Hong Kong's prosperity owes a debt to one person

By Boss Gu, rewritten in English by Mr. Y

When discussing Hong Kong's economy, one historical Financial Secretary is particularly noteworthy.

Hong Kong's economic miracle in the 1960s to 1980s was actually a very strange thing.

A small island of only 1,000 square kilometers, bordering a mainland that was then in turmoil; Hong Kong lacked Singapore's natural geographical advantages and had no resources.

It's difficult to understand how Hong Kong became one of the “Four Asian Dragons” at the time.

Even more peculiar is that Hong Kong was a British colony at the time, and while Britain was mired in a prolonged economic slump after World War II, Hong Kong maintained an unusually high rate of development.

In 2006, Milton Friedman, a leading figure in the Chicago School of economics, wrote an article titled "Hong Kong Was Wrong".

This article criticized Donald Tsang. The criticism was intended to commemorate and praise another person, John James Cowperthwaite. Cowperthwaite passed away that year. Donald Tsang and Cowperthwaite had both served as Hong Kong's Financial Secretary.

Friedman wrote this article because then-Chief Executive Donald Tsang announced that Hong Kong had long since abandoned its policy of active non-intervention in economics.

In the article, Friedman poignantly stated: "Hong Kong's 'active non-intervention' policy was too wonderful, but good things are often unsustainable. This policy philosophy went against the nature of government bureaucracy and its tendency towards excessive spending and intervention. Therefore, when Mr. Tsang, Hong Kong's leader, announced last month that this policy that had brought prosperity to Hong Kong was dead, I was not surprised, but it was still saddening. The achievements brought about by the spirit of Cowperthwaite will not be forgotten. No matter what happens in Hong Kong in the future, the experience of Hong Kong over the past fifty years will continue to guide and encourage those who believe in free economics, providing a model of economic policy for those around the world who wish to create prosperity."

Cowperthwaite, the former Financial Secretary of Hong Kong whom Friedman highly praised, is the subject of today's article.

Discussing him is to answer the question posed at the beginning of the article: After World War II, Britain was mired in a prolonged economic slump, while the Labor Party implemented universal free healthcare and a policy of nationalization at the expense of private sector; meanwhile, Hong Kong was experiencing a period of high economic growth. Although Britain colonized Hong Kong, Hong Kong's economic freedom consistently ranked higher than that of Britain. Why were virtually no British economic policies implemented in Hong Kong?

The reason is Cowperthwaite. Cowperthwaite was an ordinary bureaucrat stationed in Hong Kong by the British during the British colonial period. In 1952, he was promoted to Assistant Financial Secretary, and later to Deputy Financial Secretary. On April 17, 1961, he succeeded Kenny G as Financial Secretary of Hong Kong, beginning a ten-year tenure.

These ten years were the miraculous decade in which Cowperthwaite transformed Hong Kong.

Cowperthwaite studied economics at the University of St Andrews in the UK, earning a degree in economics, and was a successor to classical British economics. His policy proposals during his tenure as Financial Secretary of Hong Kong not only changed Hong Kong but also drew global attention to its prosperity, even inspiring the economic policies of governments such as Britain and the United States in the 1980s, prompting other major countries to follow suit. Many of the policies adopted by mainland China's “Reform and Opening Up” were learned from Hong Kong.

Contrary to popular belief, although Cowperthwaite was a British government official stationed in Hong Kong, he actively resisted various British government controls over Hong Kong during his tenure.

For example, the British government once demanded that Hong Kong raise its personal income tax, but Cowperthwaite maintained the salaries tax at 15% during his tenure, resolutely opposing the British authorities' demand that Hong Kong's tax increases align with those of Britain. At that time, the highest marginal personal income tax rate in Britain was as high as 83%. The infamous Value Added Tax (VAT) was also introduced in the 1970s.

Not only did Cowperthwaite not align with the British authorities, but he also abolished some existing taxes to maintain a low-tax policy. When British Defense Secretary Dennis Healy requested that Hong Kong residents bear the cost of the British garrison in Hong Kong - that is, to levy taxes to fund the colonial army's expenses - this plan also failed due to Cowperthwaite’s strong opposition.

On November 19, 1967, British Prime Minister Wilson suddenly announced a 14.3% devaluation of the pound sterling, and the Hong Kong dollar, pegged to the pound, immediately followed suit with a sharp devaluation. Cowperthwaite did not mince words, refusing to let the British central government exploit the people of Hong Kong. He took action to intervene in the Hong Kong dollar exchange rate and pushed forward the process of decoupling the Hong Kong dollar from the British pound seven years later.

During his tenure, Cowperthwaite implemented a laissez-faire policy across Hong Kong, significantly reducing government intervention in the market in addition to maintaining low taxes. This economic policy he championed later evolved into Hong Kong's fundamental economic policy system of active non-interventionism, adherence to fiscal discipline, and maintenance of a free market. Cowperthwaite opposed any subsidies or grants to the market; therefore, he not only opposed subsidies for local industries but also refused to provide funding for the under-construction Hung Hom Cross-Harbor Tunnel upon request.

Interestingly, Cowperthwaite even refused to accept the Financial Secretary's allowance for renovating his official residence, demonstrating his unwavering commitment to opposing intervention.

He also recognized the tactic of many companies’ using regulations to reduce competition. In 1962, the Bank of England proposed legislation to limit the number of commercial banks in Hong Kong. Cowperthwaite immediately saw through this proposal and strongly opposed it; the related legislation was significantly more lenient than the original proposal. Hong Kong's status as a free port was established during Cowperthwaite's tenure.

In 1960s Hong Kong, a large influx of refugees caused a surge in poverty. Hong Kong, lacking natural resources, relied heavily on imports for everything from daily necessities and food to drinking water. Cowperthwaite actively promoted extremely low tariffs, allowing inexpensive and high-quality imported goods to flow into Hong Kong, freeing residents from the need to purchase expensive local products. This extremely low tariff policy is a hallmark of a free port. Hong Kong thus became a place with virtually no restrictions on foreign goods and zero tariffs on most imports, a key factor in its later status as a shopping paradise.

One of Cowperthwaite's most commendable achievements in economics was his opposition to detailed government statistics on the economy during his tenure. Cowperthwaite bluntly stated that for impoverished areas to escape poverty, the government's statistical departments should be abolished first. He believed that compiling economic statistics was extremely dangerous because the government could unknowingly intervene based on the data, hindering the functioning of spontaneous market mechanisms.

Cowperthwaite even stated that "national economic accounting is a subject for scholars, not officials", a view that, despite strong opposition from the British government, remained unchanged throughout his tenure. Cowperthwaite pursued a laissez-faire economic policy, keeping public spending extremely low during his term. Meanwhile, the British government was rapidly pursuing a welfare-oriented, big-government approach.

Even the then-globally popular free education was opposed by Cowperthwaite.

Although the Hong Kong government continued to build government-run schools in the 1960s, most schools were operated by private organizations such as churches, with minimal government intervention. Cowperthwaite opposed introducing free education to Hong Kong, facing strong public pressure.

Under increasing public pressure, he reluctantly supported the introduction of six years of compulsory primary education shortly before leaving office in 1971. Cowperthwaite retired on June 30, 1971, and by the time he left office, his policies had brought about profound changes to Hong Kong's economy.

Firstly, in 1961, Hong Kong's per capita income was only about a quarter of that of Britain, and government reserves were a mere HK$77.5 million. By 1971, however, Hong Kong's per capita income had seen a substantial increase of 50%, and government reserves had surged to HK$640 million. By the 1990s, Hong Kong's per capita income had even surpassed that of Britain.

Furthermore, during his tenure, Cowperthwaite successfully reduced Hong Kong's poverty rate by two-thirds; exports also grew steadily at an annual rate of 14%, transforming Hong Kong into a major manufacturing center in the region; and laying a crucial foundation for Hong Kong's economic boom in the 1970s and 80s.

Friedman once commented on Cowperthwaite:"...In the period immediately following World War II, while Britain was rushing headlong into extreme social democracy, its only remaining colony - Hong Kong - was moving towards extreme free-market policies. Due to some bureaucratic inertia, the Colonial Office appointed Cowperthwaite as Financial Secretary of Hong Kong. The result: Britain was strangled by social democracy, but its colony evolved into a significant stage showcasing the vibrancy of the free market."

Under the influence of Cowperthwaite's laissez-faire policies, Hong Kong gradually became a highly free economic system. Since the Fraser Institute of Canada began publishing its World Economic Freedom report in 1970, Hong Kong has been consistently ranked as the "world's freest economy".

Hong Kong's success attracted the attention of scholars worldwide and even triggered a shift in political figures. The neoliberal economic policies pursued by US President Reagan and British Prime Minister Thatcher in the 1980s, and China's "Reform and Opening Up" in the 1980s, were, to some extent, influenced by Cowperthwaite, as these political figures repeatedly mentioned Hong Kong's prosperity.

Cowperthwaite’s experience in Hong Kong made Hong Kong a model of a free market. Many renowned scholars, such as Friedman and Hayek, even regarded it as a foundational case study in textbooks, demonstrating how free economic policies can lead to economic development and prosperity.

Cowperthwaite was not a bureaucrat subservient to the British colonial government, nor did he succumb to the widespread demands for welfare in Hong Kong. Instead, he was a libertarian who adhered to his own unwavering principles of a free market.

To this day, the free port model pioneered by Cowperthwaite has become a paradigm for many regions and countries. For example, a 15% personal income tax rate and zero tariffs are considered standards for free trade zones. Even US President Biden, in his global tax control efforts, set 15% as the lowest corporate tax rate target for governments worldwide.

However, after Cowperthwaite's departure, Hong Kong's economic policies gradually deviated from the principle of laissez-faire.

In the 1970s, the Hong Kong government launched a ten-year housing development plan and a government-participated subway project.

In 1983, Hong Kong implemented a linked exchange rate system, pegging the Hong Kong dollar to the US dollar.

During the 1987 stock market crash, the Hong Kong Stock Exchange suspended trading for four days.

During the 1998 Asian financial crisis, the Hong Kong government intervened in the market, using nearly HK$120 billion of foreign exchange reserves to target the foreign exchange, stock, and futures markets to combat international speculators.

During Tung Chee-hwa's tenure as Chief Executive, the Hong Kong government invested in Cyberport and Hong Kong Disneyland. In September 1999, then Chief Secretary for Administration Anson Chan defended the government's investment in Cyberport, stating that Cyberport was an exception, and that the government's proactive non-intervention was a "well-considered" intervention. On June 29, 2000, then-Hong Kong Chief Executive Tung Chee-hwa introduced a large-scale housing development policy; on September 11, 2006, Hong Kong Chief Executive Donald Tsang clearly stated that the SAR government does not follow a policy of active non-intervention and pointed out that this was something that happened "a long time ago".

After Cowperthwaite's departure, Hong Kong began to comprehensively learn from the British welfare and interventionist policies.

Hong Kong's economic policies increasingly resembled those of Britain, with welfare programs such as free healthcare and free education making rapid progress after the 1980s.

In 1978, Hong Kong began implementing nine years of free compulsory education from primary school to Junior middle school.

From 2008, Hong Kong extended free compulsory education to senior high school, implementing 12 years of free compulsory education.

By 2017, Hong Kong had included kindergartens in the scope of free compulsory education, forming the current 15-year free compulsory education system from kindergarten to high school.

In 1977, Hong Kong comprehensively promoted its healthcare welfare program, constructing a large number of public hospitals, learning from the British model.

Hong Kong's free healthcare system, with its long waiting times and inefficiency, has become a source of pride for Hong Kong people.

The corresponding cost is the ever-increasing expenditure of the Hong Kong government, a departure from the ideal of small government.

Li Ka-shing, once affectionately known as "Superman" by Hong Kong people, has become a scapegoat for Hong Kong's economic problems amidst the anti-business atmosphere caused by flawed economic policies.

Whatever is popular in Europe, Hong Kong follows. Even extreme environmentalism has emerged in Hong Kong; killing a snail can lead to arrest and prosecution.

Fundamentally, while the laissez-faire economic philosophy shaped the Hong Kong miracle, it hasn't been truly understood by Hong Kong people. For decades, many Hong Kong people have continuously called for welfare, for government intervention in the housing market, and even opposed government land sales, reclamation projects, and mainlanders buying milk powder in Hong Kong, despite exorbitant housing prices.

Laissez-faire has long been discarded; this is Hong Kong's real trouble, and the true source of many of its problems today. If Hong Kong had maintained high-speed growth, where would these upheavals be? Essentially, the root cause behind all the chaos is a poor economy.

In the 1970s, 80s, and 90s, Hong Kong didn't have so much political strife. Ordinary people didn't care about politics; they were busy making money. Because of rapid economic growth, everyone in Hong Kong was full of hope, believing that the future would get better every day.

Once interventionism and welfarism emerge, they inevitably lead to stagnant economic growth and reduced capital accumulation, resulting in a sense of class stratification. The misery index of young people increases, they lose faith in their future, fall into confusion, and search for answers everywhere. Cowperthwaite is not a product of public opinion; he is simply a libertarian who happened to come to Hong Kong.

Therefore, Hong Kong's prosperity was not due to Hong Kong people's strong support for the free market, nor was it because they truly recognized its benefits. The increasing interventionist measures and welfare policies implemented in Hong Kong after the 1970s were the result of countless ordinary Hong Kong people pushing for change through public opinion. This surging public opinion believed that a British-style welfare society was a good society; and that active government intervention in the property and financial markets was the mark of a good government.

Therefore, Hong Kong's booming prosperity in those days was due to good fortune in having encountered Cowperthwaite, although today's Hong Kong people have likely long forgotten him.

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