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01 / 05
Monnery: Human Progress in Cuba and Hong Kong, Pt. 1

Blog Post | Economic Growth

Monnery: Human Progress in Cuba and Hong Kong, Pt. 1

Sixty years of outstanding human progress in Hong Kong.

As World War II drew to a close, few visitors to Hong Kong would have predicted that this “barren island” would be the setting for one of the most impressive surges of human progress that the world has yet seen. Four years of Japanese occupation had more than halved the population, left factories stripped bare, and ended normal commercial activity.

Although a British colony, the mother-country had no resources to provide any meaningful financial support. All it could offer was the rule or law, good governance, and a willingness to get out of the way of those people who were trying to rebuild their businesses.

Happily, that was enough, and the people of Hong Kong quickly re-established the entrepôt trade with China. The population rebounded and incomes per capita rose back to their pre-war level of around $4,000 per annum (in 2018 PPP adjusted dollars).

But just as stability returned, the United States imposed a total ban on Sino-American trade as Mao’s communist China entered the Korean War. The dominant entrepôt trade collapsed, and one visiting American journalist could, once-more, describe Hong Kong as a “dying city.”

Instead, textile activity surged. In 1949-50, Hong Kong provided a home to textile entrepreneurs fleeing communist China and alongside local entrepreneurs they established 1,400 textile factories employing 80,000 people. By 1970, 17,000 factories directly employed 600,000 workers.

That provoked stiff opposition from the supposedly free-trade United Kingdom and United States as imports undermined the two countries’ uncompetitive domestic industries. Prime Minister Macmillan and President Kennedy attempted to limit Hong Kong’s exports. With impediments to growth in their two key export markets, leaders in Hong Kong debated whether to abandon their previous laissez-faire capitalist policies in favor of the regulation and planning that was common elsewhere.

Fortuitously, the key policymaker was John Cowperthwaite, Financial Secretary between 1961 and 1971. He had championed the laissez-faire approach since he arrived in Hong Kong in 1945. When in charge of Hong Kong’s Department of Supplies, Trade and Industry in the immediate post-war period, he had learned how dynamic capitalism could be, and how difficult it was for government to outperform commercial companies in competitive markets. Having then spent a decade as Deputy Financial Secretary, no-one was more knowledgeable about Hong Kong’s economic policy than him. A student of classical economics, especially the Scottish economist Adam Smith, he did not take long to confirm that Hong Kong would not turn away from its free-market, capitalist, open laissez-faire economy.

So, for over six decades Hong Kong has pursued a policy of “positive non-interventionism,” which Cowperthwaite’s successor described as “taking the view that it is normally futile and damaging to the growth rate of an economy for the government to attempt to plan the allocation of resources available to the private sector and to frustrate market forces, no matter how uncomfortable may be their short term consequences.”

Cowperthwaite’s policy was not non-interventionism, as some have alleged. He limited and regulated monopolies, fought corruption and collusion, learnt to restrict unsafe banking practices, and intervened where he thought he saw market failure, most notably in the provision of low-cost housing. Rather, Cowperthwaite believed that human progress would best be served by a skeptical stance toward proposed government intervention.

It required constant vigilance not to drift into economic activism. At one point, for example, commentators forecast calamity as Hong Kong was forced to accept quotas on the export of natural cotton to the United States and Britain. In fact, industrialists quickly moved to more value-added cotton products and to clothing. As competition and export restrictions slowed that kind of growth, industrialists moved into synthetic fibers.

As those sectors declined, rather than the economy stalling, new sectors such as plastic toys and flowers blossomed. As those sectors wilted, electronic assembly and radios produced even better paid jobs. And so, trusting in market solutions was vindicated. Growth continued, with resources shifting between manufacturing sectors, and then through ever more complex and value-added services to create the advanced economy that is apparent from the gleaming skyline of today’s Hong Kong.

A belief that low taxation would maximize investment and growth, combined with prudent fiscal policy, meant that social provision followed rather than preceded economic success. But follow it did. Life expectancy is up from 63 in 1950 to 85 today, the highest in the world. In 1950, an American could expect to live five years longer than someone from Hong Kong. Now it is five years less. In 2018, the PISA survey ranked Hong Kong as 4th in reading, 4th in math, and 9th in science. The United States placed 13th, 37th, and 18th respectively. The number of students studying for first degrees rose from 700 in 1950 (with half studying medicine) to over 100,000 today. In two generations GDP per capita has risen from below $4,500 in 1950 to $64,000 in 2018, thus illustrating the power of compounding at 4 percent growth for two generations. In 1950, Hong Kong’s GDP per capita was around one third of Britain’s; now it is 40 percent higher.

These are uncertain times for Hong Kong. However, whatever the future may hold for Hong Kong, the period since World War II should receive more attention than it does. It is perhaps the best example of policies delivering human progress and prosperity that we have seen to date.

More from this series:

Part 2: Cuba

Part 3: Comparison and Summary

Author

  • Neil Monnery has recently published "A Tale of Two Economies: Hong Kong, Cuba and the Two Men who Shaped them (2019)." He previously wrote "Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong (2017)." He studied at Exeter College, Oxford, and at the Harvard Business School. Between 1983 and 2004, he worked at The Boston Consulting Group as a Director and Senior Vice President. He was Group Strategy Director of WH Smith between 2004 and 2014 and Chairman of Smiths News. He is a Director at Ashridge Strategic Management Centre.

Buenos Aires Times | Macroeconomic Environment

Milei Cools Argentina Wholesale Inflation to Lowest Since 2020

“Argentine President Javier Milei notched another economic victory Tuesday after data showed wholesale prices declined in May for the first time since the height of the pandemic, adding to his momentum before October midterm elections. 

The producer price index fell 0.3 percent from April and rose 22.4 percent on the year, according data from the INDEC national statistics bureau. It’s a sharp turnaround from December 2023, Milei’s first month in office, when wholesale monthly prices soared 54 percent. The libertarian often uses the indicator to warn that Argentina was nearing hyperinflation due to his predecessor’s policies. 

Local prices stayed constant while prices for imported products fell 4.1 percent, according to the monthly report. Economy Minister Luis Caputo celebrated the good news on X.

Discounting pandemic data that saw demand plummet, the May print is the lowest in the series, which begins in 2016, Caputo wrote.

In May, monthly consumer price increases also cooled to their slowest pace in five years to 1.5 percent.”

From Buenos Aires Times.

Buenos Aires Times | Macroeconomic Environment

Inflation in Buenos Aires City Slows to Monthly 1.6 Percent

“Consumer prices in Buenos Aires City rose 1.6 percent in May, lower than the expectations of most analysts and a slowdown from the previous month.

The news will be welcomed by President Javier Milei’s national government, which is awaiting the publishing of the INDEC national statistics bureau’s national figure later this week.

According to data from the Buenos Aires City Statistics Office, prices in the capital were up 1.6 percent, down from the 2.3 percent recorded in April. Most private consultancy firms expected a rate of around two percent.

Inflation so far this year in the capital totals 12.9 percent – a massive drop on the 48.3 percent recorded over the same period in 2024.”

From Buenos Aires Times.

The Economist | Macroeconomic Environment

America Is in the Midst of an Extraordinary Startup Boom

“Last year applications to form businesses reached 5.5m, a record. Although they have slowed a touch this year, the monthly average is still about 80% higher than during the decade prior to covid, compared with just a 20% rise in Europe. Startups normally play an outsized role in creating employment in America, as elsewhere. By definition, every startup job counts as new, whereas mature companies have more churn. That difference has become even starker. In the four years before the pandemic, established firms added one net job for every four created by startups; in the four years since the pandemic, established firms have actually lost one job for every four created by startups.

Perhaps even more important than the numbers is the kind of ventures that are being created. In 2020 and 2021 many startups catered to the working-from-home revolution. These included online retailers, small trucking firms and landscapers. Since mid-2022, however, the baton has been passed to technology firms, according to Ryan Decker of the Fed and John Haltiwanger of the University of Maryland. A paper published in March by the Census Bureau found a particularly sharp increase last year in business applications based around artificial intelligence. For researchers, this carries echoes of the 1990s, when computers and the internet took off.”

From The Economist.

Blog Post | Economics

Javier Milei and the Future of Latin America | Podcast Highlights

Chelsea Follett interviews Daniel Raisbeck about the recent election of Javier Milei and what it means for the future of Argentina and the rest of Latin America.

Listen to the full podcast episode or read the full transcript here.

What are some of the most promising events in Latin America today?

Of course, the election of Javier Milei. He took office on December 10th, and it’s all quite encouraging. He had a large decree that repealed many laws and modified others to liberate the Argentine economy, which is currently one of the most regulated economies in the world.

It will depend, of course, on congress and the courts which can potentially block many of his initiatives. Here at Cato, my colleague Gabriel Calderon and I have focused on his main proposal: the dollarization of Argentina’s economy. In general, we think it’s a very good policy, but in that respect, I’ve been disappointed with the beginning of Milei’s government. We can discuss that further if you like.

First, let’s set the stage. Could you describe the situation in Argentina before Milei?

Well, the main problem was inflation, which was around 140 percent at the time of his election in November. And, of course, this is caused by the central bank. Argentina’s central bank is particularly irresponsible even within a Latin American context. Argentina also has one of the most regulated economies in the world. Forty percent of the population is living in poverty, and its economy hasn’t grown in over a decade.

This is especially sad because Argentina was incredibly successful in the 19th century. Its 1853 constitution was drafted based on the ideas of a classical liberal author called Juan Bautista Alberdi, who basically called for free trade, unrestricted industry, free immigration, and infrastructure to connect the country. And that’s what they did. It wasn’t immediate; it took a few decades, but from 1880 to 1916, you had this very successful export model that made Argentina into one of the richest countries in the world. Then, in 1916 and 1920, with everything that was happening in the world, nationalism took hold in Argentina and eventually morphed into Peronism, which is the standard, prototypical Latin American corporatist ideology. There has been a very clear decline ever since.

Could you talk more about Milei’s political beliefs?

Milei describes himself as a classical liberal or a libertarian and even as an anarcho-capitalist. He was actually trained as a neoclassical economist, but he relatively recently became an adherent of the Austrian School. And he’s been very open about it. He has never tried to soften his stances to appease some section of the electorate. He is also very talented at explaining economic concepts like the causes of inflation or the effects of regulation in a way that the public can understand.

Can you talk a little bit about the classical liberal tradition in Argentina?

Argentina has many classical liberal economists. At a per capita level, it’s probably the highest percentage in Latin America. They also have a long tradition of think tanks beginning in the 1950s. One particular think tank was started by a gentleman called Alberto Benegas Lynch, who corresponded with Ludwig von Mises and Friedrich Hayek. So, Argentina has a rich intellectual tradition in the Austrian School.

You mentioned dollarization. Could you talk more about this policy?

Dollarization means granting the US dollar legal tender or at least getting rid of exclusive legal tender for a national currency. Panama was born dollarized in 1904, and more recently, Ecuador dollarized in 2000 amid a crisis similar to what Argentina is facing now. El Salvador dollarized in 2001 after facing a similar crisis the previous decade.

When you dollarize, you end up with inflation levels akin to those of the United States. That might seem high from a US perspective after the last few years, but when you have 140 percent inflation in Argentina, 7 or 8 percent isn’t so bad. And even with all the problems with the US Federal Reserve, when you compare that to other countries, the dollar is a good option. By taking away the power of local politicians to interfere in the monetary sphere, you get rid of a huge problem. Now, that doesn’t solve all other problems. The governments can still run deficits and have debt problems. But when you have dollarization, those debt problems don’t really affect the private sector and regular citizens. Whereas with a national currency, a debt crisis usually leads to the deterioration of the currency and a loss in purchasing power.

Maintaining that purchasing power is why nobody is thinking about dedollarizing in these countries. Even in Ecuador, when the left-wing strongman Rafael Correa was at the peak of his power and popularity, with 60 percent or above in approval ratings, the dollar was always more popular than he was. That’s also why we think it’s important for Milei to dollarize and dollarize quickly. If the Peronists come back to power, they could overturn a lot of his deregulatory measures, but dollarization would be very difficult for any future government to reverse.

How hopeful are you that he’ll be able to implement dollarization?

Milei had to join forces with former President Mauricio Macri’s party to win the election, and many people in that party do not favor dollarization. Luis Caputo, the person that Milei put in charge of the finance ministry, who was also one of Macri’s finance ministers, has previously spoken out against dollarization. More recently, he has taken the view that the fiscal issue is more important and that dollarization will be a consequence of stabilizing the economy.

Caputo’s plan involves liquefying the debt through inflation. But the thing with liquefying the government debt is that you’re also liquefying everyone’s savings and salary. So, it’s a bold and even dangerous alternative. I also think that dollarization involves a similar process because once the market realizes you’re serious about dollarizing, the obvious thing would be for inflation to begin to fall and for interest rates to come down, but without destroying purchasing power even more. And I think that would be the better scenario.

It’s not clear if this decision was made out of political necessity or if Milei actually believes in what Caputo is doing. Dollarization is a niche policy that only three small countries have accomplished. Even though it’s been terribly successful, especially in bringing down inflation, relatively few economists understand dollarization and how to bring it about.

What other policies has Milei proposed?

His decree and omnibus law aim to deregulate broad swaths of the Argentine economy. One example is they got rid of price controls for rents that dated back to the 1970s. Another one is the Open Skies policy, which allows airlines from abroad to enter the market and even control flights within the country. Previously, they had a scheme to undercut the low-cost airlines in favor of the national airline, which is heavily subsidized. Milei even said he is privatizing the national airline by handing it over to the workers and cutting subsidies. But there’s a wide scope of reforms. These are just some highlights.

Let’s talk about Latin America as a whole. What are some of the biggest obstacles to the region becoming more prosperous?

One that is not well known is the lack of trade within the region. There is a mostly common language and very similar institutions and historical backgrounds, so you would think Latin America is an ideal region for trade. But trading between countries is very difficult. It’s also very difficult to migrate from one Latin American country to another. For instance, Colombia, where I’m from, restricts how many foreigners companies can hire. And this is standard across the region.

Another major problem is that there hasn’t been a very strong classical liberal element in Latin American politics. In the Anglosphere, you had Thatcherism and Reaganism and these types of movements, but the Latin American right has traditionally been very protectionist and corporatist. A right-wing government in Latin America, especially after the era of military dictatorships, might not bring about a humanitarian collapse like in Venezuela, but at the same time, these governments don’t allow their economies to grow. And, of course, if you don’t grow, you won’t be able to lift people out of poverty. That’s the big problem in Latin America: anemic economic growth. And it’s a question of how conscious people are that you need freedom to have that economic growth.

So that’s also why Milei is interesting. He is, of course, breaking from the leftist model but also from the crony capitalist, protectionist, and interventionist right.

We usually try to end on a positive note. What are you the most optimistic about concerning the region’s future?

I’m not going to be terribly original here, but five years ago, if someone had told me that, in a few years, there would be an openly libertarian or anarcho-capitalist president of Argentina, I wouldn’t have believed them. And this is where we are. And I think the lesson is that sometimes it might seem very difficult to enact freedom-oriented reforms, but it can be done. It is being done now. And it’s being done by someone who was very radical in his approach. He wasn’t moderating his principles to convince centrists. He was straightforward. And I think that’s a very positive example to follow.