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Cowperthwaite’s forgotten legacy to Hong Kong

(Next Magazine, 2016/11/3, A002, Second Opinion, Bill Stacey)

Read the Hansard record of Legco from the 1960s and you discover a very different political milieu. Many of the issues debated then shaped the Hong Kong of today. The courtesy of legislators addressing each other as “my Honourable friend” was only matched by the sharp tongue and wit brought to bear on vital issues. This was no rubber-stamp colonial parliament, the people of Hong Kong being well represented in the chamber by eminent Chinese and business people and civil servants with a strong sense of duty to justify the public trust in their judgment.

At the center of the debates was the Financial Secretary of the time, Sir John Cowperthwaite, a Scot.  He is remembered today by free marketeers the world over as a champion of “free market capitalism”, with low taxation, lean regulation, and prudent financial management. But there are also criticisms against him, largely based on the writings of aggrieved civil servants whose grand plans he thwarted.

Recently SCMP columnist Tom Holland wrote of Cowperthwaite that “In reality he wasn’t cut from the same cloth as the Austrian school of free market economists, so much as those 19th century British officials who believed that all a gentleman needed to administer the colonies was a stiff upper lip, a fly whisk, and the ability to construe Homer in classical Greek.” Holland went on to accuse Cowperthwaite as the culprit of the 1965 banking crisis due to his incompetence, i.e. not being able to read a bank balance sheet, and neglect.

This caricature is wrong. Cowperthwaite was no amateur, but had deep economic knowledge, and was inducted into the Mont Pelerin Society, founded by F. A. Hayek, the father of modern Austrian economics.

Cowperthwaite lectured legislators on the limitations of double-entry bookkeeping, and was the architect of banking reforms that were drafted well before the crisis, but resisted by industry. He attributed Hong Kong’s swift recovery from the crisis partly to the restrained response of the government and said “if we cannot rely on the judgment of individual businessmen taking their own risks, we have no future anyway.”

His most passionate concerns were avoiding waste, ensuring that when public money was spent it went to the genuinely poor and needy, not caving in to vested interests, particularly from business, and ensuring that Hong Kong maintained its financial autonomy. He believed that these things could best be achieved by prudent ambitions that built necessary public services efficiently and within our means.

He pioneered five-year forward forecasts and, contrary to myth, had a wide command of data and statistics. Yet because of that command he understood that much statistical work is more art than science. He thus eschewed the use of data for economic plans, which he believed were best left to businesses.

Cowperthwaite both raised and lowered taxes in response to budgetary necessity, but not fashionable macro policy. He observed that “we have an un-Keynesian economy in the sense that we cannot spend our way out of depression.” He understood that for all spending “the cost does not fall on the Government, but on the community …, more specifically the taxpayer.”

Hong Kong was an international financial center and he realised that “money comes here and stays here because it can go if it wants to”, so he was against exchange control.

Rival civil servants resented his preference for efficient services that benefited everyone, rather than gilt-edged housing and education plans that benefited a few. In the mid-1960s, he caused a furore amongst the privileged by insisting that drivers should pay a full market price for public parking spaces. He even advocated senior civil servants paying for their parking privileges.

The wisdom learnt from the experience of our most prosperous era, which is neglected at our cost, reminds us that, “in the long run, the aggregate decisions of individual businessmen, exercising individual judgement in a free economy, even if often mistaken, is likely to do less harm than the centralised decisions of a Government; and certainly the harm is likely to be counteracted faster”.

Bill Stacey