Hong Kong

An 'impossible anachronism' does a roaring trade in Asia

If Hong Kong did not exist, it is unlikely it could have been invented. That, perhaps, is true of any country, but it seems particularly apt in the case of Hong Kong. Could you imagine a British colony run by British "civil servants" with a more or less doctrinal commitment to laissez faire, parked on the edge of a Communist superpower that effectively guarantees its existence, in the year of 1976, when by all the canons of modern economics, such a place is impossible?

Yet there it is. Hong Kong. A place every libertarian should visit at least once in a lifetime (it'll blow your mind), an economy that should be studied by every economist and included in every free-market economist's course as the best—and probably only—living example of what he is talking about.

Certainly, Hong Kong is far from being a libertarian paradise. Philip Haddon-Cave, the colony's financial secretary, sums up his style of government as "conservative, with liberal [in the Misesean sense] economic policies." It is not advisable to blow a joint along Connaught Road; you would be subject to a typically conservative reaction—and a harsh one at that. There are the faintest stirrings of a gay rights movement among Hong Kong's Europeans (only two percent of the population; the other non-Chinese faces you see on the streets are some of the four million tourists who visit Hong Kong each year) but generally "homosexuality" is a dirty word. And the recently formed Independent Commission against Corruption, backed by tough laws, tries to uncover the widespread bribery and rake-offs that cover such activities as drug peddling and prostitution (as well as murder, extortion, and other such less savory activities) from the official eyes of the law.

Even the economy is not a complete free market. The government owns 48 percent of all Hong Kong's accommodation, the reaction to a continuing influx of refugees from China in the 1950's. Rent controls regulate rents for all houses built prior to 1975. The government grants monopolies to bus, tram, telephone, electricity, television, radio, and other such companies and licenses banks, taxis, public light buses (jitneys), and a variety of other activities, although licensing is much less restrictive than elsewhere. Also, taxes are on the rise. The company tax went up last year from 16 percent to 17½ percent, but a proposal to increase the income tax (from a maximum rate of 15 percent) was knocked back by the appointed legislative council. Haddon-Cave has also been pushing for the imposition of a dividend withholding tax.

In Hong Kong, as elsewhere, government is on the rise. But—at the moment—it is a government that is very easy to live with. In fact, the feeling of freedom is so pervasive—and such a contrast to other places I have been—that one quickly forgets the restrictions and interventions that do exist. And certainly, while the government's stance on civil liberties is typically conservative, its laissez-faire attitude to economic liberties rubs off, leaving a general sense that anything and everything is possible.

Hong Kong's present state as an industrial economy (the world's largest exporter of textiles and toys) and as Asia's financial capital (74 licensed banks plus 80 representative offices from overseas banks), as, in other words, Asia's Switzerland, is in large part a result of the Communist revolution in China. Between 1948 and 1950, close to a million Chinese left China in the wake of Communist successes. Just after the war, there had been another mass immigration to Hong Kong, and between August 1945 and the end of 1950, Hong Kong's population rose from 600,000 to 2.4 million (it is now 4.3 million).

Until 1949, Hong Kong functioned as the premier entrepôt port for the China trade. The Communist revolution not only partially closed off that trade but resulted in a massive influx of willing workers and, most importantly, an incredible concentration of entrepreneurs and capital. War, followed by the civil disorder of revolution, caused many of the wealthy Chinese of Shanghai and other commercial centers (but most importantly Shanghai) to adopt a wait-and-see attitude, storing ordered capital equipment in Hong Kong or other safe ports and sending their money to safe havens. Thus, in 1949-50, Hong Kong had an unprecedented abundance of labor, capital (in a form ready to produce), successful and driving entrepreneurs, and, of course, a government that did even less then than it does now.

Hong Kong's economy is still characterized by this concentration of entrepreneurial spirit. In the production of textiles, for example, which account for over 50 percent of Hong Kong's exports, there are only three factories that employ more than 2,000 workers. Factories with less than 100 workers account for over 50 percent of employment. The mobility of its capital and labor is another key to Hong Kong's success. Factories will be established simply to fulfill one order—for as little as one month—and then the equipment and workers will seek employment elsewhere. As the majority of businesses are family businesses, often with a finger in more than one pie, the family's resources will be concentrated in the area engendering the most profit at the moment. Bank financing is of course important, and banks will lend on a person's reputation. Thus, an entrepreneur who has been successful in one area of business has a good chance of being funded in a business he has never touched before simply on the basis that, if he can make money in one place, he is a good risk somewhere else.

Exports dominate Hong Kong, and textiles dominate Hong Kong's exports. This story is itself a textbook example of how the free market rapidly adapts to changes—not only to the changing whims of consumers but to the changing realities of costs and prices at the production end. Hong Kong's textile industry began in the 1950's, producing cheap garments and materials of the type now produced by the cheap-labor countries of China, South Korea, etc. Hong Kong's economic success forced up wages (even though the population has more than doubled since 1950), so that Hong Kong is no longer a "reservoir of cheap labor." (Hong Kong businessmen have themselves been shifting production to such cheap-labor areas—as far away as the island of Mauritius in the Indian Ocean.) Hong Kong's textile industry is now moving toward the production of fashion goods (selling in such places as New York and Paris) and has almost moved completely out of the production of cheap garments—importing them from China!

Ten years ago, textiles accounted for just over 40 percent of exports, and this was a terrible source of concern to many commentators (including many of the colony's economists, who are as dominated by the ideas of Keynes as are their colleagues elsewhere), who called for government intervention to "correct this imbalance" and "diversify the economy." Today, Hong Kong's "dependence" on textile-based production has grown to over 50 percent of exports, but the colony continues to go from strength to strength.

Hong Kong has, of course, diversified, though in ways that planners would have been unlikely to predict, or plan for. Hong Kong's position as financial capital of Asia is not something that could have been promoted. Its growth depended on two factors: the lack of exchange controls, government intervention, and taxes; and the strong domestic economy—already with a substantial demand for international financial transactions—providing the ready basis for the growth of financial institutions. (It is this domestic base that most tax havens lack, so that they cannot develop into true international financial centers.) Tokyo is, in many senses, preeminent in Asian finance—and would be its financial capital if not for Japanese exchange controls. An indication of Hong Kong's strength in this field is given by Singapore. There, the government made a determined effort to establish Singapore as Asia's money center, and its attractions are similar in many ways to Hong Kong's. The government established the Asian dollar market there, but now about 40 percent of the instructions to that market originate in Hong Kong!

Just as Hong Kong owes its present state and character to Communist China—to the Chinese who fled—so it owes its very existence to China. Hong Kong became a British colony as spoils of the opium wars of the 19th century. Faced with superior imperialistic forces, the disintegrating Manchu dynasty ceded Hong Kong Island to the British in 1842, ceded Kowloon (because the island was too small for British requirements) in 1860, and leased the New Territories for 99 years in 1898 because Kowloon was indefensible. All the treaties are, according to the Chinese, "unequal treaties," as they were forcefully extracted by imperialists from a weak government.

The British acknowledge this, and they acknowledge that the Chinese could take over Hong Kong with a telephone call. But they point out that some unequal treaties are more unequal than others, and when the lease expires in 1997 they expect the Chinese to come to some face-saving arrangement that will allow Hong Kong to continue intact.

Without the New Territories—370 of Hong Kong's 404 square miles—Hong Kong could not continue as an independent economy. If the Chinese were to resume the New Territories in 1997 when the lease expires, Hong Kong would cease to exist. Why, then, would the Chinese prefer Hong Kong in its present state—which is the implication of China's present attitude?

A good capitalist reason: profit. Until a few years ago, Hong Kong was the center of China's trade, and contact, with the Western world. The annual Canton trade fair, a few hours by train from Hong Kong, was China's annual industry showplace. By far the bulk of Chinese sales either went through Hong Kong or were written in Canton at the annual fair. Today, however, China is more open to the West, and both Hong Kong and the Canton fair are diminishing in importance to China's export business. Sales are being made in Shanghai, Peking, other Chinese cities, and elsewhere around the world.

But Hong Kong's importance to China has not diminished. Certainly, for the past few years, it seemed that is what was happening. Now, however, a new trend is developing that will make Hong Kong even more important to China than it has ever been before.

China supplies most of Hong Kong's food and water. Nowhere else in the world would China be able to turn a wide range of agricultural products into hard, Western cash. But China also does a lot of business in Hong Kong, and this business is growing.

Of Hong Kong's 74 banks, 13 are owned by the Communist Chinese. In fact, the Chinese renminbi—though inconvertible like the ruble—is the only Communist currency in the world that can be held in a bank account outside the Communist country's borders. After the Hong Kong government, China is probably Hong Kong's biggest landlord, owning factories, apartments, buildings, and land. The Chinese own six major department stores, two manufacturing firms, six warehousing and cold-storage companies, four insurance companies, seven investment companies, and four shipping and travel companies. In nearby Macao, which is the only remaining outpost of Portugal's empire and is now effectively run by the Chinese, China dominates the petrol market—a position gained through the good capitalist practice of cutting prices. The Chinese have just announced plans to enter Hong Kong's petroleum market, with the establishment of a fuel depot and service stations.

Most interesting of all for the future is the recent news that China will operate a machine-tool plant in Hong Kong. China has established a world market for its light machine tools—such as lathes—selling them in countries such as the United States and Switzerland. Rather like bringing coals to Newcastle. But to maintain the quality required for export, most of the steel used as the basic input must be imported. Continued supply to export markets points up the basic problems of a centrally planned, politically directed economy. Whatever the economics of the matter, it will become increasingly difficult to justify politically the diversion of resources to the production of exportable machine tools away from the political necessity to merchandize agriculture. Exports are seen (and not only in totalitarian states such as China) as "selling our resources" and becoming "too dependent on the West" (or whoever it is you don't like). Supplies of essential materials can also be erratic, being commandeered for some other purpose somewhere along the production line.

In Hong Kong, of course, none of these problems exist. Steel is available in any quantity and quality—as are labor, transport, land, capital, equipment, and whatever else is necessary. The guaranteed availability of these essentials outweighs the cheaper land, labor, and materials (not to mention no taxes!) available to the Chinese a few miles across the border.

The Chinese can still export from China, but their Hong Kong operation ensures that no markets are in jeopardy and that there are no restrictions on the possible expansion of those markets. Interestingly enough, such a venture cannot really be attacked within the Chinese Communist party on political grounds. One or more of the 13 Chinese banks in Hong Kong can supply or guarantee all the capital necessary for the project, so China would not even need to use any of her hard currency reserves.

Whether more of these projects are announced in the future remains to be seen. Hong Kong has always provided a ready market for Communist products, with a large minority of the population sympathetic to China, and also acts as a convenient testing ground for the marketing in the West. (The Chinese have begun advertising in Hong Kong, and, I understand, even have an interest in an advertising agency!) It is certainly a natural place for the location of export production that has become so successful as to pose political problems at home.

In one sense, the Chinese—via what are really political fictions—already view Hong Kong as part of China. Approximately 50 Chinese enter Hong Kong each day with permits from the Communist government to do so. These permits are not exit visas but internal travel passes of the same type a Chinese citizen requires to visit Peking. Western journalists stationed in Peking receive two telephone bills—one domestic and one international. Hong Kong appears on the domestic account. (For embassies, of course, Hong Kong is on the international account. Otherwise there would be an "international incident.") On the subject of Hong Kong, the Chinese have been highly pragmatic and realistic in the past. As long as they continue to view Hong Kong this way, they will continue to be one of the colony's larger capitalists. Nevertheless, it does remain an unsettling paradox that one of the major beneficiaries of the world's freest economy should be the late Chairman Mao Tse-tung's Communist Party!

Although Hong Kong's future is not certain (there are, however, only two options: continuing as is or reverting to China) Hong Kong's history is certain, and its lesson is written in black and white. The free market is the best economic system for any "developing" country.

Of course, compared to other "undeveloped" countries, Hong Kong had certain advantages. The influx of capital and entrepreneurs in the late 1940's would certainly boost all but the most dictatorial of economies. The entrepreneur predominates in Hong Kong, and the person brought up in that environment inevitably absorbs some of the entrepreneurial attitudes that are part of his everyday experience. As a British colony in a special place on the Chinese coast—with more or less free movement for the local population to and from China—Hong Kong never developed an identity separate from China that would lead to demands for political independence. Thus, the institutions and legal framework of Hong Kong developed much differently from in other colonial dependencies in a way that was conducive to the attraction of capital, finance, and foreign investment.

But—and this is a big but—Hong Kong also had all the problems that economists consider drawbacks to "development." Its population was 600,000 in 1945, over 2 million in 1950, and has doubled since then to today's figure of 4.3 million. Admittedly, the character of much of this increase has been different from that in other countries—able-bodied young men emigrating from China, in addition to the excess of births over deaths. Land for any purpose is more expensive in Hong Kong than just about anywhere else in the world—simply because only 20 percent of the colony's 404 square miles is usable for residential, manufacturing, or agricultural purposes, Hong Kong's main markets—Britain, Europe, and the United States—are on the other side of the world. Most of Hong Kong's food must be imported.

There can be little doubt that a factor in Hong Kong's success is the willingness of its people to work, and to work hard. I remember flying into Hong Kong from Manila. I had noticed some workmen leaning on their shovels beside the runway at Manila, resting in the hot midday sun. In Hong Kong, as we landed, were some Chinese workmen in the same hot sun, digging away without even seeing the planes taking off and landing. Hong Kong is indeed a receptive home for the "puritan" work ethic—but this is not something peculiarly Chinese. In fact, Manila airport forcefully reminded me of Chinese mainland airports, where dozens of people sit around doing nothing.

And so it goes. One can argue from whatever ideological perspective one wishes, choosing one's facts to suit. At any geographical location at any time in history there are advantages and drawbacks. On balance, it always seems to be the social and economic system that makes the fundamental difference. Hong Kong's success is due more to its lack of government than to anything else.

Hong Kong has (effectively) no unions, no minimum wage laws, low taxes, no exchange controls, very little legislation proscribing hours of work, no barriers to starting a business, no restrictions on foreign investments, no tariffs, no quotas, and no subsidies to farmers or businessmen.

Most of its laws have expiry dates (although, as in the case of rent control, those dates have been extended on occasion) The government has little involvement (other than granting monopolies) in public transport and utilities—providing water and running the Kowloon-Canton Railway. Hong Kong's new mass transit system is, certainly, owned by the government and established as a public corporation. The system, which is now building an underground railway connecting Hong Kong Island with Kowloon, is completely free to make its own financial arrangements—and if the government wants to keep fares down, for example, it must vote the amount of the fare reduction in its annual budget. That sort of proposal has very little chance of passing through Hong Kong's appointed legislative council. (Although the government has guaranteed loans, I suspect it would allow the corporation to go bankrupt and then pay off the creditors rather than bail it out.)

Although the government grants public transport monopolies, there is such a variety of different systems that competition is still the prime regulator. The new mass transit system will have to compete with buses and ferries. (The ferry from Kowloon to Hong Kong runs every five minutes or so and costs 15 cents—Hong Kong cents, that is, or about 3 U.S. cents. On the Hong Kong side, buses and the world's only remaining double-deck trams run next to each other; and everywhere are little 14-passenger "public light buses" (jitneys), which cost only 20 HK cents more than the bus fare (30 cents). If you want individual transport, a taxi costs only HK$2. And on top of that, there are radio taxis as well. In Hong Kong, a car is an unnecessary luxury (though there are quite a few of them, a good percentage chauffeur-driven!). Even at those low fares, everybody makes a profit. (So does Hong Kong's post office.)

As measured by government statistics, the per capita standard of living has doubled since 1961 and is now second in Asia only to Japan's, having surpassed Singapore's and Taiwan's in the past 20 years.

As if reflecting its competitive nature, one can choose between four consumer price indexes to measure the rate of price changes. And all four agree that in 1976 prices rose at about 3-4 percent. This compares with 15 percent two years earlier.

In fact, one of the most striking things about Hong Kong, from the economic point of view, is how its economy has reacted to the ups and downs of the world over the past two years. According to Austrian economic analysis, the freer the market, the faster the economy will eliminate the effects of past inflation. For Hong Kong, recession/depression was a memory by mid-1976. Unemployment dropped from 9 percent in September 1975 to 5 percent in March 1976; exports were 50 percent higher in the first six months of 1976 compared to a year before. Not only did Hong Kong respond faster, its "boom" was much shorter—and wilder—than in the United States or Europe. The Hong Kong stock market began falling about six months before other stock markets in the Western world—and it had gone higher faster before it fell.

What makes Hong Kong completely unique in the world is the way the economy is almost self-regulating via the currency—the Hong Kong dollar (which, after the Swiss franc, is probably the world's hardest currency). The Hong Kong government does not keep balance of payments statistics. It does not know and does not need to know whether its payments "balance." The Hong Kong dollar is issued by three private banks (Hong Kong has no central bank), and in order to issue currency the banks must deposit foreign currency to an equivalent value with the government. That, combined with the floating of the currency, means that the internal money supply is entirely regulated by exports, imports, and money flows. Even though the government issues statistics for the currency on issue, we still do not really know just what Hong Kong's money supply is, since U.S. dollars are also widely used, especially for financial transactions and capital payments. And all the world's currencies are available.

The Hong Kong dollar has often been likened to the gold standard that operated throughout the Western world until 1914. And rightly so. Under the gold standard, an outflow of gold, caused by more overseas purchases than sales, would lead to a deflation of the currency and a fall in the price level until the gold outflow ceased. The reverse would lead to an inflation of the currency and a rising of the price structure. For that system to work, prices—particularly wages—must be flexible downward. Hong Kong is one of the few economies in the world where that is true. Instead of gold, foreign currencies form the base. But the principle remains the same.

Hong Kong's success is second only to that of Japan in the region and is affecting the economic policies of other Southeast Asian nations. In an effort to attract foreign capital, there seems to be a competition developing between the governments of the region to see which can give the most tax breaks, low-interest loans, and other special subsidies. Envying Hong Kong's dominance as a financial center, and as the logical location for the headquarters of multinationals operating in the region, the Philippines recently announced tax and other incentives to try to attract such activities to Manila. President Marcos (or maybe his wife, Imelda) wants to turn Manila into a financial center and in his bid for their business is offering to banks such carrots as complete exemption from foreign exchange controls on offshore dealings.

Much of Taiwan's and South Korea's economic growth comes from allowing the market to take its course, even though such governments may be exceedingly oppressive in other ways. Singapore—like Hong Kong, a Chinese city-state—sees itself as Hong Kong'srival in many ways, but Hong Kong has been growing much faster despite Singapore's aggressive use of tax and other incentives to attract investment. Hong Kong recently passed Singapore in per capita living standards and came out of the recession as much as a year before Singapore. Singapore's government is much more authoritarian and interventionist in nature, so Hong Kong's preeminence seems assured.

Hong Kong is what an economy should be. Capital, labor, and even land (though in short supply) are highly mobile between different uses. Prices, including those of labor, are flexible up and down. And because the price system is flexible, all persons in the market are highly aware of price changes and react to them quickly, no matter what their position within the economic system. (An important indication that this is true in the labor market is that there is no differential between wages in manufacturing and in agriculture. Even in "developed" economies such as the United States or Australia agricultural laborers' wages can be significantly lower than those paid for industrial workers.)

The result is Hong Kong. An anachronism in a world of welfare states; an economy that, according to conventional economics, cannot work; but a place whose very existence should call into doubt most of the political myths of our time.

Mark Tier is the editor of World Money Analyst, an international financial newsletter. He is cofounder of the Libertarian World Society.