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Book review

November 2017

Title: Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong

Author: Neil Monnery

Publisher: London Publishing Partnership

Whether Hong Kong, with its stratospheric property prices and oligopolistic businesses, is the world’s freest economy is debatable, but there’s no denying that its open markets roots run deep.

The light-touch policy that opened Hong Kong to global business was a response to the devastation of World War II and the influx of capital and ideas after the subsequent Communist revolution in China. But it wasn’t until the 1960s that “laissez faire” was formalized.

It was the crowning achievement for the public service career of Sir John Cowperthwaite, Hong Kong’s financial secretary from 1961 to 1971. Though later tweaked by his successor, Sir Philip Haddon-Cave, into “positive non-intervention,” the principles and effects were largely the same: the government would leave business decisions to the business people, but provide a policy framework under which they could thrive.

Management consultant Neil Monnery, in Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong, tells how a young economist ran contrary to established thought. When industrialized societies – including the United Kingdom, Hong Kong’s colonial power – were focusing on nationalization, central planning and increased public spending financed by higher taxes, Cowperthwaite took the opposite path and rebuilt Hong Kong on the principles of small government.

Cowperthwaite created the foundation for policies such as low taxes, fiscal prudence and free trade that helped transform a poor backwater of Britain’s dwindling empire into an international centre for business, finance and trade.

He had arrived in Hong Kong after liberation in 1945 and was assigned to the Department of Supplies, Transport and Industry, scouring the Asia-Pacific region for essentials such as coal and rice, managed distribution and enforced price controls.

While that statist approach might have been necessary after the war – Hong Kong was run in 1945-46 by a military government – Cowperthwaite, as he rose through the civil service ranks, became convinced that long-term prosperity hinged on capitalism unfettered by bureaucratic policy.

Cowperthwaite, a follower of the classical economics of Adam Smith, admired Hong Kong entrepreneurialism. When he banned the export of scarce glass, companies exported bottles. When he banned bottle exports, they exported broken bottles. When he banned all empty-bottle exports, they exported bottles of coloured water. He was more impressed than angered, says Monnery.

The admiration wasn’t always returned. In office, he refused to subsidize private companies, sparking anger from business people. When Hong Kong’s earliest industries – wig-making and cotton-spinning – hit trouble, he let them die. Forced to innovate, entrepreneurs shifted to toys, then electronics.

Yet Cowperthwaite could be unnecessarily dogmatic, banning economic data. “[The] leverage exercised by government on the economy is so small that it is not necessary, nor even of any particular value, to have these figures available for the formulation of policy,” he once said.

His trust in the markets enabled him to eschew official responsibility for setbacks. In a clash with executive councillor Yuet-keung Kan over the 1965 banking crisis, Cowperthwaite rejected suggestions that the government should have seen a credit and real estate bubble forming.

Another criticism levelled at Cowperthwaite is that he lacked affinity with the poor. Public housing support was kept to a minimum, leading to tiny flats. Cowperthwaite was unrepentant, arguing that state spending should focus only on the very needy. “Rapid growth of the economy… produces a rapid and substantial redistribution of income [and] makes it possible to assist more generously those who are not… sharing in the general advance,” he said.

On retirement, Cowperthwaite became an adviser to Jardine Fleming until 1981, when he returned to his native Scotland where he died in 2006 aged 90.

Cowperthwaite’s policies have resonance today. The high price of property and the lack of competition in areas such as retailing and telecommunications are directly related to his laissez faire principles. Well-heeled companies simply pushed smaller rivals into extinction.

The present government appears to be leaning more towards “positive intervention” with its overt promotion and funding of innovation. Hong Kong businesses – whether selling artificial flowers in the 1960s or luxury goods in the 2010s – have traditionally spent little on research and development. Could an earlier nudge from government have steered them into better preparation? Sir John Cowperthwaite would have given a resounding “No.”

Author interview: Neil Monnery

It is perhaps ironic that a career based on crunching numbers should have led Neil Monnery to the famously data-averse Sir John Cowperthwaite. Monnery, a management consultant and corporate strategist, discovered the former Hong Kong financial secretary while researching recoveries from the global financial crisis that began a decade ago.

He had been struck by how few economies had seen robust growth. “I know there’s a lot of people talk about nominal gross domestic product growth but we were really much more interested in real GDP per capita and median incomes,” he says during a stop in Washington, D.C., while promoting his book.

One exception, Monnery noticed, was Hong Kong, and he started to delve into possible historical reasons for the territory’s resilience. Combing through records, his eye quickly settled on Cowperthwaite and the critical period in which he held the top financial job, encompassing the 1967 riots sparked by the Cultural Revolution in China and numerous banking crises.

Educated at Oxford University and Harvard Business School, Monnery spent more than two decades with the Boston Consulting Group. Since 2011, he has been Director of the Ashridge Strategic Management Centre, a think tank in London focused on corporate performance. He published his first book, Safe as Houses? A Historical Analysis of Property Prices, in 2011.

Cowperthwaite’s reticence about his achievements made research into his life difficult. He had died in 2006 and had not written down any significant memoirs. Monnery is grateful for archival material in Hong Kong. “The Hong Kong archives are absolutely wonderful and staffed by wonderfully helpful people.”

Despite his self-assurance and somewhat prolix public speaking, Cowperthwaite saw himself operating behind the scenes. “The reasons were perhaps twofold,” says Monnery. “One was his character, his shyness, but also because he believed the people of Hong Kong created the success. He never saw himself as the primary agent… it was done by entrepreneurs [and] people working in factories.”

Monnery believes the heart of Cowperthwaite’s story is the transformation of an interventionist bureaucrat into a supporter of free markets. “He faced accounting problems, management problems, and realized that he had to pull back,” he says.

He says libertarians should not read too much into Cowperthwaite’s overall economic philosophy. “He was not doctrinaire… he was very concerned where market failure occurred, like monopolies. He was also of the Adam Smith view that companies and private enterprise act in their own interests.”