Hong Kong. The self-imposed image of "laissez-faire"

Seminar Paper, 2009
16 Pages, Grade: 1,0



1. Introduction
1.1 The problem examined in this study
1.2 Purpose of the paper and research methods
1.3 Definitions
1.3.1 Laissez-Faire
1.3.2 Hong Kong, Special Administrative Region of China

2. Economic and financial policies in Hong Kong
2.1 Policies in late imperial Hong Kong
2.1.1 Structural economic changes under British rule
2.1.2 Minimalist vs. interventionist state
2.2 Economic development under Chinese rule
2.2.1 The public sector: Government expenditure
2.2.2 Examples of governmental intervention
2.2.3 Regulations on trade and enterprises
2.2.4 Beijing’s influence on Hong Kong’s economy

3. Conclusion: Hong Kong and its image of laissez-faire

4. References

1. Introduction

1.1 The problem examined in this study

A lot has been said and written about today’s liberal market mechanisms, about the self-regulation within free market economies, and about the necessity to increase the controls over a system which has failed to prevent enduring economic crises and which as well seems to be blamed by many for social problems such as escalating income inequalities. Others, mostly conservative economists, believe that both economy and society would be better off without governmental intervention, regulations, or directing policies that restrict the economy’s full potential and therefore lead to a decline of social benefit. The former British colony of Hong Kong is frequently cited as a classic example of limited government and free market capitalism. The island is widely considered to be one of the last bastions of free enterprise, and by governmental measures the least regulated marketplace. In many papers, Hong Kong is therefore referred to as a so called “laissez-faire” system.

1.2 Purpose of the paper and research methods

It is the purpose of this paper to examine to what extent the nature of laissez-faire can in fact be accounted for in colonial but especially post-colonial Hong Kong politics. A proper evaluation, whether or not the definition of laissez-faire is applicable to the Hong Kong market, requires a definite characterization of the terms “free market” and “governmental interference,” which are inextricably linked with laissez-faire. Furthermore, the particular situation of Hong Kong as a former British colony and now as a Chinese Special Administrative Region needs to be analyzed in order to draw accurate conclusions of the matter. The focal point of this paper is to investigate governmental economic and financial policies in Hong Kong, using statistic data, governmental and non-governmental reports, and diverse essays on explicit Hong Kong policies, government expenditure, and market regulations.

1.3 Definitions

1.3.1 Laissez-Faire

The term “laissez-faire” is originated in 18th century France, and is commonly known as a theory of (economic) freedom. The literal English translation would be “let (us) do” or “leave it to us”, but it is unproven when the term was first used in an economic context.

Adam Smith, author of The Wealth of Nations (1776), was the first to elude to the doctrine of laissez-faire. In his understanding, “economic phenomena were manifestations of an underlying order in nature (…) [which] required, for its most beneficent operation, a system of natural liberty (Viner 1927: 198).” It was Smith's philosophy that the market would regulate itself and that any kind of governmental interference such as restraints on imports and exports, duties, bounties or prohibitions would result in a decline of social welfare. Nonetheless, he made out three central areas where the government should provide its support in order to sustain the market’s stability; protection against foreign aggressions, a functioning jurisdiction, and investments into public institutions or projects (i.e. education and infrastructure) that barely distribute any profit and therefore, cannot be provided by a group of individuals (see Heilbroner 2000: 68-70).

Smith’s contemporary successors like Milton Friedman criticize the “proliferation of restrictions” that emerges from national interest groups calling for protection from “unfair” competition. But to defer to these calls would only result in higher prices, and it would also deprive the consumer of the freedom to choose (see Friedman 1980: 38-41).

The lines of argument are similar. But a universal definition of what laissez-faire is about and whether governmental measures are counter-productive or not cannot be easily determined. As a result, the conclusions in this paper on the level of “economic freedom” in Hong Kong can only be partly objective and are limited to the evaluated subjects.

1.3.2 Hong Kong, Special Administrative Region of China

Hong Kong is located at the south-eastern coast of the People’s Republic of China. It is one of the most densely populated places in the world with nearly seven million people spread over hardly more than 1100 square kilometers. The island used to be a British Crown Colony from 1843 to 1997. With its return to China in 1997, Hong Kong became a “Special Administrative Region” (SAR) of the People’s Republic. Under the formula of “one country, two systems,” the city was pledged to maintain most of its autonomy. For a period of 50 years, the Basic Law - Hong Kong’s “mini”-constitution - guarantees the SAR its own partly democratically elected legislature, an independent judiciary, and full autonomy regarding the economy, while foreign and defense affairs are the responsibility of the Central People’s Government in Beijing (see Hong Kong Government 2008).

Hong Kong is a center of international commerce and trade. Manufacturing and agriculture are of minor importance for the economy due to a lack of available natural resources and space. In contrast, financial services, logistics, and (mostly) China-related trade and tourism account for more than 90% of the Gross Domestic Product (GDP) (see Innes-Ker 2008: 14).

2. Economic and financial policies in Hong Kong

When Hong Kong returned to China in 1997, both British and Chinese governments agreed to maintain the city’s status as an international center of commerce and finance, which it had become in the second half of the 20th century. The legal foundation for this agreement was laid down in two documents. One was the Sino-British (Joint) Declaration from 1984 which set the rules for the change of sovereignty; the other was the Basic Law which still serves as the territory’s constitution today. Regarding the economy, both documents affirm that “The Hong Kong Special Administrative Region will retain the status of a free port and a separate customs territory (…) and its markets for foreign exchange, gold, securities and futures will continue (Hong Kong Baptist University 1996a).” According to the law, there shall be “free flow of capital”, and the Hong Kong government shall ”formulate monetary and financial policies, safeguard the free operation of financial business and financial markets, (…) [and] the HK dollar (…) shall continue to circulate and be freely convertible (Bowring 1997: 15).” Annex I of the Joint Declaration also points out that the SAR government is to continue to determine its economic policies “in accordance with its own needs”, and that Hong Kong’s independent participation in trade agreements and economic-based organizations such as the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), will remain unchanged (see Hong Kong Baptist University 1996b).

2.1 Policies in late imperial Hong Kong

The above-stated information implies that Hong Kong’s economic and financial policies of today were basically taken over from the British-colonial administration. One could therefore assume that the degree of economic freedom would have remained unchanged as well. But reflections on the nature of British-colonial Hong Kong are not sufficient to explain recent economic characteristics - especially the degree of economic freedom. Nevertheless, they serve as a framework and a basis of comparison. The following chapter will provide this framework by analyzing the nature of the colonial state.

2.1.1 Structural economic changes under British rule

Hong Kong owes its extraordinary economic development mainly to the British need for a “treaty port” for their trade with China. This became necessary after the Qing Empire had limited foreign access to its market, and banned the opium trade in the first half of the 19th century (see Klein 2007: 35-36). With the formation of the British colony of Hong Kong in 1843, the island was turned into a “free port” under the protection of the British common law (see Bobrowski 1994: 14). In the beginning, merchants were primarily engaged in opium smuggling as well as in “trade in coolies” (Liu 1997: 587), which means that Chinese peasants were shipped abroad to work as “contract laborers” for low costs.

Soon, Hong Kong attracted merchants from all over the world who sought to sell western goods on the Chinese market in exchange for chinaware, tea, silk, or crafts. During this period, Hong Kong developed into an “entrepôt” of China-related business, covering up to 50% of the country’s total imports and almost 40% of its exports in 1890 (see Bobrowski 1994: 15). Because of Hong Kong’s limited natural resources and since the intermediate trade has always been the colony’s “raison d’être” (Ma 2007: 19), the local industry mainly consisted of enterprises dealing with ship building and repairs. According to Liu, it was not before the early 20th century when light industry emerged in the territory (see Liu 1997: 588).

The most significant structural transformation towards an industrialized city state took place during the Chinese Revolution in the 1940s and after the Korean War in 1950. Before the outbreak of the Second World War, many Chinese enterprises moved to Hong Kong in order to escape the Japanese occupation of Shanghai and other industrialized cities along the coastline. These companies brought along large amounts of capital and qualified personnel. This led to a quick rise in factories and exported, manufactured goods (Liu 1997: 588). According to Bowring, the stream of immigrants and assets from China continued during the civil war and also after the Communist Party had promulgated the People’s Republic of China in 1949. In Hong Kong, manufacturers found an outstanding commercial infrastructure of “facilities for unloading, (…) warehousing, (…) [and] services such as agency trading, forwarding, banking, ship management, and insurance” that had been established over the years and that could now provide the organizational framework for the upcoming industrial revolution (see Bowring 1997: 10-11).

The Korean War put a sudden end to Hong Kong’s intermediate trade with China. After the United Nations had laid a severe economic embargo on the People’s Republic, the volume of Hong Kong’s exports to China dropped from 39.3% of its total exports in 1951 to only 4.2% in 1956. Imports of Chinese commodities had already been restricted in 1950 due to a US-embargo (see Bobrowski 1994: 17). The colony had no choice but to develop its own industry. This process was initially carried by waves of cheap labor forces from Chinese inland provinces, and the global trend to relocate low cost manufacturing into developing countries (see Bowring 1997: 11). In the 1950s, the textile and clothing production was the key branch of the new export oriented industry. Later, garments, plastics, rubber, chemicals, toys, and higher value-added commodities like watches and (entertainment) electronics were produced in Hong Kong (see Bobrowski 1994: 20).


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Hong Kong. The self-imposed image of "laissez-faire"
University of Tubingen  (Asia-Orient Institute, Department of Chinese and Korean Studies)
Regional Studies Greater China
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ISBN (eBook)
ISBN (Book)
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Hong Kong, Laissez-faire, government intervention, liberalism, government expenditure, marketing
Quote paper
Marco Klapper (Author), 2009, Hong Kong. The self-imposed image of "laissez-faire", Munich, GRIN Verlag, https://www.grin.com/document/143167


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