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1 July 2017

Hong Kong

Tag(s): Foreign Affairs, Politics & Economics
This week marked the 20th anniversary of the return of Hong Kong from being a British colony to being a Special Administrative Region of China. On 30th June 1997 with great pomp and circumstance HRH Prince Charles and the Governor Chris Patten ceremonially kept the British side of the bargain as they came to the end of a 99 year lease taken out with the expansion of Hong Kong to include the New Territories in 1898. I was still working for Sony at the time as Managing Director of Sony United Kingdom. I remember the then Chief Executive of Sony Corporation Nobuyuki Idei telling me that he had been to a dinner in Tokyo when Margaret Thatcher had been the speaker. Idei-san had the temerity to ask her why Britain had kept its side of the bargain. After all Hong Kong was once described as “the barren island” and it had been British ingenuity that had turned it into an economic miracle. For me Jardine Matheson got it right by transplanting lock, stock and barrel to Bermuda so that they could carry on their trading from an open market base rather than come under the jurisdiction of communist China. Two of its companies are among the top 200 in the world by market capitalisation.  But the other Hongs like the Swire Group have listings in London but also still in the Hang Seng Index.

But it was after the Second World War that Hong Kong really blazed a trail that might be an example today to modern politicians who seem to have lost the idea of where economic growth can come from. In Britain we know we are leaving the European Union and therefore the internal market, wrongly described as the ‘single market’, and the customs union but we don’t hear much of how we can get through the inevitable disruption and come out economically stronger at the end of it.

Hong Kong was left devastated by Japanese occupation during the Second World War but is now one of the richest places in the world, with income per capita 40% higher than the UK’s. One key architect of this success was a Scottish civil servant John Cowperthwaite who was Hong Kong’s Financial Secretary from 1961 to 1971 when he retired, but then became an adviser to Jardine Matheson. Cowperthwaite was educated in Britain and joined the British Colonial Administrative Service in Hong Kong in 1941, but was fortunately posted to Sierra Leone and thus avoided the Japanese occupation, returning to Hong Kong after the war in 1945.

Initial recovery after the war was built on trade but this collapsed when sanctions were imposed on China during the Korean War. Hong Kong responded by building a textile industry but this ran into protectionist pressures from the UK, the US and the EC.

Cowperthwaite was asked to find ways in which the government could boost economic activity but despite external challenges he found the economy was recovering swiftly without any government intervention.

He looked at the approach being taken in much of the West: industrial planning, state ownership of industry, deficit financing, universal welfare and higher taxation. He rejected virtually all of this. Positive non-interventionism became the watchwords of his economic policy as Financial Secretary. He refused to collect economic statistics to prevent officials meddling in the economy. His policies helped it to develop from one of the poorest places on earth to one of the wealthiest.

Government spending depended on government revenues, and this in turn was determined by the strength of the economy. Therefore, the vital task of government was to facilitate growth. Only through such growth could society’s aspirations be met, and jobs for the increasing population created.

Private companies, risking their own capital, were best placed to identify such opportunities. He believed in the freest possible flow of goods and capital. He kept taxes low in order that savings could be reinvested in businesses to boost growth. He rejected government borrowing and aimed for a surplus.

In his view higher government spending now destroys future growth. In fact since the Second World War Hong Kong has limited the size of the state to below 20% of GDP (in the UK it exceeds 40%) and growth has been much faster than in the UK. This is not just some piece of dogma, it also has moral force. Since financing current needs can be at the expense of the future then every proposal for greater expenditure must pass a tough test.

Cowperthwaite was highly sceptical of state spending as a subsidy for middle and higher income groups. Resources were limited so they should be directed at the most needy. We can contrast this to policies offered by all the parties in the recent British General Election which sought to placate higher income families whether it be maintaining energy subsidies for the pensioners or Corbyn’s bribe to students with free tuition fees which would have primarily benefitted the middle classes.

But Cowperthwaite would also have been critical of successive British governments’ failure to build sufficient social housing. Hong Kong has a huge involvement in the property market with over 30% of the population renting government housing. The horrible tragedy of Grenfell Tower should be a loud alarm call. On Christmas Day 1953 a fire swept through Shek Kip Mei shanty town leaving 53,000 people homeless. The government decided that the private sector could not build sufficient homes for the vast number of unhoused immigrants many of whom had escaped from Mao’s China. It built low cost basic apartments, mostly away from the centre, but they were very popular and also helped to suppress rents in the private sector.

In general Cowperthwaite saw the need to trust markets and to avoid state intervention. But this was not universal and he saw no problem in intervening where the market had failed. He would have been surprised at the intervention today in so many markets where it is not helpful while other markets which are not working well go with little or no regulation.

He and his team believed passionately in free trade and negotiated many free trade agreements in the face of strong protectionist policies in the UK, the US and the EC. He would have been delighted by the success of GATT and the WTO which have successively reduced tariffs from in excess of 20% on average after the War to under 5% today. Even when other nations imposed tariffs on Hong Kong’s exports he did not retaliate, except perhaps as a negotiating tactic, because he understood that this would harm Hong Kong citizens. After all in the golden age of the Victorian era while Germany set tariffs at about 13% and France at over 20%, Britain’s tariffs were effectively zero and Britain was by far the most prosperous nation.

I have enjoyed many business trips to Hong Kong and always marvelled at its vitality, its inventiveness and its resilience. It is always recreating itself. As the handover to China approached two decades ago, new stamps and coins were issued without the Queen’s head, the red post boxes were painted green, the flag for what would become the Hong Kong Special Administrative Region was designed with a bauhinia flower blooming on it. The official emblems worn by those who patrolled frontiers - police, customs, immigrations, and army – changed at the stroke of midnight on June 30, 1997.

There had been extensive predictions of what would happen after such a huge change, but no one predicted that just 30 hours after the handover at 6am on July 2, Thailand would devalue the baht and spark the Asian financial crisis.

The Hong Kong dollar, pegged to the US dollar, made it so expensive that despite the enormous new airport built on an artificial island and opened in 1998, tourists stayed away. The new government was forced to run a campaign encouraging locals to be more welcoming, and it worked. But then Severe Acute Respiratory Syndrome (SARS) hit the Special Administrative Region in 2003 and it changed Hong Kong even more. Effectively that’s when the handover really took place as Hong Kong realised it was placed firmly within China. International tourism almost dried up so China loosened restrictions on visits by its own citizens; and they have poured across the border ever since.

But now the one country, two systems constitutional principle developed by Deng has never seemed under more pressure.

Source: Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong Neil Monnery London Publishing Partnership 2017

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