Milton Friedman and other neoliberal economists long admired Hong Kong as a rare empirical demonstration of laissez-faire principles in practice. Under Financial Secretary John James Cowperthwaite (1961–1971), Hong Kong pursued minimal government intervention, low and stable taxes, strict fiscal discipline, open trade as a free port, and a deliberate avoidance of subsidies or welfare programs. At a time when postwar Britain and much of the Western world were expanding welfare states, nationalizing industries, and raising taxes, Hong Kong’s sustained economic boom appeared to validate the claim that free markets and limited government could generate prosperity without extensive state planning. For Friedman and Hayek, Hong Kong became a textbook counterexample to interventionist orthodoxy.
Yet the broader lesson for the Global South has since become more complex. For decades, many developing countries were told that prosperity required adherence to the Washington Consensus—privatization, deregulation, and liberal democratic governance. China’s rise challenges this assumption. Through state-led development, long-term planning, massive infrastructure investment, and selective integration into global markets while maintaining political autonomy, China has demonstrated an alternative path to modernization. Its achievements in poverty reduction, education, and technological and energy development suggest that modernization is no longer synonymous with Westernization. This reality has unsettled long-standing Western assumptions about universal development models, revealing that liberal democracy and free-market orthodoxy represent not the only route to prosperity, but one among several viable forms of modernity.
Why Free-Market Theorists Held Up Hong Kong as a Model Economy
Milton Friedman and other free-market economists promoted Hong Kong because it offered a rare, real-world illustration of their theoretical claims about laissez-faire capitalism. In the decades after World War II, Hong Kong—then a resource-poor British colony—experienced extraordinary economic growth under policies that closely matched the prescriptions long advocated in academic economic theory. For economists often criticized as operating in the “ivory tower,” Hong Kong provided empirical validation rather than abstract argument.
Central to this appeal was the policy framework implemented under Financial Secretary John James Cowperthwaite in the 1960s. Government intervention was deliberately restrained: taxes were kept low, public spending tightly controlled, trade almost entirely free, and industrial policy largely absent. Cowperthwaite resisted subsidies, price controls, and expansive welfare programs, believing markets were better at allocating resources than bureaucrats. The result was rapid industrialization, exceptionally high export growth, substantial poverty reduction, and a dramatic rise in per capita income—eventually surpassing that of Britain itself.
This performance stood in sharp contrast to the economic direction taken by many Western countries at the time. Post-war Britain and much of Europe were expanding welfare states, nationalizing industries, and relying heavily on state planning. To Friedman, Hayek, and their intellectual allies, Hong Kong functioned as a living counterexample: a society achieving broad-based prosperity without extensive redistribution, central planning, or high taxation. Its success challenged the prevailing assumption that modern economies required large, interventionist governments to deliver growth and social improvement.
Hong Kong’s experience also mattered because of its influence beyond academic debate. Policymakers in the United States and the United Kingdom later drew on its example when advancing market-oriented reforms in the 1980s, while Chinese reformers studied Hong Kong closely as they began opening their economy. For free-market theorists, Hong Kong was not merely a prosperous city, but a powerful demonstration that minimalist government and open markets could work at scale—turning economic theory into observable reality.
When Context Fades: Why the Hong Kong Free-Market Model Failed to Endure
Milton Friedman’s admiration for Hong Kong was grounded in real and observable achievements. In the mid-to-late twentieth century, the territory experienced extraordinary economic growth under a low-tax, lightly regulated, and outward-oriented market system. These outcomes convincingly demonstrated that free-market mechanisms could generate rapid expansion, particularly for late-developing economies during a catch-up phase. In this narrow, short-term sense, Friedman’s observations were not wrong. What history has challenged, however, is the durability and universality of the conclusions he drew from them.
The core limitation of Friedman’s analysis lies in his abstraction of historically contingent success into general economic law. Hong Kong’s rise was inseparable from unique conditions: Cold War geopolitics, preferential access to global markets, the relocation of manufacturing along global value chains, and a large influx of low-cost, disciplined migrant labor. These factors created a temporary equilibrium exceptionally favorable to laissez-faire governance. Over time, as these conditions faded or reversed, the same institutional framework proved insufficient to address new structural pressures. The long-run trajectory thus revealed that the original success was context-dependent rather than indefinitely self-sustaining.
At the institutional level, Friedman was right to highlight Hong Kong as a challenge to the belief that democratic governance was a prerequisite for market efficiency. The colonial administration under John James Cowperthwaite showed that a technocratic, politically insulated state could, under certain circumstances, foster remarkable economic dynamism. Yet Friedman overestimated the transferability of this arrangement. Cowperthwaite’s personal authority, judgment, and freedom from electoral pressure were exceptional, not replicable. Once leadership changed, the system lacked internal mechanisms to preserve strict laissez-faire policies against rising social demands.
Economic success itself generated new contradictions. Rapid growth and minimal regulation produced extreme wealth concentration and soaring property prices, particularly in the housing market. Over decades, inequality hardened and social mobility weakened. These outcomes eroded public trust and highlighted a fundamental weakness in Friedman’s framework: markets alone do not guarantee distributive fairness or social cohesion. As the gap widened between aggregate prosperity and individual well-being, the legitimacy of the economic order came under strain.
External shocks further exposed structural vulnerabilities. Hong Kong’s deep integration into global finance and trade made it highly sensitive to international crises, from the 1987 stock market crash to the 1998 Asian financial crisis and the 2008 global recession. In each case, government intervention became unavoidable, contradicting the ideal of minimal state involvement. These episodes demonstrated that, in the long run, even highly efficient markets require stabilizing institutions to survive systemic shocks.
Finally, public opinion proved decisive. Laissez-faire policies in Hong Kong were never deeply rooted in popular consensus; they were sustained largely through top-down governance. As social expectations evolved, residents increasingly demanded public housing, healthcare, education, and regulatory protection. The gradual expansion of welfare and state intervention after the 1970s reflected not ideological reversal, but political necessity. History thus suggests that while free markets can ignite growth, only systems that integrate fairness, resilience, and social consent can maintain stability over time.
In retrospect, Friedman’s error was not empirical but theoretical. He mistook a temporary alignment of exceptional people and circumstances for a permanent model. Hong Kong’s experience ultimately shows that economic engines may start with markets, but their long-term survival depends on institutions capable of adapting to social realities and sustaining collective trust.
Milton Friedman and Hong Kong: A Lens on the Western Narrative of Modernity
In the early 1960s through the early 1970s, Milton Friedman presented Hong Kong as a paradigmatic case of free-market triumph, framing it as a “miracle moment” that extended far beyond mere economic performance. Within the broader Western narrative of modernity, Hong Kong appeared to exemplify a linear logic: modernization necessitates marketization, which fosters liberalization, and ultimately leads to democratization. Its small size, minimal government intervention, and remarkable prosperity seemed to confirm the idea that non-Western societies must emulate Western systems to achieve success.
Hong Kong, under this lens, functions as an “ideal witness” to this narrative. Despite its non-democratic governance, it demonstrated rapid growth, significant poverty reduction, and the emergence of elements of civil society. The implication was profound: even without political liberalization, allowing market forces to operate unimpeded could yield prosperity and social development. Moreover, this framing retrospectively legitimized China’s later reforms, suggesting that its economic liberalization drew directly from Hong Kong’s market-oriented model.
Yet, this celebratory account relies on selective amnesia. The Hong Kong “miracle” was not the product of spontaneous market order alone, but of deliberate and centralized policy decisions by figures such as John James Cowperthwaite, who wielded extensive bureaucratic authority and deliberately resisted populist pressures. Subsequent periods of stagnation and socio-economic division were tied to the territory’s adoption of welfare policies, mirroring Britain, which marked a departure from the earlier period of atypical liberalism. More critically, Hong Kong never completed a comprehensive project of nation-building: it lacks strategic industries, technological sovereignty, and essential resource security. Its prosperity and “freedom” were contingent upon external protection and geopolitical advantages, rather than endogenous resilience.
Consequently, Hong Kong’s experience challenges the universalist assumptions embedded in Friedman’s narrative. While it offers a compelling case study, it remains an unreplicable exception rather than a model for large, complex nations. The Friedman-Hong Kong paradigm cannot answer the pressing question faced by countries like China: how can a civilization of 1.4 billion people achieve widespread, sustainable prosperity in the absence of external protection and under conditions of systemic constraint? Hong Kong’s story, therefore, serves less as a blueprint than as a provocative anchor point, illuminating both the allure and the limitations of the Western narrative of modernity.
China’s Rise and the Paradigm Spillover Effect: Challenging the Core Assumptions of Western Liberalism
The rise of China over the past four decades has profoundly challenged the foundational assumptions of Western liberalism, revealing a “Paradigm Spillover Effect” that reshapes conventional thinking about development, markets, and modernity. By pursuing an alternative model of growth, China has demonstrated that the pillars of Western modernity are neither universal nor inevitable.
Historically, Western thought has assumed that economic development requires institutional convergence, such as secure property rights, independent judiciaries, and multi-party political competition. China’s experience offers a striking counterexample. Maintaining an average annual growth rate of nearly 10%, lifting over 800 million people out of poverty, and building the world’s most complete industrial system, China shows that institutions can be endogenously adaptive. This is not a transient anomaly; rather, it is empirical evidence of the resilience and flexibility of governance systems that differ from Western templates.
Another long-held presumption is the sharp dichotomy between market and state. Classical liberal thought valorizes market inaction, exemplified by figures like John James Cowperthwaite. China’s model, in contrast, illustrates the efficacy of a “state-empowered market,” where strategic government intervention coexists with competitive innovation. Through coordinated infrastructure projects, technological investment, and industry-specific funds, China has accelerated transformative sectors such as renewable energy and electric vehicles. In contrast to Western approaches, which rely on fragmented market incentives and struggle with political volatility, China has achieved systemic synergy, producing 70% of global photovoltaic modules and nearly 60% of new energy vehicle sales. Similarly, in poverty reduction, China integrates infrastructure, industrial activation, education, and digital technology to break intergenerational poverty cycles, demonstrating that state-led interventions can strengthen, rather than replace, market dynamics.
Finally, China challenges the Western presumption that modernity is synonymous with individual rights. While liberal modernity emphasizes procedural justice and freedom from want, China prioritizes the right to survival and the right to development, embedding these within national strategies such as “common prosperity,” ecological goals, and rural revitalization. For a super-large society of 1.4 billion people, China’s vision balances order, fairness, and sustainability alongside efficiency and innovation. Modernization, in this framework, is not only measured by GDP growth but also by systematic civilizational upgrades, encompassing ecological restoration, cultural revival, technological autonomy, and global responsibility.
China’s rise, therefore, constitutes a paradigm spillover effect: it deconstructs the triple presuppositions of liberalism regarding institutional convergence, the market-state relationship, and the conception of modernity. By offering a viable alternative path to development, China compels a reexamination of what is possible in the 21st century, challenging the West to reconsider its assumptions about growth, governance, and human progress.
From Constraint to Choice: China and the New Development Paradigm of the Global South
For decades, many developing countries faced development paths dictated by external prescriptions, most notably the “Washington Consensus” promoted by the IMF. Structural adjustment programs, fiscal austerity, and rapid financial liberalization were presented as universal solutions, yet the results often proved devastating: capital flight, deindustrialization, and social unrest defined Latin America’s “lost two decades” and the Southeast Asian financial crisis. Nations were left with the sense that there was no alternative—a single route imposed from outside.
Today, the landscape is shifting. Countries across the Global South are exploring new pathways, inspired in part by China’s developmental experience. Ethiopia has embraced state-led industrial parks and infrastructure projects; Indonesia is nurturing a domestic battery industry through strategic resource policies; Saudi Arabia’s Vision 2030 positions its sovereign wealth fund as a driver of economic transformation. These nations are no longer hesitant to acknowledge the value of learning from China, rather than simply following Western templates, signaling a newfound confidence in choosing their own developmental trajectories.
China’s significance lies less in exporting a fixed model than in offering methodological insights. Its experience demonstrates the importance of policy space sovereignty, allowing countries to reject “one-size-fits-all” reforms. Long-term planning—from five-year plans to centenary goals—offers a temporal advantage, enabling incremental yet strategic progress. And China’s ability to integrate infrastructure, industry, education, finance, and digital platforms illustrates how systemic coordination can catalyze development. In short, the Global South is moving from a position of constrained choice to one of multiple possibilities, redefining development on its own terms.
Final Thoughts
This is not the “Thucydides Trap,” but rather a “paradigm shift trap.” For decades, the Global South was told there was only one path to prosperity: the Washington Consensus of privatization, deregulation, and democratic governance. China has shown that another model is equally viable: state-led development, long-term planning, massive infrastructure investment, selective global integration, and political autonomy. The West’s anxiety is not merely about China surpassing it in military power or GDP, but about the realization that its own system struggles to address wealth inequality, aging infrastructure, political polarization, and industrial decline, while a so-called “authoritarian” rival demonstrates greater organizational effectiveness and long-term vision in tackling shared human challenges—from poverty reduction and renewable energy to digital infrastructure and pandemic response. When Indian farmers irrigate fields with affordable Chinese solar panels, Kenyan youth start businesses with Chinese-built digital payment systems, and children in Brazilian slums return to school thanks to Chinese vaccines, they see not ideology, but tangible hope—and hope always outweighs dogma. This is the essence of the paradigm shift: the question is no longer simply who will lead, but what constitutes a good society and viable modernity.