Table Of ContentARCHITECT OF PROSPERITY
SIR JOHN COWPERTHWAITE AND
THE MAKING OF HONG KONG
NEIL MONNERY
LONDON PUBLISHING PARTNERSHIP y
Copyright © 2017 Neil Monnery
Published by London Publishing Partnership
www.londonpublishingpartnership.co.uk
All Rights Reserved
ISBN: 978-1-907994-69-2 (hardback)
A catalogue record for this book is available from the
British Library
This book has been composed in Adobe Garamond Pro
Copy-edited and typeset by TT Productions Ltd, London
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Cover design by James Shannon
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ARCHITECT OF PROSPERITY
CONTENTS
INTRODUCTION
AN UNLIKELY START
IO
A CLASSICAL EDUCATION
22
CADET COWPERTHWAITE
34
A Focus On INDUSTRY
47
>
THE FoLtows FOUNDATION 69
”
M
N THE DECLINE OF THE ENTREPOT TRADE 86
DEPUTY FINANCIAL SECRETARY 98
N
o WINNER'S Dousts 113
FINANCIAL SECRETARY AND CHIEF TRADE NEGOTIATOR
10. THE THREAT OF ‘BRENTRY
145
II. A BANKING CRISIS ISI
I2. COWPERTHWAITE’S First BUDGET 159
13. FIscAL FUNDAMENTALS 173
14. THE BOUNDARIES OF THE STATE 188
15. A BIGGER BANKING CRISIS 201
16, THE PRESSURES OF A DOWNTURN 210
17. DEVALUATION AND INDECISION 223
CONTENTS
18. FRICTION WITH CHINA 242
19. CONSOLIDATION AND CONTINUITY 256
20. CHANGING GUARD 275
21. History LESSONS? 289
ENDNOTES 309
BIBLIOGRAPHY 325
ACKNOWLEDGEMENTS 331
INDEX 333
vi
INTRODUCTION
HIS IS A BOOK ABOUT a now largely forgotten Scotsman, Sir John Cowper-
thwaite, who Milton Friedman identified as playing the central role in Hong
Kong’s remarkable post-war economic success. When this shy, intellectual
civil servant arrived in Hong Kong in 1945 it truly lived up to its description as ‘the
barren island’, with an income per capita of only 30 per cent of its mother coun-
try, Britain. After World War IJ, Britain and other countries turned to industrial
planning, deficit financing, activist economic policies and high levels of government
spending and taxation to engender growth. How much did Cowperthwaite and his
colleagues adopt from this emerging global consensus? Virtually nothing. Now Hong
Kong's income per capita is 40 per cent higher than Britain’s. How did that happen,
and who was John Cowperthwaite?
Hong Kong's prosperity is evident the moment you land at its vast, modern air-
port. Built on reclaimed land around the island of Chek Lap Kok, it serves 60 million
passengers each year, making it the eleventh busiest airport in the world. Operating
24 hours a day, its scale, sophistication and efficiency suggest it serves a country much
larger than one that is in fact only the world’s 102nd most populous.
Anyone who leaves a few years between visits will see how Hong Kong is con-
stantly developing. Since the airport opened in 1998 at a cost of $20 billion, new
terminals and concourses have regularly been added, and current debate surrounds
whether to add a third runway. Leaving the airport, you may well join a queue of
expensive cars crossing Ising Ma Bridge, opened by Margaret Thatcher in 1997. You
will pass the vast container port, with its bowing cranes, and look up at the forest of
high-rise housing that stretches in every direction. Soon the famous crowded, illumi-
nated downtown skyline will emerge, stretching further from east to west than you
INTRODUCTION
remember. As your eyes scan the ever-changing shiny office blocks and their neon
corporate logos, the towering apartment blocks and the crowded shopping malls, you
will be left in little doubt that mankind is capable of creating great wealth.
But that capability was not always evident on this small collection of islands. For
centuries Hong Kong supported no more than a few thousand people, engaged in
marginal activities such as fishing and charcoal burning. The population would rise
for a few generations and then fall back. As recently as a hundred years ago, the pop-
ulation was only around half a million, with the majority living at subsistence levels.
The most dramatic period of Hong Kong’s economic miracle started as World
War II drew to a close. Having been occupied by the Japanese through the war, Hong
Kong returned to British rule a broken economy. The population, which had reached
over 1.5 million just before the war, had collapsed to around 600,000 people. But the
bounce back was rapid, and despite many challenges Hong Kong started to claw its
way back to its pre-war levels of activity. And it did not stop there: it carried on grow-
ing at pace for the next few decades to become the success story that we see today.
The foundations for this post-war economic miracle were built in the years imme-
diately after the war by the economic policies pursued by the governments of the
1950s, 60s and 70s. Society, business and government combined to create great pros-
perity for the people of Hong Kong.
Throughout this period Hong Kong had an unusual form of government, being
a British colony until 1997. Its governor had very wide powers to create laws, and to
enforce them. The Legislative Council advised the governor and formally passed leg-
islation, but a majority of the members of the council were civil servants, appointed
by and responsible to the governor. Even the external members were selected rather
than elected. It was a system that in the wrong hands could have led to corruption,
dissent and disaster, but used well could lead to extremely long-term, rational gov-
ernment. It is thought provoking to see the direction that these British civil servants
decided to pursue when free to choose the path they thought would best serve the
people of Hong Kong.
The success or failure of the model relied heavily on the colony’s professional
cadre of civil servants, and Hong Kong was fortunate in recruiting and retaining
a group of mostly capable, honest, hard-working, dedicated and thoughtful indi-
viduals. They worked effectively as a team, harnessing their talents around shared
goals. Perhaps the most important of those goals was a desire to make Hong Kong
economically successful. As well as sharing this goal, they shared a broad philosophy
about how to do this, driven in part by situation and necessity and in part by beliefs
about what would create progress and prosperity.
INTRODUCTION
The man at the centre of this philosophy was John James Cowperthwaite. Cow-
perthwaite was himself something of a paradox. He was an old-fashioned colonial
administrative officer, brought up in Scotland before serving as finance minister of
one of the most modern, successful economies of the post-war era, halfway around
the world. He was not elected but his approach had widespread support. Although he
never had to run for office, that did not prevent him from devising and articulating a
set of economic policies that he then implemented, affecting millions of people, who
had little say in their creation.
Cowperthwaite would serve in the Hong Kong administration from 1945 until
his retirement in 1971. As financial secretary in Hong Kong between 196] and 1971,
Cowperthwaite fashioned a set of economic policies that were at odds with those
pursued by most governments of that time. Indeed, they still look very unusual com-
pared with the approach selected by most governments today. Their nature lies far
from our own experience, and this lack of familiarity makes one almost prejudge
them and reject them as peculiar. And yet Hong Kong’s demonstrated success over
decades pulls one back to seek the causes behind their spectacular results.
Cowperthwaite was not alone in crafting this approach. He spent a decade as dep-
uty to his predecessor, Arthur Clarke, who was financial secretary between 1952 and
1961. Clarke had pursued a broadly similar policy stance based on similar beliefs, in
part influenced by Cowperthwaite. And Clarke’s predecessor, Geoffrey Follows, set
the foundations in the immediate post-war period. Cowperthwaite’s successor, Philip
Haddon-Cave, drew heavily on the same set of principles during his tenure between
1971 and 1981. They all enjoyed the support of their governors for such an approach.
So, Hong Kong's economic miracle was guided by several different architects, but
Cowperthwaite is perhaps a little more prominent than the others in the group. His
twenty-year tenure, first as deputy and then as financial secretary, was exceptional, as
was the level of thought and intellect he brought to the fundamental economic issues
of the day. That intellectual underpinning and his impressive ability to articulate his
thinking made him the leading proponent of a distinct economic philosophy. It was
the ideas that Cowperthwaite fashioned and then explained that provided a bulwark
against the pressures to change course in a world where compromise so often prevailed.
Furthermore, one can argue that his predecessors had fewer alternative paths to follow.
When Cowperthwaite took charge many thought that his economic approach had run
out of road and were proposing greater government management of industry, central-
ized economic planning, larger government (financed by higher taxes), loose fiscal pol-
icy, and a shift away from free trade. It took great commitment and energy simply to
maintain direction in the face of such apparently compelling panaceas.
INTRODUCTION
The policies that these financial secretaries implemented built on Hong Kong's
history as an open port where goods and funds could flow freely. They looked primar-
ily to the private sector to generate the wealth of their society. In doing so they were
slow to add regulations, and equally slow to offer support to any specific industry or
company. Theirs was a philosophy of laissez-faire in the Adam Smith tradition. They
hoped that capital and labour would move efficiently to areas where they could earn
higher returns, and they were rewarded in seeing precisely that happen each time
Hong Kong ran into difficulties.
They believed in low levels of taxation, and in any case found it hard to obtain
support to raise taxes materially. Their belief was that with low taxation, funds would
flow into investments, which would in turn turbocharge economic growth. They
were not against public spending on critical areas such as education, housing and
the like, but their constant struggle was to grow these areas within the constraints of
modest levels of tax. They fully understood that this often meant saying no to new
spending initiatives, or, perhaps more accurately, saying ‘not yet.
Perhaps most surprising to us today is the fiscal conservatism that they pur-
sued, in part because of necessity, in part because they saw it as self-evidently
sensible. They achieved government surpluses in all but two years (one of which
was the year immediately after the Japanese occupation in World War II), and
in fact they aimed to keep a year’s worth of spending as a cash reserve. How
different that is from the debate in most countries today about how large the
annual government deficit can be, and what multiple of GDP is manageable
as national debt. Hong Kong enjoyed decade after decade of growth without
creating any national debt.
Now, with the benefit of hindsight, we can look back and see how well these pol-
icies worked. Milton Friedman, the Nobel-winning economist, visited Hong Kong in
1955 and again in 1963, when he met Cowperthwaite, finding him hugely impressive.
Later, in 1997, he gave a speech about the success of Hong Kong, noting its extra-
ordinary growth:
From 1960 to 1996, per capita income in Hong Kong rose from about one-quarter
of that in Britain to a third larger. It’s easy to state those figures. It is more difficult
to realize their significance. Compare Britain, the source of the industrial revolution,
the economic superpower in the nineteenth century, with Hong Kong, a spit of land,
overpopulated, overcrowded, no resources except for a great harbour. Yet this spit
of overcrowded land is able within four decades to provide its people with a level
of income one-third higher than the income enjoyed by the residents of its mother
country.|
