The Wisdom That Built Hong Kong’s Prosperity

The Wisdom That Built Hong Kong’s Prosperity
By NANCY DE WOLF SMITH
July 1, 1997 and January 26, 2006

Copyright by Wall Street Journal, available only for personal non-commercial use.

This article originally appeared the Wall Street Journal on July 1, 1997, and was reprinted in 2006 in memory of former Hong Kong Financial Secretary Sir John James Cowperthwaite (1915-2006). The article recounts his achievements which resulted in astounding prosperity for Hong Kong’s citizens. I am posting it here because I have loved it since I first read it on the day it was first published, and because I believe that Sir John’s brilliant strategy of “positive nonintervention” is a powerful force to alleviate poverty and produce the greatest happiness for the greatest number of people in this world.  This story needs to be told everywhere possible. The author, Nancy De Wolf Smith, tells it wonderfully.

* * *
The end of British rule over Hong Kong is a fitting time to pay tribute to
the people and ideas that made it a colonial success story like no other.
[Remember, she’s writing in 1997] As economist Milton Friedman likes to point out, for all the sweat and
mental effort that made Hong Kong the envy of the world, fate also played
a role. Had things been different, Hong Kong could have ended up like so
many other postwar British possessions, which became laboratories for the
socialist ideas that keep ex-colonies like Kenya and India in poverty to
this day.

In Hong Kong, so close to a menacing Communist China, independence was not
an option. By sheer luck, it would seem, neither was socialism. In 1945,
at a time when Britain was exporting Fabians every place else, there
arrived in Hong Kong a Scottish disciple of Adam Smith who would spend the
next quarter century building the foundation for the most spectacular
economic and human success story of our time.

Sir John Cowperthwaite’s crowning achievement was his term as Hong Kong’s
financial secretary, from 1961 to 1971. Now retired, he believes as
strongly today as he did then that society is best understood as a
collection of individuals, whose interests can be served only by a
government that limits itself to maintaining an environment in which human
enterprise can flourish. Under Sir John’s guidance, the “theory of
positive nonintervention” was put into daily practice.

Writing last year in the Sunday Times of London, Peter Clarke noted: “It
was one of those glorious accidents that a man unversed in the 20th
century’s fad for socialism could apply his 18th century ideas in a
territory unencumbered with democracy. Governors came and went but
Cowperthwaite kept balancing budgets, lowering taxes and keeping markets
open, including the market in immigrants.”

Sir John’s achievement was hard won. Only a few years ago, someone asked
another Hong Kong financial secretary to define the difference between
positive nonintervention and doing nothing. The record indicates that
Hamish Macleod had no ready reply. The correct answer is that while doing
nothing is easy, positive nonintervention is constant hard labor — to
resist the temptation to “do something” under pressure by unrelenting
critics convinced they know how to spend public money better than the
public does, and preferably without the public’s permission.

Official records of cabinet meetings from 1961 to 1971 bear testimony to
this struggle, as Sir John fended off bad ideas about everything from pig
farming to deficit financing. Here’s how he dealt with a proposal that
lower water rates be funded out of the government purse: “I see no reason
why someone who is content with a cold shower should subsidize someone who
is able to luxuriate in a deep hot bath, or why someone who waters a few
plants on his window-sill should subsidize someone who waters his
extensive lawns.”

One of Sir John’s longest-running battles was his effort to get government
out of the business of building parking lots and other facilities. He
noted that the capital employed to build one parking space could build a
five-person apartment. Meanwhile, the price of a government-financed
parking space was so low that no private builders wanted to build lots on
their own land: “One trouble is that when government gets into a business
it tends to make it uneconomic for anyone else,” Sir John said.

No one had a keener eye for the way government attempts at massaging a
problem or producing a desired result have unintended consequences: “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.”

Sir John was a dogged opponent of efforts to regulate and direct the
movement of capital in Hong Kong: “Simply put, money comes here and stays
here because it can go if it wants to. Try to hedge it around with
prohibitions and it would go and we could not stop it and no more would
come. . . . Our only course is to ensure that the economic and political
conditions here are such as to give every inducement to come and to stay.”
Arguing against an income tax increase, Sir John noted that money works
harder when it is not in the government’s pocket: “Enterprise in Hong Kong
has a good record of productive reinvestment and I have a keen realization
of the importance of not withdrawing capital from the private sector of
the economy. . . . I am confident, however old-fashioned this may sound,
that funds left in the hands of the public will come into the Exchequer
with interest at the time in the future when we need them.”

Even when the economic news was not rosy, Sir John resisted efforts to
change course: “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 figures into its sensitive mechanism. In particular, we
cannot afford to damage its mainspring, freedom of competitive
enterprise.”

When Sir John criticized the concept of economic planning back in the
1960s, a local newspaper accused the government of displaying a colonial
“Papa Knows Best” arrogance. Sir John’s reply was a classic: “It is
precisely because Papa does not know best that 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 deflected repeated efforts to get Hong Kong’s government into the
business of choosing businesses to favor: “I must confess my distaste for
any proposal to use public funds for the support of selected, and thereby
privileged, industrialists, the more particularly if this is to be based
on bureaucratic views of what is good and what is bad by way of industrial
development.” That, he said, is a recipe for failure: “An infant industry,
if coddled, tends to remain an infant industry and never grows up or
expands.”

Sir John applied the same reasoning to proposals that the government take
action to discourage “overexpansion” of existing industries: “By what
standard can one possibly measure overexpansion? On what basis can one
forecast it? On whose judgment can we rely? Who is to decide who is to
have the good fortune to reap what I have heard called ‘the spoils of
economic planning’? Do we no longer put our faith in the judgment of free
private enterprise?”

The line Sir John Cowperthwaite held so long and to such good effect is
under assault today as never before. With few exceptions, such as the
lonely voice of Financial Secretary Donald Tsang, Sir John Cowperthwaite
has no influential fans on new Chief Executive Tung Chee-hwa’s team. “With
suitable guidance from the government,” Mr. Tung predicted in a speech
last January, “Hong Kong entrepreneurs will quickly be able to find a new
industrial direction and rally Hong Kong’s manufacturing industry.”
But it’s difficult to argue with the record — not that Hong Kong was
keeping all the figures to prove it. Sir John refused to gather statistics
on many aspects of economic life, seeing them as the playthings of
interventionists eager to fine-tune their manipulations: In Hong Kong, he
said, “We are in the happy position where the leverage exercised by
government on the economy is so small that it is not necessary, nor even
of any particular value, to have these figures available for the
formulation of policy.”

But some things are known. Throughout Sir John’s tenure, Hong Kong’s
economy grew at an average annual rate of 13.8%. Its reserves quadrupled,
from $550 million in 1961 to more than $2.2 billion in 1971, and tens of
thousands of families who began that decade living in poverty finished it
on the path to prosperity. If Mr. Tung — or any other public official in
the world — hopes to come anywhere near that record of achievement, he
would do well to follow the footsteps that so clearly mark the correct
path.

Ms. Smith, a member of The Wall Street Journal’s editorial board, is a
former editor of The Wall Street Journal Asia’s editorial page.


Sadly, Hong Kong is now falling to Chinese Communism, something the Chinese promised would not happen.

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