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Tuesday, May 01, 2007

Market Failure in Everything: The Hong Kong Edition

This commentary argues that Hong Kong, which is often held up by libertarian types as an example of the success of a laissez faire approach to regulation, needs to implement antitrust law to reign in monopoly power:

Why Hong Kong needs an antitrust regime, by Mark Williams, Commentary, Financial Times: For decades the British colonial administration, and later the special region’s government, maintained that Hong Kong’s laisser faire economic system was best left to its own devices and antitrust-type rules were both unnecessary and harmful... Lauded as the world’s freest economy..., Hong Kong has been seen by rightwing ideologues as the paradigm of classical market liberalism. But in reality the need for a comprehensive antitrust regime in Hong Kong has been obvious to many observers.

While the externally traded sector is competitive in world markets, the non-traded domestic segment is dominated by a small number of diversified, family-owned conglomerates based on property. Over the years they have consolidated their grip on other sectors, from private monopolies in electricity and gas to tight control of ferries, buses, the port, retailing and telecommunications. High concentration ratios and intra-firm trading create barriers to entry in many markets and incumbents in some sectors have used exclusionary and exploitative abuses of market power to maintain pre-eminence.

At the root of many economic distortions lies the all-pervasive and corrosive government land monopoly, whereby government and property developers maintain a symbiotic dependency on high land prices to boost their respective revenues.

The assumption of power by Donald Tsang in March 2005 appeared to mark a shift away from the government’s traditional hostility to a competition regime. The government has now signalled that it wants legislation in place by summer 2008...

Whether the government will adopt an effective regime remains open to question. The existing pro-competition rules in telecommunications give room for optimism. The deregulation of this sector over the past decade has been hugely beneficial for business and domestic consumers, who now enjoy one of the most dynamic telecommunications sectors anywhere.

The proposed law may not regulate market structure or mergers, so cartel operators need only become a single entity to retain their profitability. However, the proscription of monopoly abuses and cartel practices will be a start. ... Resistance to change from legislators chosen by business groups may sabotage or dilute government plans unless a coalition of forces is assembled to ensure passage of the bill.

The big issue is how a Hong Kong competition law will function alongside the imminent mainland version, given the increasing dependence of Hong Kong on the motherland. Economic convergence is a fact and a “fortress Hong Kong” mentality that attempts to continue a cordon sanitaire for the domestic sector is unsustainable.

In the link given above, Milton Friedman was not happy about this attempt to pass an antitrust law, and believed the market would correct the imperfections "long before Mr. Tsang gets around to it":

Hong Kong Wrong, by Milton Friedman, Commentary, WSJ: ...Mr. Tsang insists that he only wants the government to act "when there are obvious imperfections in the operation of the market mechanism." That ignores the reality that if there are any "obvious imperfections," the market will eliminate them long before Mr. Tsang gets around to it. Much more important are the "imperfections" -- obvious and not so obvious -- that will be introduced by overactive government.

    Posted by on Tuesday, May 1, 2007 at 06:48 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (11)


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