Why Hong Kong developed

It's thanks to Sir John Cowperthwaite (1915-2006)

When he became Financial Secretary, the average Hong Kong resident earned about a quarter of someone living in Britain. By the early 90s, average incomes were higher than Britain's. Cowperthwaite made Hong Kong the most economically free economy in the world and pursued free trade, refusing to make its citizens buy expensive locally-produced goods if they could import cheaper products from elsewhere. Income tax was never more than a flat rate of fifteen percent. The colony's lack of natural resources, apart from a harbour, and the fact that it was a food importer, made its success all the more interesting. Cowperthwaite's policies soon soon attracted the attention of economists like Milton Friedman, whose television series Free to Choose featured Hong Kong's economic progress in some detail.

Asked what is the key thing poor countries should do, Cowperthwaite once remarked: "They should abolish the Office of National Statistics". In Hong Kong, he refused to collect all but the most superficial statistics, believing that statistics were dangerous: they would led the state to to fiddle about remedying perceived ills, simultaneously hindering the ability of the market economy to work. This caused consternation in Whitehall: a delegation of civil servants were sent to Hong Kong to find out why employment statistics were not being collected; Cowperthwaite literally sent them home on the next plane back.

Free trade and low income taxes. What's the problem with taxes? In "The Real Lesson of Hong Kong" (National Review, December 31, 1997) Milton Friedman compared Hong Kong to several other countries:

Direct government spending is less than 15 percent of national income in Hong Kong, more than 40 percent in the United States. Indirect government spending via regulations and mandates is negligible in Hong Kong but accounts for around 10 percent of national income in the United States. In both respects, the United States differs from Hong Kong less than either Britain or Israel, both of which have even higher government spending as a fraction of national income and even more intrusive and extensive regulations and mandates, which is presumably why per capita income in the United States is more than a third higher than that in the United Kingdom and nearly 80 percent higher than that in Israel.

We are more productive than Hong Kong. But we have chosen, or been led by the vagaries of politics, to devote roughly half of our resources to activities to which Hong Kong devotes 15 or 20 percent. Our higher productivity means that we can produce with 50 percent of our resources the same per capita income as Hong Kong can produce with 80 to 85 percent of its resources.

The real lesson of Hong Kong for the United States is that we’re using our resources inefficiently. Our government is spending our money to subsidize tobacco and to penalize smoking; to subsidize childbearing and to discourage childbearing; to build new housing and to tear down housing; to subsidize agriculture and to penalize agriculture; and on and on—not to mention converting square miles of forests into billions of paper forms and spending many man-years of labor filling them out and then filing them.

(via Tim Worstall).