HONG KONG

Rank: #1
Category: Free
Score: 1.30

Trade Policy 1 Government Intervention 2 Foreign Investment 1 Wages and Prices 2 Regulation 1
Fiscal Burden 1 Monetary Policy 2 Banking 1 Property Rights 1 Black Market 1

Hong Kong became a Special Administrative Region (SAR) of the People’s

Republic of China (PRC) on July 1, 1997. Two years later, it remains the world’s Scores for Prior Years:
freest economy. The economy has been built on Hong Kong’s status as a major 1999: 1.30 1997: 1.40 1995: 1.30
trading port and financial center for East Asia. In particular, Hong Kong is 1998: 1.30 1996: 1.30
renowned for its rule of law, lack of trade barriers, and low taxes. Nevertheless, it
suffered in the recent currency crisis. The economy contracted by over 5 percent in
1998, with only modest growth predicted for the next two years. Moreover, Population: 6,706,965 (July 1998
exports remain weak, banks are reluctant to lend, and consumer spending has est.)
fallen. Of great concern is recent government intervention in the economy. In
Land area: 1,092 sq. km
August 1998, the Hong Kong government intervened in the country’s stock
exchange to counter speculative attacks. This raised concerns about the Major industries: textiles, clothing,
government’s commitment to a free market. Recently announced plans for tourism, electronics, plastics, toys,
watches, clocks
orderly disposal of the assets acquired in the intervention are encouraging. In
contrast to its predecessors, however, the government seems inclined to favor some Major agricultural products:
sectors at the expense of others. This would represent a step back from its fresh vegetables, poultry
successful laissez-faire policy and would lead to fears of crony capitalism (which GDP: $169.4 billion
the government heretofore has avoided). Since the handover, the rule of law in GDP growth rate: -5.0%
Hong Kong has been called into question by the Mainland’s interference in the
Per capita GDP: $25,257
operation of Hong Kong’s independent judiciary. As a result of a decrease in
inflation, Hong Kong’s monetary policy score has improved over last year. Exports of goods and services:
However, as a result of Hong Kong’s intervention in the stock market, its $192.8 billion
government intervention score has worsened. These two changes cancel each Major export trading partners:
other out, and Hong Kong’s overall score remains the same as last year. China 34.9%, US 21.7%, Japan
6.1%, Germany 3.9%, UK 3.4%,
Singapore 2.6%
TRADE POLICY
Imports of goods and services:
Score: 1–Stable (very low level of protectionism)
$214.1 billion
Hong Kong levies virtually no import tariffs or duties and is considered a duty-free Major import trading partners:
port.1 There are, in fact, very few barriers to imports in Hong Kong, which has China 37.7%, Japan 13.7%, US
one of the world’s most accessible markets. It is a vital market for U.S. exports and 7.8%, Taiwan 7.7%, Singapore 4.9%,
consumes U.S. manufactured and agricultural goods at a higher rate per capita South Korea 4.5%
than most of the world’s other economies. Foreign direct investment: n/a

FISCAL BURDEN OF GOVERNMENT

Score—Income and Corporate Taxation: 1.5–Stable
(low tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 1–Stable (very low cost of government)
The top marginal personal income tax rate is 17 percent;2 the average taxpayer
falls in the 17 percent income tax bracket. The corporate tax is a flat 16 percent.
Government expenditures equaled 13.5 percent of GDP in 1997.

Chapter 6: The Countries 255

GOVERNMENT INTERVENTION IN THE
ECONOMY
Score: 2–Worse (low level)
According to the U.S. Department of Commerce, “The Hong
Kong Special Administrative Region Government continues
to pursue a generally non-interventionist approach to
economic policy that stresses the predominant role of the
private sector, just as it did prior to the transition to Chinese
sovereignty in July 1997. Economic policy is based primarily
on minimal interference with market forces.”3 Government
consumes about 8.9 percent of GDP, and Hong Kong has
virtually no state-owned enterprises. However, Hong Kong
did intervene in its stock market in August 1998, purchasing
some $15.2 billion in private stocks. As a result, Hong Kong’s
government intervention in the economy score is 1 point
worse this year.
MONETARY POLICY
Score: 2–Better (low level of inflation)
Hong Kong’s weighted average annual rate of inflation from
1989 to 1998 equaled 4.1 percent, down from 6.3 percent
from 1988 to 1997. As a result, Hong Kong’s monetary policy
score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN
INVESTMENT
Score: 1–Stable (very low barriers)
Hong Kong’s government is one of the most receptive to
investment in the world. There are virtually no restrictions
on foreign capital or investment, except in the media sector.
BANKING
Score: 1–Stable (very low level of
restrictions)
Hong Kong is a global banking center and one of the
world’s freest banking environments. Banks are independent
of the government, and foreign banks are free to operate
with only limited restrictions on the number of automated
teller machines and branches. The Hong Kong Monetary
Authority (HKMA) planned to liberalize these restrictions in
the second half of 1999 and is proposing to consider, in 2001,
their total elimination. Additionally, the HKMA is planning a
phased elimination of the remaining Interest Rate Rules
beginning in July 2000.
256
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Hong Kong’s market largely sets wages and prices (the only
exception being certain telecommunications services). There
are, however, price controls on rent, public transport, and
electricity. The government has the power to enforce
minimum wages, but rarely does so.
PROPERTY RIGHTS
Score: 1–Stable (very high level of
protection)
The government fully protects private property rights. The
legal system to protect these rights is both highly efficient
and effective. According to the U.S. Department of Com-
merce, “The local court system provides effective enforce-
ment of contracts, disputes settlements and protection of
rights, including intellectual property. Secured interests in
property are recognized and enforced.”4
REGULATION
Score: 1–Stable (very low level)
Hong Kong has a simple system for the licensing of busi-
nesses. The regulations imposed on business are few, not
burdensome, and are applied uniformly. According to the U.S.
Department of Commerce, “Hong Kong’s body of law and
regulation implicitly and explicitly promotes competition in
all forms of economic endeavor…. Tax, labor, health and
safety and other laws and policies avoid distortions or
impediments to the efficient mobilization and allocation of
investment. Bureaucratic procedures and ‘red tape’ are held
to the minimum and are equally transparent to local and
foreign investors.”5
BLACK MARKET
Score: 1–Stable (very low level of activity)
The black market is virtually nonexistent. For example, there
is no evidence to suggest that there is significant black
market activity in such areas as construction, labor, and
transportation. While there is evidence that piracy of
intellectual property products is a problem, Hong Kong has
passed several laws since 1997 that make it more difficult for
pirated products to enter and be sold in Hong Kong. Accord-
ing to the U.S. Trade Representative, “Hong Kong has made
significant progress over the past year to address the problem
of piracy, including passage of the Prevention of Copyright
Piracy Ordinance, closing approximately 70 pirate CD
production lines, and closing shops dealing with pirated
products in major retail arcades.”6
2000 Index of Economic Freedom
NOTES
1
Although Hong Kong levies no import tariffs, it does have domestic consumption taxes that apply to some imports
such as tobacco, alcoholic beverages, methyl alcohol, and some fuels. See U.S. Department of Commerce, Country
Commercial Guide Hong Kong Fiscal Year 1999.
2
The income tax on individuals is a progressive rate from 2 percent to 17 percent after deductions and allowances, or
at a flat rate of 15 percent on gross salary—whichever produces the lower tax liability. For purposes of grading Hong
Kong’s income tax rate, the flat 15 percent rate was used.
3
U.S. Department of Commerce, Country Commercial Guide Hong Kong Fiscal Year 1999.
4
Ibid.
5
Ibid.
6
Office of the United States Trade Representative, 1999 National Trade Estimate Report on Foreign Trade Barriers.

Chapter 6: The Countries 257

258 2000 Index of Economic Freedom