Biting the Invisible Hand

The Great Society comes to Hong Kong.

William McGurn from the April 1996 issue

Not since Lord Macartney refused to get down on all fours and perform the ritual "Three Kneelings and Nine Prostrations" at the feet of an 18th-century emperor has one of Her British Majesty's representatives upset the court of China as much as Chris Patten, the current governor of Hong Kong. A 20th-century politician sent to fill a 19th-century seat, Patten made it clear from the day of his arrival in 1992 that it would no longer be business as usual. The Chinese took the announcement of his political reform package as a declaration of war. The result has been an impressive stream of personal invective directed at Patten and emanating from Beijing: "a dictator," "a strutting prostitute," the "greatest villain in all history."

Insofar as people pay any attention to these epithets, they have probably served only to persuade the Hong Kong public that their governor must be doing something right. But now the Chinese have come up with a label that is not as easily thrown off: a welfare statist. In Hong Kong these are still fighting words, and when China's representative to the budget talks of the Sino-British joint Liaison Group, Chen Zou'er, accused Patten just before Christmas of allowing Hong Kong's welfare spending to run amok, the charge made headlines. Over Patten's term as governor, Chen pointed out, welfare spending had jumped 66.5 percent in real terms. Likening the increases to a Formula One racing car that had sped out of control, Chen warned that "if it goes on at the same speed, in some years' time the car must crash and the passengers must be killed."

Leave aside, if you will, the irony of a Chinese government still officially committed to socialism attacking as welfarist the policies of what the Heritage Foundation and Fraser Institute in separate studies have each labeled the freest economy in the world, the same place of which Milton Friedman said, "If you want to see capitalism at work go to Hong Kong." Leave aside, too, the grudge China nurses against Patten for his success in having pushed through his political reform package against Beijing's express wishes. Leave aside, finally, the crowning irony that this latest of Chinese attacks came at the very moment Patten had just returned from a trip back to Britain where he took a leading role in defense of Tory efforts to trim back state spending. Because all this notwithstanding, Chen has a point.

The truth is that Hong Kong has seen an explosion in its welfare spending--an explosion important less for its amount (still tiny in both absolute and relative terms) than for the decisive philosophical shift it represents in a place like Hong Kong. Add to this a British director of social welfare who vows to leave behind a "First World welfare system" to go with Hong Kong's First World economy and the introduction into business-oriented Hong Kong of something it never had before--politics--and you begin to understand the fear among many that Hong Kong may be losing hold of the very qualities that made it so special. And so as the colony lurches toward 1997 it faces two threats: the threat to its civic life posed by its soon-to-be-overlords on the mainland, and the threat to its economic freedoms posed by a new class of politicians running fast and hard toward the very government programs the rest of the world is trying to leave behind. As Hong Kong entrepreneur Gordon Wu puts it, "You now have the Great Society being imported to Hong Kong."

That, of course, is just what some of Hong Kong's new legislators think it needs, and here they have the enthusiastic support of the English-language press. It is easy to understand this enthusiasm, however misguided, for Hong Kong's very success makes for strong contrasts: old men living in cages (a de rigueur feature of all TV documentaries), veterans who can't afford medical treatment, widows left with even less than a mite, and so on. The idea is that Hong Kong may have had to scrape by in the past, but with budget surpluses surely there is room to spread a little around to the less fortunate. "They think you can just take 10 percent here and put it there," says Jimmy Lai, the garment-maker turned media baron--he publishes Hong Kong's most popular weekly, Next, and daily, Apple. "What they don't understand is that Hong Kong is so small. If you squeeze it even just a little, you can end up losing the whole thing."

To understand the dynamics at work here, it is important to understand both how Hong Kong came to be what it is and what 1997 is doing to it. At the end of World War II, Hong Kong was still a dusty entrepot, clear second fiddle to Shanghai, its sophisticated cousin to the north. All that changed irrevocably when the Red Star was raised over China in 1949. The result was to strangle Shanghai as a competitor and send its people, along with hundreds of thousands of their cousins from other parts of the mainland, over the border into Hong Kong. They came by plane, train, and boat--some even swam through shark-infested waters--but mostly they arrived on foot. And they lived anywhere they could: in the streets, under trees, on the hills, in homes that were little more than a few sorry square feet of old boards and tin. In its 1957 annual review the Hong Kong government admitted its desperation in a bleak lead chapter titled "A Problem of People."

It turned out, however, that Shanghai's fall was Hong Kong's gain. For while these refugees brought no money, they did bring something more precious: skills, knowledge, and a willingness to work. In almost no time at all, they proved to be the impetus for Hong Kong's first wave of industrialization. Not only did Hong Kong survive, it blossomed, and it did so despite the severe blow dealt by the loss overnight of its largest market, China, to a U.N. trade embargo imposed during the Korean War. "All of a sudden, you had the best people shoved into this tiny place," says Daniel Ng, executive chairman of McDonald's Restaurants (Hong Kong). "I suppose we are fortunate the government didn't have time to react. It was simply overwhelmed."

There is much to that. Much of Hong Kong's takeoff occurred simply because the colonial government had neither the will nor the resources to attempt too much. In fairness to the authorities, however, Hong Kong did benefit from a bureaucracy with enough horse sense to realize that the best thing to do with the Cantonese was get out of their way. If that legacy has carried over today it is largely the result of one towering figure: John James Cowperthwaite, financial secretary from 1961 to 1971 and de facto author of Hong Kong's budgets for a good part of the 1950s. Under Cowperthwaite's invisible hand, industrial wages doubled, exports grew at an average 13 percent each year, and the percentage of households in acute poverty shrank from more than 50 percent to 16 percent.

Not that Hong Kong didn't have its share of leaders constantly pushing pet schemes and preferential programs to develop the colony's manufacturing or trade. But Cowperthwaite's de facto control of the purse strings, his insistence that a place as small as Hong Kong could not afford to bet wrong, and--just as critical--his ability to defend this position intellectually in debate resulted in what was, for at least a short period, the freest economic experiment in world history. So scrupulous was Cowperthwaite about keeping government's role to a minimum that there is still no official recording of Hong Kong's national wealth for many of the years he was in charge. When I asked him about this years later he said it was deliberate. "If I allowed people to keep statistics," he told me, "they would only misuse them."

Yet even in the Cowperthwaite era there were some exceptions to the rule. After a disastrous Christmas Day fire in the Shek Kip Mei squatter area that left 53,000 homeless in a single night, the Hong Kong government assumed a new role: landlord. So diligently has the government pursued this aim that it is today the largest landlord in the colony, housing just over half of Hong Kong's 6.2 million people in government flats. Often hailed as Hong Kong's proudest achievement, the government's intrusion into the housing market provides a particularly apt metaphor for how difficult it is to remove dollars from the public ledger once they move out of private control. Public housing has come to be considered a birthright, and it is not uncommon to see BMWs and Mercedes outside public flats. And though the government talks about selling flats off to the public, the extent of the subsidies makes even ownership less attractive than the status quo: In some cases what people pay now would not even cover the monthly management fee. This has led to a strange contradiction which has seen the government's involvement in the housing market grow with affluence rather than decline: witness its vow to build 292,500 new flats in the years up to 2001.

Likewise with education and health, the other two big-ticket items of the Hong Kong budget. Today health accounts for 11 percent of the budget, most of it going to government hospitals. Again the Hong Kong yearbook tells the story. "Health promotive and preventive care services are generally free," it explains. "Under a policy that nobody should be denied adequate medical treatment through lack of means, other medical charges (especially for hospital treatment) are heavily subsidized." They aren't kidding. Patients in general wards are charged only $7.00 a day, and at some clinics charges are as low as 13 cents. Again the result is an increasing government control over the delivery system: Of the colony's 27,506 hospital beds, only 3,112 are private, and private hospitals are finding it tougher and tougher to make a go of things against the subsidized competition.

Finally, there is education. Despite Hong Kong's wealth, it has not managed to maintain even one independent institution of higher learning: Of the six universities and one college, all depend on the government for funding. The government also effectively runs the primary and secondary school system, albeit in a less direct way. Again the yearbook is refreshingly frank: "Most schools," it says, "are in the public sector." On the surface things may appear to the contrary, given the abundance of privately named schools (especially those with religious affiliations). Over the years, however, the schools have gradually ceded authority in return for government monies, to the point today where the vast majority of primary and secondary education is paid for by the state. As a consequence the schools have found themselves heavily regulated with regard to curricula, teacher's qualifications and salaries, fees, etc. Altogether the social sectors--education, health, housing, and welfare--now constitute 47 percent of Hong Kong's budget and are growing. And they would have grown even more had Patten succeeded in saddling Hong Kong with the social security program he wanted.

All these tendencies are only being exacerbated by 1997. For the same political reforms that gave Hong Kong people a greater say in the selection of their legislators also gave them a new political class in search of constituencies. Like legislators everywhere, Hong Kong's new politicians find it far easier to call for ways to divide up the pie than to grow it. In days past the executive-led government would have served as something of a balance here, but today it, too, is pushing for expanded welfare programs, at least as part of a broader effort to buy public support for its political reforms.

These moves have left Hong Kong people with a political Hobson's choice. On the one side lies the business community, which vigorously opposes the welfarist inroads on Hong Kong's market but remains distrusted by the public which believes, rightly, that these same businessmen will not stand up to China lest they jeopardize their considerable investments there. On the other side of the fence are the Democrats, who each day come more to resemble their American counterparts.

With the exception of the patrician Martin Lee, a leader of undoubted courage and spirit, the Democratic party is composed mostly of teachers, social workers, and activist types who know little about business; it is no coincidence that their economics spokesman is a medical doctor. Since coming to office the Democrats have welcomed Patten's initiatives on spending and upped the ante, calling for everything from comparable-worth (yes, comparable worth) schemes to social security and populist freezes on stuff like the fare increases on buses and ferries. "It's not much of a choice," says Jimmy Lai, who has more credibility than most businessmen here if only because he's been willing to pay the price: When he criticized Chinese leaders in a column last year, they responded by shutting down the Beijing branch of his Giordano clothing outlet. "If the Democrats run things they will just vote in a free lunch. If the businessmen do they will just cave in to China."