Hong Kong was once a bastion of economic freedom and the rule of law. Along with the other “Asian tiger” economies (Singapore, South Korea, and Taiwan), Hong Kong saw its per capita GDP skyrocket during the late twentieth century, reaching levels comparable with those of advanced Western economies despite lacking a recognizably democratic system of government.

The city’s success stemmed largely from its inheriting the British legal system, which gave businesses the confidence to trade, knowing that their contracts would be enforced. The rule of law enabled Hong Kong to become such a poster child of free market success that Milton Friedman famously filmed part of his Free to Choose miniseries there.

In 1997, the United Kingdom handed Hong Kong over to China, which deemed the city a “special administrative region” but allowed it to maintain its inherited legal system. For a while, that arrangement worked, and Hong Kong continued to thrive as a financial center and entrepot. But political conflict, culminating in Beijing’s 2020 imposition of a so-called National Security Law (NSL), ultimately spelled the end of Hong Kong’s British legal system.

The NSL effectively replaced Hong Kong’s historic legal impartiality with a Chinese Communist Party–controlled system, criminalizing speech and peaceful political activity and instituting new security apparatuses. The NSL’s text and enforcement is also dangerously vague, the opposite of what a functioning economy needs.

In a recent academic paper, I analyzed Hong Kong’s shift from the British and toward the CCP-controlled legal system as a natural experiment. Such natural experiments, like when Korea split in two and when the USSR dissipated and the new countries went in different policy directions, are rare, but can be highly instructive in evaluating the influence of institutions—in this case, the rule of law—on economic outcomes.

After the NSL was implemented, I found that emigration from Hong Kong rose, Hong Kong firms’ valuations fell, public confidence in the rule of law cratered, and the city’s economic performance plateaued. According to my research, a hypothetical Hong Kong that had kept the British legal system would have had a GDP per capita approaching $60,000 USD by 2022; Hong Kong’s actual GDP per capita, by contrast, is less than $50,000 USD. While Hong Kong’s GDP per capita has been stagnant since the NSL’s implementation in 2020, contemporaries like Singapore (a major beneficiary of the Hong Kong exodus) continue to experience substantial gains. Such measured effects may also include the negative effects of Hong Kong’s pandemic lockdowns, which were harsher than those of many other countries.

The NSL’s broad scope creates uncertainty and makes it challenging for firms to predict whether their business activities will be construed as violating the law’s so-called national security provisions. The law also makes foreign employees less comfortable living in Hong Kong. Firms in globally connected industries such as real estate, air travel, and the financial and banking sectors are sensitive to such changes and are geographically mobile. Accordingly, global firms like Goldman Sachs and JP Morgan have begun relocating assets and personnel to other Asian locations, such as Singapore.

The law has also caused many Hongkongers to leave the city. The Hong Kong Census and Statistics Department and a daily immigration tracker found that the city has lost a net of approximately 700,000 non-foreign residents since the NSL was passed in June 2020. Foreign residents are also fleeing; the number of foreign lawyers, for example, fell from 1,700 in 2020 to 1,400 in 2022, according to data from The Law Society of Hong Kong, as the expected demand for the profession has evaporated. Global law firm Latham & Watkins says that it is now “treating Hong Kong like Mainland China” and is cutting off its Hong Kong-based lawyers from international databases.

These companies’ fears—that the NSL will be broadly and arbitrarily enforced—have been validated by arrest records. While it was initially unclear to what extent China would use the NSL to silence political opposition, the Communists in Beijing have used the law to imprison nearly 300 individuals. Hong Kong businessman and publisher Jimmy Lai, for example, now awaits an NSL kangaroo court verdict. The Hong Kong government is also finalizing another new law, Article 23, that will police and limit the interactions of Hong Kong citizens with journalists and foreign governments.

Hong Kong’s economic freedom and capitalist system once enabled millions to rise out of poverty. Now, robbed of the rule of law, the city is increasingly entangled in China’s authoritarian net.

Photo by PETER PARKS/AFP via Getty Images


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