Sir John James Cowperthwaite and Hong Kong’s Domino Effect

Sir John Cowperthwaite

The world is indebted to some remarkable human beings that, from time to time, have made such momentous contributions that have virtuously impacted the entire world, changing the way it interacts. Such is the case of Sir John Cowperthwaite (1915–2006).

The Scottish born economist and statesman was the chief architect behind Hong Kong’s spectacular rise from poverty to prosperity. He was Hong Kong’s Financial Secretary between 1961 and 1971, and a worthy disciple of Adam Smith (coincidently, also a fellow  Scot—read our post The Scottish Connection).

By using a laissez-faire approach, refusing to impose trade tariffs, banning state subsidies, keeping taxes down, and reducing red tape to the extent that a new company could be registered with a one-page form, Cowperthwaite’s free-market and positive-non-intervention economic policies turned post-war Hong Kong into the thriving financial center it is today.

Sir Jonh was in terra incognita. An economic experiment of this sort had never been executed in this magnitude. Hong Kong, a British colony with a population of only 600,000 at the end of World War II, was suddenly flooded by Chinese refugees in the following years. By the 1960s, around Cowperthwaite’s time, Hong Kong had a population of over 3 million people, and still rapidly growing.

But how was it possible that a Financial Secretary could have such a profound and decisive influence in Hong Kong’s economic policy? With the benefit of hindsight, a very solid case can be made that Gandhi and his peaceful resistance paved the way for this to be possible. It was because of Gandhi that the British Empire was compelled to agree on India’s independence, and shortly thereafter, started retreating from its different colonies around the world. In Hong Kong’s case, in most likelihood, this implied a consistent and increasing detachment attitude from London, as long as things went well. This detachment allowed Cowperthwaite an incredible freedom to handle and even implement revolutionary and untested policies, like laissez faire, coupled with a minimum intervention from the state in business and society.

He took full advantage of a one-of-a-kind governance structure. The high respect he commanded was also crucial, particularly among both Hong Kong’s Chief Secretary, as well as Hong Kong’s Governor. Cowperthwaite’s influence in Hong Kong can be compared to General Douglas MacArthur’s in post-war Japan, a few decades earlier. In his first budget speech Cowperthwaite said:

“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.”

Cowperthwaite didn’t stop there, Sir John believed so strongly that government should not interfere in business that, when asked by Milton Friedman in 1963 about the scarcity of economic statistics in Hong Kong, Cowperthwaite answered: “If I let them compute those statistics, they’ll want to use them for planning”.

He was an incomparable economic practitioner, a visionary, and a great leader. In most likelihood, the Hong Kong miracle would not have existed without him.

It can be conjectured that Hong Kong’s success was vital in the rise of the other three asian tigers, and also served as a point of comparison for China, which Deng Xiaoping masterfully used. Cowperthwaite was without a doubt the father of the economic model behind the four Asian Tigers’ success. In just three decades, these exemplary countries managed to turn their very poor economies into some of the most affluent in the world. To be able to consistently and dramatically improve the living standards of a nation in just a few decades is a doable feat that all nations on earth should emulate. Unfortunately, multiple and often insuperable (in the short-term) obstacles stand in the way of it. Those obstacles have been so pervasive and powerful that very few nations have been able to capitalize on the four Asian tigers’ incredible road to success—China is a remarkable exception, though still a work in progress.

Why are most of the world’s nations socially and economically underdeveloped?

Undeniably the most important question within the realm of social sciences as well as in the economical standpoint. How to account for the abysmal performance gap that separates the developed nations from the underdeveloped ones?  Before going forward with this, let’s keep in mind that, during 2010, at the very top of the pyramid, a little less than 13% of the world’s population generated 46% ($34.29 trillion) of the world’s total output. Whereas, at the very bottom of the same pyramid, a little less than 26.5% of the world’s population only generated 3% ($2.236 trillion) of the world’s output! In between those extremes lies the majority of humanity ($38.014 trillion), most of it tilted towards the lower part of the pyramid.

There have been many attempts of explaining this question and understanding the major reasons behind it. Most of them are very agreeable. From my personal perspective, there is a fundamental element missing: simplicity. Very frequently, simplicity is the key which unlocks the most profound and complex questions, and yet we insist on making it difficult for ourselves to find the most simplest of answers!

The major reason behind the huge gap which separates the developed nations from the underdeveloped ones is a lack of a true understanding of the nature of things, in the lagging countries. In short, a lack of proper understanding (and  the corresponding implementation) of two fundamental philosophical principles:

  • Cause and effect.
  • Cost/benefit relationship.

Those two principles are very closely intertwined in every day situations, at any level, in most circumstances in life. This particular analysis is no exception.

First of all, social and economic underdevelopment is a consequence, an effect due to a well known cause. The short, obvious answer is that underdevelopment is the result of noticeable lack of appropriate organization and management in the lagging societies. As well as the lack of proper social and political leadership, another fundamental cause; a different side of the same coin.

Secondly, underdevelopment is the result of a marked lack of a proper understanding of the cost/benefit relationship. If that relationship were more appropriately practiced and understood, the majority of the underdeveloped world would swiftly move in the right direction, closing the gap with the developed nations in an accelerated manner.

Very fortunately, there are a few, quite commendable countries that indeed are closing the gap that separates them from developed nation status, at a vigorous and consistent way. Currently, among the most outstanding cases are: China, Czech Republic, Slovakia, Estonia, Poland, Croatia, Lithuania, Latvia, and Chile. Along with these countries, there are others on the tracks to development such as: India, Brazil, Russia, Mexico, Indonesia, Turkey, Kazakhstan, Trinidad and Tobago, Gabon, Mauritius, and Botswana. Finally, on the-almost-there-countries category, Israel, Slovenia and New Zealand have done a tremendous job!

China has been, rightly so, making plenty of headlines concerning its astounding rate of growth. China’s case is very particular due to a virtuously rare combination: huge population mass -the largest on Earth in a single nation- combined with an astounding economic growth rate. There are very few nations that have been growing at around 10% a year for the past three decades, China is one of them. They have found a near-perfect way to lever their poverty, making a constructive utilization of their large population mass.

Other than China, (being still a very poor country on a per capita basis) the rest of the world is either growing at a dismal pace or, in the best of cases, growing at a pace significantly below its true growth potential. In all cases, lagging countries are lagging the developed nation status by a factor of 5.8 times# (the 2010 weighted average). That is, the average lagging country will need to grow its output by about an additional 5.8 times before being able to get to the bottom of the range of a developed nation standard of living. Since the total 2010 output of the lagging countries was $40.25 trillion (the complement of the 46% aggregate of the developed nations’), the relinquished annual output amounts to a staggering $233.45 trillion, over three times the total current world output!. That is the opportunity cost of the current state of affairs. That humongous gap cannot be filled overnight, even if everything that has to be done took place right away. That gap must be closed in several decades. The beauty of it is that, in so doing, the average annual growth rate of the whole world would be increased by several points, not less than 2-3%, on many decades to come, while the catching-up materializes, depending on how many countries participate in this colossal undertaking.

It is beyond the reach of this post to get deeper into such a fascinating and promising, yet disturbing subject. In GLOBALIZATION, my book, I delve deeper into this analysis, reaching a self-sustainable solution to this most pressing problem confronting mankind.

SOURCE: Computations based on GLOBALIZATION, Opportunities and Implications, The ABCs of the Global Social Revolution, Martin Marmolejo, Appendix VI, page 693.

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