Hong Kong: A Case Study in Market Development
JULY 01, 1969 by SUDHA R. SHENOY
Filed Under : Economic HIstory, Development Economics
Within the past twenty years Hong Kong has grown from a minor trading port into a center of manufacturing, with exports to some seventy nations round the world. Hong Kong seems to have found a formula for development that is not widely understood.
The number of industrial establishments in Hong Kong rose from 947 in 1947 to 9,301 in 1967, the number of employees during that same period rising from 51,627 to 431,973.¹ Exports of manufactured goods in 1965 were 41/2 times the 1953 level. By all such tests of growth, Hong Kong compares most favorably with the United Nations’ target rate of 3.5 to 5 per cent a year. It may be added that Hong Kong has never experienced the chronic shortage of exchange earnings supposed to typify underdeveloped countries.
Cotton manufactures have remained the staple among export items, accounting for as much as two-thirds of the total in earlier years, but down now to about 55 per cent. Initially, simple knitted goods, piece goods, and yarn formed the major part of these exports, but the industry has rapidly diversified to the manufacture of a large variety of clothing and the more highly finished textiles. Recent exports include woolen knitwear, brocades, carpets, and lace. Textile machinery, originally manufactured just for local use, is now being produced for export as well.Such items as firecrackers, Chinese foodstuffs, and bamboo manufactures once formed a major part of the export list. But by 1955, a wide range of consumer goods were being manufactured, including torches, nylon gloves, electric clocks, and enamelware. Current exports have moved further into the industrial range: plastics, cameras, transistor radios, air conditioners, water-heaters, light machinery (such as pumps and generators), and precision engineering products (e.g., watch parts and aircraft components) are now made in Hong Kong.
Hong Kong’s ship breaking industry is the largest in the world. At first, the scrap was utilized in the local construction industry; but this, too, is now being exported. With the development of the shipbuilding industry, yachts, and trawlers were exported, mainly to the United States. Tugs, lighters, and barges were built for Borneo, Kuwait, and Ceylon.Hong Kong’s industrial development thus proceeded along classic lines, from the simpler consumer goods to the more sophisticated varieties; from light industrial products to the intermediate types. Hong Kong has never suffered from inability to import heavy industrial goods, which supposedly hampers the development of many areas.3 Nor is there a Five- or a Ten-Year Plan or other such centralized resource allocation in Hong Kong. Indeed, no government "planner" might have expected Hong Kong to set an example of rapid development. It has few, if any, of the textbook preconditions for successful development.} The domestic market for many of its exports is narrow or nonexistent. It has no natural resources (with the exception of an excellent harbor), and no coal, oil, or other domestic fuel supply. The tillable area—13 per cent of a total of less than 400 square miles—is of poor quality. Hong Kong thus has to import virtually all its food, fuel, and raw materials. Even drinking water is pumped in from China.
No Tools for PlanningThe Colony has other handicaps from a planner’s point of view: it lacks some of the most elementary government statistics and other guides for control over the economy. Figures on registered industrial employment and daily wage-rates began to be collected in 1947. Trade figures were added the following year. A Retail Price Index was constructed in 1953 and an Index of Wage Rates the following year. But there are still no official national income estimates, or even an Index of Industrial Production. There are no official balance-of-payment figures, no restrictions on trade and payments, no export duties, no central bank; banking regulation is negligible. Consequently, the government simply has no basis for applying the various fiscal, monetary, and other measures recommended in most modern textbooks on public finance and development.
For most of the past twenty years, the highest income-tax rate was 121/2 per cent (currently 151/2 per cent); taxes on earnings and real property, and import duties on a narrow range of commodities (chiefly tobacco, wines, and drugs) are the main sources of revenue. Up to 1955, primary education (which is not compulsory), subsidized housing, basic medical services, and other "welfare" items accounted for slightly more than one-third of total government expenditure, with an equal proportion being spent on roads, water supply and other "economic" services. By 1968, "welfare" expenditures had risen to two-thirds of the total, the total having increased from an average of HK $271 million in the years1948-55 to HK $1,800 million in 1968. (U.S. $1.00 = H.K. $6.00.) The increased provision of such services was made possible by rising productivity.
Hong Kong has no minimum wage legislation, a negligible amount of labor legislation, and only a few very weak unions. Yet, take-home pay doubled between 1958 and 1967. The retail price index rose only 9 per cent in the interim, so this represented a substantial increase in real earnings. Living standards rose significantly, as exemplified at a basic level by changes in diet. Per capita rice consumption fell, while its quality improved, and more meat and vegetables were consumed. Imports of frozen meat rose from 26,000 tons in 1955 to 121,000 tons in 1965. Hong Kong thus combined rapid economic growth with a rise in living standards.
Quotas and Restrictions
Hong Kong’s development has proceeded entirely without government-to-government "aid." Indeed, other governments have sought to curb their imports of goods manufactured in the Colony. The first quotas were imposed in 1954, by the governments of the U.S.A., Pakistan, and Thailand. The next year a number of South-East Asian governments followed suit, but Hong Kong manufacturers switched to markets in Africa and Latin America. In 1958, the U.K. government imposed limits on imports of textiles and clothing manufactured in Hong Kong; the U.S. government began limiting such imports in 1963.The story behind these last restrictions is revealing. It begins with the so-called agricultural price support policy of the U.S. government, which among other things, maintains the domestic price of U.S. cotton above the world level. The Department of Agriculture, then finding itself laden with "excess" supplies of cotton, added an export subsidy to offset the price support. Meanwhile, imported textiles were beginning to replace U.S.-made textiles in U.S. markets, as foreign manufacturers bought cotton (including American cotton) at world—not U.S.—prices, while their labor costs were well below the American level. American manufacturers turned to Washington for protection against losses; and, in 1961, a "countervailing" import duty was imposed—to offset the export subsidy to offset the price support. Hong Kong textiles, however, sold so well despite this additional burden that import quotas were placed in 1963. Hong Kong manufacturers have responded by improving the quality of their exports.
Other countries restricting Hong Kong imports by means of heavy duties, quotas, and the like include Australia, Canada, France, Ghana, New Zealand, Nigeria, Norway, Rhodesia, Singapore, Switzerland, Tanzania, Uganda, and the West Indies.Laissez-Faire
How did Hong Kong achieve all this? It has been suggested that the availability of capital and the presence of a large refugee population—obviously possessed of a certain amount of get-up-and-go are perhaps the two chief factors contributing to Hong Kong’s success.5 But those individuals who came as refugees to Hong Kong possessed their enterprising qualities even before they arrived; nor does a waterless rock off the Chinese coast offer the best prospects for investment.
The difference lay in the economic environment, in the free markets created by policy: "Almost complete laissez-faireism unleashed human potentialities, paralysed in other countries by elaborate control systems." The government made no attempt to impose or preserve any particular resource allocation, but provided instead the stable legal, fiscal, and monetary framework that the market requires for optimal functioning. This use of the pricing system meant the full utilization of the empirical knowledge of ever-changing circumstances, which can never be centralized, but is only available scattered among individuals.
Resource allocations were thus determined, via profit and loss, by international consumer preference. Hong Kong’s economic growth was part of this general process. Investment in directions where returns were rapid and large meant that output and thus real incomes were raised rapidly; this, in turn, made higher saving and investment possible—but in continuously more sophisticated types of machinery, which permitted not only further increases in production but also diversification of output. Resources were thus created where none existed before.One fundamental point must be stressed: the course of Hong Kong’s development could scarcely have been predicted before it occurred, even on the basis of a detailed knowledge of the past growth of the now-developed nations. No one, in 1947, had any idea of what a developed Hong Kong might look like! It was only by the market process that this, in fact, became evident.
This logic is capable of wider application. In 1750, on the basis of the knowledge available then, it would hardly have been possible to "plan" in advance for the development of the North Atlantic region. Both North American and Western Europe were still relatively underdeveloped, and no one knew, in concrete terms, what shape any development might take!
This illustrates the contradiction in what is termed "planned economic development": since we do not know what a developed Africa, Asia, and Latin America might look like, we are necessarily limited to planning for the reproduction of what has already been achieved, in the past, elsewhere! The market process, on the other hand, sets no such limitations; it is adapted to the realization of hitherto latent and unknown possibilities. Inasmuch as the underdeveloped nations represent, as it were, a vast realm of such unrealized potentialities, it is above all essential in these areas to create the environment for a market economy.8
1 These statistics, and much of the information in the following paragraphs, have been taken from the Annual Reports of the Director of the Department of Commerce and Industry, Hong Kong, 1948-49 to 1964-65; and the Annual Reports of the Commissioner of Labour, Hong Kong, 1946-47 to 1966-67. I am also indebted to E. F. Szczepanik, The Economic Growth of Hong Kong (London: Oxford University Press, 1958).
2 Cf. J. Bhagwati, The Economics of the Under-developed Countries (London: Weidenfeld and Nicolson, 1966), ch. 18.
3 Cf. J. Bhagwati, op. cit.4 Cf. G. Meier and R. Baldwin, Economic Development: Theory, History, Policy (New York: Wiley, 1959), ch. 16.
5 Cf. The Economist (London), 19 October, 1968.6 E. F. Szczepanik, op. cit., p. 65.
7 See F. A. Hayek, "The Use of Knowledge in Society" and "The Meaning of Competition," in Individualism and Economic Order (London: Routledge and Kegan Paul, 1949).8 See F. A. Hayek, Competition as a Discovery Procedure (forthcoming publication by the Institute of Economic Affairs, London) and his remarks in What’s Past Is Prologue (Irvington, New York: Foundation for Economic Education, 1968).