To save Hong Kong, make it a charter city run by the likes of Alibaba and CK Hutchinson

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I would like to start this article in an unusual way. I admit that looking at the title, the article appears to be some sort of a drug-induced fantasy. However, I am in the Christmas mood, and, more seriously, the idea of charter cities is far less ridiculous than it sounds, and applies well beyond the extremely difficult case of Hong Kong. If you are a Hong Kong protestor, you may well be outraged by what I am proposing, and I understand. Please, consider that I myself participated in protests against an authoritarian regime, namely, Putin’s, and I salute your dedication and bravery. In other words, please hear me out.

Hong-Kong’s 2019 protests and the political reality

Before 2019, no one, except, perhaps, for some regional specialists, had expected the quiet, commerce-focused, wealthy Hong Kong to become one of the world’s hot spots, yet that is exactly what happened. [In response to the bill that would allow to extradite Hong-Kong suspects from the city to be tried in China, protests erupted.] The pro-China government led by Carrie Lam badly botched the response to the protests, first, then abandoned the bill when it was already too late to quell the discontent.

The protests continued, facing increasingly violent response, and recently, one protester was even killed. The protesters’ message has increasingly turned into one for full-blown independence and truly democratic self-government. Among the most spectacular and bold actions by the protesters have been the open appeals to the U. S. to intervene on their behalf and the moving expressions of support for the persecuted Uighurs. The protests also galvanized the support for the pro-democracy candidates at the local councils election, delivering a humiliating result for the Chinese government.

While from the moral standpoint, it would certainly be desirable for Hong Kong protesters to get their wish, it is clear that the two alternatives currently on the table are either the continuation of the creeping dismantling of the city’s autonomy or a Tiananmen-style crackdown. The reasons for this are simple: China has a tremendous advantage in physical force, its economy is second only to the US’s, and there is no appetite in the developed countries like the US for a serious confrontation with China, involving really biting measures like massive economic sanctions.

It is clear that a truly outside-the-box solution is needed. I believe that bringing Hong Kong back to its essentially charter city roots under the aegis of mostly Chinese and China-related companies could be just what is needed. Before I delve deeper into the proposal, let us briefly consider some preliminaries.

China may not want to micromanage Hong Kong but will crush sovereignty attempts

Hong Kong’s economic and legal order is pretty economically beneficial for China. It is essentially the gateway for global financial capital flowing into the mainland. The data cited by Reuters speak for themselves:

Most of China’s biggest firms, from state-owned Industrial and Commercial Bank of China (1398.HK), to private firms like Tencent Holdings (0700.HK), have listed in Hong Kong, often as a springboard to global expansion. Last year, Chinese companies raised $64.2 billion globally — almost a third of the worldwide total — via initial public offerings (IPOs), but just $19.7 billion of that came from listings in Shanghai or Shenzhen, according to data from Refinitiv, compared with $35 billion in Hong Kong.

“Connect” schemes linking the Hong Kong bourse with those in Shanghai and Shenzhen also provide the main gateway for foreigners to buy mainland stocks.

Chinese businesses also tapped Hong Kong’s debt market for 33% of their $165.9 billion in offshore U.S. dollar funding last year, Refinitiv data shows.

The Chinese leaders probably also realize that if the city’s autonomy is extinguished, the benefits of Hong Kong’s special status will disappear with it. They would probably ceteris paribus want to preserve the city’s special regime in a certain way.

However, most people and commentators all over the world probably exaggerate the importance of narrowly economic incentives in politics. The Chinese government, while maintaining a veneer of socialism, is mostly engaged in restoring the might of the Chinese Empire before China was spectacularly overtaken by the West in the 19th century. The core pillar of this ideology is, unsurprisingly, to affirm the Chinese control over all the territories considered to be part of China historically. One can be perplexed by the importance of archaic symbolism but politics is, sadly, mostly profoundly irrational, and even more so in countries like China.

The Chinese government would also probably be desperate not to allow the people of Hong Kong to serve as an example of successful democratic resistance to other people under its rule, especially to the ethnic minorities like the Uighurs, Tibetans and others. Its treatment of Uighurs speaks volumes about the lengths to which it is prepared to go.

However, if Hong Kong’s special regime were to be ultimately guaranteed by major Chinese companies like Alibaba and Baidu and China-related companies like CK Hutchinson, this would mean that the Chinese government would retain the sovereignty and symbolic control over the city that it craves, while allowing it the city’s unique very liberal legal order to remain intact.

Hong Kong has risen and prospered as a quasi-charter city

Due to a convergence of many historical trends and events, Hong Kong has been the closest the world has had to a charter city since the end of WW2. It was a small British colony within a larger territory that was never colonized. It became a large port city next to a country that was plunged into darkness and extreme economic backwardness by communism, which drove people from the latter into it. And amazingly, it was also isolated from the post-war interventionist legal and fiscal tendencies in its metropoly, Great Britain and just at the right time, it had a governor who understood the crucial role free markets play in development. It thus essentially imported into another, much poorer and less developed society the best features of British legal order. Just like in a genuine charter city model first proposed by economist Paul Romer. Only the Hong Kong’s experiment had started way before Romer came up with the idea in 2009.

No one summarized what this resulted in better than Milton Friedman:

Compare Britain — the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set — with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbor. Yet within four decades the residents of this spit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.

When China started opening up its economy after 1979, Hong Kong played a crucial role in making the Chinese miracle possible. In 1997, the sovereignty over Hong Kong was transferred to China, on the condition that the city would retain its special status and laws until 2047.

Freedom is important, democracy is overrated

Now, let us turn to the Hongkongers’ yearning for democracy. After many decades of the at best semi-democratic rule and given that it is a dogma in the modern world that democracy is the highest stage of social development, it is perfectly understandable. But what if the alternative is either preserving the liberal order or a slim chance of achieving democracy coupled with the enormously higher probability of a massive crackdown?

Is democracy really so valuable? I do not know about you but governance systems are not ends in themselves. It matters how people actually live, not whether they actively participate in governance. It is true that in the context where there is an extensive government, democracy is probably the lesser of all evils because it at least renders very unlikely horrendous government misdeeds like mass repression, genocides or even all-out central planning.

However, what if government is largely limited to resolving disputes according to common law judicial precedent and policing, does democracy remain such a big deal? In fact, it could even be counterproductive but at least it does not seem worth risking the Chinese crackdown.

The crux of the proposal

Now, let us turn to the essence of the proposed arrangement. The idea is to turn Hong Kong into the world’s first formal charter city, whose status is guaranteed by a consortium of major companies from China or with significant cultural and economic ties to China. The former obviously include the likes of Alibaba, Baidu and Huawei, while the latter could include the Hong Kong-based CK Hutchinson, the crypto unicorn Binance founded by Changpeng Zhao, Justin Sun’s Tron, etc. The presence of the companies from the second category could serve to increase the trust of Hongkongers in the arrangement, while not offending the Chinese nationalism too much.

The city’s legal order will not need to change much, the consortium of companies will just largely become the guarantor of it. I will deliberately avoid going into further details of the proposal here. Think the governance structure, the exact role the governing consortium would play and how it would interact with the people of Hong-Kong, what matters would it be right to leave to the people of Hong Kong to decide through local government, and so on. These questions are better saved for another day.

What matters is that the resulting arrangement allow to preserve the relatively light regulation of markets, the independence of the judiciary and its reliance on the British common law in its decisions. Hopefully, the arrangement could also help liberalize the land extremely detrimental approach to land use by the Hong-Kong’s government that is actually responsible for the notoriously stratospheric housing prices

Should we fear a United Fruit Company scenario?

A possible objection to the charter city proposal would be that we had private companies effectively ruling territories in the past, and it did not end well. Just recall the United Fruit Company, I almost hear you say.

The problem is that, despite the predominant narrative, the net impact of the United Fruit Company was probably positive. If you want to learn more, you may read Alex Tabarrok’s summary of a recent study on the company’s long-term impact in Costa-Rica and the study itself. Tabarrok also links to other research on the impact of corporate governance of territories, including his own research on the Indian city of Gurgaon.

The world badly needs charter cities in 2020s and beyond

Finally, even beyond Hong Kong, the world badly needs charter cities. The imperative for creating them (see here and here) is as strong as when Paul Romer proposed them. Despite the efforts by him and others, the idea failed to be implemented, whether in Mozambique or in Honduras, although there are still reasons for hope for the latter.

Hong Kong is probably much easier to turn into a genuine charter city than a bare strip of land in Honduras, though. Should this happen, it could boost the prospects of charter cities elsewhere in the world.

Written by

PhD, economics (2018) from Aix-Marseille University, independent blockchain adoption consultant based in Aix-en-Provence, France, Email: daniilgor2004@gmail.com

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