Iskander's Challenge: What Took Hong Kong So Long?
By Bryan Caplan
Iskander, a devoted EconLog reader, sent me a fascinating question. With his permission, I reprint his original email and a followup.
Dear Professor Caplan,
I was reading through some old Econlog posts, and I saw one about Hong Kong (“Statist at Heart”) where you attribute rapid post war growth to the free market policies of the British. I tend to agree with this, however I do wonder about why growth was only rapid after 1950. There was next to no institutional/political change as far as I know, yet per capita output growth was not that large in the century beforehand. I can see why wages might be held down by elastic labour supply from mainland China, but not output per capita.
In many ways the British Empire acted as if it was ruled by a cabal of free market economists. It should have led to rapid global convergence as modern technology and goods were free to flow from Europe to the rest of the world and it made sure property rights were protected. Not only European property rights, as there were a large number of Indian, Chinese, Jewish and Parsi merchants and businessmen who flourished. If a Indian merchant wanted to set up a modern factory there were very few impediments from the government, which has not been the case post 1947.
In addition, taxation was low (India’s tax to GDP ratio was around 5% in the 1920s) and it usually came in forms with low deadweight loss (lump sum land taxes, excise taxes on goods with inelastic demand).
The exceptions to this were the settler colonies which were the most badly behaved (especially in South Africa) in terms of economic freedom.
Why do you think all this led to very little growth pre-1950, if these policies made Hong Kong rich post-1950?
Dear Professor Caplan,
I’m not able to find a totally convincing answer to the question myself. That said I can imagine that economic freedom has benefits even if it doesn’t lead to rapid growth.
I think that the area of China near Hong Kong was spared from most of the fighting until the 1940s (It was the base of the Kuomintang), even then Hong Kong could have produced goods for more stable South East/ South Asia (or Europe/America given the low level of wages).
At least in India, the British only moved away from free trade after WW1. A rearguard action by pro-free trade civil servants meant that tariffs were originally given only if an Industry made the case that it would raise productivity and eventually be weaned off protection, called “discriminating protection”. Under this scheme, perhaps the only successful case of Indian “infant Industry” actually growing up came about, Tata Steel. By the 1930s the rise of nationalism and fiscal pressures (The government was on the edge of bankruptcy) led to the decline of the discriminating part of protection.
The Bombay cotton textile industry was being beaten in its home market by Japanese textiles despite cotton being shipped from India to Japan, processed there and shipped back even with 50% tariffs. An interesting thing is that both industries were using the same machines but the Japanese firms had managed to raise productivity thrice as fast as the Indian firms (as far as I can remember, this is from the work of Gregory Clark and Susan Wolcott). This was a inglorious end for the first modern textile Industry in Asia (The imperial connection and an open economy meant that India’s first modern factory came thirty years before Japan’s).
Perhaps good economic policies can only go so far without widespread change in attitudes and aspirations.
Personally, I’m tempted to blame the chaos in China from the overthrow of the Manchus until the Korean War, but I’m not married to that story. Iskander’s knowledge of colonial economic policy seems better than mine, but if I were researching this in earnest I would start by nailing down the facts.
In any case, what’s the best response to Iskander’s challenge?