Hong Kong SWOT Analysis

by Jeffrey Smith

Summary

People who point to the "Four Tigers" of Asia as examples of developmental success tend to give credit to state planning and state partnership with big business. While it is true that those governments did invest in big business, other nations have done so with fewer positive results.

Common to all the East Asian success stories was land reform. Their land reform was not the type which takes land from some and gives it to others. Instead, those Pacific Rim governments captured land rent. Most of the Asian Tigers used taxes on land but one used a lease for land; that was Hong Kong.

In the middle of the nineteenth century, the British Empire demanded the land for Hong Kong – about eleven hundred square kilometers – from a weak Chinese central government. The British rulers wanted to keep strict control over land that was still in many ways a part of a foreign nation and so decided not to sell any of the land but instead to lease sites for 75 years. Too few people wanted to lease “Crown land” for that length of time so the Governor extended the term to nearly a century. That lasted for a number of years until London returned the term to 75 years and then, yielding to protests, agreed to end their rule when a century was up.

Since all the land in Hong Kong was public, owned by the government, and none was private, owned by individuals, there was no private property for government to tax, only public property for government to lease. To raise revenue from land, the Crown authorities had to get the best deal they could in leasing public land by auction or negotiation.

The terms of the lease not only determined how much rent the leasor would pay the Crown but also other conditions such as requirements of the building code. By the terms of the lease, the Hong Kong authorities did not get all the available land rent, but they did recover a healthy portion, roughly 40% (Yu-Hung Hong, Landlines, 1999 March, Lincoln Instute., Cambridge, MA). And since speculators could not buy land and avoid taxes, there was no withholding of land from use, waiting for values and prices to rise in the future.

Of course, some people did speculate that a certain location would rise in value and bought it hoping such would eventuate, but they had to put the land to use, they could not keep it vacant for long. People leased land in order to develop it as soon as possible to pay their lease rentals and profit from filling the new buildings with tenants.

Since the Hong Kong Crown government lived off of rent from land, they did not impose many or heavy taxes on people’s productive activities. Given numerous loopholes and exemptions, about half the populace did not pay any income tax and lived in low-cost public housing. Cutting individual taxes and housing costs reduces the two main drains on the budget of the average household in almost any society.

Hong Kong was more active in trade than were the natural ports on the Chinese coast. For three decades in the second half of the 20th century (the 1960s, 70s, 80s), Hong Kong’s economic growth averaged over six percent per year in real terms (after accounting for inflation).

Fortune magazine often ranked Hong Kong as one of the world’s best places for business and once ranked it as the very best place for business in the entire world (1991). Generally sympathetic to business interests, in 2008 the international libertarian movement also ranked Hong Kong as one of the freest jurisdictions on the planet, and sometimes the absolute freest. (Second place is Singapore, another land value capture jurisdiction.) Neither ranking agency – neither Fortune nor the “libertarian” Heritage Foundation – noted that the main underlying factor contributing to Hong Kong’s success was the public recovery of land rent.

Thanks to public recovery of site rent, other taxes were low, prices were low, investment high and wages high. Per capita income was among the highest in the world. In the markets consumers could find goods in remarkable diversity. Whatever was offered anywhere was available in Hong Kong.

Since leasees do not pay rent in order to hold land out of use, the coastal island that makes up Hong Kong is used so efficiently that despite 6.6 millions of people living there as of 1998, they still have enough room to grow much of their own food. However, lately they have been turning open land into courses to meet the more profitable golf craze.

Because they use land efficiently and recover such a high proportion of rent Hong Kong can afford one of the best mass transit systems in the world. Unlike most every other subway-and-bus systems in the world, it operates without one penny of subsidy from the government’s general fund; the metro subway supplements its fare box income with rent from sites near its subway stops.

Pre-unification, Hong Kong recovered 40% of its rent and used it to fund 80% of its budget (Yu-Hung Hong, Landlines, 1999 March, Lincoln Inst., Cambridge, MA). If it had recovered all its ground rent, it could have forgone other taxes completely and even paid its residents a dividend. Since unification, the new partially communist government has brought in new taxes and precise figures on public rent-recovery are not available.

However, Hong Kong still has a surplus in its public treasury. Hong Kong’s English language newspaper, The Standard (January 7, 2008 “Budget boost for welfare reviews”) reported that the government of Hong Kong’s surplus is set to break the HK$100 billion mark when the current fiscal year ends. The government announced a 2.8%, or HK$419 million, increase in welfare and handicap allowances starting from February, 2008. But persistently surging inflation has forced it to consider making payments more frequently.

Strengths

From a government’s point-of-view, Hong Kong is an exceedingly powerful example of just how much rent is available. Whereas one can turn to official sources to find out other economic answers – such as how much average wages, unemployment, inflation, productivity, GDP, private debt, public debt, private investment, international aid, etc – it is odd that one can not turn to official sources and find out how much rent flows in an economy, how much do people spend on the land that they use. Since such information is not readily available, it is quite instructive to look at a place like Hong Kong where government does recover rent and manages to live off it.

Another strength is how recovery of rent did make possible the diminishment of other taxes. Taxes are like kryptonite to many hardworking business people, anathema to risk-taking investors; they try to avoid them at all costs. Hence their love for Hong Kong where taxes are low. Physically, Hong Kong is barely more than a bit of island with no natural resources in competition with other major ports along the Chinese coast yet it prospered more than any of them. It must be comforting, from a business perspective, to know that if investors forgo returns from locations, they can still do very well and profit from investments in buildings and in other enterprises, an argument that proponents could make to enlist the support of the business community.

Such a public policy context did not benefit just businesses but also the average resident. Almost everyone in Hong Kong could find work and fashion a life of comfort and prosperity. Likewise, it should comfort workers and homeowners to know that having to pay in rent – rather than keep it as part of the value of one’s home – does not constitute a loss but instead means higher wages and lower prices coupled with a wide variety of goods in the local marketplace.

Another strength is the appeal that rent-recovery should have to environmentalists. By leasing land, rather than selling it forever, Hong Kong fostered efficient land use, which spares non-urban land; the more intensely people use land in and around cities, the less they need to disturb land out in the countryside at all. Also, given world-class mass transit, residents of Hong Kong did not have to rely so heavily on the automobile, a technology which is enormously destructive of the planet.

Another strength, from a democratic point of view, is how funding public benefits from land rent while placing few and low taxes on workers and productive capital fostered an appreciation for freedom so that when reunification came in 1997 on July first, the residents of Hong Kong were able to negotiate some degree of autonomy from Beijing. Further, both that political compromise and the recovery of land rent for social needs could serve as models for the rest of China.

Weaknesses

The main weakness of the Hong Kong example of rent-recovery is that it was not organic. It came about because the conquerors decided not to sell land but lease it and for as much rent as they could get. Hence government, foreigners in a foreign land, did the right thing for the wrong reasons.

As Hong Kong grew and buildings were built, the government did not bother to separate the value of the improvement from the site. Thereby, government took a portion of the value of both the land and the building. When owners are charged a fee or tax for constructing quality buildings, that charge acts like a penalty; the owners must calculate that cost in their budget and so have less money to spend on quality construction and on quality maintenance. Hence that unnecessary tax lowers the quality of buildings to some degree. In a culture like Hong Kong’s where the work ethic is strong – due to low taxes compared to most places – the loss in quality of buildings is not as severe as it is in another society where the work ethic is weaker and taxes are more fervently resented.

Another weakness is that Hong Kong did not recover all its ground rent so just like every other community where locations grow more valuable, the more grasping did all they could to direct rent into their own pockets. They tried to turn land into private property in perpetuity; they tried to lower the terms of the leases; they tried to raise other taxes. One speculates that if residents were to receive rent via a dividend paid by the government, perhaps then they would not turn to or allow others to turn to privatizing rent via other means.

Another weakness of the Hong Kong experience is that the local government was not fully autonomous and had to follow some orders from the central government. After “the changing of the guard”, the new regime sought and implemented other taxes of the counterproductive variety. That tax shift – away from rents, toward real enterprise – cost Hong Kong its high ranking in various lists.

The shift of taxes from rent to a more conventional system in part explains the rise in inflation in Hong Kong. When government fails to recover rent, that lets owners and buyers bid up the price of land. That lets owners borrow more against the value of their land and forces buyers to borrow more. Since most governments print new money to meet the need of lenders, the more debt in society, the more inflation in its economy. Neither debt nor inflation is healthy for workers and consumers, as they make economies top heavy and lead to recession.

Another weakness was that the people of Hong Kong did not know how good they had it or what provided the basis for their prosperity. Unlike the US government which tries to export its brand of democracy and capitalism, the government of Hong Kong did not try to educate anyone – abroad or its own populace – about the benefits of a public revenue system that recovers rent while cutting taxes on effort. The likely reason why government authorities did not proselytize is that even they did not understand how different and how beneficial was the system that was “just by accident” handed to them. It takes a special kind of curiosity to seek out such connections and a unique type of personality to want to pass on the information.

Opportunities

Hong Kong has before it an important opportunity to further its land value capture policy since the city’s land is already in the public domain. All the public authorities need to do is to strengthen the terms of the land leases, which politically should be far simpler than raising taxes on private land.

And since Hong Kong enjoys a public revenue surplus it should be able to institute citizens’ dividend payments which could win over a majority of the populace to this policy of capturing land rent while forgoing taxes on useful effort.

Hong Kong also offers the opportunity to study and compare economic indices before and after reunification in order to show how the shift of taxes from rent to effort backfired and somewhat hobbled the Hong Kong economy.

Hong Kong might also prove to be an entry to the thinking of the rest of China as to how to address both the problem of rapidly escalating land prices and the growing wealth divide. Given that Hong Kong worked so well and much better before the communists came to power and meddled with the city’s tax system, perhaps they will learn from their experience. Instead of making Hong Kong more conventional, they could understand the basis of Hong Kong’s success, strengthen its land lease system, and use it as a model for the rest of China.

Threats

As everywhere else, Hong Kong is threatened by conventional wisdom and by land speculators. Because Hong Kong succeeded so well by leasing its land at rates high enough to fund its local government, its success pushed up location values. When government authorities failed to capture this increased land rent, the high site values attracted land speculators who now are trying to reverse the policies that created the success in the first place.

Conventional wisdom offers little in the way of clear thinking or opposition to the rent-seekers. There is little public understanding and little bold leadership by either politicians or academics. The people may well lose the system that had been working so well for them.

The people of Hong Kong are hardly unique in this situation. Wherever the recovery of land rent for public benefit has been instituted and then repealed there has been little or no public outcry since most people do not have any understanding of “land rent” and that it is as a major flow in any economy.

Nor do they have a sound working knowledge of economics or a clear moral understanding of their right to an equal share of land rent as well as their obligation to pay rent to society for the land they claim for their exclusive and private use.

Asking the public to understand all that is asking a lot of anyone. While Hong Kong is threatened by individual predatory speculators, it might be less threatened by the central government. Mainland China is learning firsthand about the dangers of speculation in land and is passing taxes to try to curb the worst of it. Since the Chinese economy is now experiencing real estate bubbles it may soon do what the economies of America and Japan did – implode into recession.

Even if that does not happen, China is still seeking ways to prevent such a calamity and may look to the land value capture policy solution, especially if knowledge of the Hong Kong model could gain currency on the mainland.




This SWOT analysis was written by Jeffery Smith, founder of the Geonomics Society, for use by the UN Habitat Global Land Tool Network’s program on land rights and land value capture. In addition to the references contained within this report, information was gleaned from the Hong Kong section of the book Land Value Taxation Around the World, an anthology compiled by Robert Andelson and available from the Robert Schalkenbach Foundation.