Why Hong Kong should fear Singapore more than Shanghai

If you desire an animated dinner, start a debate about why some countries are rich while others are poor. Asia is the ideal battle ground for this debate: the region has developed and emerging economies, modern and backward nations, democracies and dictatorships. Many Asian countries were poor just 50 years ago, but are now among the richest in the world – Singapore, Taiwan, Japan, Hong Kong and South Korea. And some got poorer in the same period – Sri Lanka, Philippines, Myanmar and North Korea. China is now half way, and on the way up.

Why is that? Why are some countries rich and others poor?
Opinions are mostly determined by income – wealthy people often believe that climate, culture or even genetics and race drive the economic development of a nation. And often the debaters confuse statistical with causal correlation – the fact that many Asians are poor is not the same as saying that many people are poor because they are Asian.

The climate argument asserts that people from countries with moderate climate always had to work harder and plan better to survive lean times, while in tropical climates everything came naturally. This is classical statistical correlation – indeed, most countries in the (moderate) Northern hemisphere are wealthy, but so too are Australia and a growing list of sultry Asian countries.

More difficult to repudiate is the relationship between culture and economic progress – isn’t it true that some cultures and societies have features which drive wealth creation better than others? North and South Korea offer a great (albeit depressing) mirror: 50 years ago they were the same country, same race, same climate and culture. Now one half is very poor, the other half rich. Why is that?

At the end of the day, only one argument holds true: the way nations forge their societies, organize their institutions and legal systems, and incentivize people, businesses and innovation, drives wealth creation. The ranking of nations on the ease of doing business index correlates highly with their wealth. This index is meant to measure regulations directly affecting businesses; it does not directly measure more general conditions such as a nation's proximity to large markets, inflation, or crime. A nation's ranking on the index is based on the average of 10 subindices: (1) Starting a Business; (2) Dealing with construction permits; (3) Employing workers; (4) Registering property; (5) Getting credit; (6) Protecting investors; (7) Paying taxes; (8) Trading across borders; (9) Enforcing contracts and (10) Closing a business.

For years, Singapore has ranked first and Hong Kong second, followed by the USA and Scandinavian countries. In Hong Kong it takes 1-2 days to set up a business and there is no minimum capital requirement. By contrast, in Guinea-Bissau, one of the poorest countries in the world, there are 16 procedures required to start a business taking 213 days to complete.

The fastest ease-of-business index risers in Asia are South Korea (from 23rd in 2009 to 9th in 2012) and Taiwan (from 61st to 25th), while Japan dropped from 13th in 2009 to 20th in 2012. China sits 91st as the ease of doing business has not improved really in the past 4 years. So if Hong Kong wants to remain high in the league of wealthy nations, it has to maintain its ease of doing business and in doing so it should fear Singapore more than Shanghai.  

Wander Meijer, Global Head International Research for TNS, a WPP company.