Hong Kong - A Success Story

HONG KONG-A SUCCESS STORY ..An GJiforial 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 en terprise 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 unleash ing of private initiative has enabled the Old World to forge ahead with renewed vigor. On the other side of the globe is Japan whose re markable 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 ! From the MontJ:zly Letter of the First National City Bank of New York, Decembe~ 1959. 243 244 FIRST NATIONAL CITY BANK achievement has been one of private enterprise operat ing within a free market economy. There has been rela tively little government intervention in the Colony's affairs. This is the more significant in view of the chal lenge to its existence posed by postwar events. A great seaport and commercial center, Hong Kong grew to prosperity on the entrepot trade with China, its location convenient for transshipment of goods to and from the West. But when the mainland fell to the com munists, and the Korean War brought a United Nations embargo on trade with Red China, all this was sud denly changed. Hong Kong found itself no longer the gateway to China, but instead on the, edge of the Bam boo 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 popu lation, Hong Kong searched out other means of liveli hood. Instead of massive programs of government spend ing or requests for foreign assistance, reliance was placed on private initiative. It was natural for Hong Kong to look to its busi nessmen in time of crisis. The island was a barren, al most uninhabited rock when it was acquired by the British in 1841 as a trading settlement. Lacking in re sources, 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 HONG KONG-A SUCCESS STORY 245 alike-a stable government, the rule of law, low taxes, and a minimum of official interference.

Private Enterprise in Action When necessity forced Hong Kong to find new sources of income to replace the lost China trade, its resource ful 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 experi ence. 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 main tain 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, 246 FIRST NATIONAL CITY BANK the economic climate was favorable to enterprise. The colonial government consistently kept its accounts in balance with a standard tax rate of only 12~ per cent on personal and corporate income. Here was opportu nity for businessmen to create, to produce, and to en joy the fruits of their labor. Industry was expanded and, at the same time, ener getic efforts were made to develop larger export mar kets. New products were introduced and old ones adapt ed to consumer needs in different countries. The phe nomenal four-fold growth of Hong Kong's textile indus try, for example, has been due in large measure to skilled marketing-sarongs for the South Seas trade, woolens 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 manufacturers 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 in expensive 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.

HONG KONG-A SUCCESS STORY 247 Handicrafts and art objects for the growing tourist trade are another source of income. Hotel and office construc tion 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 indus tries has created new problems. Striking sales gains over seas have brought protests from established suppliers elsewhere. Several nations have placed import quotas on Hong Kong goods. And Red China reportedly has been undercu tting Hong Kong sales in some markets by dumping. Despite these difficulties, Hong Kong business men 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. A Lesson for Undeveloped Countries In many parts of the world today governments are seeking to raise living standards through industrializa248 FIRST NATIONAL CITY BANK tion. 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 de velopmen t .plan. In seeking to industrialize, governments have bur dened 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 arbi trary 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 dis advantages is striking testimony to the truth of liberal economic principles. Of the physical factors usually con sidered essential to industrial growth, nearly all are missing in Hong Kong. But Hong Kong has offered HONG KONG-A SUCCESS STORY 249 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 unleash ing human potentials that in other countries have re mained 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 arid enterprise of its people, has not only belied all prophe cies of economic disaster, but also established itself as a vigorous industrial power .... This development has been achieved without major recourse to outside eco nomic assistance . . . and despite formidable obstacles arising from political circumstances beyond local control."