HONG KONG AS A PARTNER IN WORLD TRADE
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there is no restriction on the inward or outward movement of funds for any purposes and no exchange controls. There are thus no payments constraints standing in the way of the conduct of trade, and capital can also move in and out of the territory without difficulty. In practice, also, there are no balance of payments difficulties because the net inward or outward movement of funds feeds back into the internal economy through the monetary system and the level of interest rates and, under a flexible exchange rate regime, through movements in the rate of exchange. This, in turn, leads to adjustments which dampen down or offset any excessive inward or outward movements of money.
Third is the importance of certain crucial and long-standing government policies. The government does not interfere, through excessive controls and regulations, with the conduct of private business. The people are free to conduct their affairs in accordance with the rule of law, including a soundly-based and well-administered body of commercial law, of capital importance for the orderly conduct of trade. No decisions have ever been taken as to which industries or activities might best be suited to Hong Kong conditions, or to attract or subsidise particular industries at the expense of others, and the fortunes of all have been subject to their success or otherwise in a free market.
Of particular importance has been the government's conduct of its fiscal policy. This has been based on the principle of balanced budgets, with revenue covering all expenditure, including capital expenditure, coupled with a relatively low, simple, certain and easily administered system of taxation. In the 40 years since the Second World War in only six have there been budget deficits, and then usually only of modest proportions. The other 34 years have all registered surpluses, sometimes very substantial. The result has been the accumulation of large fiscal reserves and virtually no public debt.
This has been accompanied by a relatively low level of taxation which has, nevertheless, been extraordinarily productive of revenue. In the early post-war years total annual government revenue came to around $200 million. In the most recent fiscal year, 1985–6, it amounted to over $40,000 million or 200 times more in money terms. Even taking account of the intervening rise in prices it was probably as much as 35 times larger in real terms. This is another indication of the growth of the economy over the period. Without it, the equally impressive expansion of public services could not have been contemplated.
What appears to have been the case is that the maintenance over a prolonged period of a low, simple, stable and certain system of taxation, with no loopholes and special deductions, has helped in nurturing incentives to achieve and to create wealth from which the whole community has benefited. This aspect of affairs, indeed, is now beginning to be more recognised in some advanced industrial countries and the tax reforms recently voted in the United States are following a path which has certainly been well trodden by Hong Kong.
The fourth factor assisting Hong Kong in world markets has been its long accumulation of commercial and financial experience. A whole network of commercial organisations has grown up over the years, ranging from the large trading houses to small import/export firms and these have been able to exploit contacts in distant markets and to seek out new ones. The existence of this network was of particular importance in the earlier stages of industrialisation because it provided ready-made links into overseas markets. A well- established banking and financial nexus was also in place to provide funds for working capital and for machinery and other equipment and to underwrite trade. Finally, a network of shipping lines and other communications links was also already in existence coupled, in Hong Kong itself, with one of the most efficient ports in the world. All these elements together played a big part in helping to give Hong Kong a head start in industrialisation.