(This essay was published in Hong Kong Economic Journal on 14 September 2016.)

 

Across Western democracies, from the America of Donald Trump to the France of Marine Le Pen, large numbers of people are enraged. When they cannot find a voice within mainstream politics, they make themselves heard from outside. Their anger is justified. They believe globalization, migration, and free market economics are not working in their interest.

 

Globalization since 1980 has brought prosperity to the majority of the world’s population, but still many have been left behind. A single diagram tells it all. Dubbed “the kneeling elephant,” the vertical axis in the diagram measures the cumulative growth rate of income from 1988 to 2008. On the horizontal axis are the percentiles of the global income distribution of the world population. On the vertical line is  the change in their percentile position in the global income distribution over two decades.

 

 

The diagram shows that populations in the 35th to 70th percentiles and also the 99th percentile have achieved the highest cumulative growth rates, in excess of 60%. The latter are the world’s highly-skilled elites. They are spread out over the world with a higher concentration among rich countries, especially the US. The former are mostly peoples in the emerging economies and many are from the most populous emerging nation China.

 

The biggest losers are those in the 80th to 90th percentiles. These are the lower middle classes of the rich nations and many are from the most populous rich nation, the US. The highest proportions of the world’s elite winners and losers are located there. Economic globalization is one of the reasons for the growing economic divide in many nations, but it is not the only reason.

 

Trade with China has benefitted American consumers enormously, and in the long run is also expected to raise American incomes, but the gradual process of adjustment has left many less-skilled Americans unemployed or unable to find jobs as good as the ones that were lost.

 

MIT economics professor David Autor found that Chinese exports accounted for 44% of the decline in American manufacturing employment between 1990 and 2007. He also found that districts hardest hit by trade shocks were much more likely to move to the far right or the far left politically, according to congressional voting records. So China trade has polarized American politics in some districts.

 

Supporters of globalization, including myself, have often failed to appreciate that while the economic consequences of globalization have been swift, the responses of governments and civil societies to alleviate the economic and social dislocations have been incredibly slow. This failure is not primarily a result of ideological blindness or the intransigence of entrenched privileged interests, although to many of the losers it certainly appears to be the case.

 

Migration

 

Globalization has also left a particularly big mark on Hong Kong, with many winners and plenty of losers. Median household income over the past two decades has largely stagnated. Hong Kong was the first place to experience the tidal waves of globalization due to China’s opening in late 1979. The economic and social impact was particularly acute because of the massive influx of unskilled immigrants that entered the territory. Most of them came through cross-border marriages and family reunion.

 

Between 1976 and 2011, an estimated 1.8 million people arrived, most from the Chinese mainland, constituting about one quarter of the population by 2011. About one million of them arrived between 1991 and 2011 was 1.0 million, about one seventh of the population in 2011.

 

In the UK (which has just voted for Brexit), the foreign born population increased from 7% in 1993 to 13.1% in 2014. In the US it has increased from 7.9% in 1990 to 13.3% in 2014. These figures are tiny when compared with the numbers that have arrived in Hong Kong.

 

The arrival of massive numbers of unskilled immigrants can have only one result – worsening inequality. Wages at the low end are depressed and those at the high end are raised. Inequality was further exacerbated in the late 1990s when 300,000 people emigrated overseas ahead of the political changeover in 1997, which depleted more people at the high end of the income distribution.

 

Rising inequality here has been a long gradual process spanning some three decades of China’s opening and globalization. Fortunately unlike the US, unemployment in Hong Kong has been minimal because of a tight labor market due to slow population growth.

 

Challenge of Political Transition

 

In the midst of this massive economic change was a political transition triggered by the restoration of sovereignty in 1997. The purpose of enacting the Basic Law was to preserve the confidence of the Hong Kong people. In particular, Article 5 states “The socialist system and policies shall not be practiced in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years.”

 

It is significant that the term “previous capitalist system” was introduced at the very outset. Surely if the intention was to preserve an existing economic system (which would necessarily imply keeping some of the critical defining economic policies) then the political arrangements essential for preserving such an economic arrangement would be justified.

 

The majority establishment block that still exists in the legislature today was surely a deliberate political design to preserve the “previous capitalist system.” This might not have been its sole purpose, but it was a critical purpose.

 

The onset of the Asian financial crisis in 1997 just as the new political arrangements came into existence was a huge political and policy challenge. Should the $7.8 exchange peg to the US dollar be preserved? Every country in Asia except China had devalued (some by as much as 34%). Devaluing would ease the economic adjustment to a deflationary environment. Hong Kong chose not to do so in order to preserve the credibility of the existing economic arrangement.

 

As a consequence, Hong Kong suffered the worst deflation of any economy in the world since the Great Depression of 1929-39. It is a tribute to the robustness of Hong Kong’s economic system that six years of duress were taken in stride. Although at the end of those six years, half a million people in Hong Kong marched on the streets in protest against the enactment of Article 23 amidst a protracted period of economic hardship.

 

A bold 6% salary cut was mandated for the civil service during the Asian financial crisis and implemented across the public sector to uphold fiscal prudence – a decision that was in the spirit of preserving the principles of fiscal prudency inherited from of the “previous capitalist system.” Current economic debates raging over the appropriateness of fiscal austerity in the US, UK and EU are paths Hong Kong crossed in the early 2000s.

 

Any attempt to preserve an economic system through institutionalized political arrangements entrenches the privilege of preexisting interests. The risk that the Basic Law would become captured by such interests was real, but there was an understanding that democratic elections would be further opened, providing a path for avoiding gridlock in the political system. However, only modest progress has been made to date and the process is likely to be stalled for some time. There are a number of reasons for this.

 

First, the democratic opposition exploits fear of Beijing. In the wake of the Tiananmen Incident, massive numbers of citizens took to the streets in Hong Kong to show their support for the protestors in the square. This was a display of deep anxiety about Beijing’s crackdown on dissent. It also demonstrated to the leaders of the democratic opposition that building on the fear of Beijing, especially among the middle class, could be a winning strategy for mobilizing political votes in Hong Kong. Jiang Zemin’s warning that each should mind their own business (“the river water should not assail the well water”) fell on deaf ears.

 

Second, the democratic opposition has strengthened in the wake of the rising economic divide. Left-leaning social and labor policies have gained ascendancy as the real incomes of the middle and lower middle classes have stagnated. Although the democratic opposition did not monopolize the left-leaning political agenda, their political strength gained ground among the grass roots and the disadvantaged classes.

 

Third, the entry of Beijing into the domestic conflict has led to total political gridlock. The establishment was slow to appreciate the deepening plight of the economically disadvantaged at the grass roots. They viewed the left-leaning political agenda of the democratic opposition with deep concern about the long-term economic consequences. Still, these disagreements were only over domestic policy conflicts. Within the framework of the Basic Law there was considerable scope for policy accommodation between the opposing views. A proper balance that did not threaten the preexisting capitalist system could still be found.

 

Unfortunately Beijing’s displeasure at the constant attacks mounted by the democratic opposition against its ruling style has halted the search for legitimate social and economic accommodation. It has also driven the establishment and Beijing together as a single force that is locking horns with the democratic opposition. Domestic conflict over social and economic policies has escalated into political animosity between Hong Kong and the Mainland.

 

Beijing’s activism has escalated over time, as the ability of the establishment to contain the democratic opposition has failed to make progress. When a political rift appeared within the establishment, Beijing had to redouble its effort to keep the democratic opposition at bay. As a result, important economic and social policies have failed to be considered and adopted. Many outstanding problems have been left unresolved. The economic divide has widened and public dissatisfaction has been brewing.

 

A fourth factor is that public dissatisfaction is escalating into radicalism and utopianism. Keeping the democratic opposition at bay does not address economic and social problems. Under the Basic Law, only government can propose policies that require spending. The democratic opposition has the right to veto bills, but without any need to act responsibly to deliver on campaign promises.

 

A democratic opposition that is unable to deliver on issues, be they political, economic or social, will however backfire. Voters will remain dissatisfied. Opposition party members will leave their political parties over disputes about what political strategies to take. Every political split among the ranks of the opposition will lead to further political fragmentation and radicalization. Every new political group that emerges contributes to this process.

 

Policy stalemate and political gridlock will not disappear as long as voters are willing to return a sufficient number of opposition candidates to the legislature. But if opposition politicians cannot deliver, why do voters still elect them back into office? Here, the fear of Beijing intervening in their lives and taking away their liberties is at the core of the problem.

 

Hong Kong is in the grip of two emotive forces. The politics of anger is about the rising economic divide that grew out of China’s opening and economic globalization since 1980. The politics of fear is a continuing anxiety over whether Beijing will end the previous way of life. The politics of fear gets in the way of finding a solution for the politics of anger. And in producing political paralysis, each force fuels the other.

 

The Basis Law was promulgated because there was widespread support within Hong Kong for the preexisting capitalist system. But the failure to assuage the growing economic divide in the recent decades has driven more people to towards a leftist solution.

 

If Hong Kong were to become a leftist egalitarian society, then it would obviate any need for one-country two-systems to be preserved. Article 5 would be breached and the Basic Law would no longer be relevant.  A socialist democracy would be a disaster and liberty will not survive.

 

The recent Legislative Council elections have returned us more or less back to where we were before the elections – political gridlock – but with a new set of faces in both the opposition and establishment camps. There is little doubt that many of them are men and women of courage, conviction, and commitment, but are they prepared to exercise leadership as representatives of the people to lead Hong Kong out of its dark hour? Or will they copy their predecessors in dishing out their vetoes, but with their eyes glued to the rearview mirror? Another unknown is whether the government will also exercise leadership in this situation.

 

 

 

 

 

 

 

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