By James Gwartney
and Fred McMahon
The Fraser Institute
In the Fraser Institute’s latest Economic Freedom of the World ranking, Hong Kong again tops the list as the world’s freest economy. It has occupied this position almost without exception through the past half century – but will it remain there?
The foundation for Hong Kong’s economic freedom was laid by Sir John Cowperthwaite, the financial secretary of Hong Kong from 1961 to 1971. Cowperthwaite was an old-fashion classical liberal. Like Adam Smith, he believed that the key elements of economic progress were “peace, easy taxation, and a tolerable administration of justice.”
Under British rule and Cowperthwaite’s direction, during the 1960s and 1970s, low taxes, free trade, competitive markets, limited government, sound money and rule of law characterized the Hong Kong economy.
The results: surging economic growth and higher income levels.
When Cowperthwaite became financial secretary in 1961, the per capita gross domestic product (GDP) was about 25 per cent that of Britain. Three decades later, income in Hong Kong exceeded that of the British. By 2016, the real income level of Hong Kong was more than nine times the figure of 1960. Moreover, the per capita income level of Hong Kong today is five times that of mainland China.
The rapid growth of Hong Kong didn’t go unnoticed. In the 1980s, U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher pointed to Hong Kong to support their policies of economic liberalization. Moreover, the success of Hong Kong was an important motivation for the economic liberalization of mainland China following the death of Chairman Mao.
Sadly, Hong Kong’s freedom is now threatened.
Pressures from mainland China forced Hong Kong’s legislature to consider a law that would allow the government to extradite persons accused of crimes to be tried in the mainland. This triggered protests that have continued for three months even though the government has promised to withdraw the bill.
The demonstrators are protesting the failure of the Chinese government to live up to its commitment to respect the rule of law in Hong Kong, and its commitment to a democratically-elected legislature and chief executive. China turned Hong Kong’s legislature and chief executive into mainland puppets. And the extradition treaty would have subjected Hong Kong residents and visitors to the mainland rule of law, firmly under the thumb of the Communist Party.
We have already witnessed by the Chinese government using its legal system to take two Canadian hostages, under abysmal conditions, to protest the arrest of Huawei executive Meng Wanzhou in Vancouver.
The protests have led to indefensible violence and a breakdown of the rule of law. The police have used tear gas rather indiscriminately and even posed as protesters in order to make arrests. A small minority of the protestors have also been violent.
Most egregiously, a group of protesters held two men thought to be agents of the mainland government hostage for several hours at Hong Kong’s international Airport, zip-tied the men’s hands and beat them. At times, protests have closed the airport and train stations. Actions like these undermine economic freedom and, if continued, they will damage Hong Kong’s future.
Although both sides have violated the rule of law, government abuses hold more peril than the acts of a radical fringe of protesters. The rule of law and its protection of property form the bedrock of economic freedom. When the rich and powerful can bend the law to their desire and seize property, the vast majority are denied economic freedom.
This sadly is the state of things on the mainland. Communist officials have repeatedly stated the rule of law – or, for China, rule by law – is subservient to the Communist Party, and thus helpful to corrupt government officials and their friends.
Chinese authorities and companies routinely steal intellectual property. They also expropriate with little compensation – in effect steal – their own citizens’ homes for ego-driven mega projects.
At least until 2017, the most recent comprehensive data, Hong Kong largely maintained the rule of law and the other aspects of a free economy. However, mainland appointments to high-level positions in police and government administration and other interventions are weakening the rule of law in Hong Kong. Its rating has trended down since 2009, at least partially because of mainland interference.
The broader picture is also troubling. Hong Kong is declining in the Human Freedom Index, jointly published by the Fraser Institute (Canada), the Cato Institute (United States), and the Friedrich Naumann Foundation for Freedom (Germany). This index combines a measure of economic freedom with measures of personal and civil freedom.
The situation is explosive. If the Communist Party crushes the demonstrations much as it did the 1989 Tiananmen Square protests, it would spur a major response by the rest of the world. Removal of China from the World Trade Organization and huge reductions in trade with China head the list of possibilities.
If this happens, the decade ahead will be dramatically different from the recent past, for Hong Kong, for China and for the global trading system.
James D. Gwartney is a professor of economics at Florida State University and principal author of the Economic Freedom of the World Report. Fred McMahon is the Dr. Michael A. Walker Chair of Economic Freedom Research at the Fraser Institute.