Freeman

ARTICLE

Lessons in Liberty: Hong Kong, Crown Jewel of Capitalism

JANUARY 01, 1990 by ROBERT A. PETERSON

Mr. Peterson is headmaster of The Pilgrim Academy in Egg Harbor City, New Jersey.

For over 100 years, the name Hong Kong has been synonymous with free enterprise. Today, the label “Made in Hong Kong” can be found just about anywhere, from clothing stores in Manhattan to grit shops in London, as the raw materials of the world are turned into finished products in Hong Kong’s busy shops. To millions of tourists, Hong Kong beckons as one of the world’s most alluring bargain counters. Here Swiss watches—at less than Swiss prices—compete with duty-free Japanese cameras and stereo equipment, and silks from Thailand glow beside bolts of Italian cloth and Harris tweed. As a result, little Hong Kong enjoys one of the highest standards of living in all Asia, second only to Japan and perhaps Singapore.

In 1987, Hong Kong—with 14 times as many people per square mile as Japan—had a per capita income of $8,260. Just a few miles away, across the Sham Chun River—in Communist China—people of the same racial stock, living in the same subtropical climate on shores washed by the same South China Sea, were able to produce a per capita income of only $300. (Incredibly, even some of that paltry sum was fueled by Hong Kong’s economy, which both invests in and purchases from the mainland.)

What is it that has turned what a skeptical Lord Palmerston, in the 19th century, called “a barren rock” into such an economic powerhouse? What is it that has made this tiny Crown Colony (now a dependency) of the British Empire into one of the “Asian dragons” feared by protectionists in the world’s largest nations?

The answer, pure and simple, is free market economics and limited government. Throughout most of its history, Hong Kong has had no tariffs or other restraints on international trade. It has had virtually no government direction of economic activity, no minimum wage laws, no fixing of prices, and no capital gains taxes. Despite some government intervention—in building public housing for refugees from Communist China- the British officials who govern Hong Kong have confined their role to that of umpire. They enforce the rules of the game, but do not help one side or another gain an economic advantage. As a result of these laissez-faire policies, Hong Kong has flourished.

The story of how Hong Kong came to be the “emporium of the East” is a fascinating tale of how limited government and free markets have combined to elevate one corner of China far above all the rest. In that history also lie insights for other nations whose greater resources have remained untapped because of socialistic eco nomic policies. Now, when the world is on the verge of losing this modern exemplar of free markets and limited government—its sovereignty is scheduled to be transferred to Communist China in 1997—it is important to understand the forces that made Hong Kong what it is today. For unless right action is taken—action consistent with its history of limited government and free enter-prise—Hong Kong’s free-wheeling, highly creative society will be no more.

Throughout most of Chinese history, the island of Hong Kong and the nearby shore was the site of several small fishing villages that maintained a livelihood by fishing and cultivating the scanty soil. Hong Kong’s greatest asset—in fact, its only natural asset—was its magnificent, almost landlocked harbor, which served as a haven from the dreaded tai-phoos (“big wind”—the origin of the English word typhoon) of the South China Sea. For many years, it was used almost exclusively by pirates. (The name Hong Kong, in Cantonese, means “fragrant harbor.”) Thus, for nearly 2,000 years, the only substantial form of wealth in Hong Kong was that stolen and brought there by pirates.

The British in Hong Kong

When the British discovered Hong Kong in the 1800s—her merchant-explorers seeking to obtain Chinese tea- -they immediately recognized its value and set up trading posts there to be near Canton. Unfortunately, friction soon developed between the British and Chinese, resulting in the Opium War of 1839—42. Negotiations to prevent the war were hindered by the fact that all Europeans were considered barbarians by Chinese officials, with whom direct communication was forbidden, and by the continued smuggling of opium into China by British merchants. As a result of the Treaty of Nanking, which ended the fighting, Britain received Hong Kong Island “in perpetuity” so that her merchants might have “a port whereat they may careen and refit their ships.” (A subsequent treaty in 1860 gave Kowloon Peninsula to Britain while in 1898 China leased the New Territories to Britain for 99 years.)

News of the end of “hostilities” (war was never declared) was greeted with much satisfaction in England, where the ideas of free trade and non-intervention were gaining popularity. There was less rejoicing, however, at the news that the British negotiator, Sir Henry Pottinger, had exceeded his instructions and obtained Hong Kong. (The British government said it would have been satisfied with a treaty guaranteeing the security of its merchants.) Ironically, the ascendancy of the disciples of Adam Smith in England made the government hesitant to assume any more colonial responsibilities.

Yet it was precisely because free-trade ideas were on the rise that Hong Kong, from the very beginning, was set on its course as a model of free enterprise: Hong Kong would be accepted into the Empire not as a “Gibraltar of the East,” as some military strategists wanted, but as an emporium of trade between East and West—a free port. The flee-traders viewed the British Empire not as a military empire held together by the force of arms, but as a commercial empire held together by millions of mutually beneficial relationships. These were the kinds of libertarian attitudes that helped make the period from 1815 to 1914 one of the most peaceful centuries in the history of the world.

In the early years, Hong Kong was viewed as little more than an arid rock. Lord Palmerston, the foreign minister, called it “a barren rock with nary a house upon it,” while Prince Albert is supposed to have laughed when he heard that the mighty British Empire had obtained little Hong Kong. And when provoked to strong language, fashionable London ladies cried, “Go to Hong Kong!”

In defense of his actions, Pottinger wrote: “. . . the retention of Hong Kong is the only single point in which I intentionally exceeded my modified instructions, but every single hour I have passed in this superb country [China] has convinced me of the necessity and desirability of our possessing such a settlement as an emporium for our trade and a place from which Her Majesty’s subjects in China may be alike protected and controlled.”

Hong Kong probably would have remained undeveloped, and Sir Henry would have been discredited, had it not been for its status as a free port, where virtually no duties or tariffs would be collected. Not having tariffs would provide several key advantages that would guarantee prosperity.

First, inefficient industries would be quickly eliminated, since Hong Kong entrepreneurs would be able to respond to the true vicissitudes of the market; no buggy whip factory would outlive its usefulness shielded by a “protective” tariff.

Second, the market would direct the people of Hong Kong to do what they do best. For example, although Hong Kong has one of the world’s best harbors, it has little farmland. No matter how high Hong Kong might place tariffs on foodstuffs to “protect” and encourage its own farms, it would never be able to become self-sufficient in agriculture (even though today its capitalist farmers harvest eight crops per year). Instead, Hong Kong would do better importing food—at the lowest cost possible—and servicing ships in its excellent harbor to pay for it. This is indeed what happened.

Third, free trade would allow the people of Hong Kong to buy commodities and raw materials as cheaply as possible. The money saved by not paying a tariff, duty, or tax could be used to buy additional products and materials and thus realize a higher standard of living than otherwise would be possible. Instead of sending the fruits of their labor to Great Britain in the form of customs duties, Hong Kong consumers and businessmen would be able to spend and invest this “saved” money as they saw fit. French economist Frederic Bastiat went so far as to refer to such “savings” as a gift: “When a product—coal, iron, wheat, or textiles—comes to us from abroad, and when we can acquire it for less labor than if we produced it ourselves, the difference is a gratuitous gift that is conferred upon us.”[4] Hong Kong, with few natural resources, would depend on tariff-free “gifts” for its livelihood.

Finally, since resources could be obtained more cheaply, production could be enhanced, thus satisfying consumers, further improving quality and lowering costs, and creating more jobs.

An Oasis of Freedom

From the very outset, the British sought to remain true to their intention of setting up Hong Kong as an oasis of freedom—and not just for businessmen. Captain Charles Eliot, the military governor of Hong Kong, issued a proclamation that guaranteed protection for all the people and assured them that they were “further secured in the free exercise of their religious rights, ceremonies, and social customs.” The colony was charged with operating a limited and frugal government: the principle was stated that the British government “expects that the local revenue will be adequate to defray . . . all the . . . expenses of the government of Hong Kong,” and that there should be “a strict observance of an enlightened frugality in every branch . . . of the local government.”

Having no tariff income, Hong Kong’s government was financed by the sale or lease of land. As far as the opium trade was concerned, the British government set forth the following policy: “The British opium smuggler must receive no protection or support, and all officials must hold aloof from so discreditable a traffic.” The first ordinance passed in Hong Kong forbade all forms of slavery. This made conditions in Hong Kong consistent with the rest of the Empire, which had abolished slavery throughout its realms in the early 1800s.

Soon Victorian voluntarism began to meet the needs of the people of Hong Kong. Churches and places of worship were among the first buildings to be constructed. The London Missionary Society, under the leadership of Dr. James Legge, built the Union Chapel in 1845. American Protestant missionaries were particularly active. The first church was built by the American Baptists, followed soon after by the Catholic Church of the Immaculate Conception. The Moslems erected a mosque, while the Chinese began building their own temples. In 1849, the Anglican Church was completed, and an Anglican bishopric was established completely through private endowment. Societies of all kinds were set up. A Chinese branch of the Royal Asiatic Society, an amateur dramatic club, St. Paul’s College, the Hong Kong Chamber of Commerce, and private schools for both Chinese and British were created by voluntary effort.

Although Hong Kong was a place for individualism, the flip side of individualism is not a wanton disregard for the needs of others, but the principle of voluntarism. Such voluntary and philanthropic efforts were consistent with the policies of English free-traders, who thought that each colony should be able to fend for itself and create its own services.

Those who decry Western values—including the classical liberal political and economic tradition that developed in the West—should take note of the British treatment of the thousands of Chinese who flocked to live under the British flag. Tossed to and fro by the whims of despotic mandarins, quarreling war lords, and the corrupt Manchu Dynasty, the Chinese found both opportunity and near equality with the British in Hong Kong. The appointment of Chinese to responsible positions was agreed to as early as 1855. In 1857, Chinese were allowed to qualify as lawyers. In 1858, Chinese were permitted to serve as jurymen, allowed to register their ships under the British flag (if they held land in Hong Kong), and wills drawn up in accordance with Chinese usage were considered valid in court. The British also extended equal treatment to the boat people, or Tanka. For centuries, Chinese law forbade them to settle ashore, marry landowners, or take government examinations. Such discrimination ended under British rule and the Chinese population grew from 20,338 in 1848 to 121,825 in 1865.

Despite all the advantages the British gave to the Chinese, it was no one-way street. In 1894, Lord Ripon wrote to Governor Sir William Robinson: “. . . under the protection of the British Government, Hong Kong has become a Chinese rather than a British community . . . and Chinese settlement . . . has been one main element in its prosperity.”

Throughout the 19th century, Hong Kong’s business pursuits were centered around shipping and trade. In 1881, over 3200 ships entered Hong Kong. That same year over 24,000 Chinese junks also passed through the harbor. To service these ships, there were 400 ship chandler shops, 20 rope factories, 93 boat works, two cannon foundries, and one dry dock. To handle all the transactions that went along with these services, many banks were founded or established in Hong Kong, including the Oriental Bank; the Mercantile Bank of India, Australia, and China; the Hong Kong and Shanghai Bank; and the United Service Bank.

Into the 20th Century

In the 20th century, a new phase of Hong Kong history began: over the next 80 years Hong Kong would become a refuge for millions of Chinese fleeing persecution, instability, and violence, a home to millions of people, an industrial dynamo, as well as the site of a great airport built on land reclaimed from the sea.

The influx of refugees came in six major waves in the 20th century. The first wave came in 1911, as a result of the revolutions that overthrew the Manchu Dynasty and established the Republic of China. The second wave came in 1937, after Japan invaded China. During World War II, Hong Kong was captured by Japan. Cut off from world markets, the island languished. More than one million Chinese left Hong Kong and returned to mainland China. Since both were ruled by the heavy hand of Japanese militarism, there was little advantage to staying in Hong Kong. The third wave began in 1949 when the Communists took over China.

A fourth wave of immigration occurred in 1962, when widespread starvation—the result of Communist China’s socialist land-use policies—forced thousands of Chinese to emigrate. In one 25-day period in 1962, Communist Chinese border guards allowed 70,000 Chinese to walk to freedom in Hong Kong. The Cultural Revolution in the late 1960s sent another human wave into Hong Kong, while the 1970s saw over 100,000 Vietnamese boat people find refuge there. Fourteen thousand were given permanent resident status, while 100,000 were permitted to work in Hong Kong pending transfer to permanent homes abroad.

In the years after World War II, Hong Kong took advantage of the human capital from Communist China, and began producing goods that appeared in markets all over the world. With few raw materials, no local sources of power such as coal and oil, and shortages of land and water, Hong Kong developed one of the fastest growing economies in the world.

From 1,050 separate industries, employing 64,000 people in 1947, the figure rose to 17,239 industries employing 589305 in 1970. Most of the factories were still family concerns, using their own “capital”—including family members’ hard work—to produce quality goods at low prices. By 1970 the textile industry employed 30 percent of the work force and produced 40 percent of total exports. Plastics accounted for 12 percent of exports; electronics, 10 percent. Highly developed countries, such as Great Britain and America, be gan “protecting” themselves by asking Hong Kong to impose “voluntary” quotas on many of its exports. By this time, Hong Kong’s trade volume had passed that of much larger countries, such as New Zealand.

In the early 1980s, realizing that socialism had failed to produce a healthy economy, the People’s Republic of China established four Special Economic Zones where its people could learn the world’s economic ways. All the zones were set up in southeast China, and for good reason: to be near Hong Kong. Since that time, investment capital, visitors, and Hong Kong know-how have crossed the border to quicken the pace of Chinese economic development. Shenzhen, the largest and most successful of the economic zones, is located directly across the border. In 1983, of some 1,600 government-approved contracts, about 50 percent were with Hong Kong firms. Short of space, Hong Kong entrepreneurs were using land in China for everything from country clubs to cemeteries.

Today, little Hong Kong—which fuels its own vibrant economy as well as much of China’s—has more than 150 banks, four stock exchanges, and is the world’s third largest financial center. It is the third largest diamond and gold trading center, the largest manufacturer of toys, and the second largest maker of watches. It has an infant mortality rate lower than that of either Britain or the United States, and one of the highest protein- consumption rates in the world. In the early 1980s, during a worldwide recession, Hong Kong had a maximum 5.2 percent unemployment rate when Britain’s was more than twice as high. Over 2 million tourists visit annually, to shop in this oasis of freedom where East meets West. Chinese author Han Su Yin described Hong Kong as “the deep roaring bustling eternal market . . . where life and love and souls and blood and all things made and grown under the sun are bought and sold and smuggled and squandered.” Fueled by free trade, Hong Kong’s growth rate from 1975 to 1987 was 11.8 percent, while Communist China’s was only 4.3 percent.

A recent Fodor’s tourist guide book to Hong Kong and Macau has this to say about “Doing Business”: “Hong Kong is one of those rare places on earth that plays the free-trade game according to the classical rule . . . . A national of any country may do business or set up business (so long as it is legal) . . . . The rules of business in Hong Kong are few. Whether you are a visiting businessperson or a potential entrepreneur, you will not go far wrong if you remember this: You are in a ‘free country.’ If you succeed, you can take all the credit; if you fail, you must take all the blame. The authorities give some help (but no subsidies, tax reliefs, or featherbeds); what is more important, they don’t hinder you . . . . There is no capital gains tax . . . income arisen from abroad goes tax free . . . . The Hong Kong salaries tax return is one simple sheet . . . . There is no income tax withholding . . . . The government’s intervention in business affairs in minimal.” Milton Friedman has called Hong Kong “the modern exemplar of free markets and limited government.”

No Utopia

Hong Kong is no utopia: never has been, never will be. A nexus between East and West, it has always been a center of opium trade—first legal, now illegal. It is one of the most crowded places on earth, and hence, there is little tolerance for new refugees. There are great disparities between rich and poor. Yet there appears to be little discontent about the division of wealth because of the opportunity for advancement. Yesterday’s shanty dweller lives in a resettlement block today, tomorrow—if he works hard—he may live in upscale Repulse Bay.

Unfortunately, Hong Kong’s days are numbered. In 1984, Britain signed a Joint Declaration with Communist China, turning over sovereignty of the New Territories (over 90 percent of the colony) to China in 1997. China guaranteed that the capitalist system would last for at least 50 years and that democratic institutions would be preserved. Their slogan for the union: “one country, two systems.”

Hong Kong has not reacted well to the negotiations or the settlement. From 1981 to 1983, stock-market prices fell 50 percent. The budget for 1983-84 incurred a deficit, something unheard of in Hong Kong, which believes in surpluses. Billions of dollars flowed out of Hong Kong, so much that neighbors like the Philippines, Thai land, and Malaysia set up programs to attract its panic money.

Hong Kongians had hoped that Britain would give them British citizenship or the “right of abode” on British soil if they had to flee the Communists. So far, the British haven’t acted. Unlike people in “dependencies” belonging to other countries, those in British dependencies don’t automatically have British citizenship. As a result, even before the massacres in Tiananmen Square, a mass exodus began. In 1986, 19,000 residents left; in 1987, 30,000; in 1988, 45,000.

The exodus is carrying away some of the city’s most productive citizens—professionals and mid-die managers. Seventy-five percent of all pharmacists are planning to emigrate before China takes over in 1997; shortages among police, fire, and judicial officers are already growing serious. After 1984, many people began leaving Hong Kong for a time to live in countries like Canada, the U.S., and Australia in order to qualify for a foreign passport. Then they can return to Hong Kong safe in the knowledge that if things go bad, they have a refuge.

The massacre in Tiananmen Square and the deception that followed have only confirmed Hong Kong’s fears. Polls taken immediately after the Beijing massacre indicate that most Hong Kongians don’t want to leave—Hong Kong is their home. Yet to stay would place them under the same coercive government from which they and their parents fled. “The majority of people in Hong Kong feel helpless,” says Jonathan Chao, director of the Chinese Church Research Center there. One prominent lawyer went so far as to say, on Hong Kong television, that “For England to give 5.5 million people to Communist China is like giving 6 million Jews to the Nazis.” As this is being written, delegations from Hong Kong are appealing to Great Britain for the right to emigrate and live there.

Supporting the idea that all Hong Kongians should be given British citizenship, Frank Citing, writing in The Wall Street Journal, explains:

“No other democracy denies a dependent people the right to self-determination or forces them to live under a Communist government.

“No other democracy issues passports that do not entitle their holders to enter the country that issued the passports.

“When British Gibraltar and the Falklands were threatened with takeover by another country, Britain offered the people protection by giving them full-citizenship rights.

“Hong Kong is the only exception. The British are now preparing to hand over its 5.5 million people to a Communist government. The decent thing for Britain to do is to restore the citizenship rights of the people in Hong Kong. It is the only way remaining to salvage Hong Kong and restore British honor.”

As Ching points out, even if the British acknowledge that the land was on a lease, the people are not. As such, they should be given full citizenship rights—much as the U.S. has extended rights to Puerto Ricans, and Holland has given full rights to her dependents in the Netherlands Antilles and Aruba. British citizenship would be something the Communist Chinese couldn’t take away, if and when they dismantle Hong Kong’s free market system. It might even insure that China wouldn’t tamper with Hong Kong’s market.

In the light of Tiananmen Square, the British should use every means to renegotiate the joint accords, telling the Chinese that what happened this summer was not acceptable. The Tiananmen Square massacre—set against the backdrop of China’s historic political instability and isolationism—makes it inconceivable that Communist China would allow Hong Kong to continue its Western contacts—including Western newspapers with their stock market reports, its aviation and shipping treaties, its checkbook accounts (which are not permitted in Communist China) and myriads of other capitalistic institutions.

China’s Communist regime is trapped in a catch-22 situation: the only thing that can save its economy—a free market such as exists in Hong Kong—is the very thing that will reduce the regime’s totalitarian powers by giving power to entrepreneurs and consumers. So far, whenever Communist leaders have had to choose between a better economy or keeping power concentrated in their hands, they have always chosen the latter. To allow Hong Kong to continue “business as usual” after 1997 would guarantee a heavy flow of ideas on liberty, and that, as the world saw last summer, the present Chinese government cannot tolerate. It was apparently Deng Xiaoping who ordered the army to fire on the students, the same man who signed the Hong Kong accord with Margaret Thatcher.

Ironically, Communist China would be the chief beneficiary of continued British sovereignty over Hong Kong. Hong Kong accounts for at least 35 percent of China’s annual foreign exchange earnings. China also benefits from Hong Kong’s financial services, port facilities, and skills in marketing Chinese products. All this will most likely change when Hong Kong passes into Chinese hands. China threatens to kill the goose that lays the golden egg.

Britain needs to act quickly. To lose Hong Kong as an outpost of freedom in 1997, with its 5.5 million people, would be tragic indeed.


1.   G. B. Endacott, A History of Hong Kong, 2nd ed. (Hong Kong: Oxford University Press, 1964,1988), p. 22.

2.   John Scofield, “Hong Kong Has Many Faces,” National Geographic, January 1962, p. 4.

3.   Endacott, p. 22.

4.   George Charles Roche III, Frederic Bastiat: A Man Alone (New Rochelle, N.Y.: Arlington House, 1971), p. 53.

5.   Endacott, p. 26.

6.   Ibid., p. 215.

7.   Ibid., p. 195.

8.   Fodor’s Hong Kong and Macau (New York: Fodor’s Travel Guides, 1987), p. 25.

9.   Harry Robinson, Monsoon Asia: A Geographical Survey (New York: Frederick A. Praeger, 1967), p. 476.

10.   John J. Putnam, “China’s Opening Door,” National Geographic, July 1983, pp. 64-83.

11.   Fodor’s Hong Kong and Macau, p. 58.

12.   Ibid., pp. 106-109.

13.   Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979,1980), p, 34.

14.   Frank Ching, “Hong Kong% Hopes Wane as Britannia Waives the Rules,” Wall Street Journal, April 19,1989, p. A19.

15.   These impressions were gained from telephone interviews with an American student in Hong Kong through the month of June, 1989; Jonathan Chao, quoted in World, July 1,1989, p. 7.

16.   Ching, p. A19.

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January 1990

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