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Tinkerers eager to fix Hong Kong . . . even though it's far from broken Add to ...

Now into its 10th year as part of China, Hong Kong is well past the sell-by date that pessimists set for the former crown colony. The former British colony is still free, ruled by law, and the economy is back to boomtown.

Its affairs, under the eye of China, are more in the control of local Hong Kongers than they were when the British ran the show. All good.

Still, there is that irresistible urge to tinker -- except it does not come from Beijing. It comes from within, and one wonders if the tinkerers appreciate just how fragile an economic ecosystem can be.

There are two changes that Hong Kong is now considering that touch the soul of this place. They relate to taxes and competition.

Let's look at the last first. It may come as a surprise that Hong Kong -- the world's freest economy we are told endlessly -- is perhaps not as competitive as the ratings might suggest. Here we don't mean externally competitive, which it is, but rather that the domestic game in this city of seven million is, in the eyes of some, rigged.

Hong Kong was built on a foundation of large trading houses that ran the core of the economy. Most of these groups have declined in importance as Hong Kong has evolved, but some still hold considerable sway. For example, Hong Kongers for the most part still buy their groceries from stores controlled by either Hutchison Whampoa Ltd. (part of Li Ka-shing's Cheung Kong group) or Jardine Group (formerly vilified by China, but doing fine a decade on). The property business in particular is run in a cartel-like way by a handful of entrenched companies. Most are family run.

It's not surprising then that some politicians are keen to see Hong Kong introduce antitrust legislation. An independent committee appointed by the government earlier this month recommended that the city consider a comprehensive package of legislation to police things such as collusive pricing and bid rigging. It has been pointed out ad nauseam that Hong Kong is one of the few developed economies in the world without a competition law. It does however have a robust consumer council, and individual cases can be brought before the courts.

Antitrust law is a difficult thing to argue against. But the question is whether Hong Kong really needs it, or if it's just being driven by populist politics. The World Trade Organization and the International Monetary Fund have both commented on Hong Kong's lack of antitrust laws, but is that a reason to do it? One wonders if the added complexity of legislation of this type is a tradeoff that's worth it. Hong Kong runs well as is -- would it run better with such laws?

The fact that the behaviour of property tycoons is helping drive the antitrust movement is intimately related to Hong Kong's other big issue, taxation. The reason is that Hong Kong has a narrow tax base -- more than 60 per cent of Hong Kongers pay no income tax -- and has traditionally relied on levies as the government parcels out Hong Kong's scarce land. This makes government revenue highly exposed to often violent swings in Hong Kong's property market. At the moment, the government is flush, but will that last?

Without a doubt, Hong Kong needs a broader tax base. But what is being mooted is a 5-per-cent goods and services tax. A sales tax, in Hong Kong? The horror. Hong Kong's financial secretary, Henry Tang, said last week: "I never said it is time to introduce a GST. I said it is time to discuss one." If you said that to an 8-year-old, she'd reply: That means you're going to do it.

For individuals, Hong Kong has a great tax system. Most people don't pay, and those who do (your correspondent included) give up a mere 16 per cent.

Corporations pay a bit more. While it's wonderful, it has always seemed too good to last, especially as social services costs rise. But sales taxes are regressive, and it would put a greater burden on Hong Kong's lower-income groups. You can put aside talk of breaks and credits -- sales taxes hurt most for those who spend the greatest percentage of their income. Resorting to a GST would make more sense if corporations and wealthy individuals didn't pay so little now.

So, is major change afoot for laissez-faire Hong Kong? It seems to be heading toward a competition law for the wrong reasons. At the same time, a questionable tax change (although for the right reasons) is in the works.

Both promise to become politically hot, in an increasingly polarized political scene. One hopes Hong Kong's homegrown tinkerers are thinking these things through.

tomgrimmer@hotmail.com

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