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.
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