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Sunday, October 2, 2022

East Asian Success Models: The miraculous transformation of Hong Kong

Similar to Singapore, Hong Kong too is mainly known for its entrepot activities. It is composed of 263 islands. The largest three islands are Hong Kong, Lamma and Chek Lap Kok. It has an area of 1095 sq km.

The location of Hong Kong made it an ideal port for Southeast China. Under the treaty of Nanking in 1842, China was forced to cede it to the British. Two further treaties, the Treaty of Kowloon in 1868 and the Treaty of New Territories in 1898, cemented this cession to the British. However, despite ceding Hong Kong to the British, the Chinese community in the island increased from 7500 in 1841 to 85,000 in 1859.

Like South Korea, Singapore, and Taiwan, Hong Kong too faced Japanese occupation during World War 2 which ended in 1945–the same year for all the four countries. It remained a British colony until 1997, after which it returned to China under a “one country, two systems” formula and is now officially called Hong Kong Special Administrative Region or Hong Kong (SAR).

Government Structure

Since 1997, the Chief Executive is the head of Hong Kong SAR and assisted by the Executive Council which aids the Chief Executive in policy making and also plays an advisory role. The Executive Council has 16 principal officials and principal non-official members. All Executive Council members serve as long as the Chief Executive serves. The Chief Executive is elected from a pool of candidates approved by the Chinese government.

Administrative and executive functions are carried out by 13 policy bureaus and 56 departments. The Legislative Council (LC) is the law-making body. Half its members are directly elected through geographical constituencies and the other half are indirectly elected through interest-group based functional constituencies. In 2014, a massive occupy protest called the ‘Umbrella Revolution’ demanding universal suffrage broke out, but eventually failed. In 2019, a proposed law that would allow extraditions to China sparked violent protests. In March 2021, China announced an overhaul of  Hong Kong’s electoral system whereby an election committee would vet candidates for the LC, thereby strengthening mainland control.

There are 18 District Councils with 458 members who serve four-year terms. There is a Judiciary which is independent from the executive and legislature, but all judges and judicial officers are appointed by the Chief Executive after recommendations by a Commission. The current Chief Executive since 2017 is Carrie Lam.


With over 7 million inhabitants, Hong Kong too has a high density of population like Singapore. Population density is 6300 people per sq km. Ethnic Chinese constitute 92% of its population. Most of these are Han Chinese.  Filipino and Indonesian are around 2.5% and 2% of the population.

Chinese folk religion called Shenism, Confucianism, Taoism, Buddhism, and Christianity are major faiths in the country.

Followers of Buddhism or Taoism constitute around 28% of the total, Protestant Christians are close to 7% and Roman Catholics are over 5%. Muslims are over 4% of the total and Hindus are close to 1.5%. Many follow Confucianism irrespective of the religion or even if they have no religious preference.

The trajectory to economic prosperity

Hong Kong’s success story is miraculous. Merely a decade after its four-year occupation until 1945, it had become one of the most prosperous regions of the Far East.

Like Singapore, Hong Kong had to follow a policy of export-oriented industrialization that led to its rapid growth. The two Asian tigers share the aspect of not having natural resources or potential for agriculture.

Mainland China was in the throes of instability after overthrowing the Manchu-led Qing imperial dynasty in 1911. China also faced a disruption in its trade due to the Great Depression in the West. These events in China, along with the Sino-Japanese war of 1937 and warring between the Chinese Nationalist Party (Kuomingtang) and the Chinese Communist Party also affected Hong Kong’s entrepot activities, as did the Korean war of 1951.

In need of revenue, China exported food and water at cheap rates to Hong Kong. This helped Hong Kong during its endeavour to expand its labour-intensive manufacturing industries.

Instability in mainland China also led to diverting of business towards Hong Kong along with movement of entrepreneurs with capital and know-how from the mainland. These entrepreneurs were beneficial for Hong Kong as they set up small and medium enterprises (SMEs), mostly textiles, garment, plastics, and electronic goods. These SMEs performed exceedingly well and exports increased from 54% of GDP in the 1960s to 64% in the 1970s.

Investment in the manufacturing sector was carried out in the 1950s and 1960s while investment in the tertiary sector comprising financial services, began in the next decade. By 1970, the country was known for its low-cost manufacturing of toys, clothes, and plastic goods among other items.

In the 1970s it also became known for its banking sector in the form of the Hongkong and Shanghai Bank, Citibank, and the Standard Chartered Bank, although it had yet to grow into an international banking centre which happened between 1970 and 1997.

By the 1980s, the contribution of the tertiary sector to GDP was higher than the manufacturing sector. By 1997, Hong Kong had transformed itself into a premier financial, business, and trade centre. As suggested in this IMF report, by 1996 it had integrated into the global service economy to become:

  • the world’s seventh largest trading entity and seventh largest stock market
  • the world’s fifth largest banking centre in terms of external financial transactions and fifth largest foreign exchange market in terms of average daily turnover
  • the world’s fourth leading source of foreign direct investment
  • the world’s busiest container port, and
  • one of the world’s most prosperous economies, with per capita GDP of US$ 24500 comparable to all but the wealthiest industrial countries.

Contributing factors

  1. A non-interventionist economic policy framework: The government provides legal and administrative back up and physical infrastructure while resource allocation is based on market signals and decided by the private sector. This enabled private firms to adapt to comparative advantage and maintain competitiveness.

The lesson is that allowing free market forces to function can overcome disadvantages relating to resource endowment. Another lesson is that embracing globalization leads to economic progress if accompanied by the right policies.  The world economy continues to be integrated through trade, finance, technology, and information flows. Between 1961 and 1971, the Financial Secretary was Sir John Coppertwaite who supported free trade and carried out a policy of non-interference. 

  1. Enabling environment with the help of appropriate macroeconomic policies: An enabling environment to manufacturing and the tertiary sectors was available through the public sector which catered to institutional factors such as an independent judiciary and impartial courts thus giving a sound legal system, property rights being protected, efficient administration, and free information flow. At the same time the regulatory framework was firm and provided for a rules based environment. The monetary, fiscal, and exchange polices in place ensured that contribution of the public sector to GDP did not exceed 20% so as to ensure that factor markets and goods markets remain flexible.

Hong Kong’s fiscal policies ensure a simple taxation system with low tax rates just enough to generate sufficient revenue for funding infrastructure. Fiscal policies favouring one industry over another were consciously avoided so as to not interfere with market-driven resource allocation. Monetary and exchange policies focus on maintaining a stable exchange rate between Hong Kong’s currency and US dollars. With no controls on capital flows, this implies that Hong Kong’s interest rates are determined by US monetary conditions. Despite the monetary authority having the ability to influence interbank liquidity and affect interest rates, these tools have sparingly been used. The primary focus has been to maintain the exchange rate. Hong Kong did face a banking crisis in the 1980s after which it carried out an overhaul of its financial regulatory framework with better disclosure requirements by banks and better auditing measures so as to ensure that internal risk management systems of banks work better.

The financial sector developed with the state playing a hands-off role by providing a proper regulatory framework while the private sector was allowed to determine which financial products to develop. The state created the Mortgage Corporation to bring interbank clearing under the monetary authority.  The hands-off approach helped the smooth flow of the factors of production across sectors based on market conditions.

These policies helped strengthen the banking system which became profitable and highly capitalized.

  1. Competitiveness nurtured through the state’s policies: The IMF study found that especially the tradable goods sector and the services sector had become highly competitive as a result of the macroeconomic policies. These sectors included wholesale and import/export trade, finance and business services, transport, and communications and showed a high level of efficiency of channelling resources to the most productive and efficient uses. As a result, they grew at close to double digit annual rates from the 1980s. Labour and other resources guided by market forces moved from manufacturing to these services sectors.

Non-tradable services (restaurants and hotels, domestic transport, real estate, retail trade) performed relatively less well, with the manufacturing and tradable services growing on average twice as fast as non-tradable services. Productivity growth in the tradable industries also rose much faster than in the case of non-tradable services. To combat this, the state attempted progressive deregulation for the non-traded goods sector to increase competition.


Currently, Hong Kong has a per capita GDP of close to $60,000 vis-a-vis Bharat’s per capita GDP of nearly $12,000. Its ranking in ease of doing business is third only after New Zealand and Singapore. Although Bharat has risen 14 points in this ranking recently, it still ranks only at 63 in this index. Just like Singapore, a proper regulatory framework enforced properly, impartial courts, and a policy of free trade all contributed to its success. The Judiciary is independent but has no jurisdiction to interfere either in law making or in executive functions. Bharat must ensure a similar separation for providing a good enabling environment for progress.

Featured Image Source: blogandjournal.com

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