2009 Index of Economic Freedom

Quick Facts

Population:

• 6.9 million

GDP (PPP):

• $267.8 billion
• 7.0% growth
• 5.5% 5-year compound annual growth
• $39062 per capita

Unemployment:

• 4.1%

Inflation (CPI):

• 2.0%

FDI Inflow:

• $42.9 billion

Hong Kong's economic freedom score is 90, making its economy the freest in the 2009 Index. Its score is 0.3 point better than last year, reflecting minor improvements in fiscal freedom and business freedom. Hong Kong is ranked 1st out of 41 countries in the Asia–Pacific region.

Hong Kong has an impressive record of openness to global trade and investment. Despite a lack of natural resources, the economy's institutional strengths have allowed it to achieve high levels of prosperity reinforced by vibrant entrepreneurial activity. The small island is one of the world's leading financial centers, and regulation of banking and financial services is transparent and efficient. Income and corporate tax rates are very competitive, and overall taxation is relatively small as a percentage of GDP. Business regulation is straightforward, and the labor market is flexible. Property rights are well protected by an independent and corruption-free judiciary.

In the second half of 2008, the Hong Kong government began public consultation on government proposals for a new competition law. In addition, while the government has resisted any comprehensive minimum wage legislation, renewed debates on imposing a general minimum wage have begun. The outcome of these two political discussions will likely indicate the overall direction of Hong Kong's future economic policies and determine whether its extraordinary commitment to economic freedom will endure.

Background Back to the top

The Special Administrative Region of Hong Kong is part of the People's Republic of China but governs its own affairs and enjoys a wide range of freedoms under the territory's mini-constitution, the Basic Law. Pledges to advance universal suffrage have stalled. Hong Kong boasts one of the world's most prosperous economies, thanks to its small government, low taxes, and light regulation. Major industries include financial services, shipping, and services, but manufacturing has migrated largely to mainland China.

Business Freedom 92.7 Back to the top

The overall freedom to conduct a business is well protected under Hong Kong's regulatory environment. Starting a business takes less than half the world average of 38 days, and obtaining necessary licenses takes less than the world average of 225 days. Bankruptcy proceedings are very easy and involve only modest costs.

Trade Freedom 95.0 Back to the top

Hong Kong's weighted average tariff rate was 0 percent in 2006. Restrictive pharmaceuticals regulation, market access restrictions for some services, limited import licensing, and issues involving the enforcement of intellectual property rights add to the cost of trade. Five points were deducted from Hong Kong's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 93.4 Back to the top

Hong Kong's tax rates are among the lowest in the world, and both the top corporate tax rate and top income tax rate were reduced by one percentage point as of July 2008. Individuals are taxed either progressively, between 2 percent and 17 percent on income adjusted for deductions and allowances, or at a flat rate of 15 percent on gross income, depending on which liability is lower. The top corporate income tax rate is 16.5 percent. In the most recent year, overall tax revenue as a percentage of GDP was 12.8 percent.

Government Size 93.1 Back to the top

Total government expenditures, including consumption and transfer payments, are fairly low. In the most recent year, government spending equaled 15.2 percent of GDP. The government has made efforts to maintain a balanced budget.

Monetary Freedom86.2 Back to the top

Inflation is low, averaging 1.9 percent between 2005 and 2007. The government regulates the prices of public transport and electricity and some residential rents. Five points were deducted from Hong Kong's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom90.0 Back to the top

Foreign capital receives domestic treatment, and foreign investment is strongly encouraged. There are no limits on foreign ownership and no screening or special approval procedures to set up a foreign firm except in broadcasting, where foreign entities may own no more than 49 percent of the local stations, and certain legal services. There are no controls or requirements on current transfers, purchase of real estate, access to foreign exchange, or repatriation of profits. The government of Hong Kong owns all land, granting long-term leases to domestic and foreign interests equally.

Financial Freedom90.0 Back to the top

Hong Kong is a global financial center with a regulatory and legal environment focused on enforcing prudent minimum standards and transparency. As of mid-2008, Hong Kong had a total of 202 banking institutions, of which 134 were incorporated outside of Hong Kong. Banks are overseen by the independent Hong Kong Monetary Authority. Credit is allocated on market terms. There are no restrictions on foreign banks, which are treated the same as domestic institutions. The Hong Kong Stock Exchange (HKSE) is one of the 10 most capitalized in the world, but its regulation and transparency have been criticized in the past. Several mainland Chinese firms made a number of successful initial public offerings in 2007 and now account for more than half of the HKSE's market capitalization.

Property Rights90.0 Back to the top

Contracts are strongly protected. Hong Kong's legal system is transparent and based on common law, and its constitution strongly supports private property and freedom of exchange. Despite government public awareness campaigns to protect intellectual property rights, pirated and counterfeit products such as CDs, DVDs, software, and designer apparel are sold openly. The government controls all land and, through public auctions, grants renewable leases that are valid up to 2047.

Freedom From Corruption83.0 Back to the top

Corruption is perceived as minimal. Hong Kong ranks 14th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, and foreign firms do not see corruption as an obstacle to investment. Giving or accepting a bribe is a criminal act.

Labor Freedom86.3 Back to the top

Hong Kong's flexible labor regulations enhance employment and productivity growth. The labor code is strictly enforced but not burdensome. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be relatively costly. Regulations on the number of working hours are flexible.