With no natural resources and sited on tiny specks of land, Singapore and Hong Kong consistently rate as among the freest and most prosperous nations in the world. Both island nations have no public debt, low tax rates, high growth rates and yet provide levels of public service that are the envy of developed nations.
Hong Kong has been able to maintain an average growth rate of 5.4% since 1974 – an astonishing achievement over 40 years. Since 1990, Singapore’s growth has averaged around 5%, and hit a nerve-shattering 15% in 2010, though this has slowed in the last two years. Unemployment in both states is negligible.
What is the secret behind this phenomenon and can we learn anything from them? Hong Kong has nearly double the financial reserves of the UK and Singapore’s per capita GDP now exceeds that of the US.
In ‘No Debt, High Growth, Low Tax’, Andrew Purves, who grew up in Hong Kong, unravels the enigma of these two misfits in the economic firmament. This is the latest in a batch of books exploring the financial alchemy behind the world’s more prosperous economies.
Yes, both Hong Kong and Singapore have low taxation and are famously business-friendly, but so are many other countries with far lower levels of prosperity. Other studies have looked at the Confucian work ethic as somehow unique, or the fact that the populations of both Singapore and Hong Kong are inured to authoritarian leadership and will therefore tolerate whatever laws are dumped on them. None of this adequately explains the astonishing economic performance of these two island states, whose governance models have been copied to a greater or lesser extent across Asia.
Using land value
What these two territories have in common – apart from their low tax and high growth – is that the state is the largest land owner and collects economic rent on the land, or what is more commonly understood as Land Value Tax (LVT). Both are densely populated and land is limited, yet both have managed to expand in size by arrangements with neighbours or reclaiming land from the sea.
Purves provides a few interesting examples of how Hong Kong managed to finance public facilities by charging rent on appreciating land values. One such example is the Mass Transit Railway. This shows how these governments tackle public finances with a keen sense of business dynamics. The government leased the land for the railways to the Mass Transit Railway Corporation (MTRC) at ‘pre-development’ prices, along with development rights on land above the stations.
The MTRC built shopping centres, offices and apartments above the train stations – on which it collected rent used to fund the building of the railway network. As the development rolled out, the value of the land increased proportionately, as did the rental income. A similar method of financing was used in the early years of the London Underground. Based on this model, Gautrain and e-tolls could have been financed for a fraction of the eventual cost by using enhanced land values to subsidise the construction.
The reason Hong Kong has such low tax rates is that the government, which by law owns all land in the territory, generates most of its revenue from the sale of new leases.
Stephen Meintjes and Michael Jacques, authors of ‘Our Land, Our Rent, Our Jobs’, argue that a similar system of collecting rent on land could eventually replace all other forms of taxation in South Africa. While most land in SA is privately owned, this system would force owners of unproductive land to make their land economically productive in order to afford the rental – as happened in Taiwan and Japan at the start of their great industrialisation.
Purves says he started to research Hong Kong and Singapore to find their commonalities and to assess whether this would point the way to a better economic system for a world in desperate need of one. He dedicates the book to the people of Cuba where, like Hong Kong, all land is owned by the state. By following the leasing arrangements developed in Hong Kong, Cuba could avoid “the damaging effects of absolute private ownership of land,” he says.
Singapore’s model of land ownership mirrors that of Hong Kong. The Singapore Land Authority owns 140 square kilometres, about 20% of all land, on which 5 000 buildings are placed. In total, 58% of Singapore’s land is owned by the state. It continues to purchase land for development and resells this land under leasehold title for periods of between 60 and 99 years.
The corporate tax rate in Hong Kong is 16.5% and a maximum of 17% for individuals. In Singapore the rates are 17% for companies and 20% for individuals, though most people pay substantially less than this after accounting for rebates and deductions.
Income inequality in these island states is higher than the welfare-wedded economies of Europe, but is much lower than in SA. But perhaps income equality, like the War on Drugs, is a hopelessly unachievable goal. It’s certainly a magnificent policy tool for the dirigistes who want to meddle with every corner of the economy in pursuit of what they call equality. Perhaps, as Russell Lamberti of ETM Analytics suggests, we should welcome income inequality and positively foster it as a way to pull the masses out of poverty.
In SA, the government has set a growth rate of 5% as a necessary target to bring down unemployment. If that’s the case it should pay close attention to two countries that have consistently achieved this, decade after decade.