Freedom of Information and the Economic Future of Hong Kong

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Freedom of Information and the Economic Future
of Hong Kong

• By Zhiwu Chen
• Professor of Finance
• Yale School of Management

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What determines national wealth? Traditional
view physical assets (e.g., natural resource
endowments)
Per-Capita GDP ()
Based on per-capita oil and natural gas reserves,
44 countries are divided into three groups. The
average per-capita GDP for each country group is
reported respectively for the year 1975 (in BLUE)
and 2001 (in RED).
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What is the best asset for HK, then? (Physical
capital, human capital or Institutional capital?)

• No natural resources, and not much land
• Buildings, roads, bridges?
• It must be its institutional capital (legal,
  political, economic and informational
  institutions)!

4
Where to grow Hong Kongs economy next?

• Agricultural sector less than 0.1 of GDP
• Mining and manufacturing 13.5
• Service sector 84.4!(including financial
  services, health care, educational services)

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Manufacturing and mining can get by even without
rule of law or free press

• Consider manufacturing and trading a car
• You can look at and test-drive it
• color, style, engine, mechanical quality, .

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But, service sector depends more on the rule of
law and press freedom

• Consider buying a stock
• You cannot look at and test-drive it
• No color, no style, no engine, no mechanical
  quality, .

XYZ Corp.
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Indeed, cross-country data support the dependence
of Service Sector Development on press freedom
Service sectors contribution to GDP
Based on 1990 press freedom ratings, 107
countries are divided into three equal groups.
The average service sectors share in a countrys
2002 GDP is reported for each country group. The
higher the share, the better developed the
countrys service sector.
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Chart 3 Press Freedom and Service Sector
Development examples
Press freedom rating is on a 1-100 scale, with 1
representing the freest press.
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Financial market development depends on press
freedom and rule of law!

• Mr. Lee has to decide how invest his savings
• Bank savings account
• Stock ABC
• Stock XYZ
• Now, both ABC and XYZ claim to have a good
  future!
• _____ In reality, only one of the two is good.
• But, no media dare to investigate independently!

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Consequences of No uninhibited flow of information

• Mr. Lee and others choose not to participate
  bad for liquidity market livelihood
• If they do buy stocks, buy an equal amount of
  each, in order to hedge against uncertainty.
• When investors cannot distinguish good from
  bad, good stocks will leave the market while
  bad ones remain ? market for lemons!

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Chart 4 Press Freedom and Stock Market
Development
Stock Market Capitalization to GDP Ratio
Based on 1972 press freedom ratings, 57 countries
are divided into three equal groups. The median
ratio between stock market capitalization and GDP
is reported for each country group.
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Given the low-cost labor and land across the
border, Hong Kong

• Has to rely on the service sector to
  grow(especially financial services, fund
  management, educational services, )
• Expanding press and information freedom is the
  only way to ensure growth in these industries