Dynamic Trade, Endogenous Institutions and the Colonization of Hong Kong: A Staged Development Framework

T. Terry Cheung, Theodore Palivos, Ping Wang, Yin-Chi Wang and Chong Yip

No 23937, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E02 E65 F54 O11 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-cna, nep-his, nep-int and nep-mac
Note: EFG POL
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