January 2018 newsletter – Sir John Cowperthwaite and the making of Hong Kong

It is now twenty years since Hong Kong was handed over to China. At the time it was already one of the most prosperous nations on earth. Its per capita GDP is now 40 per cent higher than that of the UK. Much of its success is due to the role played by Sir John Cowperthwaite, deputy and then actual financial secretary until hs retirement in 1971. Neil Monnery1 explains.

Adam Smith’s simple description of a pin factory retains its relevance and richness despite having been penned over two centuries ago. He observed that a single worker doing all eighteen steps involved in making a pin would be unable to make more than 20 pins in a day. But with the division of labour, a team of workers, each focussed on just one part of the process, could make up to 4,800 pins per worker per day. Smith’s example illustrated the benefits of specialisation and scale. With other examples, he generalised that specialisation drives output because each worker becomes more dexterous at their specialised step, saves time in shifting from one step to another, and can develop tools that increase their productivity.

Smith called the manufacturing of pins ‘a very trifling example’ of the great commercial enterprises of his time. But it is highlighted on page 2 of The Wealth of Nations because he wants to show that much of his theory of the world can be derived from this simple illustration. Smith used his pin example both to extrapolate his more general theory, and to test it in the real world. His was an economics drawn from detailed observation, and intended to apply to the practical issues of the day.

Sir John Cowperthwaite, who was deputy and actual finance minister for Hong Kong between 1951 and 1971, was enormously influenced by his study of Smith. Cowperthwaite more than anyone laid the economic policy foundations that drove Hong Kong’s remarkable post-war economic growth. In the 1950s Hong Kong’s (PPP adjusted) GDP per capita was around 30 per cent of that of its mother country, Britain. Now it has a GDP per capita that is 40 per cent higher. In two generations Hong Kong has not only achieved the growth in living standards that Britain delivered between 1835 and today, but it has surpassed that to enjoy prosperity equal to that of the United States and Switzerland. And it is not just its wealth that has overtaken Britain’s; so too has its longevity and educational performance.

Cowperthwaite’s first job after arriving in Hong Kong in 1945 was in the Industry and Supplies department. This department was charged with finding and importing food and basic supplies in a desolate post-war environment, and to somehow get industry back on its feet. Cowperthwaite was thrown in the deep end and he learnt life-long lessons from this experience in the real world.
One job was to stop the export of rationed or scare products, for example glass. In many ways it too was a trifling example. But he noticed that shortly after the exportation of glass was banned that several dealers were exporting glass bottles that were then recycled abroad. The government banned the export of glass bottles. Then he discovered that dealers were exporting broken bottles, since there was no ban on that. The re-export of broken bottles was quickly prohibited. The following month a new tactic was in use. Glass bottles were filled with coloured water, labelled as dye, and exported. ‘Beer bottles filled with other than beer’ were added to the prohibited export list. A few months later, shortly before export controls were lifted, he observed that the new approach was for the export of picture frames with five or six sheets of glass in the frame, which were then dismantled abroad.

Rather than bristling with frustration, Cowperthwaite noted the ingenuity and flexibility shown by manufacturers and traders. He quickly learnt to harness this to create a speedy post-war recovery. And more generally, it would give him a belief that entrepreneurs had an ability to adapt and adjust to market changes much faster than any government could. This was one of the reasons he rejected economic planning and believed in the power of markets.

As he broadened his remit he became increasingly adept at knowing how to generalise from the specific, and to test his general framework of how to manage an economy with specific examples. When told by the great and the good that Hong Kong must have an industrial development bank, he insisted on hearing evidence from sound enterprises that had not been able to secure funding. None were forthcoming, and so the bank was not established. He was well aware that what might suit the leaders of today’s businesses might not be ideal for the long-term economy.

Even when he was finance minister Cowperthwaite would wander around shops, markets and factories in his spare time asking questions and trying to understand what was happening on the ground. Where some economists such as Kenneth Galbraith boasted that they had never visited a factory, Cowperthwaite balanced his knowledge of economic theory with practical observations. His excursions were largely incognito, and he was annoyed when the emergence of television, and the broadcasting of the budget and press conferences, meant that he was increasingly recognised whilst he was collecting this intelligence.

Cowperthwaite’s deep practical knowledge was intertwined with his understanding of economic theory. He was inclined to believe in the insights of the classical economists, of Smith, Ricardo and Mill, and a laissez-faire approach. But fundamentally Cowperthwaite was a pragmatist not an idealist. He believed in his policy approach because he saw it was working. Where it did not he was happy to intervene. He saw little need to intervene in competitive markets operating freely. But where other governments intervened with tariffs or trading barriers, or in banking where bank owners could risk depositors’ funds, or in cases of monopolies he had no hesitation in direct intervention.

Smith and Cowperthwaite devised a policy prescription that was simultaneously based on a general theory and on specific observation. Smith knew that his theory of the division of labour would be much less cogent if it did not explain the ‘trifling’ example of the pin factory, and conversely because it did, he could build the study of economics. Cowperthwaite saw in his battle with glass dealers the agility and adaptability of the private sector and on that built the world’s most successful laissez-faire economy.

As economists, politicians and administrators search for ways to reignite economic growth, could it be that approaches that combine more holistic theory with specific observation, in language that is widely understood, unfiltered by layers of business lobbyists and bureaucratic interests, will once more provide the richest seam as to what to do?


1. Neil Monnery studied at Exeter College, Oxford and at Harvard Business School. He is now active in business, investing and research. His publications include Safe as Houses: A Historical Analysis of Property Prices (London Publishing Partnership, 2011) and Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong (London Publishing Partnership, 2017).