To compare and contrast economic systems of two of the world's strongest economies, Australia and Hong Kong we have to define economic systems and the roles it plays in our society. Economic systems revolve around the nation's will to improve the standard of living of each individual. An economic system is a system involving the production, distribution, consumption of goods and services and the organization of ownership and the allocation of resources in a nation. They address the economic problem by securing limited resources to satisfy an unlimited amount of needs and wants. Each governing body of a nation must answer four basic key economic questions: what to produce, how much to produce, how to produce it and who to distribute to. These questions would be answered differently based on the different types of economic systems that each nation chooses.
Main economic systems that countries follow are traditional, planned economy, mixed economy and the market economy. The most commonly applied economic system is the mixed economy or in other terms free enterprise economy where businesses and consumers decide what is to be produced its needed quantities, however decisions are made according to supply and demand of society. The combination of both government support and a market creates the advantage where competition is created to have the best products and services taking care of people's wants and the mixture of government intervention to take care of people's needs by helping to stabilize the economy during times of crisis or to ensure portion of income for those that are unable to put their share of work in. Economic systems are usually interconnected with the social systems, ideologies and political systems depending on each country whether it be capitalism, socialism or communism. The success and health of an economy can be indicated by the Gross domestic product of a country by representing the total dollar value of all goods and services produced over a specific time period. Usually, GDP is expressed as a comparison to the previous quarter or year to show yearly growth or decline of an economy of a nation.
Considered to be the freest market economy and the financial trade center of Asia, Hong Kong's economy, ranked first in the 2008 Index of Economic Freedom by the Heritage Foundation and is highly dependent on international trade and finance. Hong Kong's largest trading partner, China has been responsible for nearly half of Hong Kong's exports by value and has strong bonds to boost the country's trade and tourism. The Hong Kong government aim of 'maximum support and minimum intervention', provides ideal basic conditions of individual freedom, rules of the law, clean and efficient operation, infrastructures, removes market limitations and the promotion of fair competition to form the mold of a business-friendly environment. Although positioned as part of China, Hong Kong adapts a "one country two systems" ideology where China's socialist system are also captivating factors that draws flocks of entrepreneurs and foreign businesses to work within the country. These factors maintain the stability of markets and enables competition between Hong Kong's financial institutions and international financial centers. The GDP nominal for 2009 was around $HK$1633.5 billion, with declined real growth rate of 2.7% due to the recent financial crisis. The private sector GINI COEFFICIENT Gini score: 43.4
Australia's strong economy is an internationally advanced mixed-market economic system that is a mixture of government control and free operation of market forces, making it a competitive economic environment. Australia's GDP is on par with other dominant European economies and opposed to speculators during the recent global financial crisis, Australia's economy floated along well due to monetary stimulus plans and mostly from the relations with China, whose buoyant export demand and investments and the relatively stable banking sector within the country. Australia's economy is able to fare well is due to its emphasis on reforms, low inflation, a housing market boom, and growing ties with China were key factors over the course of a 17-year economic expansion that ended with the recent global financial crisis. The government intervenes with the operation of market forces, production and distribution of outputs as the market is unable to always provide the most efficient allocation of resources and socially desirable or fair distribution. Private sectors in Australia do not often provide necessary collective goods and services as they are not willing or able to provide the huge capital outlay or under take the risk. So the government provides goods and services such as infrastructure, Medicare (nation-wide health care system) which contributes the health spending in the economy; universal free education (5.9% of GDP is spend on education expenditure) and welfare which ensures a minimum standard of living for the disabled or unemployed. The system consists of mostly the service sector which dominates up to 68% of the GDP, and the agricultural and mining sectors, which although consists of only 29.9% GDP, it accounts for 65% of all exports. Financial institutions in Australia including credit unions, financial companies and banks such as the Reserve Bank of Australia also a crucial part of the economic system. The role of the Reserve bank of Australia is to set the most standard level of cash rate for other financial institutions and can ultimately decide the pace (whether it rises or falls) of an economy. Institutions makes a profit by paying the depositors a lower rate of interest than they charge on the money they loan, and by charging their customers fees. Gini score: 35.2
Both countries have similarities and differences in their economic systems. Hong Kong and Australia's economies offer mainly service sectors, which are evident in Table 1. Based on Table 1, Hong Kong's service sector accounts 92.3% of the GDP composition while the agriculture and industry sectors only consists of 0% and 7.6% respectively. Australia's service sector dominates 71.3%, with the agriculture sector only consisting of 3.8% and industry is 24.9%. The information from the annual GDP reveals both countries have service accustomed economies.
The difference between Hong Kong's economy and Australia's economy is the allowance of low tax that the Hong Kong government provides to attract foreign businesses and also limits government interference in the housing sector and other various sectors in the economy that allows more room for competition within each sector allowing the wealthy to earn and keep most of the earned profits which might on a downside, cause frequent asset bubbles. In Australia, the government sets up strict regulations to make sure that the economy does not have to face severe overvalue of housing properties in order to ensure that property do not become overvalued. The Hong Kong government also applies low taxation on imports (5% is the maximum) and till now, have not legislated minimal wage regulations which as an advantage, captivates entrepreneurs and businesses to come to the country to set up their businesses in order to save the cost of labour and thus gaining more profits in return. Australia however, has a minimal 10% flat rate GST and has a minimal wage of $14.31 per hour which would not be as captivating to a business in terms of being cost effective as the low taxation, no minimal wage economy of Hong Kong.
Over the years, Hong Kong economy's main significant problem is the overvalued property market with asset bubbles that occurs frequently throughout a year. The Public Rental Housing provided by the government in Hong Kong actually creates a base where high land and private property prices in Hong Kong are nurtured. If the lower working class were the target market, sales prices of private property should be within their affordability. Instead, lower working class workers enter the Government's PRH scheme, leaving the private property market to higher income groups resulting in the spike of property sale prices. Under the high land price policy, the Government was able to receive considerable revenue from land sales and other related incomes, amounting to 40% of its annual revenue income. To a certain extent, land sales had become an "indirect tax" in Hong Kong. Without the revenue from land sales, it would be beyond our comprehension that Hong Kong could become a low-tax free port. As the price of the private properties became higher, it would be difficult, if not impossible, for the low-income people to own a house. Consequently they had no other alternatives but to turn to the Government for the PRH.
As the Government works as the sole owner of all land in Hong Kong, controlling its land supply is not a difficult task. Private property prices can be manipulated in the market and stay at its peak by carefully controlling land sales. Consequently revenue from the land sales and other related incomes, including land premiums, government rates and rent, stamp duty, profits tax from the developers etc. would be considerable. With the support of the revenue, the Government could then offer an attractive income and profits tax package to overseas investors, build massive and modern infrastructures, including the international airport, road networks, bridges and mass transit systems and provide comprehensive education, medical and other social services. For these, Hong Kong people contributed their part by sacrificing their living condition, even though the private house owners might be benefited from the increased property price.
However one of the two main significant problems in both Hong Kong and Australia is the population is ageing and increasing inflation. Hong Kong and Australia are also suffering from rising inflation which is also another major significant problem. Inflation is the increase in the consumer prices of goods and services in an economy over a period of time. This is caused by the increase in the money supply produced by the government faster that the increase in quantity of goods and services. The increase in the supply of currency means that each dollar is worth less and businesses would have to increase prices to get the same value as the products. Inflation can affect people who have a fixed income as they would reduce their purchase in goods & services; deficiency in the currency rate and inefficient allocation of resources. Inflation can be indicated in Hong Kong and Australia in Figures 6 and 7. In Figure 6, the inflation rate during 2007 in Hong Kong is 2.2%, which has increased by 1.3% from 2006. Australia's 2007 inflation rate is 3.8% which has increased by 1.1% from 2.7% during 2006.
In Hong Kong and Australia, both market and mixed economic systems are operating successfully. Australia and Hong Kong mainly focus on services sectors and have relatively low tax rates and unemployment, even though Australia has a legal minimum wage but not Hong Kong. Although Hong Kong and Australia have different economic systems, they have free operation of market system but also having government intervention to provide goods and services that are not provided by the private sector and creating a fairer society. However their successful economic systems also cause some problems like the continuing ageing of the population and inflations which may be able to manage overtime.