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Hong Kong a free economy? Don’t make me laugh

Last month The Spectator magazine carried a column praising Hong Kong to the rafters as “one of the most aggressively free market cultures in the world” – and one of the most prosperous. In comparison, it declared, most Western economies were “incorrigibly, nauseatingly socialistic”.

Published ever since 1828, the “Speccie” is a venerable rag. Past owners include the chairman of Jardine Matheson, Henry Keswick, while former editors include the current British foreign secretary Boris Johnson. With a colourful cast of writers who take a pleasingly idiosyncratic, even eccentric, view of the world, the magazine generally makes a good read. But when it came to Hong Kong, however, The Spectator got things badly, embarrassingly, wrong. The city is emphatically not the paragon of small government, free market liberalism the writer appears to believe.

We’ve heard this sort of rubbish before, of course, usually from ill-informed ideologues who choose to believe what they want, rather than inconvenient reality. So, for example, The Spectator article credited what it described as Hong Kong’s economic success to “one of empire’s greatest unsung heroes”, the city’s financial secretary from 1961 to 1971, John Cowperthwaite. The column described Cowperthwaite as “an ardent classic liberal who believed economies do best with minimal government intervention”. On his watch, read the article, “the economy grew like Topsy”.

It’s a pretty story, but even the most cursory check of Hong Kong’s history proves it to be nonsense. Cowperthwaite was no free market liberal. In the late 1940s he argued that the government should pick winners by extending subsidised loans to favoured industries.

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In reality he wasn’t cut from the same cloth as the Austrian school of free market economists, so much as those 19th century British officials who believed that all a gentleman needed to administer the colonies was a stiff upper lip, a fly whisk, and the ability to construe Homer in classical Greek.

This cult of amateurism cost Hong Kong’s economy grievously. Cowperthwaite knew nothing about banking – he could not read a bank’s balance sheet – and he wasn’t prepared to learn. He allowed the city’s proliferation of locally-owned banks to operate almost entirely unsupervised, refusing to employ professional banking regulators. Given that the main businesses of Hong Kong banks in the early 1960s were currency, gold and property speculation, it will come as no surprise that the result of his benign neglect was an almighty banking crisis, in which three local banks collapsed entirely and a further six – including Hang Seng, the colony’s second biggest bank – had to be rescued.

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What’s more, Cowperthwaite’s pig-headed refusal to collect economic statistics – on the grounds that they were unnecessary, unhelpful and might give people the wrong impression – left the government woefully ill-equipped to respond to the deep slump that followed the banking crisis.

So much for the great hero of liberal economists, but The Spectator’s characterisation of contemporary Hong Kong’s “red-in-tooth-and-claw free market environment” is scarcely more accurate. Red in tooth and claw it may be, but a free market it certainly is not.

The writer waxes lyrical about the brusque enterprise of the city’s cab drivers, apparently failing to realise that Hong Kong’s taxi drivers are not the hustling businessmen he professes to admire so, but rather the victims of a system in which the government both arbitrarily restricts the supply of taxi licenses and fixes the fares that cabs can charge, leaving the drivers to eke out a living on the thin pickings available to them as hapless sub-contractors to big boss license owners in a city where, because of government interference, a taxi license now costs as much as 500 times the median monthly income.

The story is the same across much of the rest of an economy captured at every level by cosy cartels supported by the government. Above all, the government colludes with a tiny group of giant real estate developers to keep the city’s property prices artificially high. As monopoly freehold owner of all the land in Hong Kong, the government deliberately restricts the supply of new building plots in order to push up its income from land sales, land premium – the fees developers pay for a change in land use – property rates and stamp duty, which together make up around a quarter of its revenues. And the favoured developers are only too happy to play along, because high property prices erect an insurmountable barrier to new entrants across a range of business sectors, stifling competition and cementing the privileged position of the incumbent developers and their affiliates.

In short, what looks to visiting journalists like a model free market is in reality a mutually-lubricating embrace between government and its cronies so squalid that if it were to be attempted in a public place by ordinary consenting adults, they would immediately be arrested by the police for gross indecency. Don’t be fooled; whatever The Spectator might say, in no sense can Hong Kong be considered a free market economy.

Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years