Tales of arrogance and incompetence

PUBLISHED : Tuesday, 27 November, 2007, 12:00am
UPDATED : Tuesday, 27 November, 2007, 12:00am

Among devotees of free-market capitalism, Sir John Cowperthwaite is regarded almost as a demigod.

Milton Friedman and Friedrich Hayek may have been the movement's prophets, but they were only academic theorists. As Hong Kong's financial secretary between 1961 and 1971, Sir John put their principles into practice, say the faithful.

Believers talk with awe about how his hands-off policies towards business and the economy ignited the growth boom that transformed the city into the hub of free-wheeling capitalism we know today. On Sir John's death last year, the Wall Street Journal called him 'the architect and guardian of the greatest natural experiment in free-market capitalism in the postwar world'.

Leo Goodstadt sees things differently. In his new book Profits, Politics and Panics, published by Hong Kong University Press, the former deputy editor of the Far Eastern Economic Review and head of the government's Central Policy Unit argues that Sir John's time in office was characterised less by ideological conviction than by bumbling amateurism and incompetence bordering on the cretinous.

Sir John is not the only British official to draw fire. The sub-title of Professor Goodstadt's book is Hong Kong's Banks and the making of a Miracle Economy 1935-1985, but it might as well have been How Hong Kong Succeeded Despite the Bungling Ineptitude of its British Administrators.

The way Professor Goodstadt tells it, for much of the post-war period, economic policy was driven by a singular combination of arrogance, ignorance and folly.

The hands-off approach of successive financial secretaries to Hong Kong's vital banking sector was the result not of any deep-seated belief in the effectiveness of light touch regulation. Rather it grew out of political expediency mixed with a culture of amateurism which pervaded the senior levels of the colonial administration.

In fact, Sir John was no committed free-marketeer. In 1947 he had advocated extending subsidised loans to favoured industries.

But standing back from business could be politically useful. During the 1950s and early 1960s, locally owned Chinese banks, whose main business was currency, gold and property speculation, were allowed to operate almost entirely unsupervised. This suited the authorities, who, in order to help support Macau's ailing economy turned a blind eye and even facilitated the banks' involvement in the lucrative but illegal trade in gold smuggled into Hong Kong from the Portuguese colony.

Professor Goodstadt argues this lax attitude contaminated the banking system with criminality and encouraged reckless risk-taking with depositors' funds.

The systemic risk was exacerbated by officials' pig-headed belief in the virtues of amateurism. Sir John himself did not know how to read a bank's balance sheet and failed to understand how a bank's loans could far exceed its deposits.

Yet the 'aloof and taciturn' financial secretary refused to employ professional bank regulators and disdained to collect official statistics on the grounds that they were unnecessary, unhelpful and might give people the wrong impression.

As a result the government was woefully unprepared for the crisis of 1965, in which three banks collapsed entirely and a further six - including Hang Seng, the colony's second biggest bank - had to be rescued. And without adequate data to work with, Sir John completely failed to recognise the severity of the economic slowdown that followed.

Alas, few lessons were learned, and the boom-bust cycle was repeated in the 1970s under Sir John's successor. It would be years before the government began to compile comprehensive data, and the mid-1980s before it finally recognised the need for professional regulation.

Profits, Politics and Panics is hardly light entertainment. Nevertheless, it should be required reading for bankers in Asia, their regulators, and all those who worship at the altar of hands-off free-market capitalism.