Freedom Works: The Case of Hong Kong

Source: Morriss, Andrew PView Profile. Freeman58.9 (Nov 2008): 8-12.

Hong Kong has a remarkable reputation for financial independence and classical-liberal virtues. In a series of posts, Milton Fried- man used Hong Kong showing the way the power of free markets combined with little else can make prosperity, pointing out that its percapita income rose from 28 percent of UK’s in 1960 to 137 percent of Britain’s in 1996. As Friedman wrote in 1998, “Compare UK – the birth place of the Technological Revolution, the nineteenth-century economic superpower on whose empire the sun never set – with Hong-kong, a spit of land, overcrowded, with no assets except for a great seaport. However within four decades the residents of this spit of overcrowded land had achieved a degree of income onethird higher compared to the residents of its former mother country” (http://tinyurl.com/5s3cmw).

Friedman’s evaluation corresponds to Hong Kong’s consistent standing on top of the Heritage Foundation’s Index of Economic Freedom and also the Fraser Institute’s Economic Freedom of the Globe reviews. In the 2008 Index, as an example, Hong Kong scored 90-percent or better on seven of the ten measures of financial freedom.

Why has Hong Kong been so free?

Hong-kong never would have gotten the eco- nomic power-house it really is now if either British or Chi- nese senior politicians had had any say in the issue. Britain got Hong Kong island in 1 842 (added territory came afterwards) through a deal involving the British representative, Captain Charles Elliot, along with the Chinese negotiator, the Marquis Ch’i-ying, to be in a small war that had broken out over-trade problems. (Settlement for a Chinese seizure of British opium was one issue, but the dispute was broader in relation to the dilemma of opium, and current scholarship tends to throw doubt on the traditional labeling of the dispute an “opium war.”)

The resulting deal was unpopular both with the Chinese Imperial Court along with the British government. The Chinese authorities disliked any cession of territory to the British and worried about the impact on tariff revenues of producing a Britishcontrolled port. What’s More, the Chinese disdained the British obsession with commerce. The British authorities believed Hong Kong a lousy location compared to the potential choices, including Formosa. Nonetheless, the limits to communication in the nineteenth century had compelled the two authorities to delegate the authority to resolve the dispute to their own representatives to the scene, so they were left with what Frank Welsh’s outstanding onevolume history, A History of Hong-kong, conditions “a generator of humiliation and aggravation to its progenitors since it first appeared to the international arena.” (Unless otherwise indicated, quotations are from Welsh’s book.)

Early History

Early assessments of Hong Kong’s possible were negative. Lord Palmerston, in maybe the worst prediction ever made with a British diplomat, figured it was “a barren isle, that’ll never be considered a mart of commerce.” The colonial treasurer, Robert Montgomery Martin, a prolific writer on UK’s foreign possessions (including a fivevolume History of the British Colonies printed in 1840), echoed Lord Palmerston’s evaluation in 1844, discovering that “there isn’t any commerce of any noticeable extent in Hong-kong… There’s barely a business within the isle but would… be happy to go back half the cash that they have expended within the colony and retire in the area… There doesn’t seem the smallest chance that, under any conditions, Hong-kong could possibly become an area of commerce.”

Some trade did start, nevertheless, as a consequence of the institution of British retailers’ warehouses. But early British guidelines regarding their new territory did little to boost economic development.

Hong-kong physically grown twice during the 19th century. And in 1898 Britain leased for 99 years the New Territories, added mainland land plus some islands. In both instances, the justification for growth was supposed to safeguard the seaport in the number of firearms situated in the mainland.

UK did comparatively small with its new colony, beyond extending the rule of law and creating public order. The effect was basically a treaty port, similar to the ones that European powers established in the mainland below the Treaty of Nanking in 1842 43. One reason for Britain’s comparatively handsoff policy was the persistence of the view shaped by early colonial authorities the Chinese residents didn’t desire or value British lawmaking. They don’t understand us; they can’t understand our ways; and when they’re told that they’re to do first something and then another, they get frightened and aren’t going to come to us.”

An All-natural Trading Center

What did UK produce in Hong-kong? The mix of the rule of law and also the superb harbor meant Hong-kong was a natural trading centre. However, it absolutely was not the greatest spot to trade in China, and by the early twentieth-century Shanghai was successfully gaining trade from Hong-kong. Shanghai provided a more educated citizenry, a more suitable place, access to European defense under treaty concessions from the Chinese authorities, and comparatively small Chinesegovernment hindrance because of the decline of imperial power. From the 1910s Shanghai had become a much more important centre of commerce than Hong-kong. With the British picking as the middle of British naval power in the area the more defensible Singapore, importance was also lost by Hong Kong for the British authorities. Consequently, the colony languished as a backwater, getting recognized as a centre for betting and prostitution as opposed to the economic powerhouse it’s now.

One thing Britain didn’t produce in Hong-kong was a democratic government. No local democratic organizations were permitted to produce, as were authorized in other British colonies, since the British were reluctant to provide an actual voice to the Chinese bulk in government. Consequently, as Welsh concludes, “Hong Kong was going to continue as authoritarian an administration as any Chinese authorities, but the ultimate authority was going to be the law, instead of individual impulse.”

China’s imperial central government scarcely favored economic freedom, and also the late-nineteenth and early twentieth centuries were no exceptions. Since the national government’s strength ebbed away, regional warlords started to create competition, but equally predatory centres of strength. European, Ameri- can, and Japanese energy in China also enlarged, concentrate- ing on accessibility to the Chinese market for their nationals, but not making financial independence for the Chinese in their spheres of influence. Hong Kong’s equilibrium increasingly attracted migrants from elsewhere in China. People grew from 600,000 in 1920 to more than a mil- lion in 1938. 5, 000 migrants each day started to pour into Hong-kong, as conditions worsened in China against the communists and fighting between war – lords, the Kuomintang (Nationalists), and Japanese invasion. By March 1950 the town had 2.3 million people, which brought Hong-kong both a significantly improved workforce and also the human capital of Chinese entrepreneurs who escaped before Mao’s armies. What’s More, the communist victory on the mainland meant that Shanghai discontinued to become a serious competition.

Finding Freedom in Hong-kong

Life to the border of communist China wasn’t simple. During the Korean War, embargoes on commerce harm the city’s entrepot company, compelling many Hong Kong dealers to re-invent themselves as makers. However, the flooding brought refugees like Jimmy Lai, among the millions of penniless persons who sought independence in Hong-kong.

Lai was handed his first chocolate bar with a traveler, while operating within the Shang – hai railway station for a porter. Running after the man, he questioned where this won- derful food came from along with the reply was “Hong Kong.” Deter- mined to go to the area where such wonders were available, Lai finally convinced his mom to enable him to flee and was smuggled out of China within the base of the fishing vessel. On his arrival in Hong-kong, he went to perform the same evening in a garment factory. Lai is really a billionaire, owner of one-of the very successful media companies in Asia, now. His drive and entrepreneurial skills played a leading part in his own success, obviously. However, it was the flexibility obtainable in Hong-kong that enabled him to set his skills to work. Consequently, Hong Kong started to boom.

Why?

Hong-kong had a capable authorities, pursuing market economics under the rule of law. It ended up being a government that completely met the Confucian aim – “Make the neighborhood people happy and bring migrants from afar.”

Cowperthwaite had nearly entire control of Hong-kong government finances and used it to apply his policy of “positive non- intervention.” Hayek).

Cowperthwaite deserves the accolades he’s received. During his decade as economic secretary, real wages increased by 50 per cent and also the part of the people in acute poverty dropped from 50 to 15 per cent. What’s exceptional is the fact that Hong-kong executed this without any source other than its individuals. The colony had no natural resources, no actual agricultural property, and also the one source it did have – folks – lacked much instruction. Certainly, few at the time believed the masses of refugees who reached Hong-kong during the 1950s would amount to something other than a weight for that state.

No Libertarian Paradise

Hong-kong has never been a libertarian eden, while consistently freer than most areas. Governmentsubsidized housing has long dominated Hong Kong’s residential marketplace, with 60 percent of citizens living in it previously. As well as the government manipulated (and continues to-do so) the land market to maximize sales revenues for public coffers, which has an essential role in creating the housing shortages that demanded the public housing “alternative.” Medical care has also always been socialized. Moreover, Hong Kong had serious corruption problems even during the height of the Cowperthwaite age, with the cops in the sixties and early 1970s “riddled with corruption,” according to former Governor Patten.

Then there is Hong Kong’s persistent “democratic deficit.” Indeed, UK showed practically no interest in enlarging representative government in the colony until it became obvious that Hong Kong would “return” to China in 1997 when the lease on the New Territories expired.

In some sense this democratic deficit served Hong Kong well, for guys like Patten and Cowperthwaite held classical – liberal suggestions on economic freedom and therefore mainly refrained from actions that may have won popular acceptance (and certainly would have in Britain). But, the lack of representative government also permitted Britain to handle Hong Kong’s occupants shamefully when Britain rejected allowing Hong Kong passport-holders the right of residence in Britain, fearing a torrent of refugees in advance of the return to China. (The rest of Europe behaved no better.)

“One Country, Two Systems”

Hong Kong returned to China in 1997 under an arrangement negotiated between Britain and the People’s Republic which provided a guarantee that for at least 50 years Hong Kong and China will be “one nation, two systems.” The return itself was certain, as was China’s readiness to sustain capitalism in its midst. Not only were Hong Kong island and Kowloon unsustainable less the leased New Territories, where much of the water-supply was located, but British voters still didn’t care a farthing for Hong Kong in the 1990s. China’s interest in the preservation of the goose that laid the golden eggs was also apparent. The People’s Republic had long made use of Hong Kong – which it could have seized by force at any given time – as a way of accessing foreign markets and sources of capital. Occasionally 80 percent of China’s overseas revenue came through Hong-kong. China also wanted to demonstrate to Taiwan that peaceful reunification was potential.

The risk was that China’s leaders would not understand what Patten, in his book, termed “the relationship between Hong Kong’s components – a capitalist economy – and its applications – a pluralist society – and yet it was the latter that enabled the former to work so well.” To date Hong Kong’s new rulers have shown themselves remarkably skillful at continuing the smooth operation of both the hardware and the applications. Whether that will remain true in the very long run is still an open question, needless to say.

Chinese Emperor Tao-kuang’s initial response to the British were that “these barbarians are wanting in almost any high purposes of striving for territorial acquisition; they always look on-trade as their very first profession.” Frank Welsh concluded his history by noting that Hong-kong “established the Emperor’s level.” It is not only the British who made Hong-kong a success. They were able to do this as the Hong Kong authorities normally left them sufficiently alone. Hong Kong is far from ideal, and far from a libertarian dream world. Nevertheless, it remains a sensational case of how far entrepreneurial talent and human ingenuity can take a culture.

Why has Hong Kong been so free? Partly, Hong-kong has been fortunate to be dominated by men who recognized their function as fairly limited. Nearly the classical-liberal ideal, even under Cowperthwaite, but nonetheless significantly closer than any other twentieth century society. And also the mixture of Britain’s failure to provide any actual democratic institutions and its lack of interest in Hong Kong enabled those men to hold to those policies, even while Britain herself experienced financial catastrophe below the socialism of the 50’s- 70s. Hong Kong also benefited from the example of China’s devastating 1960s economic policies. With so many citizens having come as refugees from communism, demand for freedom in Hong-kong was large. Independence made possible the success of Jimmy Lai, and that of the millions who did not become billionaires but who had a higher standard of living than the majority of the world through their own efforts.

Hong-kong was lucky that liberty was attempted. But Hong Kong’s folks proved that independence worked.