Joseph Yam's paper on "The Future of the Monetary System in Hong Kong" caused quite a stir this month.
Irrespective of what happens to the Hong Kong dollar peg, the fundamental thrust of Joseph’s argument is irrefutable – that no fixed exchange rate system is consistent with sustainable budgetary deficits. This is the major lesson learned from the current European crisis, and was bitterly learnt in the last Asian financial crisis. Hence, I interprete Joseph’s remarkable essay as a reminder that any deviation from the convention of positive non-interventionism in Hong Kong’s budgetary stance must factor in the exhange rate policy.
There is no doubt that with strong fiscal surpluses in Hong Kong, good growth and a strong macro-economic situation in mainland China, the status quo is not a bad place to be in. But as Europeans have learnt to their cost, good times are probably the best times to think about rainy days, since it is never easy to change course in stormy weather.
The trouble with money is that it lies in the intersection between the state and market. Over time, money tends to deteriorate in value because all states tend to over-spend. We are living in a time of financial crises precisely because government debt in advanced countries is at unprecedented high levels. There is still no global order to manage global money, with private shadow banking credit still being underwritten by public guarantees. In the words of the late management guru Peter Drucker, written presciently in 1993: “We are not in fact facing the ‘new world order’ today’s politicians so constantly invoke. Rather, we are facing a new world disorder – no one can know for how long.”
Just as we are trying to seek order out of disorder, philosopher Francis Fukuyama has written an outstanding new book, The Origins of Political Order, that tries to examine historically whether liberal democracy will survive the challenges of different models of statism, particularly the rise of the modern Chinese state.
Francis Fukuyama made his name with his 1991 essay, the “End of History”, which some interpreted as the triumphalism of the Anglo-Saxon model of liberal democracy after the fall of the Berlin Wall in 1989. Even though liberal democracy has spread rapidly throughout the emerging world since then, its failings in tackling corruption, crime, terrorism, the emergence of predatory states and the creation of a stable international order, has induced Fukuyama to examine Trust (1995) as the foundation of social prosperity and the importance of State-Building (2004), drawing on lessons from Iraq, Afghanistan and other failed states.
Origins is the first of an ambitious two-part volume on the evolution of political and governance systems, the first covering the period from the dawn of human society to the French Revolution, and the forthcoming volume on conditions since the Industrial Revolution. If the first is any indication of the breadth and depth of analysis, Fukuyama’s second volume is likely to have as profound an influence on modern thinking as his mentor, the late Samuel Huntington of Harvard University, had on this generation through his books on Political Order in Changing Societies (1968) and The Clash of Civilisations and the Remaking of World Order (1996).
What Origins tries to do is to not deal with the idealism of liberal democracy, but the question of why there is political decay. He recognises that “political institutions are necessary and cannot be taken for granted. A market economy and high levels of wealth don’t magically appear when you ‘get government out of the way’: they rest on a hidden institutional foundation of property rights, the rule of law and basic political order. A free market, a vigorous civil society, the spontaneous ‘wisdom of crowds’ are all important components of a working democracy, but none can ultimately replace the functions of a strong, hierarchical government”.
Fukuyama’s work reminded me of the magnificent trilogy by Oxford Professor SE Finer, on The History of Government, published post-humously in 1997, which also surveyed the rise of government from ancient times to the Industrial Revolution. Finer reminded us that “big government” is a modern invention – from 1821 to 1985, the number of British bureaucrats rose from 27,000 to over 1 million; in the US from 8,000 to 1.8 million. The rise of the state came from the demands of the welfare state, when the share of government spending rose from less than 10 per cent of GDP in the 18th century to 46 per cent of GDP in OECD countries in 2009.
Fukuyama’s contribution is to argue that a successful modern liberal democracy comprises three sets of institutions in stable balance – the state, the rule of law and accountable government. The latter two constrain the state from becoming despotic. His survey of history and comparative analyses across countries – from Chinese to Islamic and then European states – suggest that the evolution of the rule of law is not ordained, and patrimonialism (the natural human propensity to favour family and friends) is a constant bane on accountable and just government.
Indeed, contrary to the conventional wisdom, Fukuyama argues that “the English experience was exceptional in many way but is not necessarily a good guide to development in countries differently situated”. This explains the failure of governance in many former British colonies, because the British rule of law often conflicts with tribalism, clan and cultural beliefs, and behaviour that re-institutes patrimonialism.
In many ways, Fukuyama’s line of academic research has more relevance in a world where politics trumps economics. He has gone back to the study of social and political institutions that shape human behaviour, beyond the narrow economic assumption of rational behaviour. Markets are all about the exchange of goods and services defined in monetary terms, but the state is all about the exchange of power.
All societies struggle with the need for order, which conflicts with the need for creativity and innovation. We await eagerly Fukuyama’s second volume to shed new light on this perennial contradiction.
Andrew Sheng is president of the Fung Global Institute.