Monday, January 08, 2007


After 40 years of rapid economic growth, Hong Kong has successfully emerged from an entrepot in the Far East to a first class metropolitan. A unique geographical location, availability of intelligent and diligent people as well as the massive inflow of skill and capital during the establishment of the People's Republic of China explained only partially Hong Kong's success: the above factors alone were simply not enough for Hong Kong to prosper unless there existed the fertile soil. Quoted as "the freest economy in the world" and "the world's model of free economy", free market, together with a trustworthy judiciary system, made up the fertile soil, which must be the most precious asset that we inherited from our precedents.

After the handover, Hong Kong experienced successive setbacks from the Asian financial crisis, burst of the 'Dot Com Bubble' and the devastating SARS. Recession and the high unemployment rate during the period perturbed most Hong Kong people. The public and the government started to think what they could do to 'save the economy'. Government officials seemed to believe they could make a difference. Even the "positive non-intervention policy" was announced to have already been DEAD.

In fact, no one should take economic freedom for granted and it is something everyone needs to fight for and protect. Sir John James Cowperthwaite, the Financial Secretary of Hong Kong from 1961 – 1971, was commended by the 1976 Nobel Prize Laureate in Economics Milton Friedman as "so famously laissez-faire". On the first anniversary of the death of Sir John Cowperthwaite, The Lion Rock Institute launched The Sir John Cowperthwaite Online Memorial And Study Centre to contribute to the greater understanding of the contribution of this freedom fighter to Hong Kong's economic freedom and prosperity.

*** Please notify us if any discrepancies to facts and omissions on Sir John's important events. Your comments are important to us! The reference materials for this blog can be accessed by the links on the right side, including articles by Milton Friedman and PJ O'Rourke, etc. ***

Arriving in the Colony

Born on April 25, 1915 in Edinburgh, Scotland, Sir John Cowperthwaite was educated in Merchiston Castle School and majored in Classics at St. Andrews University and Christ's College (Cambridge). He studied Economics after his return to St. Andrew University.

He was married to Sheila Thomson in 1941 and joined the Colonial Services in Hong Kong the same year. However, during his journey to Hong Kong, the Pacific War broke out and the British government had him spent 3 years in Sierra Leone until the War was over in 1945. He then worked in the Trade and Economic Affairs Department and was promoted in 1952 as the assistant Financial Secretary. In 1961, he succeeded Arthur Clarke as the Financial Secretary.

The Global Economy and Hong Kong's situation after World War II

The world was in ruin after WWII. As most countries had operated planned economy (eg. ration policy) during wartime, this kind of policies did not change immediately after the war. Looking back, it was understandable as the reconstruction of physical infrastructures required governments to take the leading role. However, the central planning framework was maintained even after the self regulatory price mechanism (of the private sector) recovered. Keynesianism: governments' manipulation of the economy through fiscal and monetary policies (quite easy to turn into budget deficit and high inflation) was the mainstream in that era. According to data from Organization of Economic Cooperative Development (OECD), the real GDP growth from 1949 to 1973 for western industrialized nations were 4 – 4.5%, much higher than 2 – 2.9% for the later 25 years. In 1950s and 1960s, there was a common belief that prosperity was the norm as long as governments followed the Keynesian doctrine. As a matter of fact, whether the robust economic growth in the post-war period was mainly out of Keynesian policies or explosive productivity growth driven by wartime technologies is itself debatable! All we know is that the former chairman of the Federal Reserves, Alan Greenspan, attributed the stagnancy of the US economy in 1970s partly to Keynesianism.

Contrary to the rest of the world, although the economy of Hong Kong was also overseen by government right after the war, the policies of development went back to market oriented mechanism quickly. Soon after the establishment of the military government in September 1945, export and import resumed in November 1945. When the governor was back to his office, he announced Hong Kong as a free port: minimal restrictions on import, no export subsidies and no tariffs on all imports except several commodities. The free port policy highlighted Hong Kong's exceptional freedom in the era of protectionism, especially when compared to her sovereign country: the United Kingdoms. So without government playing an active role in the economy, how did the economy of Hong Kong perform? The annual real GDP growth was 7.8, according to OECD.

Being The Financial Secretary of Hong Kong During the 60s

In 1961, the British government appointed Sir John Cowperthwaite as the Financial Secretary of Hong Kong. By that time, Hong Kong had successfully evolved from an entreport to a light industry city. The government was financially sound and started to have surpluses from 1948. If the embargo in 1950s triggered the creative destruction in Hong Kong, forcing Hong Kong people to turn to light industries, the 1960s was the era of economic boom. The successful transformation made the Hong Kong government more resourceful and some institutions were then set up: Hong Kong Trade Development Council, Hong Kong Productivity Council, Hong Kong Export Credit Insurance Corporation, Hong Kong Standards and Testing Centre and an industrial design and packaging centre all established in this decade. These organizations did improve the quality of exported goods and the overall trading environment to a certain degree. However, when the government started to participate, politicians and business people expected the government to play a more active role, like the governments of Philippine, Malaysia and Indonesia (e.g. to subsidize directly some industries). Sir John stood firm at that time to discourage excessive government intervention.

Sir John's Philosophy

Why didn't Sir John follow the fashion of government intervention or central planning? This has to start with his character and philosophy: a thrifty Scot, he is a disciple of Adam Smith (also a Scot), the author of The Wealth of Nations, who discovered that an "invisible hand" (hidden in the market) would drive the resources in a society toward their fullest and most efficient use. As a government official, below were some of his quotes, that should reflect his philosophy in regards of free market, fiscal policy, national statistics and the last but not the least, his contribution to the Hong Kong's (independent) monetary policy:

Free Market

1. Less restrictions and let the money flow

"… money comes here and stays here because it can go if it wants to. Try to hedge it around with prohibitions and it would go and we could not stop it and no more would come."

2. Never compete with public

"…when government gets into a business it tends to make it uneconomic for anyone else."

3. More confidence on the aggregate decisions of the public than bureaucrats

"In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government, and certainly the harm is likely to be counteracted faster."

"For us a multiplicity of individual decisions by businessmen and industrialists will still, I am convinced, produce a better and wiser result than a single decision by a Government or by a board with its inevitably limited knowledge of the myriad factors involved, and its inflexibility."

4. Let the market select; let winners stay

"I must confess my distaste for any proposal to use public funds for the support of selected, and thereby, privileged, industrialists, the more particularly if this is to be based on bureaucratic views of what is good and what is bad by way of industrial development."

"An infant industry, if coddled, tends to remain an infant industry and never grows up or expands."

Fiscal Policy

1. (finding original quotes) Creating 5 principles for the government budgeting, expenditure within the limits of revenues and fiscal balance

(finding original quotes) "Deficit budget won't work for us under our current economic conditions."

2. Keeping resources in the hands of public

"…I have a keen realization of the importance of not withdrawing capital from the private sector of the economy. ...I am confident, however old-fashioned this may sound, that funds left in the hands of the public will come into the Exchequer with interest at the time in the future when we need them."

Positive Non-intervention, Spending with Care

1960s was a decade of turbulence for Hong Kong. She walked through a major bank crisis, currency instability caused by the British Pound devaluation and the riot happened in 1967. There were a lot who needed help from the government; however, who could tell who were really in need and who were just looking for free lunch?

In fact, Sir John could have chosen an easy way. Given that Hong Kong accumulated much reserve, there was an incentive to encourage Sir John to spend. What else could be easier than doing a yes-man with the use of the public fund? It was the excellent time for Sir John to do something great and showed his sympathy. He didn't do that. Seemingly unrewarding, he simply followed his belief and rejected requests from lawmakers and representatives from various industries.

For instance, an executive from a large British firm asked him to develop the merchant banking industry. He told the executive that a merchant banker should be a better person to find and asked him to leave.

A legislator requested the government prioritized the development of various industries by encouraging new industries as well as inhibiting obsolete industries. Sir John didn't believe in his prophecies. After all, who knew for sure which industries had the potential and who knew successful cases in elsewhere would also be successful in Hong Kong? If an industry really had the potential, why would it need subsidies from the government? Also, who had the power to inhibit the development of "obsolete industries"? Isn't the once-obsolete Apple Computer rejuvenated and revived by its ipod?

Owning a private car in Hong Kong was certainly not common in 1960s. However, the drivers who had offices in Central requested the government built a car park in the heart of the small city – the cost was so high that was sufficient to build a 5-people apartment. To follow Sir John's rationale: if no private firm was willing to do it, how could it become the responsibility of the government?

National Statistics

To minimize the temptation of government intervention, he said that governments "should abolish the Office of National Statistics." He believed statistics would increase the likelihood of economic intervention by government officials and this would only hinder the market's natural recovery mechanism. When he was still the Financial Secretary of Hong Kong, officials from Britain came to find out why data on unemployment were not being collected and he literally sent them back on the next flight.

Independent Monetary Policy

Sir John once told Yeung Wai Hong, the editor-in-chief of Next magazine,"I was just damn lazy". While his free market policies gave people an impression that he had not much to do in his job, he made one important decision for Hong Kong though -- the government of Hong Kong setting the exchange rate for its own currency for the first time! On November 19, 1967, the United Kingdom annouced that British Pound devalued by 14.3%. Hong Kong dollar had to follow the devaluation inmediately since Hong Kong was a member of the Sterling Area. The devaluation came all the sudden and had a great impact on the society and the manufacturing industries, especially the economy of Hong Kong was robust at that time and its currency had a pressure to appreciate instead of depreciate. Sir John had a brief discussion with the British government and reappreciated the currency by 10% within 90 hours. That was the first time the Hong Kong government decided on its exchange rate. 7 years later, Hong Kong dollar floated freely and started to have its own monetary policy.

Intervention is tempting. Politicians gain popularity by giving out free lunch. He didn't buy that. He overcame the temptation and insisted to allow the invisible hand work. He spent carefully, as he knew money came from the hard work of Hong Kong people. Who sacrificed in order to generate tax revenue? Who benefited from the government spending? What he did in response to these questions was he refused to accept the offer from the government of upgrading his residence.

The essence of Sir John's philosophy is that the individuals are wise enough to make decisions, and policy makers should give individuals sufficient freedom to choose. And in this direction policy makers strive to overcome pressure from various parties in the society and resist the temptation of doing great jobs.

"I did very little"

Sir John stepped down in 1971, and what he left for his successor was HK$2.1 billion of reserves and an economy growing at a pace of 13.8% (real growth of 8.9%). No doubt that Hong Kong people should take the greatest share of the credit. It was totally insensible not to attribute Hong Kong's success to her people's diligence and intelligence. However, being the Financial Secretary for 10 years, it was equally unreasonable if Sir John was erased from the credit list. Hong Kong people knew little of him, as Nobel Prize Laureate, Milton Friedman said, "It would be hard to overestimate the debt Hong Kong owes to Cowperthwaite." He was so low profile that he rejected any offer of writing an autobiography about his time in Hong Kong.

Without Sir John's belief in free market, we never know if Hong Kong would be another laboratory for socialism, like other former colonies of Britain. It is equally hard to answer if his successors would strive to achieve fiscal balance if Sir John didn't stick with fiscal balance as the principle of managing Hong Kong's public finance. Without him laying the foundation, would Hong Kong enjoy more than 30 years of prosperity?

When asked how he himself described his achievement in Hong Kong, he said that it was his duty to serve and there was not much for him to talk about.

His Life After Leaving The Government

After leaving the government, Cowperthwaite was an advisor to Jardine Flemming & Co in Hong Kong until 1981. Then he retired to St. Andrews with his wife Sheila. For many years, he spent six months of the year with his wife traveling the world visiting friends and relatives.

His Influence

After Sir John Cowperthwaite's retirment as the Financial Secretary in 1971, his successors including Charles Philip Hadden-Cove and John Henry Bremridge basically followed Sir John's market oriented framework with slight modification. Pointed out by Milton Friedman, "The results of his policy were remarkable." In 1945, Hong Kong was just a tiny poor island in the Far East. The per capita income of Hong Kong was only a quarter of the UK. By 1997, the per capita incomes of both places were about the same, though the UK also experienced a sizable gain in its economy in the same period. "That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests."

Some might think that the concept of free market is vague; however, Dr. James Gwartney, Professor of Economics at Florida State University, portrays the key ingredients of economic freedom as followed:

1. Personal choice
2. Voluntary exchange
3. Freedom to compete
4. Security of privately owned property

These are the cornerstones of a free market. In summary, individuals' self ownership and the right to choose ought to be respected. At the same time, nobody can intrude others' properties and all the exchange must be voluntary. Individuals have the freedom to decide how to use their time, talents and resources to compete with others. For a government promoting economic freedom, it needs to set up a just and fair platform for individuals to compete and to refrain itself from actions that interfere with personal choice, voluntary exchange of goods and services as well as the freedom of individuals and businesses to compete.

It was Sir John's market oriented and positive non-intervention system that released the potential of Hong Kong. After his departure, Hong Kong's real GDP continued to grow at 7%. Hong Kong has already become a world-class metropolitan and one of the wealthiest cities in the world. Hong Kong is known by the world so famously for its non-intervention and the place has been ranked as a freest economy for years. The 'market oriented soil' has contributed to the success of Hong Kong and the principle shoud be embraced.

The Influence of Sir John

Sir John has had a great influence on Hong Kong fiscal policy. His principle of keeping the expenditure within the limits of revenues and achieve a fiscal balance was written into the Basic Law of Hong Kong, representing widespread recognition by most people of Hong Kong and the government of China and the UK.

Almost no one, perhaps including even Sir John himself, could have imagined that his market oriented public financial regime would have such a great impact to the global economy. It was Friedrich von Hayek and Milton Friedman who put an intellectual case for the free market, but it was Sir John who showcased a theory into reality successfully. Hong Kong became a textbook example of a market oriented society and gave Margaret Thatcher and Ronald Reagan confidence when promoting economic reform and finally revived the economy of UK and US. Hong Kong was also the showcase for China's economic reform that started in the late 70s. Another country that was influenced by Hong Kong was New Zealand. Economic reform including massive privatization and drastic tax cut started back in 1980s. Now the unemployment rate is below 4%, even lower than that in Hong Kong.

Remembering Sir John

Milton Friedman, Nobel Prize Laureate in Economics

"Yet that doesn't detract from the scale of Cowperthwaite's achievement. Whatever happens to Hong Kong in the future, the experience of this past 50 years will continue to instruct and encourage friends of economic freedom. And it provides a lasting model of good economic policy for others who wish to bring similar prosperity to their people." (Original)

"By some accident of officialdom, the Colonial Office had assigned John Cowperthwaite to serve as the Financial Secretary of Hong Kong. The result: the home country strangled by socialism; the colonial possession converted into a showplace of free markets." (Original)

Donald Tsang, Chief Executive of HKSAR

"We shall always remember Sir John for the pioneering and dominant role he played in the birth of the legend of Hong Kong as the freest market economy in the world." (Original)

P. J. O'Rourke, American bestseller and journalist, Cato Institute's Mencken research fellow

"A master of simplicity" (Original)

Marian L. Tupy Policy Analyst, Center for Global Liberty and Prosperity, Cato Institute, USA

"He was a principled and modest man, whose wisdom and courage of convictions greatly contributed to the spectacular rise of Hong Kong from poverty to prosperity." (Original)

Alex Singleton, Director General The Globalisation Institute, UK

"Cowperthwaite made Hong Kong the most economically free economy in the world." (Original)

John James Cowperthwaite (Sir John) Profile

April 25, 1915 Born in Scotland. Attended Merchiston Castle School in Edinburgh,

1933 Studied Classics at the University of St. Andrews and Christ's College
(Cambridge) before returning to St. Andrews to study Economics

1941 Joined the Colonial Service in Hong Kong

1961 – 1971 Promoted to Financial Secretary

1971 – 1981 Joined Jardine Fleming, an Hong Kong investment bank. Retired and went
back to Scotland in 1981

January 21, 2006 Died in Dundee, Scotland