Is Hong Kong’s Success Story Coming to an End?

by | Jul 10, 2023 | Blog

The astonishing development of Hong Kong is an example of how a city-state can work its way up from simple beginnings with a classical liberal system to considerable prosperity and also to enormous size. The population has multiplied (from 7,500 in 1843 to 1.7 million in 1945 to over 7.3 million in 2015), mainly due to immigration from the People’s Republic of China. For many mainland Chinese, the British colony was a refuge from the Chinese Civil War and later the Communist People’s Republic of China. Today, the quality of life and life expectancy, per capita income and business friendliness in Hong Kong are among the world’s best. [1]

Hong Kong was under British administration from 1843 to 1997, but was able to gain extensive autonomy, especially after the Second World War. This enabled its leadership to steer a very different course during a period when planned economy, protectionism and Keynesianism were very popular in the motherland and elsewhere. Hong Kong allowed free markets, kept taxes low and did not accumulate debts, but instead built up a reserve equivalent to one annual budget. This enabled high growth rates lasting decades. Basically, it was only a small group of English colonial officials who set this course. They were advised by official and unofficial members of the Legislative Council, the latter mostly Chinese businessmen. In 1959, then-Governor Robert Black told this body that Hong Kong was probably the only remaining country in the world with genuine free trade. He added that he was proud of it and sure that all those present felt the same. [2] The goal was to raise everyone’s standard of living through full employment and thus also to integrate the many migrants arriving from China.

Hong Kong’s Chief Financial Officer, John Cowperthwaite, derived from this the doctrine of Positive Non-Interventionism, according to which the government interferes in the economy only in very exceptional cases and instead creates the legal and infrastructural framework to facilitate market-based development. [3] In contrast to the British motherland, Hong Kong has permitted free markets without redistribution and thus achieved enormous success. The direct comparison between the two systems is clearly in Hong Kong’s favor, as it has overtaken the UK in all relevant indicators. [4]

Cowperthwaite had recognized:

In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster. [5]

He further noticed that every dollar the government takes away from the taxpayer could otherwise have been used by him to meet a need or increase his well-being or make an investment. [6] It is thanks to Cowperthwaite’s perseverance and intellectual independence that this path was maintained even in times of economic downturn. Even in Hong Kong, there was no shortage of efforts to raise taxes, restrict imports, control prices and increase government activity. [7]

On the subject of political participation, Governor Grantham said in his farewell speech that critics often overlook the fact that democracy is not an end in itself, but only a means to an end, namely to guarantee individual freedom. He concluded that Hong Kong may not be democratic, but freedom would be guaranteed and there were few places in the world where the guiding principle “live and let live” would be so well manifest. [8] Grantham hit the nail on the head. While at the time he argued that freedom could exist (in exceptional cases) even without democracy, today the question has to be asked whether economic freedom in particular can survive at all in democratic systems. In view of the tendency of the majority to demand state interventions of all kinds, the permanent guarantee of a laissez-faire system based on Hong Kong’s model does not seem possible in democracies. If even a determined member of government like Cowperthwaite can avert all possible requests for intervention in a non-democratic system only with the greatest effort, then this is probably hopeless in a democracy. A Cowperthwaite would simply be voted out of office; a position of non-interference, i.e. inaction, is lost in the political battle for votes. [9]

This is the case even though his approach would demonstrably benefit the electorate. A social order that grows at 5% a year but only has a government spending rate of 20% (of all GDP) initially spends less on each individual than a system that has twice the government spending rate but a growth rate of only 2% a year. After 24 years, however, both societies would already spend the same amount per citizen in absolute figures, and after 48 years, the leaner but faster-growing system could even double the amount for each individual despite a much lower government quota. That’s how it happened in Hong Kong, but majorities aren’t that patient.

Deng Xiaoping, who initiated the opening of the People’s Republic of China to a market economy and who is perhaps one of the greatest Chinese reformers in history, is said to have taken Hong Kong as an example. He realized that Hong Kong’s economic system was obviously working, but not that of the People’s Republic. This concerned in particular the existence of free markets and the right to acquire private property, including ownership of the means of production. Following Hong Kong’s example, special economic zones have been established throughout the country since the early 1980s, beginning in Shenzhen. These have proven themselves so successful that they have been expanded further and further and China has been experiencing an enormous economic upswing ever since. Finally, the free market system was extended to the whole country. Today, no one has to go hungry in China, despite its earlier reputation for famine and poverty. It can therefore be argued that Hong Kong, because of its role model function, has changed China far more than it has changed itself since the political takeover by China in 1997.

Since then, Hong Kong has been a Chinese Special Administrative Region (SAR) headed by a so-called Chief Executive, maintaining a market economy, its own private law based on English law, its own authorities, its own currency and internal autonomy. Under the “One Country, Two Systems” principle agreed to between China and the United Kingdom in 1984, Hong Kong will retain its political and economic autonomy for at least 50 years after the acquisition. Exceptions are foreign policy and matters of defense. In this respect, Hong Kong is certainly a model for the relationship between a Free City and a host state.

Non-interventionism, however, had already been undermined in British times after the departure of Cowperthwaite and with increasing parliamentary participation. Today Hong Kong has minimum wages, anti-discrimination laws, mandatory old-age provisions and a taxation equivalent to that of Western countries. Businessmen report that parts of the civil service, which has been replaced or supplemented by mainland Chinese, are now susceptible to corruption, which was previously unthinkable. [10]

Unfortunately, to the regret of many Hong Kong Chinese, in recent years, the government in Beijing more or less openly interferes in domestic politics, calling the treaty of 1984 between the UK and China a “historical document”, not binding any longer. [11] Subsequently, the possibility for political opposition, participation in elections and the legally guaranteed freedom of expression and freedom of the press are more and more restricted. Still, Hong Kong is one of the freest places in the world with regard to economic activity, but many have left or are about to leave. Because of this, the long-term trend has reversed, and Hong Kong’s population is now shrinking. [12] Some emigrants have organized themselves and are looking for a new home. [13] This could create an opportunity for Free Cities projects to find exceptionally qualified residents in sufficient numbers. In the not-too-distant future, a new Hong Kong might replace the old.

 

 

References:

  1.  https://en.wikipedia.org/wiki/Hong_Kong
  2. Monnery, Neil: Architect of Prosperity – Sir John Cowperthwaite and the Making of Hong Kong, London 2017, 123.
  3. https://en.wikipedia.org/wiki/Positive_non-interventionism
  4. Monnery 2017, 123.
  5. Official Report of Proceedings of the Hong Kong Legislative Counsel, March 24-25, 1966, 216.
  6. Monnery 2017, 200.
  7. Monnery 2017, 188ff., 252ff.
  8. Monnery 2017, 121.
  9. This was already the view of contemporary observers: the business journalist Rabushka wrote in 1973 that the economic laissez-faire model in Hong Kong was only possible because there were no elections, Monnery 2017, 296.
  10. Own conversations of the author.
  11. https://www.reuters.com/article/us-hongkong-anniversary-china-idUSKBN19L1J1
  12. https://edition.cnn.com/2022/08/12/asia/hong-kong-population-record-fall-covid-intl-hnk/index.html
  13. https://www.victoriaharbor.group