"I would like to congratulate your Financial Secretary, Antony Leung, for resisting the temptation in his latest budget to propose massive new taxes in Hong Kong. One thing that this outsider believes is that one of the advantages that Hong Kong has had over the years has been its reputation as having a low tax regime. You can have debates about how you may expand the tax base, or jiggle this tax or change that tax, but the key is to keep the tax regime low.

One thing that many leaders around the world tend to forget is that taxes are not just a way to raise the revenue of the government, taxes are also a price burden. The taxes you pay on income are the price you pay for working. The taxes you pay on profits and capital gains are the prices you pay for being successful, for being productive, for being willing to take risks.

The proposition is very simple: when you lower the price of good things, such as productive work, success and risk taking, you tend to get more of those good things. If you raise the burden and price of those good things, you will get less of them. So therefore, even though you [Hong Kong] are going through a very difficult period, I hope you will resist the temptation [to raise taxes] and not lose your unique reputation.

I like coming to Hong Kong because this area has a system of income taxes that I wanted to introduce in the United States. So I feel a spiritual home here! And I must confess, too, that even though my campaign for higher office did not succeed, I took some comfort that last year, when Russia -- of all places -- introduced a single rate income tax system. Imagine my surprise when I hear that Russia has put in a system of 13 per cent. I never thought that I, working for a capitalist magazine, would see the day when a former member of the KGB would get to my right on the issue of taxes!

And lo and behold, Russias economy is growing, and their tax collections from this new system -- even through the rate was sharply reduced -- their collections in the first six months of the year were up 28 per cent from the year before, even though tax rates were cut almost 70 per cent. Make the system simple, lower the rates and you will get more at the end of the day. Countries that have friendly tax regimes usually do better than countries that have high tax regimes.

Let me share with you five basic principles of economic progress. These will sound very simple and simplistic, but it is amazing how often these basic principles are ignored.

First, if you have a good, sensible tax regime you will prosper.

Another basic principle is sound money. Unfortunately the International Monetary Fund has the strange notion that [currency] devaluation is the way to prosperity. It might work in a classroom, but in the real world when a currency collapses or you have a big devaluation, all you get is internal inflation, flight capital, higher cost of capital and a lower standard of living. It does not work long term. Who wants to hold money that is worth less and less? Instead of putting it to work you want to get rid of it.

Another basic principle is to make it easy for people to set up and run business. It is amazing, in so many parts of the world, how difficult it is to set up a legal business and how many licences and processes you have to go through.

Another basic principle is reducing trade barriers. Reduce trade barriers and people will trade more with one another.

And the final basic principle is the rule of law, which Hong Kong has benefited from. The rule of law means equality before the law -- if you don't respect entrepreneurs' rights, it is very difficult to get them to set up new businesses -- and property rights -- if you buy a piece of property everyone recognise that you own it.

Property rights is vitally important. For example, in the U.S. the biggest source of capital for new businesses is not venture capital or banks, it is mortgages. People take a mortgage out on their home or increase it, or take out a second mortgage to get the money to start a new business. And yet you look around the world, there are countries where you don't have this kind of mortgage system because you don't have a well-developed property rights system.

So five basic principles. There is no rocket science here, but it is extraordinary when you look around the world how often those basic principles are violated.

This gets now to the U.S. economy today. Where is the economy going? Statistically, we are at the beginning of a recovery.

Statistically, we will have great growth in the first quarter, but there is something unique about this recession. There was a downturn period. One of the reasons we had a downturn -- and this hurt Hong Kong too -- was due to the mistakes made by our own bankers, the central reserve. Our central bankers have this strange theory that there is a trade-off between inflation and unemployment. If you want to bring inflation down you have to have high unemployment. If you want to bring unemployment down you have to have high inflation. It's called the Philips Curve, named after an Australian economist some 50 years ago. The curve is nonsense; the theory is nonsense.

In the U.S. in the 1980s and 1990s, we had a long period of growth and virtually no inflation. But central bankers, when the theory goes wrong, they don't blame the theory, they blame you for not co-operating with the theory.

About three years ago, our central bank decided that the U.S. economy was too prosperous, so they decided to raise interest rates and tighten up credit for the express purpose of slowing the U.S. economy down. It would be as if you went to the doctor. The doctor said you are in good health therefore we have to make you sick; you are too healthy. In medicine, if you do that in the U.S., you will get a lawsuit. In economics, however, they put you on the Federal Reserve on a pedestal and call you a genius.

So the Fed started to tighten up and they started a deflation of the dollar. Hong Kong is tied to the hip on the dollar. Our deflation was your deflation. What you have experienced in recent years wasn't just because of the slowdown of 1997 and 1998, it was also because our deflation hit you and the rest of the world as well -- not as bad as Japan, but a real deflation, and we are just about to come out of it.

So this recovery that we have in the U.S. is coming out of a recession that didn't begin with consumers cutting back their spending; it was businesses slashing capital spending and cutting costs because of a shortage of liquidity. The Fed is beginning to provide that liquidity, and therefore, the recovery will proceed. However, it is going to be a slow recovery and is not going to pick up real steam until later this year. The key is for the Fed to keep that liquidity coming. Right now, all the fundamentals are in place for a real recover.