(This essay was published in Hong Kong Economic Journal on 17 April 2013)


From 1949-1979, Hong Kong experienced a period of economic development involving little interaction with the Mainland. In those three decades the city was completely open and became closely integrated with the world economy. The social order that emerged was characterized by the policies initiated in three interrelated areas: the economy, social services and politics. In each area a variety of institutions were created to support these policies. These institutions existed in society and within government. As we shall see many proved incredibly resistant to change.


In the area of economic policy the British colonial government was committed to free and open markets, limited government, low taxes, light handed regulation, and respect for private property rights. In the area of social policy it developed a social welfare system in which education, welfare services, health care, housing and other areas were to varying degrees based on the British model of relying on both direct public provision and subsidies to non-profit voluntary organizations. Any excessive aspiration for creating a lavish welfare state was kept in check, not only because it threatened fiscal prudence, but also out of fear it could lead to an appetite for greater participation in political life.


Separating Politics and Economics


Within government these two policy approaches could be easily identified with the responsibilities of the offices of the Financial Secretary and the Chief Secretary. Since Hong Kong’s primary interactions with the rest of the world involved business and finance, the outside world’s perceptions of the territory were interpreted through the representations of the Financial Secretary’s office. For this reason, Hong Kong came to be seen as the freest economy in the world.


In the area of political life access was limited. Political administration primarily entailed implementing checks and balances among conflicting political interests in society so that their ambitions were kept at bay. The political-administrative machinery was not constituted to take bold and visionary steps that required broad based political support, since garnering such support could easily trigger an even greater appetitive for political participation among the mobilized elements in society. The colonial government was not eager to open a Pandora’s Box. Participation in political life was simply not encouraged.


Hong Kong’s economic, social and political organizations were crafted to be fit for purpose through these policies. Access to each of the three realms varied enormously. While access to politics was strictly limited by the colonial government, in the economic realm there were few barriers to entry. Strong positive incentives in the form of low taxes and light-handed regulations provided powerful incentives for individuals to participate fully in the economy. In the realm of social affairs access to public subsidies and other forms of support were more selective.


The underlying philosophies of these three approaches were not always mutually compatible and needed periodic political mediation by the Colonial Governor, whose legitimacy was ultimately and formally derived from the Crown. But these arrangements were by and large seldom openly challenged in most of Hong Kong’s post-war history. The fears and anxieties the local population harbored against the Chinese government from across the border made the colonial menu of limited politics, moderate social welfare, and free economics an acceptable recipe.


As a consequence, political freedom never achieved the same level as the expansive economic and civic freedoms that were allowed. This arrangement defined and supported the social order of Hong Kong and it was deployed to control and resolve conflicts in society and without having to resort to the use of violence.


This social order worked reasonably well for the first two post-war generations – those who arrived by the early 1950s, and their children who grew up here. A society based on open access in economic affairs, partially open access in social affairs and limited access in political life suited people who were “staying in a borrowed place living on borrowed time” – a caricature made popular in the book by Richard Hughes. But could it still work for the third generation – those born in the 1980s or the grandchildren of the early post-war immigrants?


The 1950s generation and their children were, of course, aware that the British would eventually return Hong Kong to China – it was merely a question of how, maybe of when, but never of whether or not. Many who grew up during this period probably thought about staying or leaving. Those who are still here today chose to stay. The proportion of leavers in the population has probably declined over time.


Exit, Voice, and Public Preference


Albert Hirschman in his book Exit, Voice and Loyalty (1960) has an insightful discussion on the role of two mechanisms that help an organization to maintain its performance and avoid decline and failure, and it can shed light on Hong Kong’s situation. His basic concept is as follows: members of an organization, whether a business or a nation, have essentially two possible responses when they perceive that the organization is demonstrating a decrease in quality or benefit to the member: they can exit (withdraw from the relationship); or, they can voice (attempt to repair or improve the relationship by communicating a complaint, grievance or proposal for change).


For example, the citizens of a country may respond to increasing political dissatisfaction in two ways: emigrate or protest. Similarly, employees can choose to quit their unpleasant job, or express their concerns in an effort to improve the situation. Disgruntled customers can ask to speak to the manager, or choose to shop elsewhere.


The implication of this concept is that it allows for a new perspective on daily examples of social interaction. Exit and voice represent a union between economic and political action. Exit is associated with Adam Smith’s invisible hand, in which buyers and sellers are free to move silently through the market, constantly forming and destroying relationships. Voice, on the other hand, is by nature political and at times confrontational.


While both exit and voice can be used to measure a decline in an organization, voice is by nature more informative in that it also provides reasons for the decline. Exit, taken alone, only provides a warning sign of decline. The role of exit and voice can sometimes be combined. For example, by providing greater opportunity for feedback and criticism, exit can be reduced; conversely, stifling dissent leads to increased pressure for members of the organization to express discontent through departure. Members who do not bother to voice a complaint are usually those who place a high value on time and the purchases they make are not significant enough for them to spend valuable time making a costly complaint.


The general principle is that the greater the availability of exit, the less likely voice will be used. The use of exit or voice, however, can affect whether there is loyalty to the organization. Exit may be reduced when there is strong political patriotism among citizens or brand loyalty among consumers. This is especially true when options to exit are not so appealing due to, for example, poor job opportunities or political or financial hurdles to emigrating or moving.


By understanding the relationship between exit and voice, and the interplay that loyalty has with them, one can apply Hirschman’s concept to examine the different options of (1) the people of Hong Kong today versus thirty years ago, and (2) the first two post-war generations versus the third generation.


Compared to thirty years ago, there are probably more stayers than leavers today and the options to exit are probably less attractive now than in the past because Hong Kong has caught up with the living standards of the richer economies. The third generation may also be different in other respects, but these are less apparent. Certainly the exit option is less useful than it was in the past as a signal of dissatisfaction, given the future of Hong Kong was decided prior to 1997.


This state of affairs suggests that since the 1990s a higher proportion of the population would be more willing to choose the voice option. The reason for this is the declining propensity to use the exit option which means that voice and exit are no long effective as twin complementary mechanisms to convey dissatisfaction. Instead, the expression of dissatisfaction has become increasingly monopolized by the voice of the stayer and not the exit of the leaver. Failure to understand the change that has taken place can easily lead to a mistaken exaggeration of the level of dissatisfaction among people. The rising voices of dissatisfaction that we hear more frequently could well be the result of the fading away of the exit option.


An important difference between leavers and stayers emphasized by Hirschman is that the latter believes they are the loyal ones. Leavers are often accused of being disloyal even though they contribute positively by providing important feedback to the organization on its performance through exiting.


The shift in balance between using “voice” versus “exit” as competing mechanisms for expressing public dissatisfaction is only one aspect of political change in Hong Kong. Another important dimension for understanding the rising divisiveness of politics here has its roots in the way economic, social and political institutions were constituted in the post-war era.


Keeping the Balance


The population of Hong Kong grew rapidly with the influx of immigrants from the Mainland after the war. Although initial living conditions were extremely harsh for the vast majority of the immigrants, they were able to enjoy the benefits brought by rapid economic growth in the subsequent decades. Broad spectrums of the community were able to participate in the fruits of the economy. The first two post-war generations were able to experience enormous upward social mobility, and they witnessed considerable advances in human progress and civil liberties during their lifetime.


Confidence in Hong Kong took a big step forward when even corruption in government was rooted out. This was a rare accomplishment in the developing world and the post-war generations grew up with pride in what had been accomplished. The people of Hong Kong knew modernity had finally arrived for them.


The Financial Secretary Philip Haddon-Cave (1971-1981) implemented an economic policy that he described as positive non-interventionism. This soon metamorphosed into a widely cited characterization of the society and economy of Hong Kong as a whole even though it was not a correct portrayal of many aspects of life. The territory became internationally famous after Milton Friedman called it the freest economy in the world. The largely recent rural immigrant population had embraced values that emphasized self-advancement, individual responsibility, and social and political temperance. These became the social virtues of the place and the personal values of its people.


The “can do” spirit embraced by the people of Hong Kong sums up these virtues. To some extent it was the only choice available to the largely immigrant population who had arrived in a new place, under unfamiliar circumstances, and had no one to turn to but themselves. The only social support structures were mostly pre-modern ones often rooted in the origins of the inhabitants, as most came from rural villages and few from urban centers. Social support services were therefore provided through a diversity of informal village kinship networks, church groups, charitable organizations funded by the wealthy, neighborhood associations (kaifongs), and various trade organizations and unions. These were primarily voluntary and charitable organizations.


Of course, positive non-interventionism did not preclude government intervention in social and other services when the free market was perceived to have failed to function well. In the areas of housing, education, and healthcare, Haddon-Cave believed the government had a role to intervene in the market. Many of these interventions were often undertaken in the wake of a huge crisis in society that compelled the government to act. Interventions in the housing market occurred after the massive immigration wave during 1945-50 and in the aftermath of the civil unrests in 1966-68. They were not the product of a visionary development strategy proposed by an enthusiastic political leadership keen on community building.


By the late 1960s, the social stresses of an indigenizing immigrant community in an industrializing economy had surfaced. Hong Kong’s integration into the world economy meant the lives and fortunes of individual families and firms would become closely tied to world market conditions. The poor and the less fortunate were not always well prepared to endure economic suffering due to events beyond their control. The limitations of relying on informal voluntary and charitable organizations to alleviate economic and social stress became apparent, of which poor housing conditions was a constant complaint.


Origins of Social Conflict


Governor MacLehose took on the challenge of community building to relieve social and political pressures. Direct public provision of housing on a much larger scale took place through the creation of housing estates in both old communities and also new satellite towns. Social support initiatives were organized and provided through government sponsored social work services. These new organizations co-existed with pre-modern informal voluntary and charitable organizations as providers of social services. They competed with each other, but also formed partnerships and alliances.


Present day political organizations and parties often have their origins in these organizations formed in an earlier period. Their political beliefs, affinities and loyalties are not difficult to trace and work out. These overlapping networks of organizations, coming from housing, education, health care, environment and other social sectors, have over time become increasingly active in the public policy arena. Some are funded by government either wholly or partially, others receive no public funding. The newer state-connected organizations and the older informal voluntary and charitable organizations form the social foundations of the gradually evolving political life of Hong Kong.


Huge public bureaucracies and a full complement of interest groups have emerged around these public social programs. The institutions created by such an approach have become a permanent part of the public policy infrastructure. These bureaucracies and interest groups often resist change and defend their own prerogatives.


In many developed countries, these institutions have expanded beyond what governments can afford through taxes, creating fiscal deficits and public debts, and are the source of highly divisive politics that make society ungovernable. In Hong Kong this did not happen because public policy decision making in the social policy arena was always checked and balanced by economic policy considerations. This was possible largely because access to the political arena had been limited under British colonial rule.


The transition to a more open access political system promised under the Basic Law has redrawn the terms of engagement between the social and economic policy arenas. The balance in the tug of war between the economic and social policy agendas has been tilting against the economic agenda; positive non-interventionism is increasingly under attack. The change started to take place even before the restoration of sovereignty from Britain to China in 1997.


My essay next week shall consider other factors that are further tilting the balance that was achieved during the post-war colonial era.




Albert Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Harvard University Press, 1970.


Richard Hughes, Hong Kong: Borrowed Place – Borrowed Time, Frederick A Praeger, London, 1968.



(To be continued)

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