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Case Code: ECON067
Case Length: 18 Pages 
Period: 2016-2018   
Pub Date: 2018
Teaching Note:Available
Organization :Hong Kong’s Economy
Industry :Economic Sector
Countries : Hong Kong
Themes: Fundamental Economics/Micro-economics/International Economics/Business environment/Business Ethics
Case Studies  
Business Strategy
Human Resource Management
IT and Systems
Leadership & Entrepreneurship

Hong Kong`s Free Economy: At the Crossroads?

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Hong Kong’s free economy began with John James Cowperthwaite (Cowperthwaite), a British civil servant who was commissioned as colonial Hong Kong’s Financial Secretary from 1961 to 1971. Cowperthwaite took the initiative to draft a radical laissez-faire policy for Hong Kong known as positive non-interventionism, which would minimize taxes and eliminate all market regulations. Following its independence from British colonial rule, Hong Kong retained the characteristics of a free-enterprise economy, as specified in the ‘Joint Declaration’. The Chinese government committed itself to protecting Hong Kong’s “capitalist system and way of life” and granted it “a high degree of autonomy,” .

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Although Hong Kong was technically a Special Administrative Region of China, the territory stood on its own as an independent free market. Its capitalist features such as free and open trade, light regulation, simple and low tax system, and a level playing field, among others, made the region one of the world’s most attractive markets. The expansion of the economy was attributed to buoyant stock market, increased trade, hot property sector, growing employment, and a positive global outlook. .


Hong Kong, described by an American economist Milton Friedman (Friedman) as “the world's greatest experiment in laissez-faire capitalism” , had introduced a number of regulations during Cowperthwaite’s period (from 1961 to 1971). It was considered as the world’s freest economy for the 24th consecutive year on the Heritage Foundation’s 2018 Index of Economic Freedom report. Hong Kong had ranked at the top every year since the inception of the Economic Freedom Index in 1995..


Though Hong Kong remained the world’s most dynamic and freest economy, the political conditions went from bad to worse over the years. While many people in Hong Kong did not have confidence in the local economy, its ties to the “mostly unfree” mainland stunted its economic performance. With the mature Chinese economy and cities in the country flourishing as global hubs of their own, Hong Kong’s economic relevance came into question. .


Hong Kong’s growing resentment toward the mainlanders continued to increase, primarily due to Beijing’s political interference. In the Basic Law governing the city, China had promised to honor Hong Kong’s historical liberties under the “One Country, Two Systems” concept. Under the arrangement, Hong Kong would become a part of China, while continuing to have its own constitution, political system, and civil liberties. But after 21 years of independence, Hong Kong was facing a critical situation with its autonomy and core values in serious danger and with no sign of the promised democratic development of the region.


Hong Kong had been lauded for decades by economists for its free economy, which had few regulations of any kind and no sales tax or capital gains tax. At the same time, the greatest challenge to its unique economic model was the prevalence of income inequality. According to Richard Florida, director at the Martin Prosperity Institute in Toronto


Though Hong Kong ranked consecutively among the top in the world in economic freedom, with the threat to its position looming large, its pro-democracy agitations continued to spread across the territory. Andy Kwan Cheuk-chiu (Kwan), director of the ACE Center for Business and Economic Research , noted that political controversies in the territory, including the disappearance of the Hong Kong book publishers, could harm its position as a country where freedom prevailed. .


Exhibit I: Major Economic Indicators of the Hong Kong Economy (2015-2018)
Exhibit II: Hong Kong’s Merchandise Trade Performance (2016-2018)
Exhibit III: Economic Overview of Hong Kong (2015-2019e)
Exhibit IVA: Ease of Doing Business Ranking (2018)
Exhibit IVB: Ranking on Doing Business – Hong Kong
Exhibit V: Hong Kong’s Ranking in Ease of Doing Business (2005-2018)
Exhibit VI: Hong Kong’s Freedom from Corruption Score (1995-2016)
Exhibit VII: The World’s 10 Freest Economies (2018)
Exhibit VIII: The Global Competitiveness Index 2017-2018 Rankings
Exhibit IX IMD World Competitiveness 2017
Exhibit X Gini coefficient of Hong Kong – A Deeply Unequal City (Figures in 2017)
Exhibit XI Hong Kong’s Unaffordable Housing System