From independence, freedom and truth


A model that works just fine

Fernando del Pino Calvo Sotelo

September 26, 2012

In today’s Spain, paralyzed by fear and doubt, trapped in the shifting sands of a moral political and economic Depression that seems to have no end, we witness in total shock how the government raises our taxes every three weeks shamelessly breaking every promise it made, and trying to neutralize the uproar caused by this behavior with a grotesque populism that is about to destroy without remorse the thin layer of rule of law that their predecessors in power had somehow forgotten to skin off. In sheer contrast, the enormous squanderings of our administration and the ruinous regional political structure remain untouched.

In this situation, we wonder in despair whether there are alternatives or not to these policies sold as inevitable. We search for a different paradigm, a true North. Does it exist? Today I am going to talk about a story of rags to riches, in which a small territory, labeled a “barren rock”, traveled from poverty to wealth in just one generation. I would also like to introduce you to the architect of that notable feat: a brilliant, highly educated, frugal, modest and incorruptible public servant, who strongly defended his principles because they were right and built the with enormous success the economic foundations, solid as the barren rock on which they stood, that would outlast him.

Hong-Kong, 1961. For fifteen years now, the successive tides of refugees fleeing from the Chinese communist regime are crowding into this British colony, formerly a poor fishing village. The population has multiplied by five times during this period, reaching one of the highest population densities on the planet: up to three million people live in this tiny patch of land. Except for a beautiful bay, no better than the myriad of bays around this coast, this territory has no natural resources. Devoid of any meaningful cropland, it has to import food from the outside; it even has to import water from its hostile, giant neighbor, who intermittently cuts the supply when it feels in the vein of doing so. Its per capita GDP remains one fifth that of Great Britain, or half of the African country of Gabon.

Time goes by. Hong-Kong, 1997. England hands its former colony to China. At that moment, the colony’s seven million people enjoy a per capita GDP 25% higher than that of their former mother country and a higher life expectancy as well. In just one generation, Hong-Kong has left behind the Third World club and has become the seventh richest country in the world. How come? How could such an extraordinary change take place so fast?

The responsibility first lies, of course, with its hard working people, where risk-taking entrepreneurs abounded: people who knew and embraced the concept of sacrifice with their sight fixed on a brighter future. But there is a man who deserves the credit for creating and fiercely defending the principles that made this success possible, building the adequate framework and reward system, the Scot John Cowperthwaite, Hong-Kong’s Secretary of Finance from 1961 to 1971. In his first speech he openly outlined his clear ideas. Please read them slowly and savor this breath of fresh air: “In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster”.

Cowperthwaite set up the basic pillars of progress: the rule of law, property rights and free enterprise and trade. He decided to hold a fixed tax rate for both individuals and corporations of 15%, and that rate remained unaltered for decades. Moreover, a vast part of the population remained exempt because of high minimum income hurdles. Even today, personal income taxation remains at 15%, capital gains pay 0, corporate tax is 16.5% and there is no VAT. He also kept the size of the State down to a minimum: public expenditures were 12% of GDP when he left office (the figure is 50% today, in Spain). The proportion of public employees never went beyond 5% of the labor force (as compared with 17% in Spain); these public employees became famous for their efficiency and vocation of service. Paperwork was kept to a bare minimum: a business could be started by simply filling out a one page bilingual form. The government did not issue any debt and operated its budget with surpluses (as compared to a 80% debt to GDP and north of 7% deficit in Spain today). Hiring and firing were totally free, and no minimum wage applied (although there was an impartial legal system where workers could defend their rights). As a general rule, no subsidies were allowed. As an example, one day a group of businessmen came to see Sir John to propose the “indispensable” building of a tunnel underneath the bay, or course, backed by public funds. The redoubtable Secretary of Finance responded that is it was indispensable indeed they should build it themselves (which they would end up doing). Nothing to do, may I add, with our passenger-empty super expensive high speed trains or our public airports built and abandoned in the middle of nowhere. Thanks to all this, Hong Kong turned out to become a true industrial power (the financial center would come later), and the “Made In Hong Kong” trademark became widely known throughout the world: in the sixties, exports rose at a 14% annual rate. Unemployment was negligible, ranging between 2% and 4% (25% in Spain nowadays). Last but not least, in spite of the constant population growth, real wages kept growing (at a 4% rate during Cowperthwaite’s office term).

It wouldn’t be realistic to try to implement Hong Kong’s model in a country such as ours. However, we do know that this model had a quantifiable and obvious success. Therefore, it seems logical to defend policies that might approach those which achieved such success and openly criticize those which might go in the opposite direction. Low taxes, rule of law, freedom without bureaucratic obstacles, free competition, minimum interventionism and a small sized State, all lead to success and riches. Raising ever higher taxes; changing laws willy-nilly; constantly intervening in the economy; keeping a system which is hostile to the creation and survival of business; and refusing to reduce the size of a giant and amorphous State, overcrowded with a thick bureaucracy full of rigidities and superfluous formalities, are all policies that go against success and consequently lead to failure and poverty.

If we follow the trail of success, we will achieve success; if we follow the trail of failure, this is precisely what we will get. Now you are acquainted with John Cowperthwaite and his hugely successful policies. His accomplishment should not surprise anyone, because everywhere and at all times, the trail of success has always followed the scent of freedom. Applying logic we should follow this trail. I wonder why we are moving in the opposite direction.


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