Part 1. The Hong Kong Economic Experiment or the freest economy on earth

Milton Friedman, recipient of the Nobel-prize in economics, wrote a famous and discerning article about the economic success of Hong Kong shortly after its sovereignty was transferred from the United Kingdom to the People’s Republic of China in July 1997.  According to him, social scientists have been complaining long ago about their disadvantage, compared to the natural scientists, when it comes to performing empirical research. To make it clear, a “laboratory experiment” is literal for a biologist or a physic but not so for an economist or a political scientist. However, Friedman thought that this complain was fully unjustified, as the most ambitious experiment of economic policy  of the 20th century was to be found in the ethnic Chinese city of Hong Kong, a British colony consisting of a tiny spot of rocky land surrounded and “isolated” by communist China (like a microscope slide) and thus ready to be looked at “under the microscope”.

 

What’s the Hong Kong experiment all about? It’s fairly easy to grasp: Since WWII the city has belonged (and to this day still belongs) to the freest economies on earth. According to the Heritage Foundation’s Index of Economic Freedom, Hong Kong ranks, since the index was established more than 15 years ago, number 1 out of 179 countries.  

In a century of social engineering, state interventionism and communist dictatorships (most notably in Asia), the colony led a revolution on its own in the opposite direction, that is, towards free trade, property rights, free enterprise and limited government. This was an atypical revolution, as it consisted of changing nothing in a world that changed everything. We could say that Hong Kong was during the 20th century one of the last guarantors (if not the only one) of pre- WWI laissez faire capitalism, the essence of an age of prosperity and freedom unheard of by former generations that shattered down between world wars, revolutions and the consequences of new ideals. Those Western principles were inherited by the colony from its motherland and kept alive long after they were forgotten in the West. In a matter of a few decades a semi-dessert territory with scarce land and no natural resources turned into a prosperous and modern commercial metropolis, a hub between East and West populated mainly by ethnic Chinese.

 

The wave of postwar decolonization didn’t affect Hong Kong either, as neither the population nor the motherland were willing to surrender the sovereignty of the territory to a voracious and brutal Maoist China. Actually, the United Kingdom, a “benevolent dictator”, didn’t even apply its own policies abroad. As it is well known, the size of states increases during wars, but usually it never returns to its prewar level. In the case of the postwar British government of Atlee, government economic planning wasn’t dismantled but fostered with the nationalization of entire sectors such as health, railways, mining, heavy industry… along with increased regulations and taxation. At the same time, a Scottish liberal named John Cowperthwaite (follower of the also Scottish Adam Smith) arrived in Hong Kong to become soon after the financial secretary of the colony. Opposed as he was to the socialist drift of his motherland, he made sure that the Anglo-Saxon tradition was kept alive by having as the cornerstone of his policies the principle of what was later called “positive non-interventionism”. 

To sum up: Taxes remained very low as well as the size of the government expenditures in relation to the GDP, custom duties were inexistent, the budget was balanced, corruption was fought, entrepreneurial activities were fostered by a clear and efficient legal system, property rights were protected… It is said that Cowperthwaite even refused to collect economic statistics for fear it would encourage officials to meddle in the economy. 

When Friedman first visited the city in 1955, the refugees from mainland China were arriving by the thousands, skyrocketing the population of a saturated city still recovering from the Japanese occupation. “The fact that people would accept such miserable living quarters testified to the intensity of their desire to leave Red China” explained Friedman. In fact, the worst was about to come in the period between 1958 and 1962, when a policy of forced collectivization and industrialization (the Great Leap Forward) starved 40 million people to death in the mainland.

Both “Chinas” shared a population with identical origins, culture and traditions, they differed on the system of government: “Old school” laissez faire capitalism on the one side and real socialism on the other side. By 1978 the market-oriented reforms of Deng Xiaoping sentenced the end of real socialism as it was understood under Mao. A little colony with a couple of millions of inhabitants had defeated the imperial landmass of Red China with around 1000 million inhabitants, which was at that time on the verge of social and economic collapse. Although the increasing openness of China was a sort of “hongkonization” (as a last resort, the reforms were needed for the ruling communist party to survive), the country still remains essentially unfree. Today, Hong Kong (SARC) has a GDP per capita at least 8 to 9 times higher than the mainland, so in 1978 the difference should have been more blatant.