Beyond Market and
State: A Study of
Hong Kong's
Industrial
Transforma tion
ALEX HANG-KEUNG eHOI
ince the 1970s, the rapid growth of a small group of
Newly Industrializing Countries (NICs) has caught
the attention of some prominent neoclassical economists, including Ian Little, Bela Balassa and Ann Krueger.
A number of empirical studies have been carried out on these
countries and the conclusions invariably associate their extraordinary growth with superior free trade and export-oriented policies) However, such findings are not uncontroversial. Studies conducted by other writers have shown
that the markets and trading regimes of these NICs have
not been as free as the neoclassicists claimed.
The focus of the debate has gradually shifted to Hong
Kong. With no exchange controls, no discriminatory tariffs,
few import controls, and neither protection nor subsidies
for industries, Hong Kong's free market approach stands out
from other more interventionist NICs. In a recent work, Sung
Yun-wing, a neoclassicist, has emphasized, and perhaps is
proud of, this uniqueness. He writes, "Unlike the trio [South
Korea, Taiwan and Singapore], ... the Hong Kong government has largely confined itself to limited functions. The
governments of the trio are deeply and extensively interventionist by comparison.t'Such uniqueness and its theoretical implications for the
NICs debate has also been recognized in the opposite camp.
S
Studies in Political Economy 45, Fall 1994
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For instance, Robert Wade, a well-known interventionist, has
concisely pointed out in one sentence the high stakes of a
correct interpretation of the source of Hong Kong's industrial
growth. He says,
If Hong Kong did as well as the other apparentlymore dirigiste
countries, this shows that industrial policies must have been
unimportant in the development of the others because Hong
Kong is as near to a free market economy as it is possible to
get.3
The implication is clear. As long as Hong Kong is regarded
as an example of free market growth, the neoclassical economists can still claim that the market is working, and the
interventionists still face a recalcitrant counter-example.
Given this importance, it is worthwhile for us to rethink the
industrialization experience of Hong Kong and, indeed, the
entire debate on NICs.
After examining the arguments of the neoclassical economists and the statist-interventionists, this paper goes on to
maintain that the debate is often misguided by a market-state
dichotomy, and overlooks the significance of society. Although the statist challengers have done a useful job in revealing the extent of the dirigiste policies of the NICs, and
thus contribute to the weakening of the free market case,
their arguments are not entirely immune from problems. Not
uncommonly, the statist-interventionists are more interested
in the creation of an "insulated" and "capable" state and the
"correct" policies such a state devises, than in investigating
the highly conflictual social processes that mould the state
and its policies. In the end, they have committed a similar
error by replacing a mystified market with an equally mystified state. If the free market approach is guilty of distorting
reality, the statist-interventionist is at least guilty of painting
an incomplete picture. For a realistic understanding of the
development process, one has to transcend the market-state
dichotomy and to firmly base discussion on the formation
and evolution of the national and global socio-economic
forces in which the market and state are embedded.
The rest of this paper is divided into two major parts.
The first part is a brief review and critique of the neoclassical
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ChoiIHong Kong
and statist-interventionist paradigms, and their application
to Hong Kong. This part concludes with the argument that
universal laws and mono-causal theories cannot be helpful
guides, and with a plea for a return to concrete historical
analysis of economic development. The second part is a historical study of the process of Hong Kong's industrial transformation between 1945 and 1958.4 It is argued here that
two elements were critical to the process. The first was the
dramatic change in the colony's external environment, and
the second, the consequential adjustments of domestic class
and race relations, and the policies of the colonial state.
Central to the adjustment process, was the forging of a consensus on export manufacturing between and amongst the
state and the dominant social classes.
The Critique of Neoclassical Theory The main tenet of
the neoclassical growth theory is that if the market mechanism is allowed to operate freely, the forces of supply and
demand will adjust until an equilibrium price is reached.
This equilibrium price is also the point where a country's
resources are most efficiently allocated. The basis for linking
the domestic economy with the international market system
is provided by the theory of comparative advantage. By demonstrating that it is relative advantage, not absolute advantage, that matters, the theory maintains that every participating economy in the international trading system will gain
by specializing in areas of production where it has relative
advantages, while obtaining other goods, which can only be
produced at a relative disadvantage, through trade. Just like
the free market in the domestic economy, free trade allows
the optimal allocation of resources worldwide.
In the early 1970s the neoclassical economists began attacking the then dominant import substitution (IS) strategy,
and its theoretical base, structuralist development economics. The emergence of the NICs supplied the neoclassicists
with some powerful ammunition. By showing some successful and living examples of the alternative export-oriented
(EO) strategy founded on free market and free trade principles, they were able to demonstrate the dismal failure of
the protective and interventionist IS strategy.5
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By the early 1980s, there was little doubt that the neoclassical paradigm had gained a dominant position in the
development field. The clear signal was the replacement of
Hollis Chenery (a structuralist) by Anne Krueger (a neoclassicist) as the vice-president of development policy of
the World Bank in 1982.6 Yet despite their rise to prominence
in the trade, the theoretical claims of the neoclassicists' paradigm have long been criticized as unsound. The ideological
connotations of the paradigm and the not uncommon manipulative treatment of data when neoclassicists engage in
empirical studies have also come in for criticism.
An often heard and not easily dismissed criticism is that
the neoclassical paradigm is built on some very unrealistic
assumptions. For instance, if the invisible hand of the free
market is to work, the economy needs to possess all of the
following characteristics: perfect information, perfect mobility of factors of production, consistent diminishing return,
complete and instantaneous markets, and the absence of disproportional market power possessed by an individual firm
or person. No doubt, the economy of the real world does
not possess any of these features. The free market and its
efficient functioning are largely an imaginary construct."
Frank Hahn, a prominent economist, admits that the invisible
hand works only under "very special assumptions," and it
is "likely to be unsure in its operation and occasionally
downright arthritic.t'f
To make matters worse for the neoclassicists, critics have
pointed out that there is no theoretical basis for linking a
"freer" market with higher efficiency and growth, even if
one accepts the free market argument. The theory of second
best has shown that the removal of one or more distortions
will not guarantee more welfare because, in a world of multiple
distortions, the effects of one distortion may be partially or
wholly neutralized by another. There is one, and only one,
situation in which the removal of one or more distortions
will surely lead to higher efficiency, and that occurs if, soon
after such removal, the economy achieves a state of perfect
free market. Given that such a state is highly unlikely, the
seemingly solid grounds built by the neoclassical theory for
a freer market are, in fact, shaky.?
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Another line of critique is directed at the theory's philosophical foundation, namely economic liberalism. Rather
than a timeless artifact of scientific achievement, neoclassical economic theory reflects the particular worldview of
a particular group of people. Underlying such a worldview
are certain assumptions about human nature. These include
the notions of individual sovereignty, self-interest and instrumental rationality. All of these are subjects of intense
debate in the history of Western social thought. Since these
assumptions are so crucial to the neoclassical construct, it
is worthwhile for us to take a few moments to reflect on
them.
The starting point of economic liberalism is the creation
of the sovereign individual. 10 Instead of treating it as a social
phenomenon, sovereignty is inscribed in the individual as
a natural capability, prior to any engagement with other individuals in the society. The formation of wants and the
design of means to achieve these wants take place within
the individual without any interaction with other individuals.
Secondly, these sovereign individuals are assumed to have
unlimited wants, and their actions are designed to satisfy
these wants in a self-interested way. Not only are these wants
formed without social patterning, but also non-material
wants are marginalized in the theory. In some rare cases
when non-material wants are considered, they are treated in
the same way as other material wants, as though the desire
for peace has no categorical difference from the desire for
an apple. Finally, economic liberalism further assumes that
these self-interested individuals are also rational beings
whose sole intention is to maximize the utility of their resources. Hence, above all others, economics claims to be
the science of choice-making. The problems of such a formulation are that it fails to consider whether an individual
can be solely conceptualized as an undiscriminating maximizing being, and whether the individual can exercise a rationality other than the instrumental, costs-benefits calculating type.
With these assumptions, economic liberalism creates an
inborn "economic man." When this economic man enters
social life, he is joining a world where private property rights
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Studies in Political Economy
and self-regulating markets have already been institutionalized. Private property rights are regarded by liberals as a
key social institution that allows sovereign individuals to
assert their command over economic resources to satisfy
their wants. The lack of accountability to others for one's
actions is justified in this formulation because the utilization
of one's resources is strictly within the limits of one's sovereignty. Economic liberals also accept that private property
rights are the most efficient, and hence natural, form of ownership, ignoring the intense social conflicts that have dotted
their evolution throughout history.
The liberal version of the market is a romanticized and
harmonious one. Individuals actualize their freedom, equality and efficiency in a self-regulating market without interference from the government or powerful groups. This happy
scenario does not even entertain the possibility that the economically disadvantaged may be subordinated to those with
greater advantages in a free market. Power, conflict, domination, the destructive potential of the unregulated market,
and the need to embed this market in society,I I are not even
contemplated in the free market discourse.
It is only by making the concepts of individual sovereignty, self-interest and instrumental rationality part of an
inborn human nature - hence unproblematized and beyond
scrutiny - that the neoclassicist can invent the self-regulating market. The cost of doing so is the creation of an
under-socialized individual. The individual, and by extension
the market, exists prior to and apart from the society. The
society is no more than an aggregate of the individuals. In
this way, liberal economists compartmentalize the study of
economics separating it from all other areas of social activities.
Perceiving these difficulties, critics have pointed out that
neoclassical economics is no more than an ideological argument camouflaged under the mantle of science. The belief
in the free market is just "an article of faith."12 The prescription for free market policies is no more than some moralistic counsel. Neoclassical practitioners are like "missionaries" who are eager to spread their version of salvation to
the world.P
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ChoiIHong Kong
At certain franker moments, some neoclassical economists
do confess that there are serious shortcomings in their theory.
For instance, Ann Krueger goes so far as to acknowledge
that "there is nothing in [the neoclassical] theory to indicate
why a deviation from the optimum should affect the rate of
economic growth."14 Yet after delivering the usual exhortation for the followers of the neoclassical discipline to build
better theory, Krueger finds comfort for her theoretical pain
in empirical evidence. In other words, even though there is
no sufficient theoretical ground to link freer trade with higher
economic growth, she asserts that empirical evidence does
overwhelmingly support such a correlation. Given this form
of argument, the empirical battleground is no doubt as important as the theoretical one.
Unfortunately, the shelter of empirical evidence does not
afford any permanent refuge for the neoclassicists. Under
repeated assaults from the statists, it is actually crumbling
piece by piece. The statists have challenged the neoclassicists' assertion that free-trade regimes prevail in South Korea
and Taiwan. They point out that the neoclassicists can only
sustain the claim of the existence of free trade because they
focus very narrowly on a few strictly defined variables like
exchange rates, tariff rates and interest rates. Government
policies that do not directly alter the values of these variables, or do not work through price mechanisms, simply do
not appear in the equations of the neoclassicists. Once the
blinders are removed, one can see a plenitude of policies
subjecting the national economy to tight government control. These policies include: import control; credit rationing;
foreign exchange rationing; large public sectors; technological import screening; various direct regulations of enterprises
like plant size requirements; domestic contents regulations;
domestic sale restrictions; export targets and industrial rationalization plans; and various social and labour policies.
All of them have profound impacts on the industrialization
process of the NICs.IS
Another line of critique is directed at the integrity of the
neoclassicists' mode of inquiry.l'' To quote Shahid Alam,
the neoclassicists simply "have not been getting their facts
straight."!" Some of the problems originate with "selective
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inattention" to facts as mentioned above.l'' others are due
to data manipulation and questionable methodologies. For
instance, the World Bank in its 1987 edition of World Development Report is accused of building a positive correlation between high growth rate and outward-oriented policies
by simply putting countries with known rapid growth records
into the "strongly outward-oriented" category.l? The concept
of a "neutral trade regime," a situation comparable to free
trade, is also problematic because it is not certain how different policies can be separated and aggregated into two
different figures of effective subsidization rate and effective
protection rate. It is further unsure how the two rates can
cancel each other to produce a neutral regime. Policies like
export incentives and currency overvaluation are like "apples
and pears" which cannot easily be added or neutralized.20
The Critique of the Statist-Interventionist Theory By providing a competing story of what the NICs really are, the
statist-interventionists have done an admirable job in mounting an effective challenge to the neoclassical economists.
However, just parading the set of interventionist policies
adopted by the NICs provides an incomplete account because
it leaves so many unanswered questions. For example: What
makes governments intervene? Why are their policies effective? And why do some countries intervene successfully
while others fail. It is when the statist-interventionists try
to answer these questions that they begin to invent a state
nearly as mystified as the neoclassicists' free market.
It is true that not all the statist-interventionists are the
same. For instance, Stephan Haggard does not object to the
free market. He only claims that not many states adopt a
free market policy, and such a policy is not the only way
leading to rapid industrialization. What is essential is to understand why a state picks the right "pathway" that does
lead to rapid economic growth.s! Robert Wade and Alice
Amsden explicitly argue for an accumulationist model of
development. Late developers need a strong state to create
their own comparative advantage by channelling capital and
resources to industries with growth potentials. This idea is
clearly illustrated in the name Wade chooses for his theory
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ChoiIHong Kong
the "governed market theory," and Amsden captures the essence of her arguments in the phrase, "to get the relative
prices wrong. "22
Despite these differences, what unites the statist-interventionists is a shared vision of those qualities the state must
possess before it can either make the right policy choice or
carry out the accumulationist agenda effectively. Two of
them are indispensable, namely autonomy and capability. An
autonomous state is one that is insulated from the rent-seeking activities of various social groups. A capable state is
one with high technocratic ability to devise and carry out
policies consistently and cohesively. Taking them together,
it means that correct policies can be made and effectively
implemented by the technocrats if state institutions are devised in such a way as to fend off the interest-seeking social
groups.23
One needs to point out that this autonomous and capable
state shares the same liberal roots with the theory of the
free market.24 The state, like the individual, is regarded as
a sovereign actor free to make rational choices. Self-interested individuals coalesce into rent-seeking coalitions to exploit the state for their own benefit. The state as rational
maximizer functions best if these sectoral interests are excluded from the bureaucratic decision-making mechanism.
What state interventions do to the free market is the same
as what social coalitions do to the autonomous state. Growth
and industrialization are the unimpeded manifestation of
some rational force, whether it is the free market or the
autonomous state. At a deeper level, the differences between
the neoclassicists and the statist-interventionists boil down
to a common view: the need for an autonomous state to
adopt market rational strategies. Undoubtedly, Deepak Lal
strikes a responsive chord in the statist when he argues for
authoritarianism: "a courageous, ruthless and perhaps undemocratic government is required to ride roughshod over
... special interest groups."25
The state in the liberal formulation is very much a black
box. Save for some individual politicians and bureaucrats,
it is devoid of social moorings. Detached from society, the
aims, functions and evolution of the state can only be derived
Studies in Political Economy
from some abstract assumptions, and the study of the state
is advanced by building some highly generalized and simplistic hypotheses. For instance, a "hard" state is better than
a "soft" state in leading development. In a timely and refreshing piece, Jayant Lele reminds us that this vacuous,
under-socialized state is the outcome of the pursuit of pure
political variables by "normal political science." By artificially dislodging the state from the society, it generates a
dualism and renders the "inability of NPS [normal political
science] to confront the intricate and dynamic interaction
between the state and society." 26
This dualism generates some undesirable consequences.
With the existence of a black box state, the statist-interventionists equate development with the adoption of some efficient policies by a benevolent despot. In so doing, they
present a remarkably conflict free and consensual picture of
the industrialization process of the NICs.27 Statism becomes
an apology for the authoritarian state. Authoritarian states
use statism to legitimize their existence. Hands joining
hands, they sing the conservative refrain of means justified
by their ends.
Infested with so many theoretical problems, it is only
natural that both the free market and statist theories encounter serious problems in explaining the actual development
process. In the next section, we are going to briefly examine
one such example, the case of Hong Kong.
Free Market, Statism and Hong Kong28 It is unfortunate
that Hong Kong has not been included in any of the major
neoclassical studies on NICs conducted in the 1970s and
early 1980s.29As a result, the elaboration of the neoclassical
growth model for Hong Kong is left to the neoclassicists'
disciples based in the colony. The main task these disciples
have identified for themselves is to demonstrate quantitatively the positive correlation between labour-intensive exports and economic growth. Various statistical studies of
trade figures, labour content of exports, sources of export
growth, and the like lead them to conclude that: Hong Kong's
industries really specialize in labour-intensive production in
which Hong Kong has a comparative advantage; the colony's
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ChoiIHongKong
industrial growth is produced by export-oriented industries;
and the growth of Hong Kong's industries closely parallels
the growth of world trade. In addition to these statistical
studies, the neoclassicists also point to the fixed exchange
rate, low tax rate, non-expansionary budgetary policy, the
lack of discriminatory tariff, little import control, and the
government's steadfast commitment to non-interventionism,
as the indisputable factors in Hong Kong's free market
growth. 30
However, subjecting the neoclassicist's own accounts of
Hong Kong's industrialization to close scrutiny, one can easily gather a list of non-market factors that can also be regarded as pivotal to the colony's growth. These factors include: the influx of refugee capital and labour from China;
an efficient infrastructure inherited from entrepot history; a
congenial world trade environment in the 1950s and 1960s;
the government's trade promotion efforts; and low labour
costs sustained by a cheap supply of food stuffs from China
and the large-scale, low-cost housing provided by the government. These non-market factors are allowed in the neoclassicists' accounts, reflecting the common acceptance of
their importance. The problem is the evasive manner the
neoclassicists choose to deal with them. Not uncommonly,
these factors appear in some comer of their work, but the
main effort is devoted to the analysis of the market. These
two sets of factors are treated as though they are scarcely
linked and have their own independent existence.
A prime example in this respect is the way the neoclassicists handle the influx of refugees from China. While they
are quick to point out that specialization in labour-intensive
industries is the primary source of the colony's growth, they
fail to trace the formation of this comparative advantage to
the international conflicts that brought about the refugee influx. By rendering these international forces exogenous to
their theoretical model, the neoclassical economists produce
not only an incomplete picture, but also a highly biased one,
giving the false impression that the free market alone is
responsible for Hong Kong's growth. The exclusion of these
non-market factors is also part of the reason for their silence
on the fundamental question of why manufactured export
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growth did not take place before the Second World War,
even though all the major elements of a free trade regime
were in place for a long time in the colony's history.
While the neoclassicists try to marginalize government
interventions, the interventionists have done exactly the opposite; they argue that these interventions were indispensable
to Hong Kong's growth.U The real challenge for the interventionists however is not to convincingly demonstrate that
these measures fall.outside the boundaries of legitimate government interventions set by the neoclassicists,32 but rather
to explain why the Hong Kong government intervenes in
some areas and not others. In particular why is the manipulation of such protective variables as discriminatory tariffs,
import quotas and credit rations that may encroach upon the
free port institution considered such anathema.
A different kind of problem plagues Haggard's statist account of Hong Kong's growth. Essentially, he is arguing
that Hong Kong is able to choose a free trade path because
its state exhibits qualities similar to those of the other NICs.
He pinpoints the role of the financial secretary in the state
structure. Socially insulated and technocratic ally efficient,
the financial secretary of Hong Kong symbolizes an autonomous and capable state.33This focus on the financial secretary
is however absurd because his freedom to act is constrained
by the colonial structure. The acclaimed balanced budget
and free trade policies of the financial secretary, for instance,
are the policies of the British Empire and are expected to
be followed by all obedient servants of the Queen. Viewed
through the lenses of statism, Haggard finds the Hong
Kong's state as autonomous and capable as the states of
other NICs. His lenses, however, blur his vision, and prevent
him from seeing the profoundly different class and race dynamics between a colonial state and an independent one.
If the core message of the above critique is to be summarized in a few words, it is a call for the return to history.
Economic development is a much more complicated process
than just the manipulation of government policies, or
changes in the tariff system or the exchange rate. The process
is full of contradictions, conflicts, subordination and domination. The great helmsman state smoothly sailing along,
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ChoiIHong Kong
leading its subjects to the promised land is rare in the extreme. The separation of market or state from society may,
perhaps, help build scientific theories. It is, however, done
at the expense of obscuring the remainder of the society.
Barry Rodan has got it right: "concrete actors in concrete
conditions, not abstract laws determine development.t'H
These laws do not help us understand history; the makers
of these laws use history for their own purposes.
The following sections of this paper represent a modest
effort to reconstruct the history of Hong Kong's industrial
transformation - a reconstruction that aims to free history
from the biased views of the free market or the mighty state.
The materials used here are some readily available government documents and old journal articles.35 Thus it makes
no claims to novelty or to the revelation of previously unavailable information. Neither is it aimed at making theoretical breakthroughs. The only merit it can claim is its closeness to history. Such closeness leads the author to argue
that the crisis of the colonial system, the cold war conflict,
the nature of the colonial state, and race and class relations
all critically affected Hong Kong's postwar economic development.
The Crisis of British Colonialism The British colonial empire appeared to remain intact after the Second World War.
Beneath the surface, however, irreparable damage had been
done to both Britain itself and to its ability to hold onto its
empire. The war exhausted its wealth and greatly undermined
its productive capacity at home. Harsh extractions in the
colonies during the war had set off a wave of independence
struggles. Although Britain had still cherished the hope of
regaining its prewar eminence in world affairs for some time,
the reality was that it had unwittingly entered a phase of
decline, which is amply indicated by the serious balance of
payments problem in 1947, known as the dollar crisis.36
Corresponding to the imperial decline was an adjustment
of the colonial policies. Some of the colonial possessions,
like India, Burma, Ceylon and Palestine, which could not
be profitably kept within the colonial empire were granted
independence shortly after the war. More pertinent to the
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discussion of this section is the new development strategy
formulated for the remaining colonies. These colonies were
required to help lessen the acute shortage of US dollars that
had seriously threatened the status of Sterling as a world
class currency. The colonies were now expected to save and
to earn US dollars through the development of their agricultural and mineral resources.I? In the absence of exportable primary commodities, Hong Kong colonial officials responded to the call through the promotion of labour-intensive
industrial exports. For Hong Kong, the aims were twofold.
It was expected that such a policy would make the colony
financially self-sufficient and thus remove it as a potential
burden to the ailing empire. Secondly, if the export drive
was a success, it would hopefully contribute to the dollar
earnings of the Sterling Area. It was during this moment of
crisis that the industrialization of Hong Kong was found to
be not incompatible with British colonial interests.
Since Hong Kong's industrialization took place within
the orbit of British colonialism, the shape it evolved was
more or less determined at the beginning. In the first place,
industrialization through the path of import substitution was
largely ruled out since protective or discriminatory policies
were at variance with Hong Kong's role as a free port in
the colonial empire. In the second place, as industrialization
was promoted in response to the dollar crisis, the first and
foremost task of Hong Kong's industries was to export in
order to earn foreign exchange. This export-oriented industrialization closely resembled the export economy of other
colonies, with the only major difference being the kind of
goods exported - labour-intensive manufactures in place
of primary commodities. 38
Since the export industries in Hong Kong performed such
a vital function for the colonial empire, it comes as no surprise that the colonial administration actively supported the
development of industry. Although this support fell short of
a systematic attempt at industrial protection (discussed later
in this paper), it undoubtedly provided critical support at a
crucial moment of Hong Kong's industrial transformation.
Firstly, during the period of postwar shortage, the colonial
government imposed supplies control and rationing to ensure
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ChoiIHong Kong
that industries obtained the needed raw materials at reasonable prices.I? Secondly, domestic and commercial rents were
controlled and land was sold to industries at concessionary
prices. Later, this involvement expanded into a massive public housing project and a new town program. Both of these
together represent a major effort at spatial restructuring so
that capital and labour could be combined in locations that
would allow industrial production to continue in a cost efficient way.40 Thirdly, the government joined hands with
major private employers to regulate wage Ievels.U Fourthly,
cheap foreign exchange was made available to industrialists
for raw material imports through a multiple exchange rate
system that existed until 1949.42 Fifthly, the tariff concessions granted by the Imperial Preference system gave Hong
Kong products a critical margin of protection in the British
market.43 Lastly, the government devoted considerable effort
to promoting the colony's industrial products overseas from
the very beginning of its industrialization.H
The intention in listing these areas of intervention is to provide some concrete evidence to show that the Hong Kong government was not as non-interventionist as has been suggested
by the neoclassical economists. Earlier discussion of the colonial crisis and its impact on the development policy of
the colony also demonstrates that the pattern of export-oriented industrialization does not necessarily reflect some superior choice on the part of the state. The arrival of such
industries took place within a complicated environment that
can not be encompassed by market or state explanations.
Moreover, their arrival did not automatically signal their
dominance of the economy. It is true that export-oriented
industries experienced some brisk growth under the promotion of the colonial government. Despite this growth, it is
fair to say that, before 1949, they had not yet replaced entrepot trade as the dominant factor in the colony's economy.
What abruptly reversed the order were two major external
events: the victory of communism in China in 1949 and,
shortly after, the outbreak of the Korean War and the imposition of an international trade embargo on China and
Hong Kong.
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Communist China and the US Embargo As a close trading
partner and a near neighbour, Hong Kong could not be unaffected by the Communist victory in China and the subsequent trade embargo. What was widely expected immediately after these events was the elimination of Hong Kong's
main source of livelihood as an entrepot of China. The once
prosperous city would be turned into a backwater of the
colonial empire. This spelled further uncertainty as to how
long Britain would hold onto the "dying city." History ironically turned up a few surprises. While the eclipse of the
entrepot trade was a foregone conclusion, few could anticipate that these traumatic events would open another door
of prosperity for the colony by providing both the ingredients
of labour and capital and the brute driving force for its transformation into an industrial city.
Since the Hong Kong government of the time did not
record the capital flows in and out of the colony, there is
no accurate figure on the volume of Chinese refugee capital
reaching Hong Kong immediately before and after the Communist takeover in China in 1949. Nevertheless, the total
volume reaching Hong Kong appears to be very substantial.
Edward Szczepanik conservatively estimates that more than
300-600 million Hong Kong dollars reached the colony each
year between 1948-50, and stabilized at that level thereafter.45 Coupled with the inflow of capital from overseas Chinese, the general picture of Hong Kong in the years before
and after the communist victory was a place glutted with
capital eagerly seeking profitable investment. Some of it
went into trade and various kinds of speculative activities.
A substantial portion, particularly from the Shanghai industrialists, was invested in businesses with which they were
already familiar.
Arriving together with this capital was a large number
of refugee industrialists. The most important of these were
an elite group of cotton spinners from Shanghai. The spinning industry was well developed in China, and was its most
modernized industrial sector. Immediately after the Second
World War, spin mill owners started to rejuvenate their outdated machinery. A total of two and a half million modem
spindles were ordered from Britain and the United States
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ChoiIHong Kong
from 1946 to 1947.46 However when the spindles were ready
for delivery, the political situation in China had so much
deteriorated that many Shanghai industrialists had already
decided to relocate their factories to Hong Kong. As a result,
a number of shipments were diverted to the colony.s? Realizing that there was a lack of skilled spindle workers in
Hong Kong, many Shanghai industrialists brought along a
nucleus group of skilled workers, who were expected to train
the unskilled local Cantonese workers. In this light, the entire
process of relocation is a transference not just of capital,
but also of an industrial class together with their management
experience, skilled workers and industrial machinery.
Concomitant with the injection of capital was a huge
movement of Chinese refugees into Hong Kong. These refugees, whose number eventually reached one million, comprised about one-third of the total population of the colony
in the mid-1950s.48 Since most of these refugees were unwilling to return to China, their rural roots as a result had
been cut off. The only means of livelihood for them in a
colony with little agricultural land was to sell their labour,
and to sell it at whatever wage was being offered.s? These
refugees and their offspring not only provided the most important source of industrial labour for the up-and-coming
manufacturing industries, their arrival also produced a major
change in the nature of Hong Kong society. In the past, the
majority of the Chinese workers and the European traders,
like "migratory birds," returned home after their business
in the colony had finished. With the presence of this massive
group of refugees having nowhere to go, the colony had,
for the first time in its history, a stable population that, willingly or not, claimed Hong Kong as its home. In other words,
a society of its own was in the making, with all the attendant
political and economic ramifications.
The great influx of capital and labour provided the two
essential ingredients for the development of industry. Nevertheless, the abundant supply of these factors does not by
itself constitute a sufficient cause of industrial transformation. Trading constituted a more profitable business and thus
an attractive outlet for capital investment. Trade with China
had been the mainstay of the economy before the Second
44
Studies in Political Economy
World War, and because of this, the prosperity of the colony
was closely linked to that of China. What suddenly severed
this tie was the takeover of the government in China by the
Chinese Communist Party in 1949. The weakening of trade
relations was as much the outcome of China's efforts to
redirect its trade to the communist bloc as it was the effect
of the imposition of economic sanctions by the US-led capitalist countries. The event precipitating a full scale trade
war was the UN embargo imposed on China after China
joined the Korean War in late 1950. To prevent materials
from reaching China, Hong Kong, because of its economic
function as an entrepot, was also declared an embargo target.50
The structure of the Hong Kong economy emerging from
the trade crisis was profoundly changed. The change of regime
in China and international economic warfare greatly reduced the
volume of trade between China and the capitalist bloc. Hong
Kong found itself engaged in a business the prospects of which
were directly linked to political relations between China and
the Western powers. Since political and trade relations between
China and the western countries did not improve until the
1970s, the entrepot trade of Hong Kong remained stagnant
throughout the 1950s and 1960s.
The trade embargo had different impacts on different sectors of the economy. It hit the entrepot trade hardest, but it
did not cripple the growing industries, although these were
temporarily deprived of foreign imports of raw materials.
The ultimate purpose of the embargo on Hong Kong was
preventive, that is to obtain assurances from Hong Kong
that no commodities entering Hong Kong would be redirected to China without the consent of the US. Hence, after
the US had been satisfied that the Comprehensive Certificate
of Origin, set up in 1953 by the Hong Kong government in
response to the US demand, provided adequate procedural
guarantees against the diversion of imported materials to
China, the flow of industrial raw materials resumed.
As it turned out later, the embargo was a disguised blessing for Hong Kong's manufacturing industries. On the one
hand, it reduced trade to an unprofitable pursuit and pushed
the consequently unemployed capital into the business of
45
ChoiIHong Kong
export manufacturing. On the other hand, it opened the lucrative US market to the Hong Kong manufacturers, first in
the Chinese style goods that US retailers could no longer
obtain from China because of the trade embargo, then to a
host of other products. In 1959 when the first accurate ftgures
on domestic exports became available, it was revealed that
the US had bought about 25 percent of Hong Kong's domestic exports, and had already overtaken Britain as the
chief buyer of Hong Kong's products.S!
In sum, the consequence of the embargo was the delinking
of Hong Kong from China and the reintegration of the colony
with the world capitalist system on a reconstituted base of
export manufacturing. After this restructuring, trade with
China was relegated to the sideline. The mainstay of the
economy was the labour intensive industries with their main
sources of raw materials and major markets all located in
the capitalist countries. Even the growing tourist industry
was greatly boosted by the designation of Hong Kong as
the recreational ground for US soldiers serving in South
Korea.
There is little doubt that the colonial crisis and East-West
economic warfare had a fundamental impact on the industrial
transformation of Hong Kong's economy. But these external
factors should be not treated in a deterministic way. In this
account, they are viewed as indispensable factors setting the
stage for a profound restructuring of the economy towards
export-oriented industrialization. The exact path of the industrial transformation and the chance of its success were
deeply affected by domestic factors, including the nature of
the state, the relationship between the state and social
classes, and inter-class conflicts and compromises. In Hong
Kong, a highly interventionist path of industrialization was
precluded by the bureaucratic nature of the colonial state.
The success of the industrial transformation was built on
the subordination of the rural and working classes, and on
a consensus around export manufacturing between the British trading class and Chinese industrial class. These issues
will be discussed in the following sections.
46
Studies in Political Economy
The Bureaucratic Colonial State The colonial state in Hong
Kong is prevented from taking a highly interventionist approach to industrialization because it is bound by its bureaucratic nature and the class interest it is supposed to serve.
For the same reasons, it is also highly questionable to portray
this state as an autonomous and capable one. It may be truly
insulated from the great majority of the local Chinese people,
but it is neither autonomous from the local British trading
and financial class, nor from their masters in London. It is
highly bureaucratized, and perhaps efficient in carrying out
orders, but it is also equally conservative, rigid, and extremely unwilling to initiate change without intense social
pressure. The so-called free trade regime is not in any sense
a strategic choice, but has a direct lineage from the century
old colonial system. If free trade, especially under a colonial
system, could have, by itself, generated growth and industrialization in Hong Kong, the proponent of this theory must
be prepared to explain why the same pattern of free trade
could bring about exploitation and degeneration in so many
other British colonies. What is taken to be a free trade regime
is actually a colonial trading system coupled with a bureaucratic, conservative state disposed to a crisis/response pattern
of intervention.
As in other colonies, the defining character of the political
system in Hong Kong was the merging of the roles of the
bureaucrats and the politicians. 52 Strictly speaking, the bureaucrats assumed the role of the politician. The peak of
the system consisted of three elements: the governor, the
Executive Council and the Legislative Council. The governor, appointed by London, was part of the bureaucratic establishment of the Colonial Office. He had either been transferred to the post from other British colonies or promoted
from within the ranks of the elite Hong Kong Cadets who
were recruited from Britain and were trained to take up the
most senior positions in the Hong Kong government. He
was advised by the two councils: the Executive Council functioned like his cabinet and the Legislative Council resembled
a form of parliament. Performing a purely advisory role,
however, the councils had no binding power on the governor.
47
ChoiIHong Kong
The structure of the two councils underwent little fundamental change over the hundred years of their existence.
Even though they had expanded in size and had incorporated
unofficial members (both British and Chinese), the essential
nature remained intact: they were not accountable to the
people. The majority of the council members were officials
throughout the period under the present study.53 Although
the government insisted that no policies would be made if
the appointed unofficial members (hereinafter the "unofficials") were strongly opposed, it was also true that no decisions could be passed if they were not approved by the
bureaucrats. In fact, both councils functioned as an arm of
the government machinery. The officials rubber-stamped
policies and legislation in the councils penned and tabled
by themselves. In this light, it is not surprising for John
Rear to insist that there were no politicians in Hong Kong:
"... heads of departments are civil servants and all policies
are the policies of the civil service."54
The political structure had its defenders and detractors.
The defenders claimed that the undemocratic colonial system
provided the efficiency and stability needed for economic
growth. Without the intrusion of electoral politics, the system
could operate according to the principle of economic efficiency rather than political considerations. At the same time,
policy consistency was high because there was no change
in government. All changes, even the successions of the governors, were strictly a matter of personnel realignment because the successors were required to follow the decisions
made by their predecessors. 55 Comparing this defense of
the system with the arguments of statism, one could not fail
to see their close similarity. The association of authoritarianism with efficiency has long historical roots in the colonial
discourse.
The detractors pointed to the undemocratic nature of such
a system. Rear scorned it as a system still based on the
"wiseman principle."56 More pertinent to the argument here
is the criticism of the government's conservatism and its
lack of capacity for long term planning, conceded to a certain
extent even by the apologists of the existing structure.57
Being appointed directly or indirectly by London, the governor
48
Studies in Political Economy
and his subordinates did not need to worry about being voted
down in an election, and thus they were deprived of an important source of motivation and pressure to lead major reforms. In Hong Kong, the primary task of the governor was
to maintain the status quo, and this largely moulded his conservative political attitudes.58 The senior bureaucrats under
the governor could not be more innovative because they had
less elbow room and fewer incentives, and also because their
jobs required them to be professional administrators, not
innovators. 59
The first manifestation of the government's conservatism
in the industrial transformation process was its lack of foresight. Trade was so much the insignia of British colonialism
that colonial officials were blinded to any alternative future
for Hong Kong other than a free port within the British empire.
Even though industrial promotion policies had been taken up
in response to shortages immediately after the Second World
War and the 1947 dollar crisis, Governor Grantham did not
see that there could be any fundamental change in Hong
Kong's economic structure. During an address delivered to
the Legislative Council in 1949, he maintained that the future
of Hong Kong lay in trade, not industries. He said, "Trade
is the life blood of this Colony ... I am proud of being
Governor of a Colony of shopkeepers." He added the future
of Hong Kong's industries remained "obscure."60 Only after
industries had proven their vitality, after the trade embargo,
did Grantham regret the oversight of their importance.
We were all at one time too ready to think of Hong Kong only
as an entrepot and to say that industry would never really prosper. That attitude of mind is changing, largely no doubt as a
result of the realization that if it were not for the exports of
our factories we should be even more in the economic doldrums
than we already are.et ,
Although the possession of such foresight might not be transformed into aggressive industrial promotion policies, the
lack of it coupled with a general conservatism did very likely
lead to passivity and a "crisis/response" pattern of policy
making. According to Peter Harris, "[the government's] policy was no-policies except where absolutely necessary."62
49
ChoiIHong Kong
In short, the conservative nature of the bureaucracy was
not amenable to self-motivated and long range interventionism. The outcome was a piecemeal approach reflecting a
crisis/response pattern in its industrial policy. Under this
situation, both the neoclassical economists and the statists
can find evidence in support of their theories. What they
have overlooked is that interventionist and non-interventionist policies in fact existed at the same time. And the proper
way to account for them is through an examination of the
nature of the state and its relation with the social classes.
Race and Class Relations Apart from the bureaucratic state,
the policy pattern of intervention and non-intervention was
influenced by the realignment of domestic class and race
relations that took place after the imperial decline and the
trade embargo. While the rural and working classes were
subordinated, the British trading and the Chinese industrial
classes built a consensus, and arguably a symbiotic relationship, around export manufacturing. However, the relatively
weak political power of the Chinese industrialists in the coalition failed to push the bureaucratic colonial state to adopt
a more protective industrial policy. The outcome was a pattern of "selective intervention," that is, the government did
not attempt to introduce protective industrial policies that
would harm Hong Kong's free port institution. Within these
limits, interventionist policies were undertaken if they were
necessary, especially when political stability was at risk.
Before examining this export consensus, it will be helpful
to briefly discuss the pattern of class and race relations after
the Second World War. For these purposes, four actors can
be identified, namely the rural class, the working class, the
industrial class, and the trading class.63 The trading class
was a British enclave, but with a significant Chinese component. All other classes, including the industrialists, were
predominantly Chinese.
1. The Rural Class In many Third World countries, the
countryside is the source of capital and labour, and is the
market for industries' goods. The economic significance
of the agricultural elite in tum presents a particular set
50
Studies in Political Economy
of constraints to the formulation of industrial policy. In the
industrialization of Hong Kong, however, agriculture was a
neglected sector. The rural economy was small, with production based on rice cultivation maintained at a subsistence
level. The rural area was also a relatively late addition to
the colony and hence less integrated with the whole. The
New Territories, as its name implied, was acquired from
China in 1898, more than half a century after the seizure
of Hong Kong Island. Furthermore, unlike Hong Kong Island
and the Kowloon Peninsula which were ceded to Britain in
perpetuity, the New Territories was only leased for a period
of 99 years. Since the New Territories was a piece of undeveloped land leased for a specific period of time, the colonial government preferred to leave it relatively untouched.
Apart from a mild land reform carried out early in the century,64 and the setting up of a skeleton administration, economic and social institutions were not tampered with. The
rural elite was not incorporated into the colonial state, and
never achieved a level of influence comparable to the Chinese trading and the industrial elite.
2. The Working Class and Communism The working class,
like the rural sector, was a subordinated class, but for very
different reasons. Oversupply, government repression and
the refugee workers' apathetic attitude to politics were frequently cited as reasons for the weakness of the labour sector.
But the most important factors contributing to the docility
of the working class had deeper roots and were closely related to international and domestic politics.
After a period of active unionism and anti-colonial struggle between 1947 and 1952,65 the pro-Beijing Federation of
Trade Unions (FTU), the dominant union in the labour sector,
abruptly changed its confrontational course and adopted a
strategy of withdrawal. Instead of organizing strikes, it ran
welfare activities like free medical clinics, discount stores,
and benefits programs for the unemployed to win the loyalty
of workers. The change in strategy was so dramatic and the
effect so obvious that the 1953 edition of the Hong Kong
Annual Report could not but note that there was "a shift in
policy by the FTU and its affiliates," and attributed the lack
51
ChoiIBong Kong
of labour incidents in that year to "a marked stress on welfare
activities rather than the acerbation [sic] of industrial disputes [by the FTU]. "66
Ruthless deportation of labour leaders by the colonial government and the intimidation of unions by employers may
have contributed to the reorientation of Fl'U policy. But the
most important factor was the change in Chinese policy on
Hong Kong. By the early 1950s, China appeared to have
recognized the economic and political benefits of Hong Kong
and had adopted a policy of acquiescence to its status as a
British colony. As a frontal organization of the Chinese Communist Party, the Fl'U was obliged to follow this policy and
terminated its militant labour and anti-colonial activities. After that, the FTU espoused an ideology of industrial harmony
and labour-capital cooperation and transformed itself from
an agent of change to a stabilizing force.
Hence, the weakness of the labour movement in Hong
Kong stemmed not so much from the political division within
the labour sector, between the pro-Kuomintang (Taiwan) and
the pro-Chinese Communist Party (Mainland China) factions, as from the fact that the most powerful labour group
adopted a policy of withdrawal and conciliation. Such weakness was also the consequence of international circumstances, since the only real alternative to British rule appeared to be a reincorporation with mainland China. Many
workers would find this option unpalatable since most of
them were recent fugitives from the Chinese regime. Under
this situation, the working class regarded the colonial system
as a necessary evil, and acquiesced to its exclusionary policy.
Hence, it failed to play an active role in shaping the colony's
industrialization process.
3. The Chinese Industrialists and British Traders After the
Second World War, an established pattern of colonial rule
was formed. Chinese trading interests were incorporated
along with the British traders into the colonial government. 67
The British ruler needed the cooperation of the local, and predominantly Chinese, trading elite for effective governance. In
exchange, the colonial ruler allowed the Chinese elite to
playa role in the formulation of policy. But this concession
52
Studies in Political Economy
had a limit. In Governor Grantham's terms, such concessions
would be made only in matters not involving "fundamental
importance. "68
The elite incorporation process is a prime example of
wealth marrying with power. The elite first became successful in business, and then was invited to sit in the Councils. The
domination of the business class in the Legislative and Executive Councils was indisputable. As of 1951, all of the
eight "unofficials" carried the title of director, chairman or manager of at least one of the major corporations in the colony.69
Interestingly, none of the "unofficials" were representatives of
the growing industrial class. The lack of representation of the
Chinese industrial sector, was partly the consequence of the
time lag built into the elite incorporation process developed
over a century of colonial rule.
Traditionally, the most common way for the wealthy Chinese to earn social recognition in Hong Kong was to make
large donations to charitable associations, the most prominent of these included the Po Leung Kuk and the Tung Wah
Hospital Group. If the donations made over a period of time
were considered to be substantial, donors would be invited
to sit on the boards of directors of these organizations. To
remain in such a position required, according to Marjorie
Topley, a donation of about HK$50,000 a year, a huge sum
in the early 1960s when Topley's paper was writren.Z? Recognizing that the directors of these charitable organizations
were leaders of the Chinese community, the colonial government at first invited them to sit on advisory committees
or to become the Unofficial Justices of Peace. When sufficient experience had been gained and their positions in the
Chinese community had become more firmly established,
they would be awarded the most prestigious prize, a seat in
the Legislative or the Executive Council. According to Topley, all five Chinese "unofficials" serving in the Executive
Council for various periods of time between 1946 and 1960
were permanent members of the board of directors "of the
most prominent charity organization in Hong Kong.?"! In
the Legislative Council, nine Chinese served as "unofficials"
during the same period. Again, six were permanent board
members of the same organization.
53
ChoiIHongKong
The representation of the "unofficials" in the councils
strengthened their influence and safeguarded their interests
in policy formation, at least in those areas not involving
"fundamental importance." During the period of industrial
transformation, without a seat in councils, those of the industrial class lacked a voice in the colonial state. It was
only after they had proven their economic success, learned the
rules of the game, and lavished substantial amounts of money
on charitableassociations,that they started to climb the political
ladder. Such a process was especially protracted for the Shanghai industrialists because of the sub-ethnic conflicts between
them and the native Cantonese, who dominated the large
charities and blocked their advancement in traditional associations.F In practice, they had to build their own organizations along the way as they were building up their own
reputation. All this would mean time and delay. The first
appointment of a member of the Shanghai elite to the Legislative Council did not take place until 1964.73 By then,
the industrial class, the "new rich" as they were labelled by
Ambrose King, comprised only 18.5 percent of the Chinese
unofficials in the legislature in 1964. In contrast, 66 percent
of the seats were secured by the "established rich," the old
Chinese families with their base in trade and allied businesses. The composition only started to reverse in favour
of the "new rich" in the early 1970s.74
The continuous dominance of the trading class in the government strengthened the resistance of an unwilling bureaucracy to the extension of more protectionist policies to the
industrialists, and to any substantial alternation in the free
port status. The industrial class, lacking a voice in the government, found it difficult to place their issues on the government's agenda. The repeated calls for a protective tariff
in the 1950s were lightly dismissed by the government. Without a representative, it was hard to motivate a passive bureaucracy. To do justice to the issue, it should also be pointed
out that the demands for protectionism were never very
strong. Within the industrial class, there was considerable
ambivalence about the wisdom of protectionism in a colony
in which both the raw materials and markets were highly
externally dependent. Under Hong Kong's unique conditions,
54
Studies in Political Economy
the free port policy appeared to work in tandem with the
export-oriented industries.
4. The Symbiotic Relationship Between the Trading and the
Industrial Classes The relationship between the trade and
industrial classes was full of conflict and compromise. On
one level, the industrial class clashed with the trading class.
Industrialists had for a long time championed a more protectionist policy. This request was always denied for the
reason that, if granted, it would fatally harm the colony's
free port status. Moreover, it was pointed out that protectionist measures would not be helpful because the domestic
market was minuscule and most of the industrial products
were sold overseas.75
Upon closer examination, the small domestic market argument was only partially true. The market for local consumer goods might be very small. However, the market for
intermediate inputs to the expanding export-oriented industries was increasing month by month. For this reason the
local spinning sector had long advocated import control on
yams and other textile materials, the demands for which
were substantial in the weaving, knitting and garment-making sectors.Z'' In addition, the experience gained from export,
import and foreign exchange controls imposed before and
after the trade embargo had proven that separating the circulation of goods and capital into the trading and the domestic sectors was feasible. The coexistence of a free port
policy in the trading sector and a protectionist policy in the
manufacturing sector was not practically impossible, though
such policy would certainly involve considerable administrative control and ingenuity, and thus implied cost and risk
to the government and the economy as a whole.
The purpose of these arguments is to show that the existence of a small domestic market and the maintenanceof the
free port status did not necessarilyprecludea more protectionist
and discriminatory industrial strategy. The preference for
maintaining the status quo reflected a political decision more
than a practical impossibility. It also reflected the failure of
the industrial class to press for change, which in tum was
55
ChoiIHong Kong
partly the result of the considerable advantages conferred
by the free port regime on the export-oriented manufacturers.
Export-oriented industries benefited from the free trade
policy in various ways. For instance, they could freely obtain
raw materials and machinery from the least expensive sources
of the world. They had easy access to the free foreign exchange
market. There were few trade restrictions and biases against
export. Finally, protection might bring uncalled for government
interference in their economic activities, especially as such a
government was still the government of others, those being
the British trading class.
Furthermore, the pattern of industrial transformation in
Hong Kong was not a wholesale switching from trade to
industry. The trading sector had suffered a relative decline,
but their share in the economy was still substantial. The
role of the merchants in the economy was not eliminated
as a result of the development of industry. Instead, it maintained its traditional activities, though on a smaller scale,
while it underwent changes to serve the newcomers. The
p_rocessof change should be better seen as a superimposition
of industries on the trading economy.
Even after the rise of industries, trading was still the second most important economic activity in the colony. Many
traders reoriented their business away from China to serve
the newly independent Southeast Asian countries where the
heavy traffic of primary commodities and Western capital
goods promised good trading prospects. For other traders,
as well as bankers, insurance brokers and shipping agents,
the growing industrial sector provided new opportunities for
business, the volume of which later proved to have more
than compensated for their loss in Chinese trade. The trading
firms secured raw materials and machinery, and found overseas markets for the products of the factories. In doing so,
many of them extended credits on raw materials which the
factories needed, and paid in advance for the products that
the factories were going to sell. Some traders even set up
factories, or formed joint-ventures with familiar industrialists, to produce goods they had been selling for a long time.??
Even the large British commercial banks could not resist
this wave of diversification. As early as 1948, the Hongkong
56
Studies in Political Economy
and Shanghai Banking Corporation had set up a branch in
Mongkok, an industrial district, to provide loans for industries. The branch recorded losses in the first three years of
operation. However, by 1952, the loss was converted to
profit, and an eight-storey building was planned to provide
office space for handling a rapidly multiplying volume of
business.If A certain degree of dualism existed in the banking sector in which the small Chinese banks financed the
small factories while the large British banks lent to the more
established ones. The general trend, however, was a diversification of the banking sector from purely foreign exchange
and short-term-trade financing activities to the provision of
industrial loans and advances.
On the whole, the penetration of the trading sector into
industrial activities reconsolidated its position in the economy. Although it suffered a relative decline, it did succeed
in integrating with the fastest growing sector by performing
indispensable functions. In so doing, the trading class assumed a mixed identity of both industrialists and merchants.
In fact, in matters not entailing basic contradiction with their
traditional trading business, the merchants were willing to
promote the interests of the industries. Not surprisingly, M.
C. Blaker, taipan of Gilman & Co. Ltd. and Chairman of
the Hong Kong General Chamber of Commerce, urged the
government to actively deal with land shortage and high
land cost faced by the industrialists as early as 1954.79 The
traders were also concerned about the complaints of overseas
buyers about the uneven quality of Hong Kong products
towards the end of the 1950s. On this issue, they joined
hands with the industrialists to press for more government
assistance to small factory owners to upgrade their production technologies and management skills.
Conclusion: Beyond Market and State The industrialization of Hong Kong involves a complicated set of factors
including class and race relations, the bureaucratic state
structure, the crisis in the British colonial system and cold
war geopolitics. The attribution of Hong Kong's economic
successes to an autonomous and capable state or to the invisible
hand of the market provides a remarkably conflict-free and
57
ChoiIHong Kong
consensual pattern of this development. A single-minded focus on the market or the state leads one not only to overlook
the structural factors through which the market functions,
and the colonial system in which the political structure of Hong
Kong is embedded, but also to belittle the class and racial
conflicts and compromises produced within a unique environment. The consequence of the abstraction of the free market or the state from society by the neoclassical economists
and the statist theorists is the building of a theory in which
real people are removed from the centre of consideration.
The aim, it would appear, is to encourage people to entrust
their fates to one or other of these mystified entities - the
state or the market.
Notes
The author would like to acknowledge the valuable comments of Bruce
Berman, Catherine Conaghan, H. L. Leung, Colin Leys, P. Wood, and especially, Jayant Lele. Thanks are also due to the two SPE reviewers, Manfred
Bienefeld and Lynn K. Mytelka. Paritosh Kumar and Nyangabyaki Bazara
have created in our office a comradely atmosphere. Although they may not
realise it, this has made an important contribution to this paper. An earlier
version of this paper was presented to the Ninth Annual Conference of the
Canadian Association for the Study of International Development, Carleton
University, Ottawa, 7-9 June 1993.
I.
2.
The study led by Little covers six countries (Pakistan, the Philippines,
Brazil, India, Mexico and Taiwan), and the conclusions of their analysis are published in I.M.D. Little, Tibor Scitovsky & Maurice Scott
(eds.), Industry and Trade in Some Developing Countries (Britain:
Oxford University Press, 1970). Krueger coordinates National Bureau
of Economic Research studies, entitled "Foreign Trade Regimes and
Economic Development," on ten countries (Brazil, Chile, Colombia,
Egypt, Ghana, India, Israel, the Philippines, South Korea and Turkey).
The findings are published in Ann Krueger, Foreign Trade Regimes
and Economic Development: Liberalization Attempts and Consequences (New York: National Bureau of Economic Research, 1978).
Six countries (Argentina, Colombia, Israel, South Korea, Singapore
and Taiwan) have been studied by Bela Balassa, and the results are
published in Bela Balassa and Associates, Development Strategies in
Semi-Industrial Economies (Baltimore: The John Hopkins University
Press, 1982). A total of 15 different countries were covered in the
three projects.
Sung Yun-wing, "The Hong Kong Model and its Future Evolution:
Neoclassical Economics in a Chinese Society," in Y. C. Yao, Victor
Mok & Lok-Sang Ho (eds.), Economic Development in Chinese So-
S8
Studies in Political Economy
3.
4.
5.
6.
7.
8.
9.
10.
59
cieties: Models and Experience (Hong Kong: Hong Kong University
Press, 1989). p.155.
Robert Wade, Governing the Market: Economic Theory and the Role
of Government in East Asian Industrialization (Princeton. NJ: Princeton Univ.• 1990). p.299.
This period is chosen for study primarily because it witnesses the
historic transformation of the Hong Kong economy. By 1958, manufacturing industries had ftrmly replaced entrepot trade as the mainstay
of the colony. After that, these industries faced a different set of
problems, including labour shortages, a rising wave of protectionism
from Britain and later the United States, as weU as keen competition
from Taiwan and South Korea. These problems and the corresponding
responses from the private and public sectors constitute another phase
of industrial development. which can only be dealt with in another
study.
For useful summaries of the neoclassical growth theories. see R.J.B.
Jones, "Liberal Political Economy" in idem (ed.), The Worlds of Political Economy (London & New York: Pinter Publishers, 1988); Diana
Hunt, Economic Theories of Development: An Analysis of Competing
Paradigms (New York: Harvester Wheatsheaf, 1989), Chapter 10;
Deepak Lal, The Poverty of "Development Economics" (Boston: Harvard University Press, 1985); Anne Krueger. Perspectives on Trade
and Development (New York: Harvester Wheatsheaf, 1990); Bela
Balassa, The Newly Industrializing Countries in the World Economy
(New York: Pergamon Press, 1981); Little et al.• Industry and Trade
in Some Developing Countries. For an overview of the IS-EO debate,
see Wing Thye Woo. "The Art of Economic Development: Markets.
Politics. and Externalities," International Organization 44/3 (1990).
pp. 403-429; P.P. Leeson, "Development Economics and the Study
of Development," in P.F. Leeson and M.M. Minogue (eds.), Perspectives on Development: Cross-disciplinary Themes in Development
Studies (Manchester and New York: Manchester University Press,
1988); Colin Simmons, "Economic Development and Economic History." in Barbara Ingham and Colin Simmons (eds.), Development
Studies and Colonial Policy (London: Frank Casso 1987).
Woo. "The Art of Economic Development," p. 415.
Jones. "Liberal Political Economy," p. 37; Amitai Etzioni, The Moral
Dimension: Toward a New Economics (New York: The Free Press.
1988), p. 201.
Frank Hahn. "Reflections on the Invisible Hand," Lloyds Bank Review
144 (1982), p.16.
See Robert Wade, Governing the Market, pp. 14-15; John Toye, Dilemmas of Development (London: Basil Blackwell. 1987). p. 74;
Christopher Colclough, "Structuralism Versus Neo-Liberalism: An Introduction" in Christopher Colclough & James Manor (eds.), States
or Markets? Nee-Liberalism and the Development Policy Debate
(London: Clarendon Press. 1991). p. 8; Etzioni, The Moral Dimension,
pp. 201-205.
See especially Robert J Holton, Economy and Society (London and
New York: Routledge, 1992), chapters 3 & 4; Etzioni, The Moral
Dimension, Chapter 1; Martin Staniland, What is Political Economy?
ChoiIHong Kong
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
A Study of Social Theory and Underdevelopment (New Haven and
London, 1985), pp. 22-23.
See Manfred Bienefeld, "Karl Polanyi and the Contradictions of the
1980s" and Alan Wolfe, "Market, State and Society as Codes of Moral
Obligation," both in Marguerite Mendell and Daniel Sal6e (eds.),
The Legacy of Karl Polanyi: Market. State and Society at the End
of the Twentieth Century (London: Macmillan, 1991).
Etzioni, "The Moral Dimension," p. 10.
Wolfe, "Market, State and Society," p. 37.
Ann Krueger, "Trade Policy as an Input to Development," American
Economic Review 70/2 (1980), p. 288, cited in Manfred Bienefeld,
"The Significance of the Newly Industrialising Countries for the Development Debate," Studies in Political Economy 25 (1988), pp.l Q..ll,
and also Colclough, "Structuralism Versus Nee-liberalism," p. 9.
A voluminous literature has been accumulated on the importance of
the state in the industrialization process of the NICs. For some representative works, see M. Shahid Alam, Governments and Markets
in Economic Development Strategies: Lessons From Korea, Taiwan.
and Japan (New York: Praeger, 1989); Alice Amdsen, Asia:J Next
Giant (New York: Oxford University Press, 1989); Frederic C. Deyo
(ed.), The Political Economy of the New Asian Industrialism (Ithaca,
NY: Cornell, 1987); Thomas B. Gold, State and Society in the Taiwan
"Miracle" (Armonk, NY: M.E. Sharpe, 1986); Stephan Haggard,
Pathways from the Periphery: the Politics of Growth in the Newly
Industrializing Countries (Ithaca, NY: Cornell, 1990); Garry Rodan,
The Political Economy of Singapore's Industrialization: National
State and International Capital (London: Macmillan Press, 1989);
Gordon White (ed.), Developmental States in East Asia (Hong Kong:
Macmillan, in association with IDS, University of Sussex, 1988);
Robert Wade, Governing the Market; lung-en Woo, Race to the Swift:
State and Finance in Korean Industrialization (New York: Columbia
University Press, 1991).
David Evans and Parvin Alizadeh, "Trade, Industrialization and the
Visible Hand," Journal of Development Studies 21/1 (1984), pp. 4346; Toye, Dilemmas of Development, p, 86; Etzioni, The Moral Dimension, p, 19.
Alam, Governments and Markets, p. 2.
Robert Wade, "East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence," World Politics 44/2 (1992),
p.280.
See Wade, Governing the Market, pp. 15-22; David Evans, "Visible
and Invisible Hands in Trade Policy Reform," in Colclough and Manor
(eds.), States or Markets, pp. 59-63.
See Alam, Governments and Markets, p. 6; Colclough, "Structuralism
Versus Neo-Liberalism," p.l0; Wade, Governing the Market, p. 363.
Stephan Haggard, Pathways from the Periphery, p. 9.
Wade, Governing the Market, p. 27; Amsden, Asia:J Next Giant, p.
130.
Haggard, Pathways from the Periphery, p. 42-46; Wade, Governing
the Market, p. 29; Wade, "East Asia's Economic Success," p. 312;
Amsden, Asia:J Next Giant, p. 148.
60
Studies in Political Economy
24.
25.
26.
27.
28.
29.
30.
31.
32.
61
This liberal origin is clearly spelled out by Haggard. See Haggard,
Pathways from the Periphery, p. 4.
Lal, The Poverty of Development Economics, p. 33.
Jayant Lele, "A Welfare State in Crisis?: Reflections on the IndiraRajiv Era," p. 4, to appear in N. K. Choudhury and Salim Manzur,
(eds.), Indian Economy and Polity, 1966-1991: the Indira-Rajiv Years
(Boulder, Col.: Westview Press, forthcoming).
John Lie, "Rethinking the 'Miracle' - Economic Growth and Political
Struggles in South Korea," Bulletin of Concerned Asian Scholars
23/4 (1991), p. 71.
For a detailed treatment, see my "The Industrial Transformation of
Hong Kong, 1945-1958: Market or State?" (M.A. Thesis, Queen's
University, 1993), pp. 15-29.
See note 1.
For a summary of neoclassicists' statistical arguments, see Lin Tzongbiau and Victor Mok, "Trade, Foreign Investment and Development
in Hong Kong," in Walter Galenson (ed.), Foreign Trade and Investment: Economic Development in the Newly Industrializing Asian
Countries (Madison: University of Wisconsin Press, 1985); and Lin
Tzong-biau and Mel-Chiang Liu, "Export and Employment in Hong
Kong," in Lin Tzong-biau, Rance Pui-Leung Lee, and Udo Ernst
Simonis (eds.), Hong Kong: Economic. Social and Political Studies
in Development (White Plains, NY: M.E. Sharpe, 1979). See also
Cheng Tong-yung, "Hong Kong: A Classical Growth Model," Weltwirtschaftliches
Archive 104 (1970), pp. 138-157; K. R. Chou, The
Hong Kong Economy: A Miracle of Growth (Hong Kong: Academic
Publications, 1966); Alvin Rabushka, Hong Kong: A Study In Economic Freedom (Chicago: Graduate School of Business, The University of Chicago, 1979); James Riedel, The Industrialization of Hong
Kong (Tuebingen, Germany: Institut Fur Weltwirtschaft an der Universitat Kiel, 1974); Sung Yun-wing, "Economic Growth and Structural Change in the Small Open Economy of Hong Kong," in Vittorio
Corbo, Anne O. Krueger & Fernando Ossa (eds), Export-Oriented
Development Strategies: the Success of Five Newly Industrializing
Countries (Bolder.Col: Westview, 1985); Edward Szczepanik, The
Economic Growth of Hong Kong (London: Oxford, 1958).
See Lui Tai-lok, "Industrialization of Hong Kong: All Laissez Faire?"
Asian Exchange 312-3 (1985), pp. 33-48; Louis Nthenda, "Recent
Trends in Government and Industry Relationship in Hong Kong," in
Tzong-biau Lin et al. (eds.), Hong Kong: Economic. Social and Political Studies in Development; M. Castells, L. Goh and R. Y- W.
Kwok, The Shek Kip Mei Syndrome: Economic Development and Public Housing in Hong Kong and Singapore (Pion, 1990). A common
theme of these accounts is that industries are able to grow because
they are subsidized by the government. However, there is no explanation as to why a British colonial state would be willing to subsidize
the class of Chinese industrialists.
The debate on the legitimate boundaries of interventions is fruitless
from the point of view of this paper because the economy is fully
embedded in society. The boundary drawing exercise is also unlikely
to succeed since there is no common standard agreed upon by the
neoclassicists. On one extreme is Riedel who identifies with Adam
ChoiIHong Kong
33.
34.
35.
Smith on the three minimal functions of governments. In between is
Ian Little who legitimizes a bigger government role by arguing that,
among other functions, the government should subsidize industries
to promote export. On the other extreme is Balassa who accepts that
infant industries need to be protected, though protection should be
done on a "moderate scale." See James Riedel, "Economic Development in East Asia: Doing What Comes Naturally?" in Helen Hughes
(ed.), Achieving Industrialization in East Asia (Cambridge:
Cambridge University Press, 1988), p. 28-29; Little et al., Industry and
Trade in Some Developing Countries: A Comparative Study, p. 24;
Balassa, The Newly Industrializing Countries in the World Economy,
p. 21.
Haggard, Pathways from the Periphery, pp. 115-125.
Rodan, The Political Economy of Singapore
Industrialization, p.
215.
They are the official Hong Kong Annual Report (herein after HKAR),
and the Hong Kong-based Far Eastern Economic Review (herein after
s
FEER,).
36.
37.
38.
39.
40.
41.
42.
See Sidney Pollard, The Development of the British Economy, 19141983, 3rd ed. (Britain: Edward Arnold, 1983), p. 236; Allister H.
Hinds, "Sterling and Imperial Policy, 1945-1951,"
The Journal of
Imperial and Commonwealth History 15/1 (1986) p. 155.
This new policy is clearly spelled out in a Colonial Office minute
dated 17 September 1947 to Stafford Cripps, the Minister of Economic
Affairs, cited in Hinds, "Sterling and Imperial Policy," p. 156. See
also the message delivered to the colonies by Arthur Creech-Jones,
the Secretary of State for the Colonies shortly after the 1947 dollar
crisis. The message is reprinted in FEER, 10 September 1947.
The transfer of surplus exchange earnings from Hong Kong to Britain
was built into the colonial monetary system. For details, see Y. C.
Jao, Banking and Currency in Hong Kong: A Study of Postwar Financial Development (London: Macmillan, 1974), p. 142; D. K. Fieldhouse, Colonialism, /870-1945: An Introduction (London: Weidenfeld
& Nicolson, 1981) p. 63; Michael B. Brown, After Imperialism, rev.
ed. (London: Heinemann,
1970), pp. 218-9.
See Alan Birch, "The Control of Prices and Commodities
in Hong
Kong," Hong Kong Law Journal 412 (1974) pp. 133-150; Szczepanik,
The Economic Growth of Hong Kong, p. 66.
See L. F. Goodstadt, "Urban Housing in Hong Kong," in I. C. Jarvie
and Joseph Agassi (eds.), A Society in Transition: Contributions to
the Study of Hong Kong Society (London: Routledge, 1969); Wong
Siu-lun, Emigrant Entrepreneurs: Shanghai Industrialists in Hong
Kong (Hong Kong: Oxford University Press, 1988), p. 25; Roger
Bristow, Hong Kong's New Towns: A Selective Review (Hong Kong:
Oxford University Press, 1989); Keith Hopkins, "Housing the Poor,"
in idem (ed.), Hong Kong: the Industrial Colony (Hong Kong: Oxford
University Press, 1971).
See HKAR 1946, p. 14-15; HKAR 1948, p. 24. See also FEER 10
December 1947.
See HKAR 1947, p. 33; Birch, "The Control of Prices and Commodities in Hong Kong," p. 144; G. B. Endacott, Hong Kong Eclipse
(Hong Kong: Oxford University Press, 1978), p. 297.
62
Studies in Political Economy
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
63
The tariff concessions of the Imperial Preference system coupled
with a tariff-free domestic market was an important factor in encouraging Hong Kong industries, especially the textile industries, to tum
overseas for their market. In the unprotected domestic market, the
newly set up textile industries could not compete with the more efficient Japanese and Chinese producers. The overseas markets in the
British empire were a different story. The tariff margin accorded by
the Imperial Preference was wide enough to give Hong Kong products
an edge over their competitors. Hence, a critical degree of protection
was conferred on the textile industries, though the protection measure
was neither taken by the Hong Kong government nor was it targeted
at the domestic market.
See HKAR 1958, p.IO-11.
Szczepanik, The Economic Growth of Hong Kong, p. 142.
Wong, Emigrant Entrepreneurs: Shanghai Industrialists in Hong
Kong, p. 46.
Ibid, p. 46; Szczepanik, The Economic Growth of Hong Kong, p.
107.
HKAR 1956, p.3.
Nicholas C. Owen, "Economic Policy in Hong Kong," in Keith Hopkins (ed.), Hong Kong: the Industrial Colony (Hong Kong: Oxford
University Press, 1971), p. 150.
For detailed studies on the trade embargo, see Gunnar Adler-Karlsson,
Western Economic Warfare: 1947-1967 (Stockholm: Almqvist & Wiksell, 1968); Shao Wenguang, China, Britain and Businessmen: Political and Commercial Relations, 1949-57 (Britain: Macmillan in
association with St. Antony's College Oxford, 1991); John R. Garson,
"The American Trade Embargo Against China" in Jerome A. Cohen,
Robert F. Dernberger & John R. Garson, China Trade Prospects and
US Policy (New York: Praeger, 1971); A. Doak Barnett, "Hong Kong
and China Trade," American Universities Field Staff, East Asia Series
3/2 (1954), pp. 9-42.
See Hong Kong Government, Hong Kong Statistics, 1947-1967 (Hong
Kong: Government Printer, 1969), p. 101-102, Table 6.5.
See D. K. Fieldhouse, Colonialism 1870-1945: An Introduction (London: Weidenfeld & Nicolson, 1981), p. 28-29.
See G. B. Endacott, Government and People in Hong Kong (Hong
Kong: Hong Kong University Press, 1964), pp. 250-251.
John Rear, "One Brand of Politics," in Keith Hopkins (ed.), Hong
Kong: the Industrial Colony, p. 64.
For a typical defender's account, see Norman J. Miners, The Government and Politics of Hong Kong (Hong Kong: Oxford University
Press, 1975).
Rear, "One Brand of Politics," p. 72.
See Miners, The Government and Politics of Hong Kong, p. 72.
P. B. Harris, Hong Kong: A Study in Bureaucracy and Politics (Hong
Kong: Macmillan, 1988), p. 81.
Henry J. Lethbridge, Hong Kong: Stability and Change (Hong Kong:
Oxford University Press, 1978), p. 40.
Cited in Wong, Emigrant Entrepreneurs, p. 25.
Excerpt of Grantham's budget speech delivered on 3 March 1954.
Cited in FEER, II March 1954.
ChoiIHong Kong
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
P.B. Harris, "Policy Process and Policy Formulation in Hong Kong,"
in Leung Chi-keung, J. W. Cushman and Wang Gungwu (eds.) Hong
Kong: Dilemmas of Growth (Australia: Research School of Pacific
Studies, Australian National University and Centre of Asian Studies
and University of Hong Kong, 1980) p. 44.
The trading class here includes the import and export traders, bankers,
insurance brokers, shipping and warehouse owners and alI other privileged groups connected with the trading business.
See James L. Watson, "Rural Society: Hong Kong's New Territories,"
China Quarterly 95 (1983), p.481.
For a description of these events, see Joe England, Industrial Relations and Law in Hong Kong, 2nd ed. (Hong Kong: Oxford University
Press, 1989), pp. II 0-II5.
HKAR 1953, p. 32.
See the folIowing for prewar development: Ian Scott, Political Change
and the Crisis of Legitimacy in Hong Kong (Hong Kong: Oxford,
1989) pp. 39-60; Chan Wai Kwan, The Making of Hong Kong Society
(Britain: Clarendon Press, 1991); Endacott, Government and People
in Hong Kong, chapters 7 & 8.
Alexander Grantham, Via Ports: From Hong Kong to Hong Kong
(Hong Kong: Hong Kong University Press, 1965), p. 109.
See Steven Y.S. Tsang, Democracy Shelved: Great Britain, China,
and Attempts at Constitutional Reform in Hong Kong, 1945-1952
(Hong Kong: Oxford University Press, 1988), p. 197; Harold Ingrams,
Hong Kong (London: Her Majesty's Stationery Office, 1952), pp.
232-233.
Marjorie Topley, "The Role of Savings and Wealth Among Hong
Kong Chinese" in I. C. Jarvie and Joseph Agassi (eds.), A Society
in Transition: Contributions to the Study of Hong Kong Society (London: Routledge, 1969), p. 211.
Ibid., pp. 210-214. Topley has not identified the name of this charity.
It is likely to be the Po Leung Kuk.
Wong, Emigrant Entrepreneurs, p. 130.
Ibid., p. 130.
Ambrose Yeo-chi King, "Administrative Absorption of Politics in
Hong Kong: Emphasis on the Grass Roots Level," Asian Survey 1515
(1975), p. 430.
See for instance the speech made by Governor Grantham at the annual
industrial exhibition of the Chinese Manufacturers' Union in 1948,
cited in Ingrams, Hong Kong, p. 1952.
Wong, Emigrant Entrepreneurs, p. 89.
J. M. Braga (Compiler), Hong Kong Business Symposiums (Hong
Kong: South China Morning Post Ltd, 1957), p. 382.
Frank H.H. King, The History of the Hongkong and Shanghai Banking
Corporation, Vol. IV (Britain: Cambridge University Press, 1991),
p.362.
FEER 29 April 1954.
64