“For Hong Kong, freedom to trade is life itself.” – Monthly newsletter, First National City Bank of New York, December 1959
Hong Kong’s post-war success as a laissez-faire economy has fascinated foreigners from very early on. While researching for a book, I recently hit upon this monthly newsletter which did as good a job as anyone, say Milton Friedman, in presenting the city as the poster child of free-market capitalism.
Before the 1997 handover, for almost half a century, the British colony’s success was judged almost exclusively in economic terms, by locals and foreigners alike. Thereafter, it has been considered mostly by political criteria and more specifically, by the pace of democratisation. This led to a historical paradox.
Hong Kong’s colonisation by one of the world’s oldest parliamentary governments was judged a supreme success because of its economic rise, which also involved the deliberate suppression of democratic development by the colonial government, until its last years. But the city was to be put under the microscope for its “failure” to democratise under the one-party state of China. If one were to reverse the criteria, Hong Kong would have fared quite well economically – perhaps even better than during the colonial era – under Chinese rule because of the phenomenal economic rise of the rest of the country.
The legendary Friedman most famously sang the praises of Hong Kong as the perfect example of laissez- faire capitalism. But he wasn’t the only one. Many foreign observers, especially those in the Anglo-American world, were starting to idealise the city by the mid-1950s as a free-market model. Of course, they only tasted the appetising sausages, but didn’t actually look at how they were made. Half a century later, senior government bureaucrats and policymakers would make a similar mistake and pay a heavy political price.
The December 1959 monthly newsletter of the First National City Bank of New York, which later became part of Citibank, makes for fascinating reading. Titled “Hong Kong – a success story”, it cited all the supposed laissez-faire virtues of the city, with the economic numbers and colonial policies competently explained and interwoven. Several key passages are worth quoting for further examination.
First, Hong Kong’s emerging success was due to a free-market economy and little government intervention. “Hong Kong’s recent economic growth is one of the outstanding success stories in the Far East today,” the unnamed author claimed.
“This achievement has been one of private enterprise operating within a free-market economy. There has been relatively little government intervention in the colony’s affairs … Instead of massive programmes of government spending or requests for foreign assistance, reliance was placed on private initiative.”
Then, there was free trade and absence of capital controls, attracting regional and international businesses.
“With inventories of imported goods warehoused locally, Hong Kong merchants were able to make rapid deliveries to neighbouring countries,” the newsletter pointed out. “Hong Kong’s free money market eased the payment problem for many buyers. And its wide range of commercial facilities and duty-free port encouraged foreign companies to maintain regional sales offices there.”
Actually, this involved a legal loophole which allowed for the smuggling and trafficking of gold and the American dollar – interchangeable at US$35 an ounce back then – in Hong Kong as well as other foreign currencies up to the 1970s. A family friend of ours got rich by smuggling gold out of Vietnam until 1975 when the North took over the entire country
And, above all, there was the low – and flat – tax rate, according to the bank’s news piece.
“The colonial government consistently kept its accounts in balance with a standard tax rate of only 12½ per cent on personal and corporate income,” it said. “Here was opportunity for businessmen to create, to produce, and to enjoy the fruits of their labour.”
Those who have lived through several generations of tax cuts may not find it all that remarkable. But throughout the 1950s and 60s in Britain, for example, the highest income and corporate tax rates were around 90 per cent. That in fact inspired the 1966 song, Taxman, by the Beatles. In the US, the highest rate was about 53 per cent by the late 1960s. No wonder the bank’s news letter author wrote with envy.
There were also no unions, the bank author observed, and therefore few industrial disputes. Workers were hard-working and obedient. Today, that would be called “forced labour” or “exploited labour” in China.
The tribute and admiration end with these words: “Hong Kong‘s success in attracting foreign investment and achieving rapid development despite inherent disadvantages is striking testimony to the truth of liberal economic principles.
“Of the physical factors usually considered essential to industrial growth, nearly all are missing in Hong Kong. But Hong Kong has offered businessmen greater freedom from official interference than any other area in Asia. It has also provided a stable government and strong support for the free-enterprise system. This policy has paid off handsomely by unleashing human potentials that in other countries have remained paralysed by bureaucratic controls.”
Friedman would have been proud. As he and his wife Rose wrote in Free to Choose: “Hong Kong has no tariffs or other restraints on international trade … It has no government direction of economic activity, no minimum wage laws, no fixing of prices. The residents are free to buy from whom they want, to sell to whom they want, to invest however they want, to hire whom they want, to work for whom they want.
“Government spending … remains among the lowest in the world as a fraction of the income of the people. As a result, low taxes preserve incentives. Businessmen can reap the benefits of their success but must also bear the costs of their mistakes.”
Today, we can only smile at their naivete or deliberate falsification; I suspect the latter. But what fascinates me is that throughout its post-war existence, the city served the West’s ideological goal of glamorising laissez-faire capitalism and subsequently neoliberalism, at the expense of democracy and even encouraging its suppression by the British colonial government.
Among those who idolised Hong Kong, some of the most prominent were from the US conservative think tank, the Heritage Foundation, which consistently ranked the city as the world’s freest economy. Hong Kong bureaucrats then duly advertised the ranking as a badge of honour.
Hong Kong and the Anglo-American sphere had good reasons to promote its laissez-faire image, even if it was far from reality. The convergence of interests between both the capitalist West and communist China meant the city as a colony was able to focus on economic development, and avoid political controversy, for the most part. “Make money, ignore politics,” was a common mantra among locals.
Back then, no one thought democracy was necessary to make or keep Hong Kong rich.