Hong Kong’s third year as a Special Administrative Region of China begins today. But no one should forget that its long‐term future, like its past, will depend on the protection and evolution of institutions that are conducive to economic and personal freedom. Hong Kong cannot afford to allow corruption to creep into its institutional infrastructure if it wants to preserve its legacy as the crown jewel of market liberalism.
The principle of non‐intervention that has served the former colony so well — as Sir John Cowperthwaite, financial secretary from 1961 to 1971, constantly reminded Hong Kong’s Legislative Council — must not give way to pressures for a “third way.” If mainland China is to become more like Hong Kong, rather than the reverse, the private market must rule, not some mixed system of “market socialism” or “state capitalism.”
The danger to the Special Administrative Region (SAR) comes more from internal than external forces. Thus far Beijing has followed its promise “to keep Hong Kong’s economic institutions unchanged for 50 years,” but voices inside the former colony have begun to question the principle of non‐intervention.
Even before the transition, C.H. Tung, the SAR’s first chief executive, stated that post‐British Hong Kong might have to reconsider its policy of laissez‐faire capitalism. He told the Chinese Chamber of Commerce that “a non‐interference policy would not meet the needs and strengthen the competitiveness” of the new Hong Kong.
Although Tung has maintained Hong Kong’s ranking as the world’s freest economy, there are signs that threaten that status. In particular, the SAR’s support of stock prices at the height of the Asian financial crisis was a clear violation of free‐market principles. The turmoil brought about by the financial crisis is best dealt with not by undermining markets, but by strengthening them.
Economic life must be insulated from politics if Hong Kong is to retain its legacy. Private property and freedom of contract are essential institutions for free markets and free people. Those who rightly advocate democracy for the SAR must also remember that true democracy is inseparable from the so‐called voluntary principle, which calls for limited government in the defense of liberty.
Too often strict majority rule has violated the voluntary principle by leading to excessive government. In moving toward a democratic system, the people of Hong Kong should recall the words of John O’Sullivan, who in 1837 wrote in the U.S. Magazine and Democratic Review:
“This is the fundamental principle of the philosophy of democracy, to furnish a system of the administration of justice, and then to leave all the business and interests of society to themselves, to free competition and association — in a word, to the voluntary principle.”
Here “justice” simply means the protection of persons and property, not the redistribution of income to achieve “social justice” — a quest that the late economist F.A. Hayek called a “fatal conceit.”
For O’Sullivan, as for the framers of the U.S. Constitution, “The natural laws which will establish themselves and find their own level are the best laws.” The common‐law tradition of Hong Kong should be the basis for a permanent rule of law that enshrines the principles of freedom and democracy — not just for the SAR but for all of China.
Hong Kong’s institutions — its set of formal and informal rules — ultimately are shaped by the ethos of society. Hong Kong’s ethos of liberty has created a dynamic spontaneous order. Free trade and limited government have provided the opportunities for millions of individuals to use their natural talents to produce a better life for themselves and their families.
In 1844, the British colonial treasurer in Hong Kong, Robert Montgomery Martin, predicted, “There does not appear the slightest probability that, under any circumstances, Hong Kong will ever become a place of trade.” His miscalculation was to overlook the importance of the rule of law and other institutions that have made Hong Kong the freest economy in the world. He looked only at physical resources at the time.
Will creeping socialism destroy Hong Kong’s institutions and take it back to the conditions of 1844? Or will the ethos of liberty prevail, and infuse Hong Kong’s institutions with a new vitality for the 21st century, a vitality that will spill over to the mainland and bring about greater freedom and prosperity for all of China?