CONFIDENTIAL
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3. We (and also the World Bank) have expressed doubts whether the
Hong Kong Government should not increase taxation, and also raise
more loans, to pay for an even bigger development programme.
Hong Kong view is that their traditional fiscal policy is the
cornerstone of the Colony's remarkable economic progress. Given
the political insecurity of the Colony, and the Chinese dislike for
economic regulation and high taxation, the Hong Kong Government feel
that they would risk killing the goose that lays the golden eggs if they
changed their policies. This is of a piece with their general attitude of
almost 19th-century laissez-faire in economic matters the only free
exchange market in the Colonial territories, free movement of capital,
and as light a hand as possible on any form of control of private
enterprise.
4. It must be said that Hong Kong risks carrying this policy too far.
The banking crisis early in 1965, when the failure of two small
Chinese banks led to a general run on banks which had to be checked by
emergency measures, would not have happened if Hong Kong had moved
earlier to bring banking activities under the sort of control
(e.g. as to liquidity ratios or restriction of bank investment in
property speculations) which is normal nowadays. And Hong Kong is
extremely vulnerable to outside influences on the economy, whether from
political scares or from a closing up of markets. There is always the
threat that the bubble may burst. There are already some signs that there
is a levelling out in the growth rate of the economy.
5. Against this, opinion in Hong Kong can and does argue that their
policies have worked, and have enabled them to absorb more than a
million immigrants since the war; if the capital which has built up
employment opportunities were driven away, the taxable capacity which
has enabled them to be housed and looked after would wither. It can also
argue that to push up the level of social services too high will merely
bring in more illegal immigrants, so that the process would be
self-defeating, and that in any case Hong Kong is already developing
to the limit of its physical capacity, And it certainly will argue that
/since
CONFIDENTIAL