Are there limits to growth?

Dateline 03 May 2006

When writing recently about India, I pointed out that economic growth in the country is around 6% per annum, almost double the usual rate for the US and around treble what is common in continental Europe. Poorer countries often grow faster than richer ones. It closes the international gap. Indeed when the US was first industrializing, its growth rate too was much higher.

At first glance, this might be thought to imply some upper limit for growth. Countries get richer, and their growth rate slows down. Leftist economists often argue this. They suggest that the world is running out of resources, or of new things to invent.

But why then is the US not only much richer than Europe, but growing faster too? And why do there appear to be exceptions to the rule that growth slows down as countries get richer? Probably because it is not wealth which slows economic growth, but some policy that governments tend to adopt as they get richer. The slow down in growth is a choice we make, or at least follows from a choice we make.

Let’s take a look at Hong Kong. Milton Friedman – the greatest economist of the twentieth century – once said “if you want to see capitalism in action, go to Hong Kong”.

The growth rate in the city-state in 2005 was 7.3%, down from 8.6% the previous year. Admittedly this followed a ‘bad’ run from 2001 to 2003, when growth rates where in the 2-3% band. But this is considered normal in other developed countries. As recently as 2000 Hong Kong’s growth rate topped 10%. I doubt that rate of growth has been seen in the US for a century.

And Hong Kong is a developed country. Its GDP per head is over US$33,000 a year, measured by purchasing power parity. That is well below the US (over $42,000) but ahead of Japan, Germany or the UK. It is roughly on a par with city-state rival, Singapore.

What could account for Hong Kong’s remarkable economic growth. Probably, its low taxes. Income tax only covers salaries, not investment income, and not money earned outside Hong Kong. Most people who pay the salaries tax pay a flat rate of 16%, but there are substantial deductions. A married couple with children and a mortgage might well pay no tax at all on an income of around US$50,000. This means that most lower paid people pay no tax at all. There is little tax avoidance, and hardly anyone challenges their assessments. With tax rates that low it would cost more to challenge your assessment than you could possibly save.

Singapore does not have a flat tax. In fact rates are sharply progressive, rising from 4% to 22%. But compared with the US – let alone Europe – the overall tax burden is extremely light. The 4% band covers people earning up to around US$20,000. People earning around US$25-50,000 pay just 9%. The top rate only affects people earning well over US$200,000.

Western countries chose to sacrifice high performance growth rates by letting government grow out of control. Hong Kong and Singapore keep government in its box. As a result they have overtaken Europe in terms of standards of living. It will be several more years before they overtake the US. But they will. It is a matter of time.

Copyright © 03 May 2006

Quentin Langley is editor of an academic at the University of Cardiff and is a columnist with Campaigns & Elections. This article was first published in the Common Sense series for Lake Champlain Weekly.

View article with menu

All information © copyright Quentin Langley 6544