Singapore Vs Hong Kong
Laissez faire against central economic planning - who is winning? A New Zealand Herald commentary.
May 23, 2002.

SINCE the inception of the Index of Economic Freedom, Hong Kong and Singapore have ranked at the top of the economic freedom scale.

It is instructive to understand what they might have in common that produces such exemplary performance, as well as the differences that enable the editors to place one above the other.

In his classic 1992 article on these two city-states, Massachusetts Institute of Technology professor of economics Alwyn Young chronicled the modern evolution of Hong Kong and Singapore.

He noted their obvious similarities. Both had once been British colonies that served as trading ports.

Each country developed a flourishing manufacturing sector after World War II and a financial services sector during the 1980s. In 1960, their economies had similar per capita GDP, which grew at approximately the same rate thereafter.

Further, both countries experienced heavy immigration from Southern China.

The similarities end there, however, and the differences between the two have come to define them.

As Young observed, "While the Hong Kong government has emphasised a policy of laissez faire, the Singaporean government has, since the early 1960s, pursued the accumulation of physical capital via forced national saving and the solicitation of a veritable deluge of foreign investment."

Since the two city-states consistently rank at the top of the Index of Economic Freedom and both have shown remarkable economic growth, do the differences matter?

The editors of this year's Index suggest both that they have mattered and that they will matter even more in the future.

Singapore's economic growth, which has not been systematically greater than Hong Kong's, has come at much greater cost.

While Hong Kong's investment rate has been fairly constant over the period at 20 percent of GDP, Singapore's rose from 11 percent of GDP in 1960 to 42 percent in 1984; in 1992 it was approximately 36 percent.

Since Singaporean growth rates were no higher for all the compulsory investment required of its citizens, it is fair to say that the government effectively dissipated all the forced savings.

The questions are how and why.

The savings were squandered over the years by Singapore's policy of "industrial targeting."

As Young put it, "Singapore is a victim of its own targeting policies, which are increasingly driving the economy ahead of its learning maturity into the production of goods in which it has lower and lower productivity."

Young found that Singapore "has had one of the most rapid rates of intra-manufacturing structural change in the world economy."

He also found that, as a consequence, "Singapore had one of the lowest returns to physical capital in the world. The days in which Singapore can continue to sustain accumulation driven growth are clearly numbered."

Over the years, Singapore's government has massively transformed the economy, developing new sectors more rapidly than anywhere else, but at the cost of lower and lower total factor productivity and returns on investment.

Young's study paints a picture of a kind of dilettante central planning in which the authorities strive to be first but at the cost of efficiency and the ultimate well-being of the people.

Industrial targeting is only one of several Singaporean policies that cause concern.

For example, the government occasionally "gazettes" periodicals' including The Asian Wall Street Journal and its sister publication, The Far Eastern Economic Review-which limits their circulation for violations of Singapore press law.

This practice is troublesome from the perspective of the rule of law and, predictably, has drawn criticism from advocates of free speech.

Limiting the circulation of print media also constitutes a straightforward infringement on commercial activity. Moreover, it has profound effects that go beyond the publishing industry.

A modern market economy depends on the free flow of economic and commercial information.

Particularly in asset markets (for example, stock and bond markets), up-to-date information is crucial to efficient operation.

Interference with the flow of economic and financial information becomes one of the most problematic and costly forms of intervention.

Even if it were Singapore's policy to censor only political material, in a modern economy it would be impossible in practice to censor the political without inhibiting the economic flow of information and opinion.

As financial services become more important to Singapore, the inner contradictions of promoting that sector while censoring the information that flows to it will become more evident.

One of these two policies' if not both will need to give way.

Though not without its faults, Hong Kong's more laissez-faire policy has made its economy once again the freest in the world.

At the same time, Hong Kong has achieved enviable economic growth without compulsory saving, industrial targeting, or other policies that not only impinge on economic freedom but also do nothing in the long run to foster growth.

(This commentary entitled "In Singapore Government squanders savings - 2000 Index of Economic Freedom Report" by Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Melanie Kirkpatrick was published in New Zealand Herald on
May 18, 2002.)