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HongKOng A Study In Economic Freedom Alvin Rabushka Hoover Institution on War, Revolution and Peace Stanford University The 1976-77 William H. Abbott Lectures in International Business and Economics The University of Chicago • Graduate School of Business © 1979 by The University of Chicago All rights reserved. ISBN 0-918584-02-7 Contents Preface and Acknowledgements vn I. The Evolution of a Free Society 1 The Market Economy 2 The Colony and Its People 10 Resources 12 An Economic History: 1841-Present 16 The Political Geography of Hong Kong 20 The Mother Country 21 The Chinese Connection 24 The Local People 26 The Open Economy 28 Summary 29 II. Politics and Economic Freedom 31 The Beginnings of Economic Freedom 32 Colonial Regulation 34 Constitutional and Administrative Framework 36 Bureaucratic Administration 39 The Secretariat 39 The Finance Branch 40 The Financial Secretary 42 Economic and Budgetary Policy 43 v Economic Policy 44 Capital Movements 44 Subsidies 45 Government Economic Services 46 Budgetary Policy 51 Government Reserves 54 Taxation 55 Monetary System 5 6 Role of Public Policy 61 Summary 64 III. Doing Business in Hong Kong 67 Location 68 General Business Requirements 68 Taxation 70 Employment and Labor Unions 74 Manufacturing 77 Banking and Finance 80 Some Personal Observations 82 IV. Is Hong Kong Unique? Its Future and Some General Observations about Economic Freedom 87 The Future of Hong Kong 88 Some Preliminary Observations on Free-Trade Economies 101 Historical Instances of Economic Freedom 102 Delos 103 Fairs and Fair Towns: Antwerp 108 Livorno 114 The Early British Mediterranean Empire: Gibraltar, Malta, and the Ionian Islands 116 A Preliminary Thesis of Economic Freedom 121 Notes 123 Vt Preface and Acknowledgments Shortly after the August 1976 meeting of the Mont Pelerin Society, held in St. Andrews to commemorate the 200th anniversary of the publication of Adam Smith's The Wea/th of Nations, Dean Richard Rosett proposed that I deliver a series of lectures on the general subject of business and politics in Hong Kong. These were to be the 1976- 1977 William H. Abbott Lectures in International Busi­ ness and Economics, to be delivered at the Graduate School of Business of the University of Chicago. I accepted his invitation with great enthusiasm. There must be no better place than the University of Chicago at which to lecture on the subject of the industrial world's most robust example of a free-market economy. If Chicago symbolizes the concept of competitive markets, Hong Kong must surely reflect the living reality. In this published volume, I have made a few slight changes to the original lectures that I delivered in April 1977. All tables, statistics and financial data have been updated to March 1978 and reflect the Financial Secre­ tary's March 1978 Budget Address. The other major change consists of an expanded treatment of Hong Kong's money supply process. I have taken advantage of the knowledge of the fine monetary economists in residence at the Hoover Institution during the 1977-1978 academic year and for their comments thank Michael Darby of Vil U.C.L.A., Robert Barro of the University of Rochester, and Milton Friedman, who needs no identification. I first went to Hong Kong in March 1963 as a Chinese language student and, though unintended, acquired a wife. Since then, I've made six additional trips to the colony. With the support of the National Fellows program of the Hoover Institution, I spent part of the summer of 1972 gathering materials to write The Changing Face of Hong Kong. This brief monograph highlighted the record of Hong Kong's remarkable economic growth and the structure of its free-market economy. A subsequent grant from the Hoover Institution enabled me to spend the fall of 1973 in Hong Kong conducting interviews, collecting published and unpublished statistics on budgetary alloca­ tions, and reading numerous government papers in order to write Value For Money: The Hong Kong Budgetary Process. This lengthier book analyzed policy-making and budgetary practice within the Hong Kong government. The Abbott lecture series thus afforded a splendid opportunity to blend the two previous foci-one on mar­ ket economics, one on political decision-making-into a comprehensive treatment of politics and business in Hong Kong, and add considerable new material as well. The four chapters that comprised the lectures now provide an intro­ duction to anyone interested in the political economy of Hong Kong. They survey, in turn, (1) the political geog­ raphy of Hong Kong and its historical evolution as a free market economy, (2) the political status of the colony to show why public officials are able to conduct respon­ sible fiscal, economic and monetary policies, (3) a businessman's perspective on the economic freedom in Hong Kong, and (4) Hong Kong's future prospects. I have also used this lecture series to make an initial statement on the general subject of economic freedom, which I have researched for the past three years. Is Hong Kong unique Vlll or, an example of many cases of ecomom1c freedom? Under what circumstances is the competitive market economy likely to emerge? Both past and present support provided by the Hoover Institution has been invaluable in the preparation of these lectures. It is enormously helpful to have distinguished monetary economists as colleagues. It is equally helpful to have as colleagues a number of social scientists who are skilled analysts of the market economy. The presence of these scholars creates an environment that is especially conducive to thinking and writing about the subject of economic freedom. I have many people to thank. For helpful comments on various parts of the manuscript, I thank Terry Anderson of Montana State University, Hugh 0. Nourse of the Univer­ sity of Missouri-St. Louis, Allan H. Meltzer of Carnegie­ Mellon University, and Dan Usher of Queen's University. Sir John Cowperthwaite, former Financial Secretary of Hong Kong [1961-1971], cleared up a number of mistakes in the preparation of my first two studies of Hong Kong and, in the process, kept me from wayward paths in the preparation of this volume. I also want to thank Philip Haddon-Cave, Financial Secretary of the Hong Kong gov­ ernment. Not only have I made use of his affectionate phrase "automatic corrective mechanism," but he has faithfully supplied me with his speeches, budget addresses, and annual economic reports over the past few years; without them I could not have prepared these lectures. The first draft of these lectures was typed by Samirah Taha and the final version by Ilse Dignam; I thank them both. For shepherding the lectures through publication, my thanks to Betty McGuire. ,. Finally, I want to thank Dean Rosett for extending the invitation to deliver the 1976-1977 Abbott Lectures, de­ spite the blizzard conditions of early April. But I also want IX to thank his entire family for their splendid hospitality during my two visits to Chicago in April 1977. No family has been a more gracious host. Alvin Rabushka Stanford, California April 1978 x The Evolution of a Free Society I. I can think of no more fitting place at which to discuss the political economy of Hong Kong than the University of Chicago. Many informed lay persons see Chicago as the spiritual and intellectual home of free-market economics. Economists, as the limited survey I've conducted indicates, identify Chicago with attempts to use notions of price theory and competition in the marketplace to explain a wide variety of real world economic behavior. Economists and non-economists alike suspect that the Chicago economist is a nineteenth century economic liberal-a de­ votee of laissez-faire-who disguises himself in a twentieth century analytical cloak labelled "positive economics." Right or wrong, I share this suspicion and undertake this pilgrimage to honor the modern-day descendants of Adam Smith. The tribute I offer is an exposition of the industrial world's most robust example of a truly competitive marketplace-the British Crown Colony of Hong Kong. This fascinating Gladstonian dream world stands in sharp contrast with today's increasingly interventionist, regu­ lated and heavily taxed world. The people of Hong Kong live their economic lives free from both government's heavy hand of interference in their private affairs and what have so often become inquisitorial systems of high rates of taxation. I must confess a certain measure of disappointment that Hong Kong receives so little analysis from the advocates of 1 market economics. To date, the lion's share of printed words emanates from the typewriters of British expatriate intellectuals who condemn Hong Kong for its stubborn refusal to imitate the errors and declining fortunes of the mother country. These collectivist critics of Hong Kong's market economy regard making money and having low taxes as inherently immoral. One can, I think, count the number of American economists who study Hong Kong's political economy on the fingers of one hand, or at most two. I hope in this lecture series to kindle interest in Hong Kong's government and economy, which so closely ap­ proximate the classical notions of economic freedom and limited government. Hong Kong may be the one place where government consciously restricts its economic ac­ tivities. The Market Economy I would like to begin this tale of one city by describing for you what is affectionately and appropriately termed the "automatic corrective mechanism."1 This corrective mechanism continuously alters internal costs and prices to bring them quickly into line with costs and prices in the rest of the world. The flexible movement of internal costs and prices, with associated changes in output and em­ ployment, brings about internal and external equilibrium at all levels of world trade, and maximum economic growth.

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