1 Economic Freedom and Hong Kong: A Status Report November 30, 2006 Mark Mullins, Executive Director...

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Economic Freedom and Hong Kong:Economic Freedom and Hong Kong:A Status ReportA Status Report

November 30, 2006

Mark Mullins, Executive Director

The Fraser Institute

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Economic Freedom of the Economic Freedom of the World ProjectWorld Project

Objective: find a way to measure economic freedom and explore the connection between it and other variables

20 year project Led by Professor Milton Friedman, Rose

Friedman and Michael WalkerInvolved 60 of the world’s top scholars

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What is The Economic What is The Economic Freedom of the World Index?Freedom of the World Index? An annual compilation of data representing factors

which make a country economically free Authors: James Gwartney and Robert Lawson A compendium of 38 government policies affecting

economic freedom based on objective data or independent surveys

A ranking of 130 countries representing 93% of the world’s population according to the extent to which they permit their citizens to be economically free

Now a collaboration of Institutes in 72 different countries

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Economic Freedom DefinedEconomic Freedom Defined

Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.

James Gwartney et al. 1996

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Components of The Economic Components of The Economic

Freedom of the World IndexFreedom of the World Index

Size of government and taxation Private property and the rule of law Soundness of money Trade regulation and tariffs Regulation of business, labour and capital

markets

Based entirely on objective or third party data for 130 countries

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Talk about making a difference …Talk about making a difference …

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Albanian Center for Economic Albanian Center for Economic Research, AlbaniaResearch, AlbaniaFundación Libertad, ArgentinaFundación Libertad, ArgentinaInstitute of Public Affairs, AustraliaInstitute of Public Affairs, AustraliaTIGRA®, AustriaTIGRA®, AustriaCenter for Economic and Political Center for Economic and Political Research, AzerbaijanResearch, AzerbaijanThe Nassau Institute, BahamasThe Nassau Institute, BahamasMaking Our Economy Right (MOER), Making Our Economy Right (MOER), BangladeshBangladeshScientific Research Mises Center, Scientific Research Mises Center, BelarusBelarusCentre for the New Europe, BelgiumCentre for the New Europe, BelgiumFundacion Libertad y Democracia Fundacion Libertad y Democracia (FULIDE), Bolivia(FULIDE), BoliviaInstituto Liberal do Rio de Janeiro, Instituto Liberal do Rio de Janeiro, BrazilBrazilInstitute for Market Economics, Institute for Market Economics, BulgariaBulgariaCambodia Institute of Development Cambodia Institute of Development Study, Cambodia Study, Cambodia The Fraser Institute, CanadaThe Fraser Institute, CanadaInstituto Libertad y Desarrollo, ChileInstituto Libertad y Desarrollo, ChileILP- Instituto Libertad y Progreso, ILP- Instituto Libertad y Progreso, ColombiaColombiaInstituto para la Libertad y el Instituto para la Libertad y el Análisis de Políticas, Costa RicaAnálisis de Políticas, Costa RicaThe Institute of Economics, CroatiaThe Institute of Economics, CroatiaLiberální Institut, Czech RepublicLiberální Institut, Czech RepublicCenter for Politiske Studier (CEPOS), Center for Politiske Studier (CEPOS), DenmarkDenmarkFundación Economía y Desarrollo Fundación Economía y Desarrollo Inc., Dominican RepublicInc., Dominican RepublicInstituto Ecuatoriano de Economía Instituto Ecuatoriano de Economía Política, EcuadorPolítica, Ecuador International University Concordia Audentes, Audentes University, EstoniaAssociation pour la Liberté Economique et le Progrès Social (ALEPS), France

Alternate Solutions Institute, PakistanAlternate Solutions Institute, PakistanFundación Libertad, PanamaFundación Libertad, PanamaCentro de Investigación y Estudios Centro de Investigación y Estudios Legales (CITEL), PeruLegales (CITEL), PeruThe Center for Research and The Center for Research and Communication, PhilippinesCommunication, PhilippinesCentrum im. Adama Smitha, PolandCentrum im. Adama Smitha, PolandCausa Liberal, PortugalCausa Liberal, PortugalRomania Think Tank, RomaniaRomania Think Tank, RomaniaInstitute of Economic Analysis, RussiaInstitute of Economic Analysis, RussiaThe F.A. Hayek Foundation, Slovak The F.A. Hayek Foundation, Slovak RepublicRepublicThe Free Market Foundation of Southern The Free Market Foundation of Southern Africa, South AfricaAfrica, South AfricaPathfinder FoundationPathfinder Foundation , Sri Lanka, Sri LankaInternational Research Foundation (IRF), International Research Foundation (IRF), Sultanate of OmanSultanate of OmanTimbro, SwedenTimbro, SwedenLiberales Institut, SwitzerlandLiberales Institut, SwitzerlandArthur Lok Jack Graduate School of Arthur Lok Jack Graduate School of Business, The University of the West Business, The University of the West Indies, Trinidad, W.I.Indies, Trinidad, W.I.Association for Liberal Thinking, TurkeyAssociation for Liberal Thinking, TurkeyThe Ukrainian Center for Independent The Ukrainian Center for Independent Political Research, UkrainePolitical Research, UkraineThe Institute of Economic Affairs, United The Institute of Economic Affairs, United KingdomKingdomCATO Institute, USACATO Institute, USAThe Centre for the Dissemination of The Centre for the Dissemination of Economic Knowledge (CEDICE), VenezuelaEconomic Knowledge (CEDICE), VenezuelaResearch Center for Entrepreneurship Research Center for Entrepreneurship and Development Policies, Vietnamand Development Policies, VietnamFree Market Center (FMC), YugoslaviaFree Market Center (FMC), YugoslaviaZambia Institute for Public Policy Analysis Zambia Institute for Public Policy Analysis (ZIPPA), Zambia(ZIPPA), Zambia

Member Institutes of Economic Freedom of the World Network

Society for Disseminating Economic Knowledge:“New Economic School – Georgia”, GeorgiaLiberales Institut, GermanyThe Institute of Economic Affairs, GhanaCentro de Investigaciones Económicas Nacionales, GuatemalaInstitut de Recherche pour la Liberte Economique et la Prosperite (IRLEP), HaitiHong Kong Centre for Economic Research, Hong KongSzazadveg Foundation, HungaryCentre for Social and Economic Research, IcelandCentre for Civil Society, IndiaThe Institute for Development of Economics and Finance, IndonesiaOpen Republic Institute, IrelandInstitute for Advanced Strategic and Political Studies, IsraelCentro Einaudi, ItalyBureau d'Analyse d'Ingenierie et de Logiciels (BAILO), Ivory CoastAfrican Research Center for Public Policy and Market Process, KenyaCenter for Free Enterprise, KoreaEconomic Policy Institute-Bishkek Consensus, Kyrgyz RepublicLithuanian Free Market Institute, LithuaniaD'Letzeburger Land, LuxembourgCentro de Investigación para el Desarrollo A.C., MexicoOpen Society Forum, MongoliaThe Center for Entrepreneurship and Economic Development, MontenegroThe New Zealand Business Roundtable, New ZealandInstitute of Public Policy Analysis, NigeriaCivita – Center for Business and Society Incorporated, Norway

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Sample of Press Coverage forFraser Institute’ Economic Freedom of the World 2005

All Africa, AfricaAll Africa, AfricaAsia Pulse, AustraliaAsia Pulse, AustraliaAustralian Financial Review, Australian Financial Review, AustraliaAustraliaScoop, AustraliaScoop, AustraliaLatin America News Digest, Latin America News Digest, BrazilBrazilCapital Weekly, BulgariaCapital Weekly, BulgariaEl Diario de Hoy, Central El Diario de Hoy, Central AmericaAmericaDiario Financiero, ChileDiario Financiero, ChileEl Financiero, ChileEl Financiero, ChileXinhua News Agency, ChinaXinhua News Agency, ChinaSouth China Morning Post, South China Morning Post, ChinaChinaChina Daily-Hong Kong China Daily-Hong Kong Edition, ChinaEdition, ChinaAmbiito Juridico, ColombiaAmbiito Juridico, ColombiaPortafolio, ColombiaPortafolio, ColombiaLa Prensa Libre, Costa RicaLa Prensa Libre, Costa RicaEl Financiero, Costa RicaEl Financiero, Costa RicaHina, CroatiaHina, CroatiaHospodarske Noviny, Czech Hospodarske Noviny, Czech RepublicRepublicBorsen, DenmarkBorsen, Denmark

Times of Oman, OmanTimes of Oman, OmanDaily times, PakistanDaily times, PakistanRzeczpospolita, PolandRzeczpospolita, PolandLa Tribune, CanadaLa Tribune, CanadaMontreal Gazette, CanadaMontreal Gazette, CanadaRumanian, RomaniaRumanian, RomaniaSt. Petersburg Times, RussiaSt. Petersburg Times, RussiaMoscow Times, RussiaMoscow Times, RussiaInterfax, RussiaInterfax, RussiaRussian Publication, RussiaRussian Publication, RussiaPlenipotentiary, RussiaPlenipotentiary, RussiaRepublika, Serbia/MontenegroRepublika, Serbia/MontenegroVijesti, Serbia/MontenegroVijesti, Serbia/MontenegroPobjeda, Serbia/MontenegroPobjeda, Serbia/MontenegroStraits Times, SingaporeStraits Times, SingaporeEkonomicka Sloboda, SlovakiaEkonomicka Sloboda, SlovakiaHodin Daily, SlovakiaHodin Daily, SlovakiaPravda Daily, SlovakiaPravda Daily, SlovakiaBusiness Day, South AfricaBusiness Day, South AfricaEl Economista, SpainEl Economista, SpainLibertad Digital, SpainLibertad Digital, SpainL'Agefl Suisse, SwitzerlandL'Agefl Suisse, SwitzerlandBangkok Post, ThailandBangkok Post, ThailandTrinidad Guardian, Trinidad & TobagoTrinidad Guardian, Trinidad & TobagoFinancial Times, UKFinancial Times, UKInvestor's Business Daily, USInvestor's Business Daily, USFinancial Times, USFinancial Times, USEl Nacional, VenezuelaEl Nacional, Venezuela

Jyllands-Posten, DenmarkJyllands-Posten, DenmarkBaltic Business Weekly, EstoniaBaltic Business Weekly, EstoniaBBC Monitoring, EuropeBBC Monitoring, EuropeRadio Liberty, GeorgiaRadio Liberty, GeorgiaFrankfurter Allgemeine, GermanyFrankfurter Allgemeine, GermanyVereinigte, GermanyVereinigte, GermanyFinancial Express, IndiaFinancial Express, IndiaHindustan Times, IndiaHindustan Times, IndiaJournal of Commerce, InternationalJournal of Commerce, InternationalEl Cronista Comercial, InternationalEl Cronista Comercial, InternationalEl Nacional, InternationalEl Nacional, InternationalInternational Herald Tribune, International Herald Tribune, InternationalInternationalIsrael Business Arena, IsraelIsrael Business Arena, IsraelJerusalem Post, IsraelJerusalem Post, IsraelItaliaOggi, ItalyItaliaOggi, ItalyIl Sole, ItalyIl Sole, ItalyIl Giornale, ItalyIl Giornale, ItalyKorea Times, KoreaKorea Times, KoreaSeoul Daily, KoreaSeoul Daily, KoreaKorea Herald, KoreaKorea Herald, KoreaNoticias Latinoamericanas, MexicoNoticias Latinoamericanas, MexicoAgencia Mexicanan De Noticias, Agencia Mexicanan De Noticias, MexicoMexicoRepublika, MontenegroRepublika, MontenegroFinancial Times Deutschland, Financial Times Deutschland, NetherlandsNetherlandsDominion Post, New ZealandDominion Post, New Zealand

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Economic Freedom ProjectsEconomic Freedom Projects

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Marketization Index of Chinese Provinces

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Economic Freedom Index of Indian States

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Economic Freedom of North AmericaEconomic Freedom of North America

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Economic Freedom Index of Argentine Provinces

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Economic Freedom of the Arab WorldEconomic Freedom of the Arab World

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Arab Economic Freedom ProjectArab Economic Freedom Project

International Research Foundation founded in Oman

Third Annual Economic Freedom of the Arab World Report

Regional economic freedom conferences in the Middle East – Muscat and Beirut

Economic Freedom of the Arab World AwardsOmani and Lebanese AuditsDocumentaries on entrepreneurship and policy

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Hong Kong’s Relative SuccessHong Kong’s Relative Success

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Number one ranked since 1970Highest ever economic freedom in the world at

9.1 out of 10 in 1995But …

– Peaked in 1995– Tenth worst decline in world in past decade– Slipping relative to top 10, top 20, and the world– Accelerating decline over time– Broad decline in many measures

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Overall Economic Freedom Index Overall Economic Freedom Index and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

Luxembourg

Canada

Ireland

United Kingdom

Average of Top 10

New Zealand

Switzerland

United States

Singapore

Hong Kong

Source: The Fraser Source: The Fraser Institute.Institute.

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Overall Economic FreedomOverall Economic Freedom

0

2

4

6

8

10

World Top Ten Hong Kong

1995

2000

2004


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Still number one in the 2006 report High economic freedom rating at just under 8.7 But the trend is not Hong Kong’s friend And what about China where economic freedom is

rising?

Here are the warning signs for the five components of economic freedom in Hong Kong ….

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Warning Sign:Warning Sign:Wrong-Sizing GovernmentWrong-Sizing Government

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Size of Government and the Top 10Size of Government and the Top 10

0 2 4 6 8 10

Score (out of 10)

Luxembourg

Ireland

Canada

United Kingdom

New Zealand

Iceland

Average of Top 10

Switzerland

United States

Singapore

Hong Kong


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Size of GovernmentSize of Government

0

2

4

6

8

10


1995

2000

2004


25

General government consumption General government consumption spendingspending

0

2

4

6

8

10


1995

2000

2004


26

Transfers and subsidiesTransfers and subsidies

0

2

4

6

8

10


1995

2000

2004


27

Wrong-Sizing Government PoliciesWrong-Sizing Government Policies

New GST will raise the tax burden and increase government consumption and transfers

The tax is not “tax neutral”Industrial subsidies distort investment and

increase political intervention in economySpending down recently but the government is

caught in vocal demands for more interventions

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Warning Sign:Warning Sign:Politics and the LawPolitics and the Law

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Legal System and Property Rights Legal System and Property Rights and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

Hong Kong

United States

Singapore

Canada

Average of Top 10

Luxembourg

Switzerland

Ireland

United Kingdom

Iceland

New Zealand


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Legal System and Property RightsLegal System and Property Rights

0

2

4

6

8

10


1995

2000

2004


31

Judicial independenceJudicial independence

0

2

4

6

8

10


1995

2000

2004


32

Impartial courtsImpartial courts

0

2

4

6

8

10


1995

2000

2004


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Integrity of the legal systemIntegrity of the legal system

0

2

4

6

8

10


1995

2000

2004


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Politics and the Law PoliciesPolitics and the Law Policies

The weakest component and slipping furtherPerceptual issues regarding politicization of

judicial and legal systemsIntegration with China may be part of the

problem – producer and intellectual property rights are slipping there

Democratization begets politicization

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Green Light:Green Light:Money Remains SoundMoney Remains Sound

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Sound Money and the Top 10Sound Money and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

Hong Kong

United Kingdom

Average of Top 10

New Zealand

Canada

Singapore

Luxembourg

Switzerland

Ireland

United States


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Sound MoneySound Money

0

2

4

6

8

10


1995

2000

2004


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Sound Money PoliciesSound Money Policies

Peg is secureSystem was tested through Asian crisis and

deflationMonetary Authority retains its independence Steady progress to renminbi-based trade and

finance

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Warning Sign:Warning Sign:Trade Regulations and CapitalTrade Regulations and Capital

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Freedom to Trade Internationally Freedom to Trade Internationally and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

Iceland

United States

Switzerland

Canada

United Kingdom

New Zealand

Average of Top 10

Ireland

Luxembourg

Singapore

Hong Kong


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Freedom to Trade InternationallyFreedom to Trade Internationally

0

2

4

6

8

10

World Average ofTop Ten

Hong Kong

1995

2000

2004


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Regulatory trade barriersRegulatory trade barriers

0

2

4

6

8

10


1995

2000

2004


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International capital market controlsInternational capital market controls

0

2

4

6

8

10


1995

2000

2004


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Access of citizens to foreign capital Access of citizens to foreign capital markets/foreign access to domestic capital markets/foreign access to domestic capital

marketsmarkets

0

2

4

6

8

10


1995

2000

2004


45

Restrictions on citizens to engage in Restrictions on citizens to engage in capital market exchange with foreignerscapital market exchange with foreigners

0

2

4

6

8

10


1995

2000

2004


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Trade and Capital PoliciesTrade and Capital Policies

Watch non-tariff regulatory trade barriersIs a non-preferential capital investment policy

being eroded through industrial subsidies?Capital restrictions must be addressed

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Warning Sign:Warning Sign:Tied Up in Red TapeTied Up in Red Tape

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Regulations and the Top 10Regulations and the Top 10

0 2 4 6 8 10

Score (out of 10)

Ireland

Luxembourg

Singapore

United Kingdom

Switzerland

Average of Top 10

Canada

New Zealand

United States

Hong Kong

Iceland


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RegulationsRegulations

0

2

4

6

8

10


1995

2000

2004


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Credit Market Regulations Credit Market Regulations and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

Singapore

Ireland

Switzerland

Hong Kong

Average of Top 10

Canada

Luxembourg

Iceland

United Kingdom

United States

New Zealand


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Credit Market RegulationsCredit Market Regulations

0

2

4

6

8

10


1995

2000

2004


52

Competition: domestic banks face Competition: domestic banks face competition from foreign bankscompetition from foreign banks

0

2

4

6

8

10


1995

2000

2004


53

Extension of credit: percentage of credit Extension of credit: percentage of credit extended to private sectorextended to private sector

0

2

4

6

8

10


1995

2000

2004


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Labor Market Regulations Labor Market Regulations and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

Luxembourg

Ireland

New Zealand

Singapore

United Kingdom

Canada

Average of Top 10

Switzerland

United States

Iceland

Hong Kong


55

Labor Market RegulationsLabor Market Regulations

0

2

4

6

8

10


1995

2000

2004


56

Hiring and firing practicesHiring and firing practices

0

2

4

6

8

10


1995

2000

2004


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Business Regulations Business Regulations and the Top 10and the Top 10

0 2 4 6 8 10

Score (out of 10)

United Kingdom

United States

Switzerland

Luxembourg

Ireland

Canada

Average of Top 10

Hong Kong

New Zealand

Singapore

Iceland


58

Business RegulationsBusiness Regulations

0

2

4

6

8

10


1995

2000

2004


59

Price controlsPrice controls

0

2

4

6

8

10


1995

2000

2004


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Time with government bureaucracyTime with government bureaucracy

0

2

4

6

8

10


1995

2000

2004


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Red Tape PoliciesRed Tape Policies

Credit regulation is not improvingGovernment is squeezing out private creditLabour market is sound but watch out for

minimum wageBusiness regulations are the key weaknessDramatic increase in time management spends

with bureaucracyWorld Bank Doing Business indicators coming

for 2007 – Hong Kong likely to improve

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ConclusionConclusion

Do not take Hong Kong’s number one status for granted – Singapore is very close at number two

A declining trend may be in placeGovernment interference with markets is

growingPolicy choices matterPolitical developments are the driving factor

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www.freetheworld.comwww.freetheworld.com

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Economic Freedom and Hong Kong:Economic Freedom and Hong Kong:A Status ReportA Status Report

November 30, 2006

Mark Mullins, Executive Director

The Fraser Institute

1 Economic Freedom and Hong Kong: A Status Report November 30, 2006 Mark Mullins, Executive Director...

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