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ARCHITECT 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 www.tandtproductions.com Cover design by James Shannon www.jshannon.com 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 country, 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 airport. 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 population 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 immediately 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 prosperity 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 government. 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 deputy 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 policy, 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 pursued, 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 policies 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.|