Best Practice A Public Policy Journal for Hong Kong
Moving Hong Kong Forward Minimum wage – good intentions, bad results Competition Law – why Hong Kong is different Hong Kong Mortgage Corporation – past its use-by date The wider motivations behind pressures on Hong Kong
Autumn 2009 Vol.1 No.3
Inside Best Practice Vol. 1 N0. 3 Autumn 2009
25 Reflections on Global
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From the Editor Contributors Minimum Wage – Good Intentions, Bad Results
Lion Rock writers unveil the problems with Minimum Wage and illustrate the economic reality – fewer job opportunities to exist for Hong Kong’s most vulnerable.
12 Competition Law – Why
28 Changing the Rules of the Game
Andrew P. Morriss dispels the bad reputation that onshore governments have given offshore financial centres and warns that in efforts to resist competition, onshores risk further damaging their economies.
Policy Recommended for the Crisis
35 Should Mortgages be
Hong Kong is Different
Hans Mahncke uncovers the roots of Hong Kong’s competition problems and explains why they will not be remedied by a cross-sector competition law.
17 Hong Kong Mortgage
Larry E. Ribstein exposes the wider motivations behind current international pressure to alter Hong Kong’s tax law.
Global Perspective Policy Analysis
Moving Hong Kong Forward
5
Legal Centers
Corporation – Past its Use-By Date
Bill Stacey argues that as the market has changed, the original policy rational of the Hong Kong Mortgage Corporation has disappeared. Editor: Nicole Idanna Alpert Editorial Assistant: Nicholle Brokke Design & Production: Firstline Limited Cover Artist: Bay Leung Best Practice is published quarterly by The Lion Rock Institute to encourage discussion of policy and current issues. Topics and authors are selected to represent a multitude of different views, and those opinions expressed within Best Practice do not necessarily reflect the views of The Lion Rock Institute. The Lion Rock Institute welcomes reproduction of written material from Best Practice, but editor’s permission must first be sought.
Securitized?
Arnold King argues that mortgage securitization should be allowed to die in order to keep taxpayers from inheriting more risk.
Around The World
41 Hong Kong Remains
No. 1
Wallace Chan expands on Hong Kong’s highest level of economic freedom in Economic Freedom of the World: 2009 Annual Report.
Editorial Office: Room 1207 Kai Tak Commercial Building 317-319 Des Voeux Road Central, Hong Kong Editorial Tel: +852 3586 8102 Subscription Service: +852 3586 8101 Fax: +852 3015 2186 Advertising inquires: Best.Practice@LionRockInstitute.org Production by: Firstline Limited www.FirstlineDesign.net Best Practice Advisory Board James A. Dorn, Alec Van Gelder, Philip Stevens, Tom Palmer, Reuven Brenner, Gary Shiu, Richard Wong, Francis Lui, Shih Wing Ching, Donald J. Boudreaux
42 Free Trade Agreements –
Do They Really Free Trade?
Dr. Khalil Ahmad on semantics aren’t FTAs only challenge – there’s a ways to go before trade is truly free.
Leader’s Bookshelf
44 State of the Nation
Eamonn Butler is interviewed on his most recent book, The Rotten State of Britain.
46 More Dangerous in
Death than in Life
Pierre Gave reviews Prisoner of the State: The Secret Journal of Premier Zhao Ziyang.
Odds and Ends
48 “Careful Design” in Policy Making
If policy engineered with careful design actually worked, we’d be in an utopia.
50 Guangzhou Express Rail Link
The Runaway Train that is the XRL.
52 Onshore vs. Offshore
Onshores not willing or able to compete – just like in any game – start playing dirty.
Article Submissions: All articles submitted to Best Practice must be exclusive unless permission has been sought. Articles should range between 600 and 4,000 words but may differ if editor’s approval has been sought. Please send all articles with a cover letter giving a brief summary of the articles along with the author’s fax number, day and evening telephone number, mailing address, email address and short bio. Please send articles by email to Nicole.Alpert@LionRockInstitute.org Certain images within Best Practice are published under Creative Commons licenses. We endeavor to comply fully with the terms of such licenses to ensure attribution of the author of the relevant image. For more information or details about the authors of particular images, please view our website, www.lionrockinstitute.org, or inquire.
Autumn 2009
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From the Editor Moving Hong Kong Forward
W
hile there is a sense that the financial crisis is loosening its grip, economists predict the next crisis is around the corner, glaring red in government budgets. In recessions, dirigiste practices are fashionable. In this environment, governments either resist progress with policies that increase debt and entitlements, inflate regulatory bubbles, and support protectionism – or – they follow best practice to apply smart regulations, undo crony capitalism, remove barriers to create opportunities and ensure proper safety nets are in place. Not surprisingly, most governments’ policy follows the former, breeding uncertainty. Hong Kong is now considering major changes following international trends, while larger issues like land reform linger. Hong Kong is still largely competitive, a great place to live and do business, but what direction is it headed in with the introduction of labour and competition policies, expansion of the tax law, new transportation projects, etc. What policies will move Hong Kong forward? In this issue of Best Practice: Moving Hong Kong Forward, authors analyse if the policy changes will do just that. Our cover story is dedicated to the recent debate surrounding Minimum Wage. After dissecting the bill and its potential impacts on Hong Kong, the authors of “Minimum Wage – Good Intentions, Bad Results” contend that after implementation, Hong Kong’s least competitive workers would be worse off. Hans Mahncke appeals to readers that an across-the-board competition law would not serve Hong Kong’s competition issues in “Competition Law – Why Hong Kong is Different.” After his examination, he maintains that only a reform of the land system and natural monopolies can fix Hong Kong’s competition problems. Bill Stacey adds a twist to this discussion with his detailed assessment of the Hong Kong Mortgage Corporation in “HKMC – Past its Use-By Date.” After breaking down its policy rationale, financial performance and outside-its-mandate activities,
he illustrates that the government and the HKMC itself realizes that its need has expired. Stacey reminds us that government involvement in mortgage markets has proved disastrous, leaving the HKMC, for all that it was and is today, far from desirable. In “Reflections on Global Legal Centers,” Larry Ribstein, who took part in a panel in Hong Kong this past summer on jurisdictional competition, weighs in on the current tussle between onshore and offshore governments. Ribstein’s analysis aids readers in understanding why Hong Kong recently introduced a bill to fund and add another sector to the Inland Revenue Department in order to avoid being on the OECD naughty list and comply with sharing tax information. Andy Morriss, in Best Practice’s Global Perspective Policy Analysis, “Changing the Rules of the Game,” unveils the measures onshore governments are taking to limit offshore financial centres’ ability to compete in the global financial market, and how they are doing so at their own peril. Arnold Kling’s “Should Mortgages be Securitized” warns that in order to revive mortgage securitization, taxpayers must absorb large risks. Around the World takes a look at Hong Kong’s economic freedom and free trade agreements while Leader’s Bookshelf reviews the influential book The Rotten State of Britain, and the highly controversial Prisoner of the State: The Secret Journal of Premier Zhao Ziyang. Moving Hong Kong forward doesn’t have to be like pulling teeth – but it takes the kind of determination and follow through that Zhao Ziyang had to record his memoirs, and the editors to release it to the public. Let us move Hong Kong forward, with best practice, in the right direction.
Nicole Idanna Alpert
Let us know what you are thinking. Letters can be sent to best.practice @lionrockinstitute.org
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contributors
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Hans Mahncke
Bill Stacey
Larry E. Ribstein
Andrew P. Morriss
Arnold Kling
Hans Mahncke, LL.B. (Hons.), LL.M., is an Assistant Professor at the School of Law at City University of Hong Kong. His research interests include international economic and WTO law, and common law history and method. He also teaches and publishes in these areas. Hans currently serves as a contributing editor to Halsbury’s Laws of Hong Kong and is a member of the editorial board of the Hong Kong Lawyer.
Bill Stacey is the Chairman of Hong Hong’s leading free market think tank, The Lion Rock Institute. He is also on the Board of Advisors of the Mannkal Economic Education Foundation. Professionally, Bill has been an executive with leading financial institutions in Asia and globally. He is currently a partner in boutique equity house, Aviate Global.
Larry E. Ribstein is the Mildred Van Voorhis Jones Chair in Law at University of Illinois, UrbanaChampaign. Professor Ribstein is the author of many books, including the forthcoming The Rise of the Uncorporation (2009). From 1998-2001 he was coeditor of the Supreme Court Economic Review. His blog site focusing on business law is located at www.ideoblog. org and his webpage is located at www.ribstein.org.
Andrew P. Morriss is H. Ross & Helen Workman Professor of Law and Business and Professor at the Institute for Government and Public Affairs at the University of Illinois, Urbana-Champaign. He is a Research Fellow of the NYU Center for Labor and Employment Law and is the author or coauthor of more than fifty book chapters and scholarly articles. Professor Morriss recently released the book, Regulation by Litigation (with Bruce Yandle and Andrew Dorchak).
Arnold Kling is an economist and member of the Financial Markets Working Group of the Mercatus Center at George Mason University. In the 1980s and 1990s he was an economist with the Federal Reserve Board and then with Freddie Mac. He blogs at econlog.econlib.org.
Wallace Chan
Dr. Khalil Ahmad
Dr. Eamonn Butler
Pierre Gave
Michael A. Ying la’O
Wallace Chan works with Canada’s largest and most prestigious free market think tank, The Fraser Institute, as their Coordinator, Chinese Affairs. He received his Bachelor of Commerce at the University of BC in 1994, a Bachelor of Education at the University of BC in 1998, and a Master of Economics at the University of Hong Kong in 2006. He has been published widely in Hong Kong and Canadian Chinese language publications.
Dr. Khalil Ahmad founded and heads the Alternate Solutions Institute, the first free market think tank of Pakistan. He holds a Ph.D. in Philosophy from University of the Punjab, and until 2006 taught courses on Philosophy and Education. He frequently contributes articles on current issues to various local and foreign newspapers. Alternate Solutions Institute is located at www.asinstitute.org.
Dr. Eamonn Butler is Director of the Adam Smith Institute, a market economics think tank based in London, and is a leading figure in the development of public policy in the United Kingdom. He’s written numerous academic and non-academic books including the latest, The Rotten State of Britain. He is Vice President of the Mont Pelerin Society, an international academy of free market economists and political theorists, and lectures and writes internationally on policy issues.
Pierre Gave joined GaveKal in 2001 and is today their Head of Global Research, coordinating the entire research process and contributing to the writing of the firm’s Five Corners, Ad Hocs, and Quarterly Strategy Chart Books. Pierre also meets regularly with GaveKal Research clients and speaks at GaveKal’s investment conferences, and Seminars. Pierre launched his career in 1998 as a financial analyst at a venture capital firm in Stockholm, where he specialized on company valuations.
Michael Ying worked as the General Manager of an online English language education company for the past three years. In 2004, he received his undergraduate degree in Political Science (minors in Legal Studies, and Philosophy) from Macalester College (St. Paul, MN). He now works with The Lion Rock Institute and continues to assist in the operations of the language education company.
Best Practice
moving hong kong forward
Zhao Hua Xi Shi
A worker cleans up in front of the harbour. There are fears that implementing the minimum wage will cause a large number of low wage jobs to be lost.
Minimum Wage – Good Intentions, Bad Results Lion Rock writers unveil the problems with Minimum Wage and illustrate the economic reality – fewer job opportunities to exist for Hong Kong’s most vulnerable
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ong Kong is now debating whether minimum wage should be implemented in our city. Though media-worthy, as Hong Kong is one of the last developed economies without a minimum wage now considering implementing one, most attention has been on the dismal experience in the United States. The U.S. increase in their minimum wage came at the same time its jobless rates and youth
unemployment rates were at all time highs in most recent decades. This makes it all the more difficult for people to find work and get on the first rung of the career ladder. Despite the economic turmoil in Hong Kong’s past, the flexibility for workers to climb the ladder has never been encumbered. But, a minimum wage makes it certain – while it’s a very useful policy tool for the privileged, it’s devastating for the least competitive workers. In
this sense, the minimum wage is a useless tool to help them. The plans to introduce a minimum wage law in Hong Kong as outlined in the Minimum Wage Bill introduced 26 June 2009 will cause adverse effects on the Hong Kong public. Below, The Lion Rock Institute expands on its views on this policy. The key points can be summarized as follows: 1. The Minimum Wage Bill is immoral, will be extremely Autumn 2009
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Ines Yeh
moving hong kong forward
Domestic helpers gather to spend their only day off together. The bill excludes domestic helpers because increasing their salary with the minimum wage will have detrimental socioeconomic effects on the public.
detrimental to women returning to the labour force, to young graduates, especially those that are not trained in tertiary institutions, new migrants, the elderly and finally, our city’s most vulnerable. 2. The Minimum Wage Bill is based on flawed economic theory and affects Hong Kong adversely in macro and microeconomic terms. 3. The Minimum Wage Bill, as currently proposed, suffers from a variety of logic flaws.
The immorality of the Minimum Wage Bill and potential damage to Hong Kong There are many social problems associated with the implementation of a minimum wage. But the most prominent social issue is how minimum wages have, in the past, led the most deprived members of society (the young, minorities, least educated) straight into unemployment. With a minimum 6
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wage in Hong Kong, the poorest and least educated people – the most vulnerable of our society – will typically be priced out of the labour market. They will no longer be able to get onto the first rung of the work ladder. A minimum wage thus creates a “welfare” class, those that are priced out of the market, unemployed. This despondent class typically creates the “welfare state.” In the long run, this leads to a higher crime rate and greater substance abuse. A Moral Evil – Sacrificing A Few for the Many It is not moral for the least fortunate to subsidize the better off. Ablebodied members of the public will be priced out of the market. The goal of minimum wage is to help the most vulnerable, whereas, in actuality, job opportunities will be lost and some of these workers will become or remain unemployed. It is not the Government’s prerogative to remove
individuals’ right to work. Yet, that is what minimum wage entails. The history of minimum wage is well known as a tool to discriminate. In New Zealand, the minimum wage was first used to discriminate against women. In South Africa, it was an apartheid measure to keep Black South Africans out of the work force. In both cases, the imposition of minimum wage meant that lowskilled workers whose productivity did not match the mandated wage level were effectively barred from participating in the work force. It is no surprise that these discriminatory policies are still being adopted. Hong Kong now seeks to discriminate with its own Minimum Wage Bill towards live-in foreign domestic helpers and interns. In his 2008 policy address, the Chief Executive declared that the voluntary scheme had failed, insisting that a statutory minimum wage was necessary to ensure “social justice.” The Chief Executive stated that the minimum wage would be applied to all members of society,1 and yet here the Bill discriminates against some. Discrimination in “Asia’s World City” Excluding domestic helpers is legally not justifiable in the Bill, but their exclusion is stated undoubtedly from the brief of the bill under the heading of “Possible significant and far-reaching socio-economic ramifications.”2 As the title suggests, the brief spells out that an increase in domestic helpers’ wages would lead to “distress” amongst Hong Kongers as far fewer families would be able to employ helpers. The ramifications of this policy, even without their exclusions, are far reaching. Of course, the exclusions themselves betray the
moving hong kong forward
bill as they show its hypocrisy. What applies to domestic helpers applies to other industry positions like security guards and cleaners too. If the government makes hiring more expensive, less people will be hired. Thus, the real reason for differentiating between domestic helpers and other lowwage workers is that low-wage workers in general are considered more dispensable than domestic helpers. What the Minimum Wage Bill does is discriminate against one group of people while rendering many others unemployable. Such discrimination and impediments to participating in the work force must not be tolerated in “Asia’s World City.” Hong Kong should not put forward bad policy in the name of politics.
Flawed economics Minimum wage laws do not make sense because the economic proposals do not back the suppositions. If the economics behind minimum wage laws are flawed, then the Minimum Wage Bill is flawed. Lacking Economic Justification Minimum wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive, and poorest workers. Based on extensive research, we arrive at the conclusion that minimum wage is not an effective means of reducing poverty or helping low income families; it exacerbates existing problems and causes future harms. The minimum wage narrative began in earnest with the adoption of a voluntary wage protection scheme in 2006. If it was found in the overall review that the Wage
Protection Movement (WPM) failed to yield satisfactory results, the Government would introduce into Legislative Council legislation for a minimum wage for the two specified occupations, namely cleaners and security guards. Two years later, the Chief Executive, without providing reasons or publishing the relevant data, declared that the voluntary scheme had failed. Indeed those claims remain unsubstantiated. Further, rather than focus his efforts on the two specified occupations as previously declared, the government moved towards an across-the-board Minimum Wage Bill, albeit one that excludes domestic helpers. The only public source available on the overall review of the WPM consists of 5 pages with only one paragraph, 1/3 page length, devoted to the review itself, compared with 12 pages in the mid-term review. The only public document available for review as of this article is LC Paper No. CB(2)290/08-09(04), “Overall review of the Wage Protection Movement for cleaning workers and security guards, and progress report on preparatory work for introducing a bill on a statutory minimum wage.” In fact, the LC Paper No. CB(2)2012/07-08(04), “Wage Protection Movement for Cleaning Workers and Security Guards: Assessment Criteria for Overall Review in October 2008,” reached a “consensus on the continued adoption of six quantitative indicators of the mid-term review
in the overall review, and generally agreed on the categorisation of the quantitative indicators into core assessment criteria and reference indicators” set out in paragraphs 10 to 21. Yet, both the data requested and received from the Labour Department and the overall review do not sufficiently study these required indicators. The statement then, that the WPM has failed, cannot be justified. Nor should a policy based on flawed economics, like minimum wage, be implemented because another policy has failed. Less encouraging, the minimum wage economic consequences have not been fully acknowledged by the government. The conclusion that minimum wage will aid lowerincome workers is seriously flawed. The decision to implement minimum wage following the Wage Protection Movement is a flawed policy and cannot be justified. Increase in Poverty and Unemployment Like the relationship between the price of goods and demand, once labour is set at a higher price, less of it is demanded. When government mandates higher prices of labour, fewer people will be hired. Thus, the employment opportunities for less-skilled workers are reduced, especially those opportunities which are most directly affected by the minimum wage. This in turn will increase poverty and less-skilled,
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he Chief Executive stated that the minimum wage would be applied to all members of society, and yet here the Bill discriminates against some. Autumn 2009
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Long-Term, Adverse Effects on the Hong Kong Economy Implementing the minimum wage
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lower-income workers’ earnings. Put another way, if a worker’s productivity is below the minimum wage level, that worker will not be employed. It is the least skilled workers that will face greater probability of unemployment compared to those low- but still higher-skilled workers with greater productivity. For instance, assuming an employer can only afford to hire one cleaner under a minimum wage regime, the employer will seek the highest skills for that position and the competition for that position will increase. The minimum wage will force workers to enter an employer’s market (in which supply increases and demand drops) so that the employer now has more people to choose from to fill less jobs. Under minimum wage, competition increases because of fewer employment opportunities and the number of people unemployed looking for jobs will increase. Faced with this increased competition, it is primarily the poor and uneducated that bear the brunt of the minimum wage. In short, the minimum wage is a subsidy to relatively affluent workers at the expense of poorer and less educated workers. The result will price out certain groups from the labour force and create undue discrimination. Indeed, the minimum wage law will harm the very people it intends to help.
Without job opportunities, how can families fill their rice bowls?
will have long-term, adverse effects on wages, prices, inflation, profits and the youth. The minimum wage law will reduce the quantity demanded of workers, and may therefore, manifest itself through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs. This inefficiency in business caused by higher costs and therefore smaller profits will be targeted by changing other factors, such as a reduction in other employees’ wages, price increases for goods and services and automation. Businesses will try to compensate for the decrease in profit by simply raising the prices of the goods being sold thus causing inflation and increasing the costs of goods and services produced. Inevitably, as prices for a business increase,
n short, the minimum wage is a subsidy to relatively affluent workers at the expense of poorer and less educated workers. 8
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a firm will pass on the costs to its consumers. For those minimum wage workers and the unemployed, these higher costs will be most difficult to afford. While Hong Kong may not experience the same problems as other jurisdictions with businesses moving or closing under a newly implemented minimum wage, there will be some cases in which businesses will outsource jobs to other countries, causing greater unemployment. Exposure to minimum wage at young ages may lead to longerrun effects. Among the possible adverse longer-run effects are decreased labour market experience and accumulation of tenure, and diminished training and skill acquisition. Hong Kong’s youth may be drawn to minimum wage jobs rather than finish their schooling, which will have very negative effects for Hong Kong’s future. This will decrease overall human capital by encouraging people to enter the job market instead of pursuing further education.
moving hong kong forward
Hong Kong Dollar Peg and Monetary Policy The linked exchange rate system has large impacts for Hong Kong’s macroeconomic monetary and fiscal policies. Hong Kong’s interest rate cannot diverge from the pegged U.S. dollar interest rate by a significant margin and therefore, Hong Kong surrenders its independent monetary policy. In fiscal policy, the Hong Kong government must maintain huge reserves to keep confidence in the linked exchange rate system, and therefore must keep a balanced budget. Due to the constraints on both its monetary and fiscal policies,
Hong Kong must keep a very flexible economic system. Therefore, adjustment in an economic downturn, where Hong Kong may not employ monetary policy, must happen through price mechanisms. Therefore, price flexibility is key for Hong Kong’s domestic economy. The Minimum Wage Bill, which effectively restricts the flexibility of labour prices, would render the only method to stabilise Hong Kong’s economy ineffective. Once in place, it will be next to impossible to decrease the minimum wage level or repeal the law altogether. In an economic downturn, there is a great need for price adjustment. If the Government should continue with the pegged rate, and at the same time restrict wages, adjusting prices will be difficult and necessary market corrections will not be made. Therefore, the minimum wage is bound to undermine the link rate stability. In an economic downturn, without the currently available
mechanism to adjust price flexibility, it is the lower classes that will suffer the greatest. Exclusions The very exclusions in the Minimum Wage Bill spell out the problems with all minimum wage laws – they cause unemployment. For instance, the Minimum Wage Bill dedicates at least 5 pages to exclusions of live-in domestic helpers. The reason for this exclusion is because of “Possible significant and far-reaching socio-economic ramifications.” An increase in domestic helpers’ wages under minimum wage would lead to “distress” amongst Hong Kongers as far fewer families would be able to employ helpers. However, what economically applies to domestic helpers applies to security guards and cleaners also. When the government makes hiring more expensive, less people are hired. The same fears the government has with domestic helpers, indicated in this exclusion, apply to other industries as well. Roger Walch
Unintended Consequences In the midst of the financial crisis, the minimum wage in the U.S. was raised to its highest level since 1983. The U.S. Congress may not have intended for such a hike to be implemented at the most dangerous of all times but the consequences have been dire. For instance, youth unemployment has reached 25 percent and the jobless rate currently is at 9.8 percent as of this article. The U.S. experience with a hike in minimum wage during the financial crisis highlights problems caused by central planning that is the instigation of unintended consequences. However constructed the minimum wage procedures are, data will lag behind, and the government mechanisms will not be able to adjust to the changes. Regardless of efforts to assert qualifications and best technology, no prediction will match that of the market and planned mechanisms will always be incorrect at the expense of the public. The failure to coordinate the system, which under central planning is inevitable, has a catastrophic impact on the economy and people’s livelihoods.
If these job opportunities are removed from the market, priced too high, what jobs are lowwage workers left with? The government and unions have advised they can get on welfare. This is not a solution.
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Kenn Chan
moving hong kong forward
the costs more easily than the former. This policy amounts to the government creating an unfair competitive environment for smaller business, as larger businesses will be able to absorb the costs of minimum wage with greater ability. Indeed, minimum wages may also lead to It appears as if the government is running out of good excuses to exclude domestic helpers – if most minimum demands for higher wages wage recipients would stay in public housing, the from non-minimum wage helpers’ housing issue cited as a reason to exclude domestic helpers is not viable. staff, and therefore push up prices of goods. With prices A De Facto Tax on Minimum Wage of goods on the rise, minimum wage Businesses recipients face hardship to afford The minimum wage policy which the more expensive goods. Chief Executive has said promotes “social justice” indeed does not. Logic flaws Minimum wages infringe upon the Legally, the bill as currently proposed liberty of both sides of a business suffers from a variety of defects and relationship, which is coercive logic flaws. The bill excludes domestic towards individual freedoms of helpers, interns, and people with employers and employees; actual disabilities. benefits most likely go to outsiders who face reduced competition Domestic Helpers from smaller firms hobbled by the There seems to be a contradiction minimum wage law. It is industries between Article 3 of the bill and the that employ minimum wage workers, justifications for excluding domestic such as cleaners or security guards, helpers from its ambit. which must face greater costs. This The legislative brief states that, practice represents the government in the case of domestic helpers, it placing a de facto tax on employers “would be impossible to ascertain of minimum wage workers, the actual hours worked.” It also discriminating towards certain states that “(t)he distinctive working businesses for political goals. pattern, i.e. round-the-clock presence Rather than a concerted effort and provision of service-on-demand by the government and the public to help the city’s most vulnerable workers, minimum wages are funded through a de facto tax on employers in sectors that employ the less fortunate. Minimum wage will hamper firms’ ability to reduce wage costs during downturns. The law will also harm small businesses rather than large businesses as the latter can distribute
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expected of live-in domestic workers, will give rise to insurmountable practical difficulties in bringing them under the SMW.” However, Article 3(1)(a) states that hours worked by an employee cover “any time during which the employee is in attendance at a place of employment, irrespective of whether he or she is provided with work or training at that time.” There seems to be a contradiction between the demands for minimum wage as laid out by the Chief Executive in his 2008 policy address and the actual Bill. Specifically, the Chief Executive required that “if the Government introduces a statutory minimum wage, employees in all trades and industries should be covered at the same time.” Clearly, this statement is incompatible with the bill’s exclusion of domestic helpers. Article 6(3) of the bill is economically non-sensical. It states that the “Ordinance does not apply to a person who is employed as a domestic worker in, or in connection with, a household and who dwells in that household free of charge.”3 The drafters seem to have overlooked the fact that the dwellings used by domestic helpers are not free of charge but rather create an opportunity cost for employers. This cost could be quantified and expressed as a part of a domestic helper’s overall wage package.
ather than a concerted effort by the government and the public to help the city’s most vulnerable workers, minimum wages are funded through a de facto tax on employers in sectors that employ the less fortunate.
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Similarly, the legislative brief used the terms “free food,” “free medical treatment,” and “free passage.” These items are not actually free. Employers have to pay for these benefits and they can be quantified as part of the overall pay-package. In fact, they amount to perks or employment benefits. Further, one aspect which does not seem to have been considered at all is that most, if not all, possible minimum wage recipients live in heavily subsidised public housing. Why, if the housing issue is deemed to exclude domestic helpers, is it being overlooked with respect to low-wage workers who profit from subsidised housing?
John McNab
Student Interns The legislation defines a student intern very narrowly, as “a student undergoing a period of work arranged or endorsed by an education institution specified in Schedule 1 in connection with an accredited programme being provided by the institution to the student for which the work is a compulsory or elective component of the requirements for the award of the academic qualification to which the programme leads.” The relevant education institutions are also narrowly defined and include only education institutions in Hong Kong. This provision will create major
In Chicago, IL, 1914, unemployed men queue up for a meal. Removing job opportunities removes people’s right to work.
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nless students take part in an approved internship programme organised by one of the listed Hong Kong education institutions, they will not be eligible for exemption from minimum wage and thus, find it very difficult to secure internship places. problems for students who wish to undertake internships on a voluntary basis. Unless students take part in an approved internship programme organised by one of the listed Hong Kong education institutions, they will not be eligible for exemption from minimum wage and thus, find it very difficult to secure internship places. Basic Law The proposed legislation has a far-reaching impact on the business community in that it interferes with free market principles which have up to now been applied in determining wage levels. As such, the proposed legislation seems to fall foul of Article 5 of the Basic Law, which guarantees that the socialist system and policies shall not be practiced in Hong Kong.
Avoiding disharmony in Hong Kong Working towards providing Hong Kong with the best policies for its people is of great interest to The Lion Rock Institute, but we must move forward in a way that avoids creating more harm than good. There are other options in policy which can do what minimum wage purports to with the negative consequences of minimum wage mitigated. Under the minimum wage law there will be rent seekers that will benefit the most – a few to prosper at the expense of the
poor. It is not fair to take away job opportunities for those people in need, only to prop up the more educated on the career ladder. Furthermore, this policy will create disharmony in Hong Kong which will undermine the great tradition of melting minorities into our fabric. Stability and harmony is the nation’s number one priority, and this bill threatens those objectives. We must pursue policies that are best practices for Hong Kong as a whole.
Conclusion The Minimum Wage Bill will harm Hong Kong’s most vulnerable, and therefore Hong Kong should no longer consider this policy. Hong Kong is very capable of making good policy choices and solving Hong Kong’s problems with Hong Kong solutions. Let us move forward in a positive way. Lion Rock writers contributing to this piece are from Lion Rock’s Associate Scholars and Research Associates. 1. Hong Kong Government, Chief Executive Policy Address 2008-09: Embracing New Challenges (Hong Kong Government: 2008), P. 64. 2. Hong Kong Government, Legislative Council Brief: Minimum Wage Bill LD SMW 1-55/1/4(C) (Hong Kong Government: 2009), 5-6 No. 15(c). 3. Hong Kong Government, Minimum Wage Bill (Hong Kong Government: 2009), C. 623 (2c).
Autumn 2009
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moving hong kong forward
Competition Law – Why Hong Kong is Different Hans Mahncke uncovers the roots of Hong Kong’s competition problems and explains why they will not be remedied by a cross-sector competition law Joe Gratz
but also, more broadly, why standard competition law models are not suitable for Hong Kong.
A new direction
An interesting feature of competition law is that it is usually enforced administratively through a special agency, rather than judicially through the courts.
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year and a half has passed since the Hong Kong government put forward its proposals for a cross-sector competition law regime. Although draft legislation was to be tabled in the Legislative Council during the 2008/9 legislative session, the government decided to put the plan on hold. According to a spokesman for the Commerce and Economic Development Bureau, the delay is due to “technical, legal and policy issues.” Meanwhile, Donald Tsang, the Chief Executive, who had earlier promised to enact competition
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legislation during the 2008/9 legislative session, now states that “people’s main concerns are the economy and livelihood issues.” While the government’s explanations for the bill’s delayed introduction are not particularly tangible, the policy debate which led up to the postponement offers good clues as to the material reasons for the delay. This article aims to look at those reasons by reviewing the case against the government’s competition law proposals. By doing so, the present study will explain not only why, specifically, the government’s legislative proposals are ineffectual
The competition law narrative in Hong Kong has a long history. The Consumer Council first called for the introduction of competition legislation in 1996. In 1998 the government issued a statement on competition policy stating that “competition is best nurtured and sustained by allowing the free play of market forces and keeping intervention to the minimum.” Throughout Tung Chee-hwa’s tenure as Chief Executive the government maintained this approach. The first sign of a change in attitude became visible in 2005 when the current Chief Executive used his first policy address to state that the government would “promote fair competition and adopt appropriate measures according to the circumstances.” By the time of his 2007 policy address, aptly entitled “A New Direction for Hong Kong,” Donald Tsang had decided to introduce competition legislation.
Competition law basics Before exploring the situation in Hong Kong and delving into the detail of the government’s plans for competition legislation,
moving hong kong forward
Hong Kong Mortgage Corporation – Past its Use-By Date Bill Stacey argues that as the market has changed the original policy rational of the Hong Kong Mortgage Corporation has disappeared Daniel Y. Go
1997 Annual Report was to: 1. Purchase portfolios of mortgages or other loans secured by residential properties situated in Hong Kong from Hong Kong “authorized institutions,” 2. To raise financing for purchase of mortgages through the issuance of debt securities in the capital markets, and 3. To securitize mortgage portfolios.
A failure of the HKMC and the government would be to allow the institution to linger beyond its use-by date – continuously violating its mandate.
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he Hong Kong Mortgage Corporation (HKMC) has reached its use-by date. It has sought to survive through a strategy of diversification that takes on higher risk with public funds. The organization now does little more than exploit credit and regulatory arbitrage opportunities. The government should dramatically reform HKMC by either listing the company or selling its stake to private institutions.
Rationale for HKMC Hong Kong Mortgage Corporation (HKMC) was established in 1997. The original rationale stated in the
At founding the idea was to provide an outlet for banks to manage total mortgage exposures and the Hong Kong Monetary Authority (HKMA) was particularly interesting in building Hong Kong fixed income markets. The original rationale was weak. Hong Kong had not developed deep fixed income markets because the strong fiscal position of the government, relatively conservative gearing of corporations, as well as easy access to Eurodollar markets saw limited supply of term credit. Investor demand was also weaker when in a linked exchange rate regime USD securities provided many investment alternatives. The idea that a mortgage market might emerge internationally along the lines of the U.S. model was fashionable at the time. Freddie Mac and Fannie Mae were great proponents of their model, which was advocated across Asia. However, where securitization did grow internationally it was mainly in markets where banks were more heavily wholesale funded. The Hong Kong banking system HKD loan-deposit ratio is currently just 71% and has declined since HKMC was established for reasons largely independent of the HKMC. The HKMC has strayed far from its original rationale. Mortgage Insurance is now an important line of business (from 1999). In October 2006 the Board of HKMC approved a diversification strategy. Non mortgage assets Autumn 2009
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Trey Ratcliff
moving hong kong forward
Hong Kong is competitive not only as an attractive place to do business but, in its distinct way, also an attractive place to live.
Reflections on Global Legal Centers Larry E. Ribstein exposes the wider motivations behind current international pressure to alter Hong Kong’s tax law
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rom sanctions to blacklists, there is international pressure to significantly depart from Hong Kong’s current practice and start collecting information in relation to the tax affairs of other jurisdictions. In May 2009 I traveled to Singapore and Hong Kong to get some background information on these leading examples of global legal
centers. It connects with my broader work on jurisdictional competition discussed in my recent book (with Erin O’Hara), The Law Market (Oxford University Press, 2009). Under the general theory articulated in this book, firms seek to escape from regulatory and tax burdens imposed by their home country by “unbundling” law to some extent from that territory. Unbundled law becomes like a
commodity traded in a market. “Offshore” jurisdictions are key global suppliers of this type of law. While interest groups in “onshore” jurisdictions seek to grab benefits from firms’ connections with their countries, interest groups in offshore jurisdictions reduce their tax and regulatory price in exchange for reaping benefits of firms’ moving some of their activities and legal work to their jurisdictions. Autumn 2009
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global perspective policy analysis
Changing the Rules of the Game Andrew P. Morriss dispels the bad reputation that onshore governments have given offshore financial centres and warns that in efforts to resist competition, onshores risk further damaging their economies Ryan Morrison
Demonstrators react to onshore politicians blaming offshore financial centres for “contributing to the crisis” and calling for regulatory measures to limit offshores’ abilities to compete in the global financial market.
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ecause goods, services, capital, and people can move across borders, states must compete for these resources. That competition limits the ability of states to move toward the interventionist end of the spectrum and so frustrates proponents of greater regulation of financial markets. Part of the competition for economic activity involves provision of law and competition among states that helps shape the law they provide. This competition takes place within 28
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a framework of international law including treaties, customary public and private law, and conflict of law rules. Like any competitor with power to affect the rules of the game, however, states seek to alter this framework to provide themselves with advantages against their competitors. The global financial crisis provided a powerful group of states, including the United States, the United Kingdom, France and Germany, with an
opportunity to change the rules of international regulatory competition to disadvantage offshore financial centres in their competition with these onshore governments over financial services. Interest groups favouring additional regulation in these onshore jurisdictions have sought to use the financial crisis to seek changes in the rules of the game for international financial competition that reduce offshore financial centres’ (OFCs) comparative advantages.
policy recommended for the crisis
Should Mortgages be Securitized? Arnold King argues that mortgage securitization should be allowed to die in order to keep taxpayers from inheriting more risk Alan Turkus
The Humpty-Dumpty of mortgage securitization.
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ike Humpty-Dumpty, mortgage securitization has taken a big fall. There is a widespread presumption that government policy, if not all the king’s horses and all the king’s men, should be aimed at putting securitization together again. The purpose of this essay is to question that presumption. The first section of this paper will describe how securitization worked at Freddie Mac in the late 1980s, when I worked there. This will allow me to introduce and explain the concepts of interest rate risk and credit risk in mortgage finance. The second section of this paper will describe developments in the mortgage industry from the mid1980s through the 1990s, when Freddie Mac and Fannie Mae took on more interest rate risk. The third section
looks at what evolved over the past ten years, when the process for allocating and managing credit risk changed, with “private-label” securitization and the growth of subprime mortgages. The fourth section of this paper describes various options for reviving mortgage securitization. The final section steps back and looks at interest rate risk and credit risk from a public policy standpoint. Government policy influences the allocation of credit risk and interest rate risk in capital markets. What are the social costs and benefits of various allocations? I suggest that policymakers might consider reverting to the housing finance system that preceded the emergence of securitization, in which depository institutions were responsible for managing both credit risk and interest rate risk for mortgages. Autumn 2009
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around the world
Hong Kong Remains No. 1 Kavewall
Wallace Chan expands on Hong Kong’s highest level of economic freedom in Economic Freedom of the World: 2009 Annual Report
Economic freedom is the key building block of the most prosperous nations.
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ong Kong continues its reign as the most economically free region on the globe, as it once again is ranked number one in the Economic Freedom of the World: 2009 Annual Report, released by independent research organization the Fraser Institute. Singapore is ranked second, followed by New Zealand, Switzerland and Chile. Zimbabwe once again has the lowest level of economic freedom among the 141 jurisdictions included in the study, followed by Myanmar, Angola, and Venezuela. The annual peer-reviewed economic freedom report uses 42 different measures to create an index ranking 141 countries around the world based on policies that encourage economic freedom. The cornerstones of economic freedom are personal choice, voluntary
exchange, freedom to compete, and security of private property. Economic freedom is measured in five different areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labor and business. This year’s report also includes new research that examines the likely impact of the global recession on levels of economic freedom. It suggests that economic freedom may decline in the short-term in response to crises, but over a longer time economic freedom has a tendency to increase after a banking crisis. “Opponents of economic freedom are blaming the global recession on the operation of markets and hoping to use it as an excuse for a vast expansion in government. But even in recession, the quality of life in nations with free and open markets is vastly superior to that of nations with government managed economies,” said Fred McMahon, Fraser Institute director of trade and globalization studies. “To successfully navigate the global financial crisis, nations must focus on policies that support the principles of economic freedom. By choosing this path, the current crisis will be reversed and fade into history. But if we learn the wrong lessons and choose reforms and policies inconsistent with economic freedom, our destiny will be like the generation of 1930; we will face a decade of stagnation and decline.”
Hong Kong retains the highest level of economic freedom, with a score of 8.97 out of 10. Other top scorers are: Singapore (8.66), New Zealand (8.30), Switzerland (8.19), Chile (8.14), United States (8.06), Ireland (7.98), Canada (7.91), Australia and the United Kingdom (7.89), and Estonia (7.81). Hong Kong’s scores in key components of economic freedom (from 1 to 10 where a higher value indicates a higher level of economic freedom): • Size of government: 9.29 • Legal structures and security of property rights: 8.16 • Access to sound money: 9.51 • Freedom to trade internationally: 9.58 • Regulation of credit, labour and business: 8.31 “Economic freedom is the key building block of the most prosperous nations.” McMahon said. Wallace Chan is the Coordinator of Chinese Affairs at the Fraser Institute. Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The annual report is published in conjunction with the Economic Freedom Network, a group of independent research and educational institutes in over 70 nations. The 2009 report is based on data from 2007, the most recent year for which comprehensive data is available. The full report is available at www. fraserinstitute.org. Autumn 2009
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around the world
Free Trade Agreements – Do They Really Free Trade? Dr. Khalil Ahmad on semantics aren’t FTAs only challenge – there’s a ways to go before trade is truly free
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here are many opportunities and challenges to be found within Regional Free Trade Areas. Various issues highlight points of Free Trade Agreements that negate the very concept of Free Trade. Indeed, governments do not need any agreement to promote free trade; that is a contradiction in terms. Trade agreements are reached between trading parties, not between governments. In order to further explain this case, the South Asian Free Trade Area (SAFTA) agreement’s text will be used as a test case. This agreement was reached between Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka in January 2004. Free trade means freedom to trade. Naturally, everyone is free to enter an agreement with anyone in a voluntary manner to sell or purchase anything, no matter where they happen to live or be located. While one cannot be restricted to transact with this or that person only, it is the case under some Free Trade Agreements (FTAs). No doubt, it is merely political boundaries which have divided this world into various regions and countries and withdrawn this freedom from people by force. However, the fact is that free trade can flourish and bring benefits to all trading parties without disturbing these boundaries. It is necessary to 42
Best Practice
The world is one big market.
not only change our perception, but to consider this world of ours as it is – one big market – and not compartmentalize markets which only serve special interests, ignoring the rest. In recent years free trade agreements have become fashionable. Thus, when two or more countries reach an agreement to allow free trade (the semantics of FTAs are incorrect because it is the country which, in the first instance, imposed restrictions on free trade), it is publicized as a Free Trade Agreement. This is both misleading and ridiculous. In reality, “free” trade is not being allowed between the contracting countries since there are more “strings” attached here than natural freedom allows.
Upon taking a cursory look at the text of SAFTA, it is clear that many clauses nullify the spirit of free trade. Article 3, “objectives” clause b reads: “promoting conditions of fair competition in the free trade area, and ensuring equitable benefits to all Contracting States, taking into account their respective levels and pattern of economic development;” Article 3, “principles” clause c reads: “SAFTA shall be based and applied on the principles of overall reciprocity and mutuality of advantages in such a way as to benefit equitably all Contracting States, taking into account their respective levels of economic and industrial development, the pattern of their external trade and tariff policies and systems;”
leader’s bookshelf
State of the Nation LC PPD LC-USZ62-662
Eamonn Butler is interviewed on his most recent book, The Rotten State of Britain
The way to grow poor, the way to grow rich.
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y his own admission, Eamonn Butler spent several fruitless years trying to generate enthusiasm from publishers for his book chronicling what he perceives as our nation’s decline from sceptr’d isle to septic embarrassment. But even he could scarcely have imagined how, when it did eventually see the light of day, The Rotten State of Britain would end up chiming so perfectly with the funereal mood of the times. In the book, Butler takes a forensic scalpel to all aspects of modern British society, from the broken economy to abuses of political privilege via the rise of spin, surveillance culture and the nanny state. As you might expect from the head of the Adam Smith Institute – the U.K.’s leading free market think tank – it’s an unashamedly
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polemical piece, railing against the “dishonesty, deceit and incompetence” of the leaders Butler charges with bringing a once proud country to the edge of financial and moral bankruptcy. But despite the book’s subtitle: How Gordon Brown Lost A Decade And Cost A Fortune – Butler insists he has no party political axe to grind. “The problem is not necessarily New Labour – it’s bigger than that,” he says over tea in the conservatory of his central Cambridge home. “The Adam Smith Institute works with the government of the day, and when Blair and co. came in 1997, we were prepared to give them the benefit of the doubt.” “They had seemed to grasp the essential message: they weren’t going to tax and spend and they were going to be a much more open type of government. During the first couple of years of New Labour I turned up
at Downing Street more often than I did under Mrs. Thatcher.” But it was not a marriage destined to last. “They disappointed us, really,” says the 57-year-old. “We saw the real tax burden go up through stealth taxes, we saw the government sector expanding, we saw there was no enthusiasm to carry on with privatising state industries or even making them more efficient. And similarly with the culture of spin – they were trying to convince us everything was absolutely fantastic when it quite clearly wasn’t.” “And it’s not a party political thing at all. It’s that we’ve got a Government that’s become hugely centralised that doesn’t actually understand the idea of the rights of the individual. So that was the disappointment – it was principally how governments can apparently ride roughshod over our rights, which have been built up over hundreds of years, and over the bodies of many brave souls.” “When you look into it line by line and subject by subject, it begins to overwhelm you how bad things have become. The relationship between government and officialdom and the rest of us has changed. We used to be the masters – we should be the masters, and now they’re our masters. I feel that in the way policing is done, in the nanny state, in the number of CCTV cameras pointing at me – all this I find very unnerving as a libertarian.” Butler also claims to have anticipated the bust at the end of
leader’s bookshelf
More Dangerous in Death than in Life Peter Morgan
Pierre Gave reviews Prisoner of the State: The Secret Journal of Premier Zhao Ziyang
Plain clothes officers often carry umbrellas in Tiananmen Square to block reporters’ cameras from view.
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ao Pu, one of the editors of Prisoner of the State, is the son of Bao Tong, a former aide to Zhao Ziyang who helped record his memoirs which have recently been released as: Prisoner of the State: The Secret Journal of Premier Zhao Ziyang. The memoirs were released ahead of the 20th anniversary of the crackdown on June 4th this year. The book is not available on the mainland, but is in Hong Kong and sold out earlier this year with many awaiting reprints. Around the book’s release, Bao Pu spoke at numerous events as the Hong Kong public wanted to know more about the controversy surrounding the publication. He said that he had to
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insist on his father’s words, that Zhao had just as much right as Mao Zedong to publish his memoirs. Bao Pu was accepted as a Hong Kong permanent resident this summer which speaks volumes about Hong Kong’s freedom. One of Asia’s biggest literary events of the year has been the publication of the clandestine memoirs of Zhao Ziyang, the Premier of the People’s Republic of China from 1980 to 1987, and General Secretary of the Communist Party of China from 1987 to 1989, until Tiananmen. The memoirs have the dramatic title: Prisoner of the State: The Secret Journal of Premier Zhao Ziyang. As Zhao tells it, this is the story
of a man who tried to bring about liberal change to the Mainland and who, at the height of the Tiananmen Square protests in 1989, tried to stop the massacre and was dethroned for his efforts. When China’s army moved in on June 4th killing hundreds of demonstrators, Zhao was placed under house arrest at his home on a quiet Beijing alley. China’s most promising agent for change had been disgraced, along with the policies he stood for. The former premier spent the last 16 years of his life up until his death in 2005 in heavily monitored seclusion. The story behind the book is compelling and is a throwback to the world of John Le Carre-like spy shenanigans. After a few years of house arrest, Zhao Ziyang, fearing that his legacy would be tainted, started to meticulously record his memoirs on an old cassette recorder. These tapes were hidden in full view among his children’s toys and were only marked with very faint numbers, indicating the tape’s place in the sequence. Over the years, copies of these tapes were smuggled out by friends and relatives and have now been compiled for the first time. The book opens at full speed with the events leading up to the Tiananmen massacre, giving the reader a first-hand view of the power plays that, ultimately, led to martial law and the deadly assault by the People’s Liberation Army on the unarmed protestors.
odds and ends
“Careful Design” in Policy Making C-Monster
If policy engineered with careful design actually worked, we’d be living in utopia
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n an oped to the public recently, Secretary of Labour and Welfare Matthew Cheung cited that Minimum Wage was a safe policy because of “careful design,” saying that the “possible economic downside of a Statutory Minimum Wage can be mitigated through careful design.” His comment raised a few eyebrows: is careful design not always used in government’s policymaking? We are confident that every project has undergone “careful design.” The 85,000 units of housing policy were implemented under careful design, as was Hong Kong’s Disneyland, Cyberport, and today’s West Kowloon. The mother tongue teaching language policy must have been just as carefully designed as the fine tuned policy to fix it.
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Careful design is used in all policy making, but it does not make any policy immune to unforeseen consequences or future problems. The government might not realize yet that the budget for welfare expenditure will increase if jobs are lost under minimum wage. In removing job opportunities, the minimum wage permanently condemns the least competitive workers to underemployment or unemployment. When Sec. Cheung cited that capitalist countries such as the United States and Britain have laws for minimum wages, he neglected to mention the welfare classes that have developed there. A welfare class is a group of people that are systematically excluded from the job market and subsist off of the state. Both the U.S. and the U.K. have their own class of citizens that rely on welfare alone to get by. Rest assured these countries employed “careful design” in their minimum wages policies, but it hasn’t stopped their welfare classes from forming. It is immoral to condemn a whole group in society to CSSA for the rest of their adult lives. Our officials don’t
seem to understand what’s at stake with a Minimum Wage Bill. Sec. Cheung is the Sec. of Labour and Welfare, but hasn’t mentioned the welfare costs that could rise post minimum wage. Another example is a question posed to Leung Chun-ying at a recent luncheon: “what will happen when someone loses their job from minimum wage?” Leung replied that there is always welfare. He continued, you have a choice to be on welfare. He might as well have said: “let them eat cake.” Even the most careful designs have facilitated unforeseen consequences and the examples are numerous. The difference with this Minimum Wage Bill, however, is that typical unforeseen effects have been identified. Imagine if our Chief Executive Donald Tsang didn’t take his first steps on the career ladder, working for Pfizer in the 1960s and receiving the training necessary to communicate to the public as he does today. When individuals like our Chief Executive, who the education system has failed and need low paying first jobs for acquiring greater skills, are buried under policies such as minimum wage, the loss is not only borne by the individual, but by society as a whole. Perhaps Sec. Cheung should ask the Chief Executive himself, if he was not able to take the first step on his career ladder, and hence never given the chance to serve the people of Hong Kong today, whose loss would it be?
odds and ends
Guangzhou Express Rail Link innoxiuss
The Runaway Train that is the XRL Express Rail Link
Awaiting the Runaway Train...
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t a cost of HK$ 63.2 billion (which was HK$ 35.4 billion only a year ago, and expected to increase before completion), the Hong Kong portion of the Express Rail Link, covering a distance of 26 km., could be the most expensive of its kind per kilometer in the world. With such a hefty price tag, one must question if the link, being built at local taxpayers’ expense, is truly for their benefit or their own good.
On October 20th the MTR Corporation proudly announced that the Chief Executive and Executive Council had approved continuation of the planning and construction phase of Hong Kong’s section of the Express Rail Link (XRL) to Guangzhou. All that’s left for the project to proceed is for the
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Legislative Council and Finance Committee to give their thumbs up to the funding agreement and then it’s full steam ahead. Construction is expected to begin in late 2009, being completed in 2015. The long term benefits of the project are: joining Hong Kong with China’s national high speed rail network, positioning it to be a participant in the southern region’s overall development, and the immediate creation of over 15,000 jobs amid the recession. Secretary for Transport and Housing Eva Leung was quoted as saying the express service will benefit Hong Kong and so cannot be held back. No questions asked. This attitude, rather than providing assurance of the project’s necessity, has only further angered villagers being displaced by the construction, conservation groups, and journalists skeptical about the government’s hard-headed eagerness with which it is proceeding with the project. For example, the fact that the XRL doesn’t go to downtown Guangzhou, but rather a district of Guangzhou called Shibi, which is 18 metro stops west of the city’s business centre, has raised a number of questions as to whether Hong Kong’s investment is really supposed to make it easier for Hong Kongers to travel to downtown Guangzhou. Apparently those travelers can rest easy with the knowlegde that the extra commute can be easily covered within an estimated one hour’s time saved with the new link (after finding their way through the 140,000
square metre terminus, of course). That said, we will be able to take advantage of the discount shopping, massages, and other entertainment to be found in Shenzhen a massive 12 minutes sooner than currently. And where will the XRL begin? The congested heart of Tsim Sha Tsui. It is a wonder why forcefully extending the link into denser Hong Kong is necessary or even more convenient for anyone when the Link’s purpose is to reach into the mainland. A group called the “New XRL Expert Group” has advanced an Integrated Option plan as an alternative, beginning the XRL at Kam Sheung Road MTR station. This would make use of existing infrastructure and reduce the overall cost among a number of other purported benefits. As of yet, there are a plethora of other critical issues that have yet to be addressed by the government. For example, details concerning how long it will take for the government to break even, what the operating costs will be, how much ticket prices will be, or the details of the terminus (which will represent half the cost of construction), all of which are still blurry. With so much to consider, one might think that it would be prudent for the government to ask for some help. Proceeding with such blind urgency rather than making a cautious investment cannot possibly be seen as best practice for a government. Michael Ying
odds and ends
Onshore vs. Offshore Onshores not willing or able to compete – just like in any game – start playing dirty.
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between offshores and onshores for revenue and underlining a lack of respect of offshore sovereignty, onshores have been acting as bullies with their unchecked demands. In reality, the onshores which lack the competitive environments to attract business seek a bigger cut of revenue. In a bid to regain tax revenue, onshores not willing or able to compete – just like in any game – start playing dirty. This is where the name calling and unchecked demands come into play in order to bolster onshore interests. Jurisdictions which do not share tax information are labeled “uncooperative” and punished with blacklists and/or sanctions. Some “uncooperative” jurisdictions aren’t allowing themselves to be victimized, they are fighting back or refusing compliance – but not Hong Kong. Hong Kong received attention once the financial centre was threatened to be placed on the blacklist for not sharing tax information. Hong Kong’s tax law only allows tax information to be collected for domestic use. If Hong Kong was to accept new agreements to share information internationally,
Olivander
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he media has well covered the significant negative publicity that Offshore Financial Centres (OFCs or offshores) have received. The Dark Knight’s shooting in Hong Kong is one example where the SAR features as the dodgy offshore centre where gangsters hide their dirty money. Although the part Hong Kong plays is about as real as Batman himself, it’s an idea popularized by media, pop culture and politicians. This negative reputation weaseled its way into reality without substantial challenge from offshores rebelling against being given a bad name – at least up until now. Problems with the financial system have little to do with havens, but it’s much easier for onshores to deflect the part they played in the crisis by employing a witch hunt. The OECD defines a tax haven not as having a competitive tax rate, but refusing “to provide information to foreign tax authorities.” The idea that offshores are shady jurisdictions that must be policed is gaining ground and has substantial backing from G20 countries like France, Germany, the United Kingdom, and the United States. At the G20 Summit, U.K. Prime Minister Gordon Brown said, “For the first time we are on the verge of an agreement which will mean that every country that was previously a tax haven will have to exchange tax information on request …we will get agreement at this summit.” Signifying increased competition
it would need to change its tax law first. Hong Kong would also have to add – and fund – another division in its Inland Revenue Department. Of course, the OECD hasn’t offered to help offset the costs the Hong Kong taxpayer incurs to fund a brand new department to serve non-domestic, international onshore interests. For Hong Kong, it’s a lose-lose situation. Hong Kong hasn’t been blacklisted before; the SAR has been considered but Big Brother is known to have acted as the deterrent. Even still, Chief Executive Donald Tsang has “ordered” that the bill changing the tax law be introduced to the Legislative Council. Nearly all of Hong Kong’s legislators are in favor of kowtowing to onshore demands. Where other jurisdictions are retaliating, seeking to balance onshores’ unchecked demands, Hong Kong has its tail between its legs. Mainland must be proud.