Apart from the above, a market economy also has an inherent self-regulatory mechanism called “the invisible hand” (Isachsen, Hamilton, Gylfason, 1993, pp 34). The “invisible hand” steers the economic system as a whole to equilibrium where aggregate supply and aggregate demand are equal. The producer and consumer both measure alternatives against one another and choose what seems to be the best. If the price in the economy correctly reflect the scarcity of the various goods and services in the society, those decisions that are made on this basis will be good enough so that production become most efficient at the same time as it satisfies the needs that people in the society through their demand. The economy can reach equilibrium by itself as long as there is no external forces at work to prevent this outcome.
Besides, it is an important point that the functioning of a market economy is the significant of competition for keeping down production costs (prices for the factors of production) resulting in an effective utilization of resources. Private firm that is unable to compete successfully, i.e. that lose money or in economic term, inefficiency, is forced to re-organize their operation or ultimately to close down if totally fails. Not only the particularly important consequence of competition that forces enterprises to become open to innovation which is aiming at utilization of new methods of production, new raw materials, new ways of organization production and distribution, it is also the bankruptcy mechanism in which it is the flexible and robust means of the market economy in organizing the productions within a modern society (Isachsen, Hamilton, Gylfason, 1993, pp 81 - 84).
In summary, the market economy functions itself in such a way that the economic decisions are left to the free market forces of supply and demand in which market prices are used as guidelines and co-ordination to ensure satisfactory utilization of existing and scare resources. The market will ultimately work out what is the most efficient allocation of resources while the market mechanism is nature and invisible to determine the best interests of the society. Such dynamic state of equilibrium of market supply and demand will have consequences for what to produce, how to produce and for whom it should be distributed as well as the direction towards efficiency without the need for any omniscient planner telling producers what to do (Isachsen, Hamilton, Gylfason, 1993, pp 113).
From the above discussion, for a market economy to function, there are three conditions must be in place:- private ownership, free competition & free exchange of goods and a bankruptcy mechanism which permits unsuccessful business to liquidate in creating conditions for necessary economic renewal and growth. Under the current economic environment of Hong Kong, such conditions are all complied and fulfilled. Since the times of British sovereignty, Hong Kong’s private property right and ownership systems are well established. The market forces are being as the principle economic determinant with no dominant central planning. Adaptive and indigenous entrepreneurship contributes to the economic development and success of the economy. Many economists point enthusiastically to Hong Kong as an example of how success comes to free-market economies. (Yu, 2006, pp 163). Also, Milton Friedman (1980) cites Hong Kong’s economic achievement as a classic illustration of the benefits of free market policy. Rabushka (1979) describes Hong Kong as the last bastion of laissez-faire.
Although the characteristics of Hong Kong economy are resemble to those that a market economy possessed, the development of economy of Hong Kong is in fact largely attributable to the economic management of the government instead of there is a laissez-faire policy and solely the market forces (Yu, 2006, pp 164). Hong Kong economy was aided by the government, whose civil servants greatly facilitated industrial planning and the development of local industry (Vogel, 1991 pp 69). The Hong Kong government has substantially, though subtly, intervened in Hong Kong’s economic affairs (Schiffer, 1991, Castells, 1992, Henderson and Appelbaum, 1992). From their illustrations and explanations, the Hong Kong government has tried its best to cultivate an business environment for private business to furnish, thus contributing to the economic development and resources allocation of Hong Kong.
Indeed, a perfect market economy cannot be found. Also, a situation where all prices, which are the carriers of correct information at any time, are right will never come into being. In reality, there is no such thing as a ‘pure” market economy in which all economic decisions are made in free markets. In fact, all market economies are mixed because in any modern society the government – as representative for the interests of the community – has an important role to play. The expression laissez-faire means that government shall leave the market entirely to the private sector. Although the members of a market economy can enjoy the freedom of business actions, the government must ensure that an appropriate institutional framework exists in the society. Moreover, if an economy based on the free play of market forces is to function well, the government must assume the role of a central coordinating intelligence to reduce uncertainty and thus provide a more stable environment for private business to make decisions.
Going back to Hong Kong situation, it has traditionally been regarded as a laissez-faire economy with a high degree of individual economic freedom and liberalism and absence of severe government intervention (Li, 2006, pp. 17). Nonetheless, since the time in 1970 (or even earlier) to build up strength in the financial system, “positive non-interventionism” has been employed by the Hong Kong government as a framework for government coordination in economic policies. “Positive” is regarded as economic policies would be coordinated positively in the provision of infrastructure and macroeconomic stability, while “non-interventionism” implied the maintenance of laissez-faire capitalism (Li, 2006 pp. 17 – 18). Hong Kong government positively intervenes in the economy when the market failure is beyond its control and/or whenever needed to ensure fair play in the market and to maintain overall stability at the macroeconomic level. Government intervention, either through taxes systems (e.g. profit tax) or other forms of regulation (e.g. public expenditure) is required if the economy is to achieve an optimal level of output and to ensure that the corrective mechanism operates as efficiently as possible.
Hence, although Hong Kong has embarked on a more liberal economic policy, this should not be construed to mean that it totally adopted a laissez-faire approach to economic management by the government. Hong Kong’s economy has been facilitated by the government intervention (Vogel 1991, pp. 68 – 72). Its policies attempt to create an environment for business to exploit opportunities (Yu, 2006, pp. 230). The government is a prototype of a positive non-intervention state. The mechanism taken by the Hong Kong government can be summarized as follows:-
- Firstly, from the social provision perspective, the government takes initiatives to maintain law and order, and social stability which are significant for development. Apart from building a legal, social and institutional framework necessary for the effective operation of markets, the Hong Kong government demonstrates it entrepreneurship in maintaining social stability. A classic intervention is in housing provision (e.g. the recent sale of the housing units under Home Ownership Scheme Housing). Another intervention is in land development such as the control of land supply by Land Sale by Application System. Due to the monopoly of land supply, the government can substantially intervened in land supply and ultimately the provision in housing to the benefits of other aspects of the society. It has used land revenue and sale from Home Ownership Scheme Housing as a budgetary mechanism to allow the delivery of a relatively extensive welfare system while maintaining low corporate and personal taxation (Henderson & Appelbaum, 1992, pp. 22)
- Secondly, from the expenditure perspective, the government takes initiatives in forecasting and planning most of the physical infrastructures such as the recent Disneyland development, high-speed railway and development of old Kai Tak Airport and reclamation land at Western Kowloon. The Hong Kong government has not undertaken full ownership, though retaining some shares, of these enterprises. The provisions are tendered to and mainly owned by private companies under government franchise. Hong Kong has not used state equity-holding as part of a general development strategy showing that such Hong Kong government’s “facilitative’ intervention is both unique and entrepreneurial (Yu, 2006, pp.177).
- Thirdly, from the policy perspective, the Hong Kong government has chosen to play a catalytic role in the development of various industries by motivating people to exercise their entrepreneurial spirit (Soon, 1994, pp.144). It has deliberately restrained itself from subsidizing or protecting any industry and let private enterprises function on their own. Meanwhile, the government has assisted entrepreneurs by furnishing them only with limited amount of consultancy facilities such as Hong Kong Productivity Centre, Trade Development Council and SME loans Scheme. Besides, Hong Kong is the most friendly host in inducing foreign firms to invest in the economy because of the lowest and simplest taxation system in the world. There are also essentially no foreign exchange control nor central bank and Hong Kong is regarded as a “capitalist paradise” (Woronoff, 1980)
- Lastly, from the financial perspective, the Hong Kong government has taken the supervisory role in order to maintain Hong Kong status as an international financial centre and the remarkable growth in Hong Kong’s financial services in banking, insurance, and securities trading and fund management. In avoiding over-regulation, the government has provided the up-to-date financial infrastructure and highly adaptable workforce to sustain an open and competitive financial market (Yu, 2006, pp. 180). In complementing the operation of the financial market, there are robust monetary regime, stable currency and healthy banking sector which are monitored by the government. In addition, coordinating function on the financial markets can be well seen from the regulation of the exchange rates markets.
Reference:-
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Samuelson, P A and Nordhaus, W D (2001) Economics, 17th edition, McGraw-Hill.
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Kui Wai Li (2006), The Hong Kong Economy, Recovery and Restructuring, Mcgraw-Hill.
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David Faure and Lee Pui Tak (2004), A Documentary History of Hong Kong: Economy, Hong Kong University Press.
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Fu-Lai Tony Yu (2006) Studies in Entrepreneurship, Business and Government in Hong Kong: The Economic Development of a Small Open Economy, The Edwi Mellen Press.
- Course Materials