Freeman

ARTICLE

Hong Kong--A Success Story

MARCH 01, 1960 by FIRST NATIONAL CITY BANK

From the Monthly Letter of the First Na­tional City Bank of New York, December 1959.

 

In a free economy, man’s inge­nuity knows no bounds. The in­dustrial expansion and high living standards of the United States are testimony to what individual en­terprise can accomplish. Abroad, too, we find striking examples of what men can achieve when left to solve their own problems.

In Europe, during the years just after World War II, many gov­ernments experimented with state planning and economic controls. Over the past decade these have been progressively abandoned or modified. The unleashing of pri­vate initiative has enabled the Old World to forge ahead with re­newed vigor.

On the other side of the globe is Japan whose remarkable postwar comeback has been due to the hard work and resourcefulness of its people and an economic climate which encourages these energies. Less well known is the case of Hong Kong, Britain‘s island colony off the South China coast.

Hong Kong‘s recent economic growth is one of the outstanding success stories in the Far East today. This achievement has been one of private enterprise operating within a free market economy. There has been relatively little government intervention in the Colony’s affairs. This is the more significant in view of the challenge to its existence posed by postwar events.

A great seaport and commercial center, Hong Kong grew to pros­perity on the entrepôt trade with China, its location convenient for transshipment of goods to and from the West. But when the mainland fell to the communists, and the Korean War brought a United Nations embargo on trade with Red China, all this was sud­denly changed. Hong Kong found itself no longer the gateway to China, but instead on the edge of the Bamboo Curtain.

As exports to China dropped from nearly 40 per cent of the total in 1950-51 to a trifling 4 per cent a few years later, and a mil­lion refugees nearly doubled its population, Hong Kong searched out other means of livelihood. In­stead of massive programs of gov­ernment spending or requests for foreign assistance, reliance was placed on private initiative.

It was natural for Hong Kong to look to its businessmen in time of crisis. The island was a barren, al­most uninhabited rock when it was acquired by the British in 1841as a trading settlement. Lacking in resources, tillable land, or even adequate water supply, its princi­pal asset is a sheltered deepwater harbor. That it grew and attracted the commerce of all nations was because it offered businessmen—Chinese and Western alike—a stable government, the rule of law, low taxes, and a minimum of official interference.

Enterprise in Action

When necessity forced Hong Kong to find new sources of in­come to replace the lost China trade, its resourceful businessmen wasted no time. New opportunities were vigorously sought in South­east Asia. To the recently inde­pendent countries of that region Hong Kong offered not just trade but the benefit of its mercantile experience. With inventories of im­ported goods warehoused locally Hong Kong merchants were able to make rapid deliveries to neigh­boring countries. Hong Kong‘s free money market eased the pay­ments problem for many buyers. And its wide range of commercial facilities and duty-free port en­couraged foreign companies to maintain regional sales offices there.

Attracted by Asian markets for consumer goods, Hong Kong busi­nessmen were soon drawn to man­ufacturing as well as trading. Although shipbuilding and some small amount of light industry were already established in the Colony, expansion faced difficul­ties: lack of fuel, scarcity of in­dustrial sites, and competition from well established foreign pro­ducers, not to mention the ever present possibility that the Chinese communists might some day choose to swallow up the little island colony.

But there were assets too. Skilled labor and investable funds were augmented by an influx of refugee labor and capital from the mainland. Most important of all, the economic climate was favor­able to enterprise. The colonial government consistently kept its accounts in balance with a stand­ard tax rate of only 121/2 per cent on personal and corporate income. Here was opportunity for busi­nessmen to create, to produce, and to enjoy the fruits of their labor.

Industry was expanded and, at the same time, energetic efforts were made to develop larger ex­port markets. New products were introduced and old ones adapted to consumer needs in different countries. The phenomenal four­fold growth of Hong Kong’s textile industry, for example, has been due in large measure to skilled marketing—sarongs for the South Seas trade, woolen gloves for European buyers, cheap print cloth for Africa, drip-dry shirts for the United States, cotton knitwear for Southeast Asia, and even made-to measure suits by mail order.

Impressive Results

In the past decade factory em­ployment has tripled. Despite fluc­tuations in over-all trade, exports of Hong Kong manufactures have climbed steadily, from a bare 10 per cent of total export sales in 1947 to nearly 70 per cent this year. In value terms this repre­sents a rise from about $40 million to almost $400 million, with more than half comprised of textiles and apparel. Other inexpensive consumer goods make up the bal­ance—kitchen utensils, rubber footwear, flashlights, thermos jugs, and plastic articles.

Production for the local market has grown apace with exports. Food processing and the manufac­ture of house wares and building materials have increased rapidly. Handicrafts and art objects for the growing tourist trade are an­other source of income. Hotel and office construction account for a good part of the building boom.

Hong Kong‘s achievement is all the more impressive since its larg­est industry—textiles—is the one that meets the stiffest competition in world markets. Hong Kong can compete effectively because its pro­duction costs are low. In the absence of exchange controls, its businessmen can buy raw mate­rials in the cheapest market. Since they do not rely on government for expensive services, they pay low taxes. Local labor is industrious and quick to learn. Very little time has been lost through industrial disputes. Although competition has kept wage rates low, the same forces have kept down living costs.

Hong Kong‘s success in building up its export industries has cre­ated new problems. Striking sales gains overseas have brought pro­tests from established suppliers elsewhere. Several nations have placed import quotas on Hong Kong goods. And Red China re­portedly has been undercutting Hong Kong sales in some markets by dumping. Despite these diffi­culties, Hong Kong businessmen are certain they can compete if given a chance. They seek no sub­sidies or special favors. But they know their future is tied to the healthy growth of world trade. For Hong Kong, freedom to trade is life itself.

Lesson for Underdeveloped Countries

In many parts of the world to­day governments are seeking to raise living standards through in­dustrialization. To attain this goal, underdeveloped nations have in­dulged heavily in state planning and other forms of government in­tervention in economic life. In­deed, it is really quite unfashion­able these days not to have a de­velopment plan.

In seeking to industrialize, gov­ernments have burdened their fledgling economies with controls. They have allocated limited re­sources to ill-conceived projects with resulting inefficiency and waste. Impatient to get ahead in the world, they have fed inflation with printing press money. Ex­change allocations, import licens­ing, and arbitrary taxation have been used to subsidize uneconomic enterprise, eliminate competition, and conceal planning blunders.

For such progress as this, the consumer pays a heavy price. Goods are more costly, selections limited. Foreign investment and private initiative are discouraged. The range of opportunity for local funds is narrowed. The final irony is often the flight of sorely needed domestic capital to more hospitable areas. Hong Kong’s postwar in­dustrialization, for example, has benefited not only from refugee money fleeing Red China, but also from the influx of capital from noncommunist neighboring coun­tries that could ill afford to lose it.

Hong Kong‘s success in attract­ing foreign investment and achiev­ing rapid development despite in­herent disadvantages is striking testimony to the truth of liberal economic principles. Of the physi­cal factors usually considered es­sential to industrial growth, nearly all are missing in Hong Kong. But Hong Kong has offered business­men greater freedom from official interference than any other area in Asia. It has also provided a stable government and strong support for the free enterprise system. This policy has paid off hand­somely by unleashing human po­tentials that in other countries have remained paralyzed by bu­reaucratic controls.

Some of the nations now bent on economic advance might well ponder the lesson of this boot­strap operation. Hong Kong‘s suc­cess has also demonstrated that external aid is not the most vital ingredient of a development plan. As the Hong Kong government it­self states in its latest annual re­port:

"The predominant theme in in­ternational discussions about Asia in recent years has been the ur­gent need for outside assistance… to promote… economic devel­opment and to raise the standard of living….

"Hong Kong, however, has [been]… the exception…. This small Colony, almost entirely lack­ing in natural resources other than the indomitable will and enterprise of its people, has not only belied all prophecies of economic dis­aster, but also established itself as a vigorous industrial power…. This development has been achieved without major recourse to outside economic assistance… and despite formidable obstacles arising from political circum­stances beyond local control."

 

 

***

Ideas on Liberty

Remove the Chains

What is required in India is essentially a redirection of the activities of government, away from policies restricting the energies and opportunities of its subjects, and away from acts of emulation of the pattern of the Soviet world, into directions aimed at releasing the energies of millions of people. These tasks will tax the resources of Indian governments for many years to come.

P.T. BAUER, United States Aid and Indian Economic Development

ASSOCIATED ISSUE

March 1960

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