Following is the speech delivered by the Financial Secretary, Mr John C Tsang, at the 14th Economic Freedom Network Asia Annual Conference this morning (November 7):
"How Welfare Populism Destroys Prosperity - The Populist Challenge to Economic Freedom"
Thank you, Bill.
We are still firm believers in the market and only when the market begins to fail in selected areas that we need to introduce intervention to restore the balance. Once the balance has been restored, we will return to status quo.
Good morning to you all. I am pleased to join you for the annual Economic Freedom Network Asia Conference. I wish to thank the Lion Rock Institute for inviting me to speak today, and I wish you all a successful Conference.
The topic of welfare populism and economic freedom is, dare I say, a timely and interesting theme for this event, and for Hong Kong. In the space of just four months or so, Hong Kong has sworn in a new Chief Executive and a new Fourth Term Administration of Principal Officials, and we have also elected a new, enlarged Legislative Council. This is our most comprehensive period of political transition since 1997.
Perhaps understandably, and perhaps putting it less harshly, amid such huge changes, the past four months have not been all plain sailing for the new Administration. Even the seemingly straightforward topic of a new Old Age Living Allowance, which simply serves to benefit those old people living in poverty in our community, has become the subject of heated debate.
Amid this change, we are firmly committed to retaining and enhancing Hong Kong's free market credentials. On this subject, I wish to thank the Fraser Institute for naming Hong Kong number one in its latest Economic Freedom of the World Report. In particular, this year's Report recognises our market-friendly regulations, our freedom to trade internationally and the small size of our government. These are attributes that we value deeply and these are the attributes that we shall continue to hold in high regard.
Before I dive into the main theme of this Conference, allow me to turn back the clock a little, and look at a few cases that highlight lessons that we should learn from countries where welfare populism, believed to be the principal cause to the accumulation of sovereign debts, has destroyed prosperity. Sovereign debts are nothing new. To many countries, sovereign debts are just part of the balance sheet in the overall budgeting process, but the consequences of prolonged debt financing have clouded the global economy since the turn of the century.
It was just over a decade ago that Argentina was plunged into crisis. Argentina defaulted on its debt of US$100 billion in 2001, the largest sovereign default in history. The situation has become somewhat stabilised after quite a few years, but not without massive social unrest and large-scale debt restructuring along the way. While the Argentine economy has generally recovered to a more healthy state now, the various key institutions still need to be enhanced and fortified further. A decade on, the pain is still being felt.
Currency control is still in place in Argentina. The official annual inflation rate of the country is 10 per cent - a figure provided by the Argentine government but considered to be unreliably low by the IMF. Economists suggest that the true figure should be closer to 25 per cent instead. Last month, an Argentine navy training ship was seized in Ghana at the request of a creditor who refused to restructure the loans on which Argentina defaulted in 2001. The Argentine government hesitated to send a state aircraft to bring the crew back for fear that the aircraft would be impounded too. What a dilemma.
Just a century ago in the early 1900s, the GDP of Argentina ranked sixth in the world, ahead of the USA. How was the prosperity of Argentina destroyed? Some blame the welfare populism policies of the Perón government, which was overly desperate to win the popularity contest. Is that overly simplistic?
On the other side of the Atlantic, the pain today is shared by many Eurozone countries, in particular Greece.
Greece was once a story of sustainable economic success. Its GDP grew at an average annual rate of 5.2 per cent for half a century between 1929 and 1980. By comparison, Japan grew at just 4.9 per cent during the same period. For many years, the Aegean islands of Greece, with their famous white-washed blue domed chapels, were the dream honeymoon destinations of newlyweds and the must-go places for tourists from all over the world.
Now, the national debt of Greece is some 150 per cent of its GDP. The unemployment rate in July this year was over 25 per cent. Street riots are becoming routine. Tourists hesitate to go to Greece because they fear that the hotels that they reserve may be out of business by the time they arrive.
Professor Aristides Hatzis of the University of Athens considers that the Greek crisis today and the destruction of the country's prosperity have their roots in irresponsible public spending between 1981 and 2009, when political parties competed to offer populist welfare policies. Is that the full story?
Similarly, overspending of governments on welfare programmes has been identified by many analysts as the main cause for unrestricted escalation of national debts in Spain, Italy and Portugal, leading to the crisis in these countries today.
That said, I have also read different analyses by respectable commentators who have eloquently articulated that other causes, instead of welfare spending, are the culprit of the crisis today.
I am not an expert in the history and socio-economic and political dynamics of these countries, and so I shall refrain from making a judgement on how, or whether, welfare populism has, indeed, destroyed the prosperity of these countries.
What is clear to me, though, is that the painful situations, in which our Western friends are now stuck, should be alarming enough to all of us, especially for public administrators who are responsible for public finance, myself included.
As the custodian of the community's purse, we must tread prudently as a general rule in making any long-term financial commitment because any sign of trouble will not usually surface in the near term. The burden is usually borne by future generations, and by that time it will almost be politically impossible to revert without severe pain.
Please don't get me wrong. I am not against helping those in need. I believe that members of a community should look after one another, just like members of a family would.
How do brothers and sisters look after one another? When everyone is doing fine, they can take care of themselves. But when a member is in need, other siblings contribute according to their respective capability and pool resources to help the one in need.
I believe that the same principle should also apply to welfare. Welfare should benefit those in need, first and foremost. It should be within the capability of the community as a whole. Moreover, welfare should also provide incentives to encourage and enable the recipients of assistance to help themselves.
Now, back to our proposed new Old Age Living Allowance. This proposal has been the subject of fierce debate in the Legislative Council recently. The Allowance is meant to help elderly people living in poverty. I do not intend to reiterate once again the pros and cons of introducing the Allowance because that has been discussed ad nauseam over the past few weeks. What should be apparent to everyone, though, is the community's consensus to provide more support to our senior citizens who lack the resources to meet their living expenses.
But some members of the legislature continue to advocate that all elderly people in our community, regardless of their state of wealth, should receive the allowance as of right, and insist that it should not be means tested. Some even go as far as suggesting the Allowance should be the first step to a universal retirement protection scheme for all, which is another question altogether and which, I think, is a really slippery slope on which for us to embark.
I disagree with this populist view that some of our legislators are advocating. When the right of one member of the community becomes an obligation, a burden for another, that right cannot be absolute. It has to be conditional - in the case of our Old Age Living Allowance - on a means test.
I believe that any welfare programme should be affordable now, and without placing too heavy a burden on future generations. Such programmes should also be sustainable without depleting the community's resources for other equally important programmes. Abiding by these principles, however, is not as easy as one may think. Politicians worldwide are often tempted to introduce welfare measures to score short-term kudos, but the costs will often only become evident in future. We must stay alert to these practices.
In the introduction of "After the Welfare State", a book that was edited by Dr Tom G Palmer, Senior Fellow and Director of Cato University, he reminded us that we should review from time to time, among other things:
* whether current welfare state systems are unsustainable; and
* whether politicians have responded to incentives to promise - and citizens to demand - much more than can be delivered.
There is a popular saying which says, "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime." A person in need is not necessarily an incapable person. With the right incentive and support, he can contribute positively to his own well-being. The working poor, the single-parent families, the disabled and other disadvantaged groups can escape poverty more easily if they can participate in employment and earn an income.
I believe that we should encourage and enable them to work, whenever possible, by providing the necessary assistance, such as travelling allowance, child care services, free meals for the children, and whatnot.
In the words of Professor Anthony Giddens, the former director of the London School of Economics, this will, and I quote, "allow individuals and groups to make things happen, rather than have things happen to them." End quote. Passive maintenance should be the fallback for those who cannot possibly work, such as the elderly and the severely disabled living in poverty.
The traditional wisdom to resolve the poverty problem is to redistribute resources and opportunities, from the better off to the vulnerable groups, through the application of taxes and welfare policies. Another school of thought is to resolve the problem through economic growth, allowing wealth generated to trickle down to the less well off sectors of the community.
I do not believe that either approach, on its own, will resolve this complex issue in the world that we live in. We need both. Over-reliance on redistribution policies often runs the risk of unduly escalating public expenditure, creating moral hazards of welfare dependency and discouraging economic growth. Practices in most capitalist economies, on the other hand, have shown that those who are better off have tended to keep most of the benefits of economic growth, leaving little to be shared among the less well off. We need a good balance of both redistribution and growth strategies. We need what Dr Jim Yong Kim, the new American President of the World Bank, calls "the dual track of creating wealth and reducing poverty."
In drawing up my next annual Budget, which will be delivered at the end of February next year, I shall continue to keep expenditure within the limit of revenue. Thanks to our adherence to fiscal discipline and keeping a small government, Hong Kong has been able to accumulate a respectable fiscal reserve. This has provided the Government with the necessary resources to create favourable conditions for economic development and to assist enterprises and people in need, at all times.
In the three fiscal years from 2008-09 to 2010-11 when I was the Financial Secretary in the last Administration, we were able to implement a package of fiscal stimulus, job creation and relief measures worth nearly $110 billion, to help the community counter the headwinds generated by the global financial tsunami. The current strength of our domestic sector, despite gloomy conditions in major Western economies, is - at least partly - a testimony of the appropriateness of these measures. We have been saving for a long time for these rainy days. Fortunately for us, we in Hong Kong have been spared the devastating effects of the storm that is creating havoc around the world.
Ladies and gentlemen, I can assure you that Hong Kong will continue to exercise fiscal prudence in the management of our public resources, for three very good reasons. First, because it is a requirement prescribed in our mini-constitution, the Basic Law. Second, because a lack of fiscal prudence has been a major contributory factor in sovereign debt crises in Europe and elsewhere, and that should have taught us a lesson or two. And the third reason is that prudent management of resources, including financial resources, is engrained in the Asian culture. It is part of our value system that has served our communities and our region well, not least during the recent global financial crisis.
As we consider lessons that need to be learned from the financial tsunami, allow me to share with you all this simple, almost folksy, down-to-earth philosophy that should work for individuals and governments alike. Here it goes:
* Not to spend more than we earn;
* not to borrow more than we can repay; and
* help each other to the best of our ability, but never beyond.
Thank you very much.
Ends/Wednesday, November 7, 2012
Issued at HKT 13:03