(This essay was published in Hong Kong Economic Journal on 1 May 2013)

 

Last week I considered how two sets of institutions that supported two different policy agendas were developed during Hong Kong’s emergence from a confluence of recent immigrants in the colonial era to become an industrial city. One set of institutions was developed to foster a free market economy and another set of institutions was built to support a public social sector funded and dominated by government bureaucracy. The incongruities of these two sets of institutions and their policy agendas were kept in check and balanced through a political system that limited open access. But the political system would change and the delicate balance would shift with the restoration of sovereignty.

 

The natural tendency of the social sector to expand was constrained by limiting their agenda. Healthcare and education services developed into almost fully funded services, but with limitations on both their service provisions and resources. In education both quality and quantity limits were set. For example, in primary and secondary education student -staff ratios were not reduced and in secondary education the extension of universal education until completion of secondary schooling was not implemented. In higher education subsidized places were limited, but the number of unsubsidized places was not constrained. In healthcare, most hospital and clinic services were essentially provided free of charge, but their services were constrained by limiting supply resulting in an extensive rationing of service.

 

Housing and welfare services were similarly organized and subsidized. For example, public housing was very inexpensive, but the volume, size and quality of the units provided have always been restricted in comparison with Singapore, which has also provided extensive housing for its population. Welfare services were similarly extended to only a subset of demanded services, and providers have consistently lobbied for more services to be subsidized.

 

A standard government practice under the colonial administration? was to provide generous full funding for subsidized services, but to set limits on the scale and scope of these services. Remuneration packages for services providers were linked to the pay of civil servants who have always received generous provisions. This of course created a common interest for fully subsidized service providers to support the policies of the government bureaucracy. It also created incentives for the unsubsidized service providers to demand the same treatment and to constantly lobby for the extension of public subsidies to the rest of the social sector.

 

The Success of Limited Government

 

The economic sector was encouraged to be entrepreneurial and innovative through low taxes and minimal regulation. But industrial policies in terms of picking the winners were resisted by the government, firstly, in the belief that they would not work economically, secondly, for fear they would erode the credibility of the government’s claim to be a limited government, and thirdly, because refusing to provide subsidies to industry provided an excellent reason for refusing to allocate more resources to the social sector. Keeping the balance between the economic and social policy agendas defined the primary role of a government that saw itself chiefly as a referee or caretaker under most circumstances.

 

The government also recognized that the incentive of rent seekers in search of benefits was directly proportional to the amount of resources the government was prepared to part with. Big government was dreaded for fear it would encourage rent-seeking activity and over-burden the government with too many difficult political choices. The colonial government was wise not to over-extend its reach to avoid challenges to its legitimacy.

 

In trying to maintain a balance between the economic and social policy agendas, the colonial government avoided taking a positive role in shaping society and its future. It was not keen to create political divisions within and between the economic and social sectors through its own actions. The political ambitions of the potentially vocal members of society had to be checked without the government being seen to be actively discouraging them, so minimizing opportunities for conflict was a way to reduce the demand for participation in a more open political system.  For the administration, a limited government and a free economy were not only good economics, but also good politics.

 

However, the delicate balance between the three policy agendas of (1) economic freedom and limited government, (2) modest public provision and state subsidized social services, and (3) limited access to political power, became progressively untenable from the 1980s. There were both external and internal factors fuelling this development.

 

1997 – An Opportunity for Political Change

 

The restoration of political sovereignty over Hong Kong to China set off a variety of political forces demanding a more open political system. These political aspirations were subsequently acceded to in the Basic Law, although the precise process as to how they would be achieved was not spelt out. The Basic Law promised to progressively develop a more open political system embracing democratic principles through first public consultation and then promulgation into law.

 

Whether and how the yet–to-be-constituted new political arrangements would be compatible with Hong Kong’s social order was not considered in the Basic Law. The Basic Law was intended to preserve the Hong Kong way of life and by implication, this meant the old social order was presumed to continue, if not be frozen in time.

 

The compatibility of the social order and accompanying political arrangements is of great importance to a society’s continued stability and prosperity. I have noted there were incompatibilities between the social and economic policy agendas during the colonial era, but the balance was preserved through a political system that limited open access. As a consequence, Hong Kong created a modern city with economic and civic freedoms, a limited non-interventionist government, a small welfare state and a clean and corruption free government. In the absence of political freedoms and popular elections it was able to set up a robust legal system that observed the rule of law and provided secure protection for the rights of individuals and for property.

 

Would a more open political system have upset the delicate balance between the economic and social policy agendas maintained in the colonial era? Would the economy have suffered if the economic policy agenda changed course? These questions were matters of great concern within large segments of the economic establishment, whose interests came into prominence in the colonial era. They would also be of deep interest to those in the social sector, many of whom harbored aspirations for a new social order that would be more biased in their favor than the old one.

 

The conditions for a change in the social order were beginning to appear even as the Basic Law was being written. Powerful social forces were unleashed as a consequence of the opening of China, deep economic globalization, and demographic changes that were taking place in the population. The manufacturing sector had vanished across the border, property prices exploded and collapsed in turn under volatile global economic conditions, and cross border marriages mushroomed bringing in large numbers of unskilled and poorly educated immigrants.

 

By coincidence all these changes started to appear in the 1980s. These changes alone would have produced enough challenges for any government to handle, not to mention one that was in political transition. In my book Diversity and Occasional Anarchy: On Deep Economic and Social Contradictions in Hong Kong (2013) [香港深層次矛盾 (2012)], I discuss different aspects of the emerging social challenges. The changes brought both positive and negative effects. The failure to mitigate the negative aspects in the past three decades is the source of our many stresses and anxieties, including some of the emotional resistance towards the Mainland that has appeared in some quarters of society.

 

In a profound sense the Basic Law was a document intended to preserve the old social order, keep the existing social and economic institutions intact, and continue the same economic and social policy agendas. The problem and challenge of devising a new political system congruent with a social order that was in the process of being transformed was hardly perceived as a concern, if it ever was at all. The demand for a more open political system focused on devising institutions to defend Hong Kong’s way of life rather than developing a fit-for-purpose model for the emerging new social order.

 

Social Economic Conflicts as Obstacles to Political Reforms

 

For those in the social sector the idea of preserving Hong Kong’s way of life was translated into preserving the existing social institutions and social policy agendas, the same approach taken by those in the economic sector. Groups and individuals from all walks of life were soon defending their own corner in the belief they were advancing Hong Kong’s way of life. Most public discussions on how the political system should be reconstituted were concentrated on the political question of how it would preserve the old way of life. Some believed a more democratic political system would be better able to do this. Others believed the opposite was more likely to be true.

 

But society was on the move and a new life had to appear. While issues like universal voting rights, the right to stand for elections, replacing functional constituencies with geographic constituencies, the optimal size of geographic constituencies, and  making functional constituencies more open and representative were evaluated in terms of their role in advancing democratic principles and values, there was very little public discussion on how the new political system would fit in with the emerging social order.

 

On the other hand, the nuts and bolts of the discussions revealed an overwhelming concern over who would be elected into political office and how many such offices would be up for contest. Such concerns are of course important considerations, it is what day-to-day politics is mostly about, but the background to these debates was a concern with preserving Hong Kong’s way of life, which was viewed quite differently by the social and economic sectors.

 

The policy agendas of these two sectors were not compatible even in the colonial era, so what would happen to them under a new social order? Players from both sectors were trying to shape the future by devising the rules of the new political system to protect and advance their own interests and concerns.

 

Unfortunately their efforts became a contest to preserve existing institutions and old policy agendas. They drew the same familiar lines as in the past, used the same rhetoric and even involved many of the same players. Within the social sector there were perceptible generational differences between those associated with voluntary and advocacy associations, and also differences based on their links to the government or the economic or social order. These incongruities and contradictions have been (suggest to retain “of the old social order”)the source of the many stresses we are witnessing today.

 

It is clear that the social sector has to expand. There is growing demand for education and housing, healthcare and welfare are needed to support an ageing population, pockets of poverty are increasing, and there is a rising disparity between the haves and have-nots as property prices have escalated. Funding social sector operations over the longer term will become an impossible challenge under the present arrangements. The old balance between the economic policy agenda and the social policy agenda has to be reconstituted.

 

This means that social sector institutions have to be reformed, and perhaps even economic institutions, too. It is a huge task for any political system, but an almost impossible task for one that is in transition. The most important unresolved matter is prolonged policy uncertainty given the yet-to-be-finalized structure and form of political authority.

 

An executive-led government working in a political system in transition has inherent difficulties, but there has been a belief or at least a lot of wishful thinking that business could more or less function as usual. We have belatedly learned that a political system in transition faces an almost impossible task in bringing about needed reforms to the old social order.

 

Bad Political Arrangements

 

Different social groups are unwilling to moderate their interests and modify their views. Political compromises are very short in supply. Part of the problem is the underestimation of the scope and complexity of the issues that have to be addressed and the inability of government and its critics to articulate a more encompassing and convincing vision of what has to be done. The articulated interests have been mostly sectional, narrow, and self-serving. The only compromises that can be agreed upon are ones that include every interest, no matter how conflicting and contradictory they are. This usually means hardly anything is agreed.

 

The most obvious and disastrous outcome of these circumstances has been the decision to adopt a system of proportional representation in elections to the legislature. This has created conditions that encourage and foster the fragmentation of representation. An aggregation of public opinion was difficult to begin with it but it has now become an impossible task. Instead of finding a proper balance for a new set of economic and social policy agendas, it produces permanent disagreements among sectional, narrow and self-serving interests that dig in their heels and harden their positions. Society becomes more politically divided over time as disagreements lead to policy stagnation. Unresolved economic and social issues pile up and society becomes more divided not only economically and socially, but also politically.

 

Avoid Fragmentation and Populism

 

The required policy changes need a level of political support that the government cannot successfully assemble in a political system in transition. This statement may not surprise those political critics who consistently accuse the government of lacking legitimacy because it is not democratically constituted. But that is an ideological claim and not necessarily a correct inference. The political authority of the Chief Executive under the Basic Law has to come from both Beijing and the residents of Hong Kong. Finding the proper balance in the new social order requires a deep and broad understanding of what is happening in society and an appreciation of what it takes to gain the trust of the people.

 

Surely the failure to effectively address the emerging social problems is partly because Hong Kong’s civil service is not the whole of government. As a public bureaucracy its primary role is to execute policy rather than to aggregate public opinion as society changes. The latter role is the role of legislature and the Chief Executive. The failure of government to work with all of its pistons firing has contributed to the dissatisfaction with government.

 

Hong Kong has done badly in this respect since the restoration of sovereignty. But it is not at all obvious that this is a failure of not having democracy. Moreover even democratically elected governments can find themselves hostage to policy divisions and politically paralyzed. Western democracies have become more prone to populist ways in recent years. The fragmentation of populist demands is a source of growing political divisiveness and ungovernability in many democratic, as well as autocratic, societies.

 

Democracy became a preferred political system in the West because it protected the rights and freedoms of individuals against an autocratic and arbitrary sovereign. Yet the founders of democracy also harbored fears that a democratic system could lead to a tyranny of the majority and a failure to respect and protect the rights and freedoms of minorities. To avoid such a fate some democracies were designed to deliberately fragment power to protect minorities. Over time the opposite problem has emerged – a tyranny of the minorities. Professor Niall Ferguson’s thought provoking book The Great Degeneration: How Institutions Decay and Economies Die (2012) is a timely reminder of how a civil society can become uncivil. It is a must read for all those concerned with the future of Hong Kong.

 

Is Hong Kong’s attempt to develop a political system leading us to such a fate? Can this be avoided before the last hour? My essay next week shall consider a more inclusive political system that could create the conditions for a new set of balanced economic and social policy agendas.

 

(To be continued)

 

References:

 

Niall Ferguson, The Great Degeneration: How Institutions Decay and Economies Die, Allen Lane, London, 2012

 

Y C Richard Wong, Diversity and Occasional Anarchy: On Deep Economic and Social Contradictions in Hong Kong , Hong Kong University Press, Hong Kong (2013)

 

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