Constitutions: Freedom from Communism?

In their bestseller Free to Choose, Milton and Rose Friedman championed the idea of an economic bill of rights that would receive coequal constitutional stature with civil rights. It might include, they suggested, such provisions as tax and spending limits, guarantees of free international trade, and a prohibition on wage or price controls.

The closest the United States has come to the protections envisioned by the Friedmans have been the various constitutional amendments pushed, so far unsuccessfully, by such groups as the National Taxpayers Union and the National Tax Limitation Committee: to require a balanced budget, impose tax and spending limits (as a share of GNP), and give the president a line-item veto. To date, no Western constitution has ever incorporated a broad economic bill of rights designed to protect individual liberty.

How ironic, then, that a Communist nation has now drafted the first economic bill of rights to be included in a written constitution! The People's Republic of China, one of the most totalitarian states in the world, has included in its tentative constitution for Hong Kong an economic bill of rights that encompasses many of the sweeping provisions outlined in Free to Choose. This bill of rights is contained in a document published in April, entitled the Draft Basic Law of the Hong Kong Special Administrative Region (HKSAR) of the People's Republic of China. More ironic still is that Hong Kong's capitalist leaders have by no means embraced the draft Basic Law's economic protections.

The Basic Law will serve as Hong Kong's mini-constitution when China resumes sovereignty over the British colony on July 1, 1997. To the best of my knowledge, the proposed Basic Law is unique among contemporary national constitutions in one respect: it enshrines both general principles and concrete policies to preserve individual economic freedom. It does so because Chinese Communist authorities recognize that the preservation of economic freedom in Hong Kong is critical to its continued stability and prosperity.

Toward that end, the Joint Declaration signed by the British and Chinese government in 1984 promises that China will allow Hong Kong to continue its capitalist way of life for 50 years after 1997. And Chinese leader Deng Xiaoping has advanced the novel doctrine of "one country, two systems": socialism on the mainland and capitalism in Hong Kong. Whether or not the Chinese later abide by the provisions they have set out in the Joint Declaration and the proposed Basic Law, they have at least explicitly recognized the importance of property rights and economic freedoms—which is more than can be said for many Western countries.

Perhaps the most fundamental individual economic right of all—that of private property—appears in Article 6 of the draft Basic Law's first chapter: "Rights of property ownership, including those related to acquisition, use, disposal, inheritance, and compensation for lawful take over [of property by the government] shall be protected by law. The compensation for lawful take over shall be corresponding to the real value of the property concerned, freely convertible and paid without undue delay." This means, for instance, that Hong Kong's residents would be free to buy and sell land as they wished and that the government could not nationalize property without paying full compensation.

As the above provision makes clear, however, private property flourishes only within the rule of law. Article 8 stipulates that the laws in force in Hong Kong, including the common law, customary law, and legislation, shall be maintained. This provision is particularly noteworthy since Hong Kong shares Britain's legal system and common law, which are especially concerned with safeguarding private property.

The drafters of the Basic Law, most of whom are mainland Chinese schooled in the socialist system, have also stipulated a set of economic provisions to restrict the scope and size of government. Again, these provisions arise from current Hong Kong policies.

Three principles have historically governed Hong Kong's public finances:

• first, that low rates of direct taxation stimulate work, saving, and investment, thereby fostering high rates of economic growth;

• second, that in Hong Kong's open economy deficit spending is inappropriate, since any increase in public spending can leak overseas—balanced budgets (erring on the side of surplus) are considered the norm of sound fiscal policy; and

• third, that the size of the public sector must be kept small to prevent it from crowding out the private sector.

Following these precedents, Article 107 stipulates that Hong Kong shall continue to practice a low tax policy; while no particular rate is specified, the policy of the last 50 years has been to keep taxes at 10–15 percent of personal income and about 17 percent of corporate profit. As a result, any expansion in public-sector spending must come either from the fruits of economic growth or by substituting spending in one program for another.

Article 105 further limits government spending by requiring revenues and expenditures to balance. And it stipulates that neither taxes nor spending shall grow faster than gross domestic product (GDP). Taken jointly, these provisions ensure low taxes, balanced budgets, and an effective limit on the growth of government. The creation and distribution of income is to remain in private hands.

Hong Kong is an international financial and banking center. Indeed, the financial services sector is the most rapidly growing part of its economy, contributing nearly one quarter of GDP. Under the draft Basic Law, Hong Kong is to remain a free market in money. Specific clauses prohibit exchange controls within the HKSAR, protect the free flow of capital within, into, and out of the region, and ensure free entry into financial businesses and financial markets. Interestingly, the draft Basic Law also guarantees a freely convertible Hong Kong currency—backed 100 percent by a reserve fund of foreign currency.

Other sections ensure free external and internal trade. The draft Basic Law calls for Hong Kong to remain a free port, true to its founding principles dating back to 1841. Specific articles state that the region shall continue to do business on the basis of external free trade and that the free movement of goods, intangible assets, and capital shall be maintained. Foreign investment shall be protected by law. And, while it is not part of the economic bill of rights, the draft Basic Law's human rights provisions guarantee Hong Kong residents the right to leave the territory, as well as to travel freely between the HKSAR and the mainland.

Finally, Hong Kong shall practice free and open policies regarding industry, commerce, and other trades. This provision is designed to ensure free entry into and exit from most lines of economic activity (save such regulated monopolies or licensed franchises as power, telephone, and transportation). These provisions require that prices remain unregulated and that the price mechanism adjust supply with demand in both internal and external markets.

One would think that Hong Kong's public leaders would appreciate these attempts to protect the economic liberty of the territory's residents after 1997. But nothing could be further from the truth. Many of Hong Kong's politicians and intellectuals sharply criticize the draft Basic Law's economic provisions for venturing into policy rather than simply stating general principles. These criticisms reflect the tradition in which Western democracies have failed to give constitutional status to economic freedom.

Testifying before the British Parliament in July, Hong Kong's governor, Sir David Wilson, said that the drafters had gone beyond the Sino-British Joint Declaration in providing for a low-tax policy and balanced budget. Such provisions, he warned, would limit the flexibility of the future government. This charge is of course true if that government tries to undermine Hong Kong's capitalist system. But the drafters were in fact trying to guarantee the continuity of Hong Kong's public finances and limited government.

In general, Hong Kong's intellectuals have criticized the draft Basic Law on the grounds that a constitution should supply basic structures and procedures of representative government, along with guarantees of individual civil rights, but that the inclusion of specific economic liberties and policies is inappropriate. It is a curious twist of fate that Hong Kong's Western-educated and -oriented elites may throttle socialist China's attempt to incorporate an economic bill of rights into Hong Kong's mini-constitution.

Only time will tell if the final draft of Hong Kong's Basic Law will retain an economic bill of rights, omit it, or weaken it by relegating economic protections to a memorandum of understanding. And, of course, the effectiveness of any guarantees depends on the government's willingness to abide by them. But if China's socialist drafters retain an economic bill of rights, they will do so over the objections of those Hong Kong community leaders whose very rights these provisions are designed to protect.

Alvin Rabushka, a senior fellow at the Hoover Institution at Stanford University, is the author of four books and numerous articles on Hong Kong.