NCPA - National Center for Policy Analysis

Ironies In The Hong Kong Transfer

July 1, 1997

International economists and foreign affairs experts are noting the ironies which abound in the hand-over of the world's preeminent laissez-faire capitalist showplace to one of the world's most persistently backward nations.

Hong Kong succeeded because it rejected the Fabian socialist advice Britain handed out to its remaining possessions after World War II -- advice which has kept ex-colonies like Kenya and India in poverty to this day.

But some observers note perhaps the supreme irony is that Hong Kong will probably fare better economically under the Chinese "two-systems" approach than it would if it were being incorporated into the U.S. -- with our stifling bureaucratic regulations, incomprehensible tax code and bankrupt social service systems imposed upon it.

Economic historians credit Sir John Cowperthwaite, who was Hong Kong's financial secretary from 1961 to 1971, with the former colony's current prosperity. He developed the theory of "positive non-intervention" and put it into daily practice.

  • Writing last year in the Sunday Times of London, Peter Clarke noted: "It was one of those glorious accidents that a man unversed in the 20th Century's fad for socialism could apply his 18th Century ideas" in colonial Hong Kong.
  • Clarke continues: "Governors came and went but Cowperthwaite kept balancing budgets, lowering taxes and keeping markets open, including the market in immigrants."

Here are some of the results of Cowperthwaite's tenacious commitment to "positive non-intervention."

  • In constant 1987 dollars, per-capita Hong Kong gross domestic product soared from $2,279 in 1965 to $22,527 in three decades -- which dwarfs China's $2,900 as of 1995.
  • Life expectancy at birth in Hong Kong is 82.0 years, compared to 69.3 years in China.
  • Infant mortality in Hong Kong is 5.3 deaths per 1,000 births -- approximately one-eighth China's 41.3 per 1,000.
  • There are 666 telephone units per 1,000 Hong Kong residents, versus only 17 per 1,000 Chinese.

The maximum individual income tax rate in Hong Kong is just 15 percent, payable on a territorial basis. Only salary and profits earned in Hong Kong are taxable there. All profits from investment are tax free. Capital gains, dividend income and interest paid to individuals -- wherever earned -- are exempt from tax in Hong Kong.

By contrast, dividends in the U.S. are subject to double taxation -- with the maximum rate of each tax more than double the maximum Hong Kong corporate rate of 17.5 percent.

The ironies abound.

Sources: Nancy DeWolf Smith, "The Wisdom That Built Hong Kong's Prosperity," Wall Street Journal; James Dale Davidson and Lord William Rees-Mogg (co-authors of "Sovereign Individual"), "At Least Hong Kong Isn't Facing the IRS," Investor's Business Daily; and Editorial, "Goodbye To All That," Investor's Business Daily, all July 1, 1997.


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