Hong Kong prides itself on being the freest economy in the world, but this month Chief Executive CY Leung declared that the "positive non-intervention" policy is outdated.
Is this the end of the laissez-faire philosophy that has served Hong Kong successfully for the last half-century?
The phrase “positive non-intervention” is attributed to Sir John Cowperthwaite, Hong Kong financial secretary from 1961 to ’71, and a Scotsman who inherited the moral philosophy of his countryman Adam Smith. His first speech as financial secretary underscored his approach to markets: “In the long run, the aggregate of decisions of individual businessmen, exercising individual judgement in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster.”
Whether one likes it or not, history has shown that Cowperthwaite was more right than wrong. Notice that he did not say that investors might not panic (as in recent share crashes) or that governments do not have a role in markets. He was simply making a statement that decisions in a world of uncertainty are better made by markets. That philosophy is also built into the new thinking of the Communist Party of China, where planners recognise that markets are better at innovation, job creation and resource allocation than the state. State-owned enterprises are good at building infrastructure where there was none, but in terms of product and service generation and profits, the markets beat state-run institutions.
In the debate between state and market, there has been too much of a tendency to see the issue as black and white, whereas Cowperthwaite’s dictum of positive non-interventionism fitted the Chinese dialectic philosophy of wei wu wei – “action without action”. There is always room for intervention, even if the natural order of markets follows the Tao.
Firstly, the philosophy was eminently realistic, practical and efficient. The British colonial government in the 1960s had limited resources and limited skills, whereas the Hong Kong entrepreneurs were hungry, creative, hard working and risk-taking in abundance. By running balanced budgets, sound money and fair markets, he simply let loose the entrepreneurial spirit to find new markets and sources of profit.
Secondly, positive non-intervention did not mean no intervention. The fact that Hong Kong had good transport infrastructure, one-third of the population in public housing, heavily subsidised healthcare and education was down to real state intervention.
Thirdly, the state worked hand in hand with the market, not against it.
The counter-examples against the Hong Kong philosophy are Singapore and South Korea. Yet these examples fail to point out that the comparative advantages were very different. Both countries saw their survival as geopolitical, with a need to spend hugely on defence, which necessitated quick wins in industrialisation, with the Koreans moving very rapidly in heavy engineering and technology through large family businesses (chaebols). Singapore relied more on government-linked companies to drive investment and growth, while welcoming multinationals. On the other hand, Hong Kong had more than its fair share of home-grown entrepreneurs as well as an open door to external talent.
What the three economies shared in common was heavy state funding of education, healthcare and infrastructure.
The difference between Hong Kong and the other two civil services was one of philosophy. The Hong Kong civil service understood in its bones that the market was smarter, and that if it ain’t broke, don’t fix it. The other two had to intervene because of geopolitical needs.
What has changed in Hong Kong is the politics post-1997. The polarisation of political views meant that the Hong Kong government became paralysed in exactly its areas of previous strength: education, innovation (technological catch-up) and infrastructure (still good, but creaking at the seams). The civil service is now caught between politics, the social media and genuine social needs. When top civil servants have to spend more time answering questions in the legislature and the media, rather than getting on with the job, it’s no surprise that the mentality is switching from one of “can-do” to one of “can’t do, no mistakes … wait for retirement?”
Positive non-interventionism is not wrong – it’s just that the context has changed, whereas the politics has not. With strong reserves and openness to global talent but high costs, the business community is asking whether they can concentrate their resources on business or should they be worried about more state intervention? If the latter, can the Hong Kong government deliver them more business-friendly incentives than competing governments elsewhere?
The long game for Hong Kong is structural – how can it build up its talent into positively benefiting from the Internet Age, rather than negatively protesting against anything that moves? While Hong Kong citizens are still debating about who is right or wrong, its competitors are already upping the game. The centre of gravity is shifting outside Hong Kong – Shenzhen, Singapore, Shanghai, Seoul and Sydney are vigorously becoming alternative centres of culture, innovation and creativity.
Thus, the issue is still about local politics, not about business. To blame the civil service for not being in sync with the leadership is the wrong game. Even if the bureaucracy is willing to follow the new change in philosophy, it can’t get past the current meat-grinder of a political process.
The politics in Hong Kong is a quagmire because both sides see issues in black and white. One thinks that democracy is all about one person, one vote, and the other thinks that it’s possible to do business as usual.
John Cowperthwaite was the right man at the right time, because he melded Scottish moral philosophy with Chinese dialectic pragmatism. To get anything done, the Chinese philosophy has always been about three things: timing, geography and social unity. With Hong Kong geographically located in still the fastest growing region in the world, the only thing that is lacking to move forward is social unity.
And how to get social unity is clearly the responsibility of Hong Kong’s leadership, at all levels.
Andrew Sheng writes on Asian issues.