Economic History Case Studies: Asian Tigers (Pt. I of III)

The term “Asian Tigers,” in reference to the South Korean, Taiwanese, Hong Konger and Singaporean economic governance models, is also a product of its own historical circumstances. It came to describe the levels of economic growth in Kapital Accumulation that occurred during the latter half of the 20th century, between the 1960s and 1990s. All four had a “Developmentalist State” employing State Capitalism to rapidly industrialize their respective countries. The extent to which industrialization occurred was complemented by a combination of land reforms, creation of an internal market, emphasis on exportation, and significant investments in educational systems. Supporting these endeavors was a Fractional-Reserve Banking System that relied on foreign investments and a political system that catered to aspects of Parliamentary Democracy. Developmentalism, it should be recalled, entailed the goal of developing a Liberal Capitalist Market/Mixed Economy, a Fractional-Reserve Banking System, and a Parliamentary Democracy before integration into the Empire of Liberty.

Of the four Tigers, Hong Kong is considered to be the first and oldest of the Tigers. The city’s history can be traced back to its former status as a British colony, an entrepôt that allowed the British Empire to conduct its economic activities in Mainland China. The British were able to control this center of international trade by exploiting the Chinese opium trade during the 19th century. They did not finally wrestle control of Hong Kong Island from the Qing Dynasty, the rulers of China at that time, until after the First Opium War’s end by the Treaty of Nanking in 1842. During this period, Hong Kong was still a remote fishing village that had yet to become the overpopulated world-city that it exists as of late.

British control of Hong Kong was not permanent. The Second Opium War was fought between the British and Qing Dynasty over the control of the opium trade. The Qing Dynasty’s defeat in that conflict allowed the British to seize Kowloon Peninsula and Stonecutters Island, both of which were adjacent to Hong Kong Island. In order to extend its control of Hong Kong, the British Empire in 1898 agreed to a 99-year lease with the Qing Dynasty, allowing Hong Kong to continue being a British colony. Hong Kong was briefly under Imperial Japanese rule during the official years of the Second World War, from 1941 to 1945. After 1945, in the unofficial years of World War II–otherwise known as the “Cold War,” the British regained control of Hong Kong and would not cede it to the People’s Republic of China until June 1997.

The economic history of Hong Kong can be split into several segments: 19th and early 20th centuries British rule, Imperial Japanese rule, late 20th century British rule, and the One Country, Two Systems arrangement after 1997.  Economic conditions for the former two are vastly different from those of the latter two. This Economic History Case Studies entry, however, will be focusing on Hong Kong’s post-1945 economic history and its status as of late. For this world-city, as it currently exists, came into being in the 1950s.

The 1950s saw a chronic housing shortage in Hong Kong, as people from Mainland China emigrated from the then-emerging PRC. Since the PRC was closed to outsiders during those years, the only way that anyone from the West could obtain information and contacts in Mainland China was through Hong Kong. Thus, Hong Kong’s status as a British entrepôt into Mainland China ceased between 1949 and 1978. It was during those years that Hong Kong redirected the bulk of its economic activities toward industrial manufacturing and exporting the finished products to other destinations throughout the Empire of Liberty. This state of affairs lasted until Mainland China began undergoing the Dengist economic reforms from 1978 onwards. And although the 1980s saw Hong Kong continue export-driven manufacturing activities, deindustrialization soon followed and would later be replaced by financialization in the 1990s. Towards the end of the 20th century, Hong Kong was transforming into a center of international finance for the Empire of Liberty. These activities coincided with the transformation of Hong Kong from one of the last remaining British colonies to a Special Administrative Region in the PRC.

For much of the 20th century, Hong Kong has been “a borrowed place living on borrowed time.” Worry about the future surfaced again in the late 1970s and early 1980s, when Hong Kong’s business community started to express unease about the New Territories lease, set to expire in 1997.

Legally, commercial leases in the New Territories could not be extended beyond June 30, 1997. As the date approached, therefore, shorter and shorter leases would be necessary, providing less time for investors to realize profits. This would, many feared, begin to damage investor confidence in Hong Kong.

Under pressure from the business community, during Prime Minister Margaret Thatcher’s visit to Beijing in 1982, Britain raised the issue of extending the New Territories lease. China, however, had long taken the position that all the 19th century treaties and agreements on Hong Kong were “unequal” and as such were not binding. Extending the New Territories lease was not an option, and Britain’s discussions with China became serious negotiations over the terms of Hong Kong’s return to China. These negotiations concluded in 1984 with the signing of the Joint Declaration. Drafting of the Basic Law was completed in 1990, setting the stage for the formal transformation of Hong Kong into a Special Administrative Region of China on July 1, 1997.

The significance of Hong Kong as a Developmentalist State cannot be complete without mentioning the fact that Milton Friedman had at one point considered the city as an actual example of Laissez-Faire Capitalism. In a 1998 memoir that he and his wife Rose wrote, Two Lucky People: Memoirs, they described why they considered Hong Kong to be an example of Economic Liberalization taken to its logical conclusions, Political Liberalization and Social Liberalization notwithstanding:

“The difference in the economic policies followed by Hong Kong and Britain was a pure accident. The colonial office in Britain happened to send John Cowperthwaite to Hong Kong to serve as its financial secretary. Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At the time, while Britain was moving to a socialist and welfare state, Cowperthwaite insisted that Hong Kong practice laissez-faire. He refused to impose any tariffs. He insisted on keeping taxes down.”

There is some credible degree of irony in the Friedmans assertions in their memoir. Whether it was deliberate or not is irrelevant. What is relevant is that the man whom Milton Friedman was admiring, John Cowperthwaite, played a significant role in the British colonial economic history of Hong Kong.

“Friedman had huge respect for John Cowperthwaite, who ran the industry and supplies department after the war, and was deputy then actual financial secretary (finance minister) from 1951 to 1971. He was clearly the central figure in establishing Hong Kong’s economic foundations. But he was not alone. His predecessors and successors also pursued a similar policy mix. His immediate successor as financial secretary, Sir Philip Haddon-Cave, called it ‘positive non-interventionism’:

‘Positive non-interventionism involves taking the view that it is normally futile and damaging to the growth rate of an economy, particularly an open economy, for the government to attempt to plan the allocation of resources available to the private sector and to frustrate the operation of market forces, no matter how uncomfortable may be their short-term consequences.’”

“Even today, Cowperthwaite’s principles of low taxation, running government surpluses, and free trade are written into Hong Kong’s Basic Law.

But it perhaps does Cowperthwaite a disservice to describe him as a simple free marketeer. He was very happy to intervene directly in large parts of the economy. He argued for government regulation or involvement in the provision of public goods, such as water supply and infrastructure. But he tried hard to find the right mix of public-private involvement. He actively regulated monopolies. He believed that companies would follow their own self-interest, and it was through competitive markets that this motive could be channeled for the common good. Absent a fully competitive market, he looked to regulation to control corporate behavior.”

Economically speaking, Hong Kong should be considered as a Market Economy, even under its current One Country, Two Systems arrangement as of late. It can be debated that Cowperthwaite was a proponent of Mixed Economy and it can also be debated that he was a proponent of Market Economy. A more realistic argument is that Cowperthwaite employed the methodology of the Mixed Economy as the means to achieve the end that is a Market Economy. This is of course the most obvious tell-tale sign of Developmentalism at play. In final analysis, the Intents behind his actions matter far more than the Incentives that were issued to initiate them.    

However, the extent to which Hong Kong is capable of becoming a fully-fledged Market Economy like the US or the EU/NATO member-states will always be limited by the PRC. The same can also be said for the extent to which Hong Kong pursues Political Liberalization as well, because the PRC also has its own influence within Hong Kong’s Parliamentary Democratic system. For those who are interested, the International Monetary Fund has a copy of the aforementioned Hong Kong Basic Law whose economic ideas were drawn from those of Cowperthwaite:

“The constitutional framework for the Hong Kong Special Administrative Region has been laid down in the Sino-British Joint Declaration (1984) and the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (1990). Under this framework, the Region is to remain autonomous in all but two areas—foreign affairs and defense—for 50 years after July 1, 1997.

Key provisions with respect to the economic and legal system of the Hong Kong Special Administrative Region are these.

  • The socialist system and policies shall not be practiced in the Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.
  • The rights of private ownership of property and investments shall be protected by law.
  • The land and natural resources within the Region shall be state property and shall be managed by the Government of the Hong Kong Special Administrative Region.
  • The laws previously in force in Hong Kong—the common law, rules of equity, ordinances—shall be maintained, except for any that contravene the Basic Law.

On public finances, the Joint Declaration and the Basic Law guarantee:

  • Independent finances of the Region and use of its resources exclusively for its own purposes.
  • Freedom from taxation by the Central Government of China in the Region.
  • Independent tax system and own tax laws of the Region, taking the low tax policy as reference.
  • Prudent budgetary principles consisting of: (i) keeping expenditure within the limits of revenue in drawing up the budget; (ii) striving to achieve fiscal balance; (iii) avoiding deficits; and (iv) keeping the budget commensurate with the growth rate of GDP.

On the monetary and exchange rate system, the key provisions are the following.

  • Independence of the Region in monetary, financial, regulatory, and supervisory policies.
  • The Hong Kong dollar shall remain the legal tender and a freely convertible currency fully backed by foreign exchange.
  • Freedom from all foreign exchange controls in the Region.
  • Free movement of capital within, into, and out of the Region.
  • Management and control of the Exchange Fund by the Government of the Hong Kong Special Administrative Region primarily for regulating the exchange value of the Hong Kong dollar.

In addition, in September 1996, the Chinese authorities defined the monetary relationship between China and Hong Kong under the concept of ‘one country, two systems’ as one country with two currencies, two monetary systems, and two monetary authorities that are mutually independent.

The Hong Kong Special Administrative Region shall also maintain autonomy in its external economic relations (including the status of a free port and a tariff-free zone, separate customs territory, and participation—in an appropriate capacity—in relevant international organizations), immigration controls on foreign persons (entry of people from the other parts of China will be controlled by the Central Government in consultation with the Government of the Hong Kong Special Administrative Region), and other policies (land leasing, shipping, civil aviation, social services).”

Categories: Economic History

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