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The Hong Kong Miracle

by Katherine McKay

When the Communists took over China in 1949, great numbers of people took refuge in Hong Kong, so as to live under British law. The refugees brought only what they could carry with them and swelled the population enormously, and no foreign aid was available to help the colony cope with the influx of so many people. The small territory had little in the way of natural resources. Elsewhere in the world, such as Bangladesh, this has proved to be a recipe for continuing disaster. Yet Hong Kong is one of the great success stories of the last 50 years.

The Heritage Foundation in Washington published its first Index of Economic Freedom in 1994, ranking 101 countries in order of economic freedom each country allows in areas such as taxation, trade, banking, capital flow, regulation and property rights. Hong Kong was ranked first in the world, while its mother country, Great Britain, ranked seventh. Not only that, but Hong Kong's per-capita GDP was one-third higher than that of Great Britain. In fact, Hong Kong's per-capita GDP ranked behind only Japan, Canada and the U.S. (the highest ranked in income), which it trailed by 5%.

After World War II, socialist Britain was exporting socialism to all its colonies and former colonies. India and Kenya, among others, accepted the economic teachings of the mother country as a matter of course, and socialism has helped them remain in poverty to this day. How did Hong Kong escape the fate of the other British territories?

In 1945 the British colonial office happened to assign Sir John Cowperthwaite to manage the financial affairs of the colony. Sir John was an advocate of Adam Smith's free- market ideas and a staunch opponent of socialism. For 26 years he kept the colony's budget balanced and practiced his "theory of positive nonintervention," resulting in economic freedom for Hong Kong unmatched anywhere else in the world except Singapore (which ranked second on the Index of Economic Freedom). Far from doing nothing in the pursuit of positive nonintervention, Sir John had continually to resist critics and those in the government who endlessly suggested more schemes for spending the taxpayer's money without the taxpayer's permission. He fought proposals for the government to subsidize water rates, to build structures at lower cost than private builders could, to favor certain businesses and discourage others, and to regulate the movement of capital in Hong Kong. He resisted raising income taxes, claiming that private enterprise could put the money to better use than the government could, and criticized the concept of economic planning: "I believe government should not presume to tell any businessman or industrialist what he should or should not do, far less what he may or may not do--and no matter how it may be dressed up that is what planning is."

Sir John, acutely aware of how government's well-meaning attempts at dealing with problems often have unintended consequences, stated: "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. . . . Over a wide field of our economy it is still the better course to rely on the 19th century's 'hidden hand' than to thrust clumsy bureaucratic fingers into its sensitive mechanism. In particular, we cannot afford to damage its mainspring, freedom of competitive enterprise."

It becomes clearer now why Hong Kong's economic success was so great. Its trade and market policies were the freest in the world. It imposed no tariffs on imports and gave no subsidies to exports. There were few if any restrictions on entry into business and no fixing of prices or wages. Income taxes were low and government spending correspondingly so. As a result, the colony, which began the postwar period as an impoverished and overcrowded territory with hardly any natural resources, now ranks fourth in the world in GDP and, before the Communist takeover in 1997, first in the world in economic freedom.

A look at the 1994 Index of Economic Freedom uncovers almost complete correlation between economic freedom and prosperity. The first ten countries listed, in order of freedom, are Hong Kong, Singapore, Bahrain, U.S., Japan, Taiwan, U.K. Canada, Germany and Austria. Over half of these countries began the postwar period with very low standards of living (some were devastated); they have been able to build up their GDP through the efforts of individuals relatively unobstructed by the heavy hand of government. The last ten countries on the Index are Ukraine, Sierra Leone, Moldova, Haiti, Sudan, Angola, Mozambique, Vietnam, Cuba and North Korea. Their repressed condition corresponds to very low standards of living for their people. The clear conclusion is that the more a government interferes in the economic life of a country, the more it impedes economic growth and the poorer the country becomes.

Foreign aid (i.e., transfers of wealth from rich to poor countries) has little effect on raising the standard of living of countries whose governments interfere with free enterprise and misuse the money. Most of the 58 countries the Index lists as unfree have received foreign aid from the U.S., to little avail as far as the condition of their people is concerned. Prosperity cannot be bought for the poorer countries by the richer ones; only liberalizing repressed economic systems will allow countries to flourish. A country which instigates economic reforms to free the energies and intelligence of its people toward pursuing their own economic good by hard work and ingenuity will soon find its standard of living rising. Hong Kong, poverty-stricken and overcrowded with refugees 50 years ago, proved this by rising to the position of first in the world in freedom and fourth in GDP, in spite of having no natural resources to speak of. It remains to be seen how much of this economic freedom will be allowed to remain by the Chinese Communist government now controlling the territory. If Hong Kong loses its economic freedoms and its standard of living declines, it will become a textbook example to the whole world of the effects, first, of economic freedom and, second, of economic repression.

Resources: Nancy deWolf Smith, "The Wisdom That Built Hong Kong's Prosperity," Wall Street Journal, July 1, 1997 (quotes are from this source)

Milton Friedman, "Hong Kong vs. Buchanan," Wall Street Journal, no date, 1996

Kim R. Holmes, "In Search of Free Markets," Wall Street Journal, December 12, 1994.

Katherine McKay 1998