road, Hong Kong’s answer to Washington’s K-Street.

Yet confidence in Hong Kong’s capitalism is eroding. There is an increasing belief that it is important to be close to the government to succeed in business. Government increasingly seeks to go beyond setting the rules of the game, to direct assistance for priority industries. Reading budget papers is increasingly like reading a wish list from all organized interests, with a little something for every party. The Hong Kong government is the largest land holder, through companies it controls the largest developer and the largest investor in infrastructure. Government dominates education and health care. In all of these areas, there is some competition. However, the priority given to policies creating competition seems low. It is little wonder that people see less and less economic opportunity, when the scope for free market activity is crowded out by a more activist government. Calls for universal pensions and similar redistribution threaten an elaborate structure of social support provided by families and the powerful incentives to save and provide for the future that have created Hong Kong’s wealth today. Budget surpluses and the exchange fund give the illusion that actuarially unsupportable “benefits” can come at no cost to people today. This type of short-sighted thinking has been tried and brought many western countries to the brink of financial ruin. Zingales offers solutions to the problems that he sees in the US. Policy should be “pro market, not pro business”. He likes simple rules. Social norms that abhor lobbying for political privilege should be entrenched. He warns against inevitable “regulatory capture”, preferring the checks and balances of competition to complex laws.As I interpret Zingales, the answer to the risks of “crony capitalism” is the “big market, small government” heritage of Hong Kong. A pro-market agenda for Hong Kong should involve a complete ban on budget subsidies for business, restricting the taxing power of the legislature just to setting rates, withdrawal from managing businesses (including health and education), and a strict limit of government spending at say 15% of GDP. This would help renew the moral foundation of capitalism in the city that arguably still exemplifies its practice better than any other place in the world.

Bill Stacey is in his 10th year as a resident of Hong Kong and is

Chairman of the Lion Rock Institute.

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