(This essay was published in Hong Kong Economic Journal on 10 April 2013)

 

The question of whether Hong Kong has lost its magic presupposes that the territory is facing an ominous future or heading down that pathway. If the future is indeed so worrying, then it may warrant taking desperate and drastic action. This is certainly the view of those who have expressed concerns about our future. But whether their concerns are justified has to be carefully analyzed. What is it exactly that they are worried about?

 

It is highly likely that different people are worried about different developments. The long-term inability of these different people to agree with each other is evidently a big part of why there is a perception of a dark future. But is this perception genuine? Is it inevitable? Can it be resolved?

 

As an economist, I have always been optimistic about the future of Hong Kong, the place, but not necessarily about its entire people. As an open city located at the center of the fastest growing region in the world and in the fastest growing country, how can one not be optimistic about the economic future? That optimism would only end if Hong Kong were turned into a closed and insular city. And if its economic future is secure, then how bad can its social and political future be? The most important lessons of human progress over the last two centuries is that economic progress can underwrite a lot of other forms of progress. Our higher standard of living, open access political system, greater equality, human longevity, and many other measures of progress are the products of economic development brought to us by the Industrial Revolution.

 

The people of Hong Kong, however, are an evolving concept. This concept includes those who are yet to be born, those who will come here from other places in future, and those who have left but may return someday; and perhaps even those who have left permanently but remain connected to the place and its people in one way or another. The “people of Hong Kong” is a difficult concept to make concrete because this is an open city and its people and their activities are connected with the mainland and the rest of the world. They all have some stake in the city’s future. This is a privilege that an isolated sleepy local village does not possess.

 

In such an open city there will always be winners and losers as the fortunes of one group ascends and another group descends in keeping with the changing relationship with the outside world. How we address the misfortunes of the losers and the fortunes of the winners will shape the future development of the city. With every step we take to insulate Hong Kong from external shocks, we will move one step closer to becoming a less open, less vibrant city. Therefore, whether and how much we protect the losers and celebrate the winners will shape whether the city becomes more open or insular over time.

 

The future of this place also depends on the expectations of two parties: the people of Hong Kong and the sovereign nation. These expectations are set out in the Basic Law and represent how both sides view Hong Kong and its future. These expectations, however, are not cast in stone and will evolve as circumstances change. These changing expectations and the actions taken in response to them will also help to determine if Hong Kong becomes more open or insular in future.

 

On Three Objectives

 

One evening in April 1997, I had an impromptu dinner with three friends who had no dinner plans that night. We met in Central – a business executive, a civil servant, and two university teachers. Over dinner our conversation turned to our hopes for the new incoming government of Mr. Tung Chee-Hwa. We lamented how the previous few years had been marked by political disputes between the British and the Chinese to the detriment of the long-term economic development of Hong Kong. Many important policy issues had been set aside and were awaiting urgent decisions.

 

In particular, the vision of Hong Kong becoming Asia’s Manhattan and the business hub for Southeast Asia was eagerly being discussed at that time among the opinion leaders and movers and shakers in Hong Kong. There was a keen sense that Hong Kong had a bright economic future due to the emergence of China. Supporting China’s continued opening and reforms presented a huge opportunity for Hong Kong, but it was an opportunity that would not be waiting forever. Hong Kong had to seize the hour to secure its place in this future before it withered away amidst political disputes. This view was shared among the four of us at that dinner.

 

We all also appreciated that the economic opportunity presented to Hong Kong through China’s rise and opening would create dislocation and disruption in our own community. Amidst rising prosperity there would be losers and laggards. These people would not be able to partake in the new opportunities. Their condition would have to be addressed so that it would not present an obstacle to future economic progress, as they gained a stronger political voice under an increasingly more open local political system.

 

Bold and visionary choices would be required to address this situation. The aim would be to achieve three goals: (1) manage continued economic prosperity as an open city through dual integration with both the Chinese economy and the world economy, (2) attain shared prosperity within the community so that populist politics would not become overly divisive, and (3) nurture ever widening opportunities for mutually advantageous cooperation between Hong Kong and the Mainland for “one country, two systems” to have growing vitality.

 

At the dinner, there was a suggestion that Mr. Tung’s government could act boldly by appointing a few “super policy secretaries” to coordinate and drive the work of several policy bureaus currently led by their own individual policy secretaries. The intention would be to ensure a better coordinated and more forceful executive-led government to implement a strategic policy agenda and make up for lost time.

 

My immediate gut reaction to this suggestion was that it would not work. I heard myself saying that the Hong Kong government did not have the organizational capacity of the People’s Action Party in Singapore nor the political legitimacy of the Singaporean government. I surprised myself in saying this for I had not given the matter much thought before that evening sixteen years ago. Since then I have devoted a lot more thinking to this problem.

 

I am sure there were numerous similar conversations in Hong Kong at that time and ever since. In retrospect, that dinner conversation was interesting in two respects. First, even then the need for Hong Kong to urgently embrace major policy changes on a broad range of economic and social issues was well recognized. Second, a strong executive-led government was needed to implement the required changes, but it also had to possess political legitimacy and organizational capacity in order to marshal public support behind its policy changes.

 

In a series of essays I plan to consider first the question of why Hong Kong needs to embrace major policy changes on a broad range of issues. What are the required policy changes? Why must some of the new policies be creative adaptations of past policies and others be a radical break?

 

The second question I shall explore is, why has it been so difficult to make the necessary policy changes happen? Is it the resistance of vested interests? Is it a consequence of the fragmentation of political beliefs and interests in society? Has our past blinded us to the need for change? Is it ideological or institutional inertia? Do policy makers lack imagination?

 

The third question I shall try to tackle is whether we can build the political support and governance capacity for affecting policy change. What is at stake if we fail to make the necessary changes?

 

History as Guide to the Future

 

Let me first consider the question of why Hong Kong needs to embrace major policy changes on a broad range of issues. Some might say that Hong Kong lost its magic after 1997. I believe there were already deep social problems before 1997. The opening of China in 1979 created enormous economic opportunities for Hong Kong as manufacturing expanded across the border, but the resulting structural transformation also brought with it huge social challenges. Initially only the economic opportunities were evident, but the social challenges grew over time.

 

The economy adapted well because labor markets were flexible, and the industrial transformation was rapidly completed in less than two decades. The resulting new service economy did a wonderful job of supporting the production base across the border. Business services, professional services, logistics and transport services grew by leaps and bounds; these were the producer services.

 

The most important reason why even the less skilled workers were generally satisfied as manufacturing moved across the border was due to demography. The timing of the departure of manufacturing production across the border coincided with a period when the growth of the labor force of young workers was at its lowest level in the post-war period. The unusually tight labor market that resulted drove up wages. It was also the era of double digit inflation.

 

But over time, the economic prospects of young workers dimmed as the new producer service economy gradually metamorphosed from supporting cross-border labor intensive manufacturing production to exporting tourist services. Most of this change took place in the midst of the Asian Financial Crisis. Chinese tourism was a greatly welcome development at the time for alleviating unemployment in Hong Kong. Unfortunately real wage growth for less skilled workers has suffered because of continued slow productivity growth.

 

At the same time the expansion of subsidized higher education places was halted by the 1990s. Human capital investments thus lagged behind. This has contributed to the rising inequality of personal incomes. The problem has been worsened by our immigration policy that gives priority to family reunion and primarily brings in those who are on average less educated than the resident population.

 

Another demographic challenge was also starting to emerge. The ageing population was creating growing pressure on social services and health care for the elderly. Public expenditure on social services received episodic injections, but health care spending generally slowed down in the past decade. These areas obviously need to be addressed by bold visions and sustained efforts. Money is part of the problem, but it is not the only problem. Progress remains elusive.

 

Political divisiveness between Britain and China before 1997 distracted political attention from addressing these emerging social challenges in good time, as did political divisiveness between the conservative establishment and the opposition democrats after 1997. The problems have grown worse over time. The social divide has become increasingly perceived to be tied to the political and economic divides. Rhetoric about the appearance of an M-shaped society rooted in all three divides – political, social, and economic – never gained true credibility, but it appears to be the firm loud belief of a small enclave of people in society, whose voices are over-represented in the media. Things that keep on being repeated have a way of being believed – is this brainwashing?

 

On the other hand, China’s opening has presented new economic opportunities for Hong Kong to capture. We have not capitalized on all of these opportunities. In the summer of 1992, I travelled with a team of fellow economists to learn about economic development in the Pearl River Delta. We made four trips to the region and we concluded that the region had surpassed Thailand, widely identified then as the Fifth Asian Dragon. On one of the trips we learned in Zhuhai that their government had started to construct a bridge that would connect to Hong Kong. This was greeted with extreme skepticism in Hong Kong for many years. Now twenty years has passed; a bridge connecting Zhuhai and Hong Kong is still under construction.

 

Failing to develop the economic opportunities presented by China’s development is detrimental to Hong Kong’s economic future, and its overall development.

 

Political conflicts and unresolved social problems are worsened when the economy fails to perform well. Education, health care, and elderly care are very expensive to provide and these are at the center of our many social problems. They affect those in poverty more severely and will become even more expensive to subsidize when a growing proportion of the population has low wages and low wage growth. I have not mentioned housing here – my favorite subject – but it has not been forgotten and I promise to bring it up again in subsequent essays.

 

Some groups in society believe resources are the least of Hong Kong’s worries because our government coffers are rich with unspent surpluses. They are probably right in the sense that the greatest challenge facing our government is to get its policies approved and supported in the legislature rather than finding the money to pay for them.

 

They are, however, seriously mistaken to believe that throwing money at these problems is sufficient. Moreover, the amount of money that is required is not merely what needs to be spent in the coming few years, but the growing amounts that will be required in the coming decades. It will be well beyond what is available to the government today or in the near future. If the economy fails to perform well, then the proposed subsidies will simply not be affordable. If we choose to raise taxes to fund the subsidies, then we shall run the risk of slowing the performance of the economy.

 

Social-Economic Commitment and Political Credibility

 

It is imperative that funding for education, health care and elderly services be carefully planned out so that the commitment is for the long term. The demographic pattern is sufficiently known for us to understand that this is a problem that will last for several decades. Expenditure on social support requires a long-term economic strategy to provide the funds that pay for it. And most important of all it requires sufficient faith in the long-term political credibility of those making the commitment.

 

Credibility in the government’s commitment to address social problems requires confidence in Hong Kong’s long-term economic performance. It also requires faith in Hong Kong’s long-term political stability to ensure these public commitments can be sustained into the future and not be subjected to the changing fortunes of different administrations. In the US, the policy consensus on the welfare state was sustained for half a century from 1928 to 1980. From 1980 to 2008 that consensus was shaken. It remains to be seen if a new? consensus can be reconstructed.

 

Will Hong Kong be able to build a long overdue policy consensus within a short period of time when society remains divided over details of the roadmap on our political development? And what must this new policy consensus be? In my coming essays I will consider the historical causes of our present policy divide to provide a guide out of our present predicament.

 

References:

 

Yun-Wing Sung, Pak-Wai Liu, Yue-Chim Wong, and Pui-King Lau, The Fifth Dragon: Emergence of the Pearl River Delta, Addison-Wesley Publishing, 1995.

 

 

(To be continued next week)

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