The kind of technological innovations that drive economic activities in a knowledge economy differ markedly from those in an industrial economy. In an industrial economy most innovations occur as labor saving and physical capital utilizing technological changes. Advances in technological innovations are embodied in physical capital. Industrial production involves pairing low-skilled workers with physical machinery. The ability to scale up production in an industrial society suggests that economic growth, sustained by continuous technological innovations, spreads the benefits relatively widely among low-skilled workers. The end result is less economic inequality.

From the 1950s onwards, the United States, as the leading advanced economy, began a sustained and noticeable transformation to a knowledge economy. The most important technological innovations began to take a different form. Instead of being embodied in physical capital, innovations became increasingly embodied in human beings. Human capital is not merely highly skilled labor. It is the source of new ideas, new innovations, new production processes, and new organizational forms. The new form of technological change contributed to widening economic inequality.

The United States took some 50 years to evolve from an industrial society to a knowledge economy. That transformation was relatively smooth for a number of reasons. First, in the 1950s the United States could boast the most educated population in the world and the largest concentration of higher education institutions. It therefore had a good foundation to move into the knowledge economy. Second, it had a relatively free and adaptable market economy that allowed the transformation to take place without too much resistance from entrenched vested interests, which would have otherwise slowed down, if not totally prevented, the adjustments occurring. Third, as the most advanced and largest economy in the world, the United States had the opportunity to determine the pace of the transformation without the constraints of too many externally-imposed pressures.

Rigidities in Education Impedes Response

Hong Kong’s transformation did not enjoy such favorable circumstances. First of all it took place very rapidly. The industrial society disappeared in less than two decades. The process was hastened by China’s opening, which saw our industries rapidly move across the border. Second, the level of education among Hong Kong’s population lagged behind the United States by a considerable margin. Indeed, today educated manpower in Hong Kong even lags behind Beijing.

Third, Hong Kong’s education system is relatively rigid and has been slow to respond to the seismic changes that have occurred in China and in the rest of the world. For example, Hong Kong produces some 2,500 engineering graduates annually, while the number of graduating medical doctors stands at around 300. This combination is not profitable for Hong Kong’s as it does not fulfill our needs, although some would argue that more engineers may serve China’s requirements if they are prepared to compete with the Mainland’s own engineers. In the schooling sector, the combination of government regulations and professionalized union power has robbed the sector of adaptability.

To be fair, the education reforms of the past decade have sought to address some of these challenges; and it is an area where the government has exercised considerable leadership. The intended changes are certainly enormous from the perspective of those employed in education, but they remain modest relative to the changes necessary to meet the demands of globalization and the opening of China. And precisely because the system has yet to respond adequately, parents with the means are voting with their feet. The market has also responded. The proliferation of commercial tutorial classes to help students prepare for examinations is a sign of a demand not met by our schooling system. Students in Hong Kong are highly motivated to study for they know the value of human capital in a knowledge society as well as their parents do.

Fourthly, the shortfall in investments in education could be made up for partly by a more pro-active system to allow the inflow of knowledge workers. This could take place in part through immigration, but even more crucially through a more relaxed system of work visas. But these possibilities have been held hostage to local policy debates that have become increasingly hostile, adopting a siege mentality, where the only comfort is to be found in building a fortress to protect the domestic citizenry. Such a view is grossly misplaced and totally wrong-headed in that it fails to appreciate the benefits of attracting knowledge workers who will create opportunities for the less skilled service workers. More importantly innovation thrives in an environment where like-minded creative individuals can brainstorm and bounce ideas off each other. The lack of an adequate pool of creative thinkers actively encourages those we have to seek out opportunities elsewhere.

Fifthly, the rapid and massive exodus of our manufacturing industries has made our town planning regime of separating land use into commercial, residential, industrial, and other uses (or non-uses, like the country parks), totally outdated. The inability to quickly update the regulations has slowed the pace of economic adjustments. It has also led to higher rents and property prices, both in commercial and residential sectors. As a consequence, a range of economic activities have found it more difficult to emerge or take root in Hong Kong, especially those where uncertainties about whether their value-added status is too poor to justify commercial rents, and the cost of hiring workers, who also must pay domestic rents. Again to be fair, some flexibility in the use of industrial space has been permitted, but it falls short of the requisite need for flexibility demanded for a smooth transition to a knowledge economy. This problem has been further exacerbated by the snail’s pace of urban renewal, the stalemates of the town planning decision process, and the moratorium on development in the country parks.

The combination of the rigidities of the education response, the feeble efforts to attract human capital inflow, the inflexibilities of the land use alteration mechanisms, and the breeding of a siege and fortress mentality will continue to hinder the transformation to a knowledge economy. These factors together present a formidable challenge because the window of opportunity is a narrow and vanishing one for the Hong Kong community. If we had fifty years to adapt it would not present such a problem, but because the decline of the industrial economy happened so rapidly, the transformation to a knowledge economy must be equally fast to sustain economic growth.

Third Sector Responsive to Social Needs

The changes that occur during the evolution to a knowledge society are not restricted to the economy. A revolution is also required in the provision of social services. The old communities based on family, kinship, church, and so on must be superseded. Let me explain.

Two hundred years ago social services were provided by the local community. But the essence of a knowledge society is mobility in terms of where one lives, what one does, and what one’s affiliations are. People become rootless. People no longer have a neighborhood that controls the condition of their home, what they do or, indeed, what their problems are allowed to be. The knowledge society is one in which more people than ever before can be successful. But it is therefore, by definition, a society in which many more people than ever before can fail. The knowledge society has the chance to become far richer than any earlier society could ever dream of becoming. Therefore those who fail to reach great heights – the poor, drug addicts, battered women or juvenile delinquents – are seen as society’s failures. But we cannot ignore these people.

Unfortunately the traditional community is incapable of tackling these problems. Before the Third Sector became recognized as a social force in addressing the social, moral and cultural needs of the knowledge society, two views dominated—a majority view and a dissenting opinion. As it turns out both were wrong. The majority view holds that social-sector issues can, should, and must be solved by government. Most people, particularly in developed counties still accept the welfare state as the answer to society’s problems —even though most people probably no longer fully believe it. Yet its benefits have been totally disproved.

Across the globe modern government has become a huge welfare bureaucracy. And the bulk of the budget is devoted to entitlements—to payments for all kinds of social services. Yet in every developed country, society is becoming sicker rather than healthier, and social problems are multiplying. Government has a big role to play in social tasks—the role of policymaker, of standard setter and, to a substantial extent, of paymaster. But it has proved almost totally incompetent in running social services. As entitlements grow, fiscal budgets explode, tax-burdened private businesses become less profitable, and economic growth slows.

Hong Kong’s huge public service bureaucracies must be transformed if they are to be fit for purpose in the knowledge economy. These include our Hospital Authority, Housing Authority and schooling sector. It seems this is unlikely to ever happen; if true then the emergence of the knowledge society in Hong Kong will prove to be very challenging. There is a recognition gap—meaning society does not recognize that building bigger bureaucracies and giving it larger budgets is not the answer to our problems. Those who work in these public service bureaucracies oppose change and their opinions have dominated the public sphere. Change will only happen when these become insolvent, which really means when the government becomes insolvent. In many developed societies this has already happened even though politicians continue to promise everyone that there will be deliverance once they are elected into office.

Another view is that a different type of organization – the large business enterprise – will become the provider of social services. In Japan and in Maoist China the large employer – government agency or private enterprise – has attempted to serve as a community for its employees. Lifetime employment is only one affirmation of this. Company housing, company health plans, company vacations, and so on all emphasize for the Japanese and Chinese employee that the employer is the community and the successor to yesterday’s village – even to yesterday’s family. This, however, has not worked either.

Retired Knowledge Workers as Reserve Amy in Social Sector

To bring the employee increasingly into the governance of the workplace community does not create a community. Nor does it create the structure for tackling the social tasks of the knowledge society. In fact, practically all these tasks – whether education or health care; the anomies and diseases of a developed and, especially, a rich society, such as crime and drug abuse – lie outside the employing institution.

The role of social-needs-provider in the knowledge society will be taken up by new social purpose organizations. Where community was an arrangement of fate, the social purpose organization is built on voluntary membership. Where community claimed the entire person, the social purpose organization is a means to a person’s ends, a tool. The first type of organization to emerge was business and its purpose was to accumulate wealth and capital. And it is for this reason that Adam Smith and Milton Friedman have insisted that the social responsibility of corporations is to make profit. The social purpose organization can have a different purpose. The Red Cross founded by Henry Dunant, with influence form Florence Nightingale during the Crimean War (1853-56), had one focused social purpose. The list is endless.

A survey conducted in 2003 by the Central Policy Unit estimated that there were about 9,363 social purpose organizations in Hong Kong, of which about 6,785 or 72.5% were primarily organizations that served only their own members, and 2,576 or 27.5% were primarily public serving organizations. A total of 49.8% of these organizations were formed during the period 1986-2002 and 42.5% were formed before 1986. About 70% reported that their main purpose was to serve Hong Kong, 12% said they served the Mainland, and 8% claimed to be serving the rest of the region, or other parts of the world. It is estimated that the Third Sector employs approximately 9% of Hong Kong’s workforce in on a full-time basis. The estimate is imprecise but provides an approximate order of magnitude. About 57% of these organizations use volunteers and the estimated number of volunteers involved amount to 8.2% of the population or 15.7% of the work force.

As Hong Kong’s population ages, an increasingly large proportion of retired knowledge workers will provide support for these social purpose organizations. The golden age of the third sector in Hong Kong is only beginning. The correct answer to the question “who takes care of the social challenges of the knowledge society” is neither the government nor the employing organization. The answer is a separate and new social-sector.

We are accustomed to talking about the two sectors of a modern society – the “public sector” (government) and the “private sector” (business). But a third social-sector comprising those organizations that increasingly take care of the social challenges of a modern society has already emerged.

Social Sector Organizations and Their Relations with Government

Sometimes labels are misleading. For example, the “private hospitals” in Hong Kong are a misnomer. They are not “private” at all. They do not pursue profits as their goal; they do not pay taxes; and they properly belong to the third sector. Whether they are organized as nonprofit or not is actually irrelevant to their function and behavior. What matters is not the legal basis but their purpose.

Government demands compliance; it makes rules and enforces them. Business expects to be paid for what it sells; it supplies goods and services. Social-sector institutions aim at changing the human being. The “product” of a school is the student who has learned something. The “product” of a hospital is a cured patient. The “product” of a church is a churchgoer whose spirituality is being honed. The task of social-sector organizations is to create human health and well-being.

Many social sector organizations will partner with government. But they will also clearly compete with government. The relationship between the two has yet to be worked out and there exists practically no precedent. The relationship between social-sector organizations and business enterprises is more complex. Some are partners working for a specific common purpose; others are adversaries, recognizing vital conflict between their common concerns.

It has yet to be established what constitutes performance for social-sector organizations, and especially for those that, being nonprofit and charitable, do not maintain the discipline of a financial bottom line. We know that social-sector organizations need management. And like business organizations, competition and good corporate governance will be essential for performance. Social-sector organizations are funded in four ways: government subsidies, fee-for-service, endowment incomes, and recurrent charity donations. The multiple sources of revenue make their management and corporate governance even more complex, and the need for transparency and accountability even more demanding. The work in this area is only beginning.

But one thing is already clear. The knowledge society has to be a society of three sectors: a public sector of government, a private sector of business, and a social- sector. It is becoming increasingly obvious that through the social-sector a modern developed society can again create responsible and achieving citizenship, and can again give individuals – especially knowledge workers – a sphere in which to make a difference in society and to re-create community in a novel form.

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