JJ Cowperthwaite and the Hong Kong Economic Miracle

With the border closed and the entrepot trade dying, the question was asked - what was Hong Kong to do to feed and house all its refugees?

The British Government's solution was to consider handing Hong Kong back to China, just at the moment when Uncle Sam had stopped telling them to do that.

There was another idea, though.

Time to introduce a hero of the Right throughout the world, the architect of the Hong Kong Economic Miracle, Sir John James Cowperthwaite:

I'm happy to say that, like Charles Darwin, he was a graduate of my college at Cambridge.

Cowperthwaite, a Scot born in 1915, had been intended to go to Hong Kong as a junior civil servant in 1941, but the Japanese war began before he could get there ,and he was diverted to Sierra Leone.

He got to Hong Kong in 1945.

As he filled a sucession of posts, a rather novel idea occurred to him - the idea that, put into practice, has made him a hero to the monetarist school of economics in general, and Milton Friedman in particular.

The idea was this - the Government did not need to do anything to help the refugees, beyond giving them freedom, security, the rule of law and a hard currency. He did go as far as to endorse the Public Housing Programme, after quite a struggle, but that was pretty much it.

Cowperthwaite's sucessor, Sir Philip Haddon-Cave,  called this the doctrine of positive non-interventionism, and it became the official policy of the Hong Kong Government .

It still is:

http://www.ceo.gov.hk/eng/press/oped.htm

Cowperthwaite, like Darwin, arrived at his conclusions by observation; he watched what the refugees were actually doing. They seemed to be getting along just fine, without help from the Government.

In 1961, he was made Financial Secretary, a post he held till 1971, when he wa suceeded by another positive non-interventionist, Sir Philip Haddon-Cave, who modified the doctrine by adding that where extreme hardship was caused or where monopolies might be created the Government should intervene

Cowperthaite was an Iron Chancellor. He insisted that the tax rate (personal and corporate) should not rise above 15% (yes, fifteen per cent), that the Government should never borrow under any circumstances, that there should be no tariffs at all and no subsidies whatsoever.

As he said in his first budget speech, in 1961, "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster."

That has been the orthodoxy of the past thirty years, but when he said it, it was utter heresy everywhere in the world, from Moscow to Melborne, from London to Los Angeles and from Peking to Paris.

(You will of course remember that, ever since Sir Samuel Bonham, the Hong Kong Government has had another way of raising revenue - from leasing land - so the income tax rate is slightly deceptive, but remember there is no purchase tax.)

Hong Kong's Government expenditure on health, under Cowperthwaite, was about US$3 per head per year, and that was normally underspent.

Cowperthwaite famously refused to collect economic statistics, "for fear that I might be forced to do something about them", and "saw off" Dennis Healey, a heavyweight political bruiser and the finest Prime Minister Britain never had, when Healey, then Minister of Defence, suggested that Hong Kong might pay something towards the cost of its own defence.

In Cowperthwaite's time the deposits that backed the HK$ were, by British law, held in Sterling (and Hong Kong therefore lost out under the Wilson devaluation) but Cowperthwaite never told anyone the method used to ensure currency stability, not even the officers of The Bank who actually carried out the operations under his direction.

Hong Kong was a little island of hard line monetary policy, at a time when Keynesianism ruled the globe.

In fairness to Cowperthwaite, I should mention the "positive" aspect of "positive non-intevention", as people mistakenly tend to concentrate on the "non-intervention" part. Cowperthwaite required that the Government should do what it did do as well as it possibly could.

Cowperthwaite overhauled the Hong Kong Civil Service, making it breathtakingly efficient and with terrific esprit de corps. One of his reforms was to reduce the form-filling needed to form a company to one (bilingual) sheet of paper. Everywhere that I can think of, the same dedicated efficiency prevails. When I came back to Hong Kong to get married, it took the Registrar's office about twenty seconds to find my old ID card number, after some years away. There is no question of not paying your taxes, of not filing a company return, etc. The Hong Kong Ship Register is the best run merchant ship flag on this planet (and the British would do well to learn from it). The Housing Department administers the world's biggest public housing system, and it does it on a small administrative budget whilst at the same time constantly improving the designs and raising the standard of living of tenants and keeping everything in good order.

The Hong Kong Civil Service is a marvel; in most places a bureaucrat gives the impression of either being harrassed overworked and underpaid or of being puffed up with self-importance; in both cases you are treated like something the cat brought in. In Hong Kong, the lady or gentleman dealing with you gives the impression that he or she really wants to help, but is also going to make quite, quite sure that you get it right. This is not characteristic of either the British or the Chinese civil services.

I think this attitude began with Cowperthaite.

So, what did Hong Kong do, with the Chinese border closed?

It made stuff. Pretty rubbishy stuff for the most part - clothing and the sort of small things that could be made in that typical Hong Kong structure, the flatted factory - a building looking like an apartment block but which actually contains several manufacturing businesses. After all, the owners of most of Shanghai's manufacturing businesses had relocated to Hong Kong.

This was the age of "Empire Made" - stamped on toys and gewgaws of every description but always cheap. "Made in Hong Kong" was a turn off for people reared on Fu Manchu and the Yellow Peril and Japan in WW2; "Empire Made" was OK. Everyone in Hong Kong will tell you that Li KaShing started off making plastic flowers - a very typical Hong Kong export. Of course, not everyone who made plastic flowers became one of the world's richest men.

http://en.wikipedia.org/wiki/Li_Ka-shing

And the GDP of Hong Kong started to grow at a real rate of 9+% p.a.