Hong Kong’s laissez-faire myth and the post-bailout world.

Like true believers everywhere, small-government ideologues have their sacred narratives, few so dear as the parable of Hong Kong. While other governments in the 20^th century took the statist road to serfdom—runs the tale—the wise folks who ran tiny, resource-poor Hong Kong took the laissez-faire path to untold riches. Milton Friedman made Hong Kong Exhibit A in the libertarian argument with the PBS series Free To Choose, which appeared in 1980. Later, Friedman found Hong Kong a useful ideological tool, once calling it a "controlled experiment" in free vs. socialist economies. P.J. O'Rourke furthered the myth in his 1998 screed Eat the Rich, in which Hong Kong appears as "socialism's perfect opposite," a place that made "everything from nothing." The British colonial regime, he drooled, "turned Hong Kong into an economic miracle by doing nothing." Hong Kong routinely tops the Heritage Foundation's annual ranking of the "freest" economies, implying that small governments and anything-goes markets make for the richest societies.

Trouble is, no one bothered to tell Hong Kong. The British didn't just "do nothing" with Hong Kong, and neither have the folks who've governed in the 11 years since it reverted to Chinese sovereignty. All along, Hong Kong authorities have rigged the economic game in all sorts of ways to produce desired outcomes. Viewed correctly, Hong Kong actually teaches that some degree of socialism is necessary in even the freest economies.

Even O'Rourke acknowledges Hong Kong's most egregious departure from laissez-faire purity: government ownership of virtually all the city's land, which it drip-feeds to the market in periodic auctions that keep prices high and developers rich. But the meddling goes way beyond land. Rather than leave it to private markets to decide who lives where, the government provides subsidized housing for 48 percent of the population. It has a public health system that accounts for 89 percent of hospital beds, serves 80 percent of inpatients, and pays for around 95 percent of their costs. (The government accounts for 55 percent of total health care spending, about the same as in the United States.) In 2000 it launched a Mandatory Provident Fund roughly comparable to the U.S. Social Security System. The government bans smoking in public places. It strictly controls immigration. For many years it regulated bank-deposit rates and allowed a telephone monopoly. It has significant stakes in public transport systems. It subsidizes education. Its currency does not float freely but for 25 years has been pegged to the U.S. dollar. In a notorious act of free-market heresy, its central bank bought local stocks during Asia's 1997-98 financial crisis to support share prices and defend the currency. (Whatever the moral hazard, it sold these assets at a substantial gain a few years later.) The government looks poised to propose a minimum wage (strongly backed by the public) as well as an antitrust law that would challenge the city's various oligopolies.

To be sure, Hong Kong comes closer to the free-market ideal in its Forbesian tax system. There is a flat, 15 percent top rate on wages and no tax on interest, rent, dividends, or capital gains. Thanks to generous allowances, about 60 percent of the population is exempt altogether. Corporations pay a 16.5 percent rate on profits. Rhetorically, the tax regime would seem to cut two ways, allowing both liberals and conservatives to claim that intervention doesn't require high taxes or a swollen public sector. Indeed, public spending in Hong Kong accounts for 20 percent of GDP, compared with 36 percent for all levels of government in the United States.

But Hong Kong residents also pay what many regard as indirect taxes—exorbitant private-sector rents and cartelized grocery prices, for example. And Hong Kong has fiscal advantages that most large economies don't. For one, there's no defense budget to worry about. Thanks to land-sale proceeds and a "betting duty"—a tax on the all-important gaming industry—it can afford to rely less on corporate and personal-income taxes (35 percent of revenues combined) than, say, the United States (60 percent). Heavily urbanized, Hong Kong enjoys efficiencies that more-rural societies don't. In short, Hong Kong's taxes are low for reasons that aren't entirely applicable to most developed economies.

None of this is news to anyone who lives in Hong Kong, but it's instructive to people who don't, particularly as hands wring over the Bailout That Ate Capitalism. The truth is, even the capitalist Oz in the South China Sea was never the laissez-faire paradise it was cracked up to be. Like successful economies anywhere, Hong Kong's has long been mixed—largely private but tempered with state interventions in critical areas.