Hands-Off Policy to Solve the Unemployment Problem

Strange things happen in this mysterious world of ours and nothing is stranger than the mass unemployment we have in South Africa. In a normal economy, in which people decide for themselves for whom to work or not work, or who to employ or not employ, people seem to sort things out spontaneously among themselves.

In SA, for every three existing jobs, one more will have to be added if today’s unemployed are to be absorbed into the labour force. What is the best way to bring this about? Adding extra people onto the government payroll does not create jobs – it destroys them. Government has no resources of its own out of which to pay wages. Every cent government pays out, including all the wages it pays, it first has to take from private individuals and their firms in taxes, which diminishes the resources available to them to invest, grow the economy, and in the process, increase the demand for labour.

Some people find employers and others find employees, all on their own. Happily, at the moment, if they cannot find the jobs or employees they want, there are lots of friendly people out there who, for a fee, will help them find better options. Without any “official” help, or more precisely, especially without official “help”, everyone would do just fine. Imagine if the 7.3 million people who currently are unemployed could go around offering their services without the inhibiting labour laws coming between them and prospective employers. Think what very modest earnings of R800 per month each (R70bn per annum) would mean to the currently jobless and their families – an amount that would quickly grow to R140bn (R1,600 per month each), R280bn (R3,200 per month each), and so on, as these workers gain experience on the job.

What SA needs is a Hong Kong-style “hands-off” policy. Hong Kong resolved a greater unemployment problem than the one that now faces this country and simultaneously grew its economy at an astonishing rate. In four decades, that tiny territory was transformed from a poverty-stricken British colony into an economic powerhouse with 37 per cent higher per capita incomes than the citizens of Britain.

Hong Kong is a rocky island off Mainland China with a small piece of the mainland attached to it. When it was a territory under British administration back in 1961, John Cowperthwaite, an astute Scottish economist, was appointed the Financial Secretary. In this position, he dominated Hong Kong economic policy and a hands-off or “doctrine of positive non-interventionism” was adopted under his guidance. This allowed the citizens to prosper, as they never would have done if British taxes, labour laws, and other legislation had been applied in Hong Kong.

Cowperthwaite played an important role in having Hong Kong maintain a low flat rate tax (15 per cent) on business profits and income from employment (after generous deductions). He declined to implement the PAYE system of upfront taxes, and excluded dividends and foreign earnings from taxable income. There was no capital gains tax and import and export duties were abolished. A currency board issued the Hong Kong dollar, maintaining a fixed rate of exchange with the US dollar, with 100 per cent foreign currency reserves backing the HK$.

Positive non-interventionism meant keeping government out of people’s wallets and lives as far as possible. After 1945, refugees flooded into Hong Kong, and the population grew from 600,000 to 3.2 million by 1961. Many of these people were poverty-stricken and housed in shacks, on boats in the harbour, or in cramped one-room apartments in high-rise buildings erected by the government. All and sundry urged the government to halt the immigration and even to send refugees back to the countries from which they had fled, but the government and its Financial Secretary refused.

There were no jobs in the colony for these additional people, but enterprising entrepreneurs soon looked for ways to employ all this available labour. Observers considered what resulted to be “exploitation” and were appalled. Hong Kong became famous for the low-cost goods the refugees made in their homes, churning out millions of items such as miniature trinkets and toys made with moulds and molten plastic.

Cowperthwaite once again applied the positive non-intervention policy. He left labour relations to employers and employees, instituted no minimum wage laws, and no government job creation projects. Instead, trinkets and toys for export to the rest of the world gradually made way for increasingly high value goods produced in modern factories by an increasingly skilful and well paid labour force. The resulting “economic miracle” of high growth and development absorbed the huge number of unemployed at such a rapid rate that, by the 1980s, employers were complaining of a shortage of labour!

In a 1998 article published by the Hoover Institution, renowned economist Milton Friedman reported that, “in 1960 ... the average per capita income in Hong Kong was 28 per cent of that in Great Britain; by 1996, it had risen to 137 per cent of that in Britain. In short, from 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger than Britain’s. It’s easy to state these figures. It is more difficult to realise their significance. Compare Britain—the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set—with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbour. Yet within four decades the residents of this spit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.”

Friedman’s conclusion was that, “the only plausible explanation for the different rates of growth is socialism in Britain, free enterprise and free markets in Hong Kong”. When Friedman asked why the Hong Kong government appeared to have no available statistics, John Cowperthwaite’s answer was, “If I let them compute those statistics, they’ll want to use them for planning.’’

If SA had less government planning and a hands-off “doctrine of positive non-interventionism”, like Hong Kong, it would have high growth and its chronic unemployment problem would be solved, rapidly.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 25 January 2011