Monday, January 08, 2007

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.


Jewish Odysseus said...

How nice to find such a tribute to Sir James! He was a great lesson for governments everyhwere.

Anonymous said...

No mention of the massive corruption that was the norm for Hong Kong during the 1950s to the 1970s?