Dynamic Trade, Endogenous Institutions and the Colonization of Hong Kong: A Staged Development Framework
To explore the interplays between trade and institutions, we construct a staged development framework with multi-period discrete choices to study the colonization of Hong Kong, which served to facilitate the trade of several agricultural and manufactured products, including opium, between Britain and China. Based on the historical data and documents that we collected from limited sources, we design our dynamic trade model to capture several key features of the colonization process and use it to characterize the endogenous transition from the pre-Opium War era, to the post-Opium War era and then to the post-opium trade era, which span the period 1773-1933. We show that while the low opium trading cost and the high warfare cost initially postponed any military action, the high valuation of the total volume of bilateral trade, the rising opium trading cost and the anticipated increase in the demand for opium eventually led the British government to declare the Opium Wars, legalizing opium trade via the colonial Hong Kong. We also show that, in response to a drastic drop in opium demand and a rising opium trading cost, it became optimal for the British government to abandon opium trade soon after the founding of the Republic of China.
We thank Ying Bai for sharing his data on opium trade. We are grateful for valuable comments and suggestions to Rick Bond, Mario Crucini, Gerhard Glomm, Boyan Jovanovic, Derek Laing, Douglass North, Pietro Peretto and Ray Riezman, as well as participants of the Summer Meetings of the Econometric Society and the Midwest Macro Meetings. Financial support from Academia Sinica, the Chinese University of Hong Kong, and the National Science Council (NSC 98-2911-H-001-001), which enabled this international collaboration, is gratefully acknowledged. Jian Tang, Long Ho Wong and Jianpo Xue provided excellent research assistance. Needless to say, the usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.