Has Hong Kong Lost Its Magic? (Part Three)

(This essay was published in Hong Kong Economic Journal on 24 April 2013)

 

Last week I considered the formation of a social order in Hong Kong during the colonial period that preserved a delicate balance among three policy agendas: (1) an economic policy agenda that emphasized freedom and limited government, (2) a social policy agenda centered around government subsidies and public provision, and (3) a political agenda that limited the people’s access to power.

 

This arrangement worked well for the two post-war generations, but the delicate balance between the economic and social policy agendas began shifting in favor of stayers and against leavers with the opening of China and economic globalization. The stayers were more prone to using political means like complaints and protests to express dissatisfaction. Moreover, political aspirations were raised with the Basic Law promising to grant more political freedoms to the people of Hong Kong.

 

China’s opening and globalization unleashed powerful economic forces that had deep social consequences. In addition, demographic changes in the population, such as ageing and immigration, as well as other domestic developments, created new pressures in the social sector. As a consequence, income and wealth gaps widened and poverty reappeared in society. Their cause and incidence have not been thoroughly analyzed, but I believe their dynamics are quite complex.

 

Some of the negative effects could have been foreseen. Unfortunately government policies to mitigate them were not adequate. Perhaps even more importantly, the new situation Hong Kong faced in the 1990s required the government to articulate and implement a total solution embracing social, economic and political dimensions. The enormity of the task was not fully appreciated and underestimated by almost everyone.

 

Private Homeownership and Wealth Gap

 

The most important reason the gap between the haves and have-nots widened significantly was the failure to expand private homeownership. Even before 1997 it was obvious that private homeownership defined two classes of people in Hong Kong: those who owned their homes and those who did not. As property prices fell after the Asian Financial Crisis the gap was temporarily hidden. But it resurfaced as property prices recovered and surged after 2004. And society has continued to be divided along these lines ever since.

 

The real concern is not over housing as shelter, but about wealth and the ownership of assets. Half the population in Hong Kong lives in the public sector and is trapped there. Unlike private homeowners they have not been able to benefit from China’s opening and deep economic globalization. Without property assets their economic situations have continued to fall behind and some have even dropped into poverty.

 

As the gaps keep on widening, the frustration among the have-nots is not difficult to imagine. If catching up becomes impossible then it would not be surprising for them to ask whether the present arrangement is at all fair. False theories of property hegemony appear credible and appealing. One person’s good fortune is portrayed as an act of duplicity and corruption, or the product of speculation and manipulation, hence, wealth so gained becomes unadmired.

 

This may of course be true in some cases. When this happens the public’s faith in the integrity of the system is further shaken. Although the rise and decline of property prices in Hong Kong is primarily the result of external market forces, the abandoned promise to bring homeownership to 70% of the population announced by the Tung administration has had lasting negative consequences. It has certainly left many families unprotected against asset price escalation.

 

Another critical element in tackling the poverty problem is the inability of the less educated and unskilled to find good jobs. This is a common problem in service economies that attract large numbers of poorly educated and unskilled migrants. The problem has to be addressed through investments in education at all levels. The failure to subsidize the expansion of education has left the share of unskilled workers in the population far too large. The poor have been particularly hurt. As a result both economic growth and economic inequality have been negatively impacted.

 

Population Quality and Education

 

The overall quality of the population can also be improved in part through attracting more talented migrants, especially for an ageing society like Hong Kong. This is an area where political consensus became difficult to forge as inequality gaps widened. The hostility towards pregnant Mainland mothers giving birth in Hong Kong is a manifestation of the lack of consensus. The evidence collected by our government shows that these families are mostly well educated and highly skilled and could be our target immigrants. A better policy solution would be to expand health care services and increase medical and healthcare personnel through training or importation.

 

Hong Kong’s decision after 1997 to keep cross-border families separated for long periods before they can be reunited is another difficult political choice. By keeping low-income families separated these immigrant parents lose a valuable opportunity to invest in their children while they are young. Hong Kong has created a huge social problem for the future with a class of children deprived of education opportunities and a nurturing family environment. The effects are manifesting in society today.

 

On matters of poverty the media focuses on the elderly. Poverty everywhere is a highly complex phenomenon that afflicts all age groups and not just the elderly. I doubt poverty in Hong Kong is predominantly an elderly problem. The television images we see of elderly women collecting paper boxes appear to be familiar clips replayed again and again. I have witnessed a young mother with a baby strapped to her back rolling a heavy cart fully laden with collected scrap metal down a steep street in Central – a sight that is more familiar from my childhood days in Hong Kong. This is poverty too.

 

External Roots of Poverty

 

The growing gap between haves and have-nots and rising poverty are summary manifestations of many processes at work – of the economic and social forces unleashed by China’s opening and deep economic globalization. They work through different pathways and impact different groups of people. Unfortunately there are too few good analyses of the causes of poverty in Hong Kong. What we hear are mostly the findings of social activists and political advocates.

 

Even so, the social sector has not expanded adequately in response to the new challenges because most of its services are dependent on public funding. The increase in funding required to address the problem appears to be so enormous that it would upset the traditional balance between the economic and social policy agendas.

 

This is a major problem. Allocating more resources to the social sector would appear to threaten limited government and everything it represents in terms of preserving economic freedom and individual liberty. It could even contravene the Basic Law because the government has a mandate to keep public expenditure within budget and the revenue it receives.

 

During the colonial period there were of course many economic shocks, but few rivaled the opening of China and deep economic globalization in terms of scale and impact. Moreover, the traditional balance between economic and social policy agendas worked then because access to political power was limited under the old social order.

 

In the immediate post-war period, the social sector was heavily dominated by voluntary organizations, a typical arrangement in pre-modern societies. The transition to state provision began after the civil disturbances in the late 1960s. The onset of industrialization in the late 1950s and political turmoil on the Mainland had given rise to a new set of social circumstances. When MacLehose became governor, he chose to respond with greater reliance on direct public provision of social services – in housing, education, welfare, healthcare, and other areas.

 

Government Role in Socio-Economic Balancing

 

MacLehose was a forceful leader and undertook to reshape the policy focus inherited from John Cowperthwaite, Financial Secretary (1961-1971), which emphasized free unfettered markets and minimal government interventions. Cowperthwaite was also a towering personality who deeply believed in preserving economic liberty. The intellectual origins and institutional roots of Hong Kong’s free market economic policy was his legacy.

 

As a colonial governor MacLehose had the formal backing of the British Crown. He arrived in the aftermath of a serious civil disturbance when a shaken population was looking for direction, and he was able to harness sufficient political support to build the necessary consensus to bring about a new social policy agenda that aimed to build community and enhance stability. He emphasized improving the circumstances of those in poverty by providing them with various forms of public assistance. This assistance was mostly transfers-in-kind, but some was in-cash. In so doing he spawned a large array of social institutions within the government civil service and numerous non-government organizations.

 

Haddon-Cave as Financial Secretary provided some checks on MacLehose’s initiatives so that a balance was achieved between the economic and social policy agendas. MacLehose did not get everything he wanted. To his credit, though, he engineered a change in the culture within the government administration to root out corruption. That change was crucial for Hong Kong to emerge as a modern first world city because it could show it was socially stable and economically clean.

 

For almost three decades, MacLehose’s social policy agenda and Haddon-Cave’s economic policy agenda co-existed along with the institutions they each fostered. Both agendas appeared to work. The social policy agenda alleviated the worse effects of poverty and fostered stability in the community. The economic policy agenda enabled individuals and enterprises to seize economic opportunities quickly and aggressively. The people benefited and society was upwardly mobile. Haddon-Cave’s positive non-interventionism relied on the market to fulfill the wants of the people and government intervened only when there was good evidence this was necessary – he supported interventions in housing, education, healthcare and some welfare services.

 

This wonderful and delicate balance between economic and social policy agendas, however, became increasingly untenable. Problems were emerging even in the early 1990s due to the macro situation of China’s opening and deep economic globalization. Demographically, Hong Kong was also ageing and immigrants (both those leaving and coming) were creating new challenges. There was growing demand for new and expanded social services in education, housing, welfare, healthcare and other areas. These would generate growing pressure on both the economic and social policy agendas.

 

Policy Imbalance Shakes the Foundation

 

The government’s first instinct was to preserve the traditional balance. It was reluctant to tamper with a familiar and reliable economic policy agenda, which had a long history of success and had put Hong Kong on the international map. The government also felt there would be formidable opposition to any change from deeply rooted institutions, and that the shake-ups would not be well received in Hong Kong, Beijing, or internationally. Those in charge believed in the existing economic policy agenda but they were more willing to try to reengineer the social policy agenda.

 

MacLehose’s idea of a social sector funded by taxpayers was perceived to be unfashionable in the wake of Reaganomics and Thatcherism. The social sector had in fact become a dominant and growing part of a modern service economy, encompassing healthcare, housing and a variety of other social services. It could not be seen as just an appendage. Some argued that where possible, social services should adopt market principles and practices like the other industries. Others began to propose a new funding approach. Hong Kong discussed and debated whether education and healthcare should also be termed “industries” and whether their services could be exported.

 

These discussions and debates led to some reconsideration of the goals of the social policy agenda, its economic role in society, and the fitness for purpose of its organizational forms. The government’s initial choice was to engineer a new approach for the provision of some services in the social sector that would tap private resources and look for productivity gains through market mechanisms and tighter supervision, but with less administrative control. This was most apparent in the early initiatives in education and housing reform, and among some later attempts in healthcare.

 

There was some progress in a number of policy areas, but taken together these did not add up to a high profile change in the social policy agenda. Each individual policy change engaged affected service providers and the wider population. But despite broad media coverage these initiatives did not provide a political interpretation of why it has to be undertaken for the long-term benefit of Hong Kong society.  It therefore lacked a political vision. The real issue – the search for a new balance between the economic and social policy agendas – was never articulated as a political choice Hong Kong had to make. It failed to enter people’s political conscience.

 

Restoring Balance a Delicate Act

 

The government’s approach of reengineering the social policy agenda and preserving the balance between the economic and social policy agendas turned out to be incredibly difficult to implement. Social service providers, interest groups, and political advocacy groups perceived these changes as a threat. They instinctively favored the injection of more public resources in the old MacLehose tradition, and they were deeply suspicious of and hostile to the government’s new proposals to re-engineer service delivery and social organizations. In the end the government had to aim for compromised and limited goals.

 

The post-1997 government, for its part, has been ill-equipped to get the Hong Kong community to agree on several key issues in order to move forward: 1) why the balance in the social and economic agenda is an important issue; (2) why it was necessary to approach the social policy agenda in a different way from the MacLehose model and what the benefits, costs and risks would be; (3) how rebalancing would be accomplished and funded in the interest of the community as a whole; and (4) why the new approach represented a coherent set of policies and what practical programs would be implemented. Achieving consensus on such issues is the normal business of a political party, and this is where government has fallen down.

 

A government bureaucracy is ill-equipped to make the time-consuming and resource-intensive effort needed to mobilize broad based political support for its approach. This would entail cogently articulating its conceptual ideas and practical operations and, most of all, deploying political skills of the highest order. But civil servants are not politicians and they have yet to learn how to take politics to the streets. Unlike other societies the Hong Kong government did not have its own political party; even Singapore has the People’s Action Party.

 

If the government cannot perform the work of a political party and does not have a political party to call its own, then it becomes extremely difficult to build broad political support among the people in competition against non-government political parties, advocacy groups, and other organized social interests.

 

Government has inevitably found itself exposed to political assault from all sides. Domestic politics in Hong Kong after 1997 have been divisive from the very beginning and this has become even more so over time. It is now fully fragmented with many loud voices and tiny agendas. Aggregating the public’s views on social policy has become increasingly difficult, and this is beginning to adversely affect not only the social policy agenda but also the economic policy agenda, as a consequence of continued disagreement over too many issues.

 

Part of the problem is that government is overwhelmed by too many disparate demands. Politicians are at loggerheads about what to do given the enormous fragmentation and divisiveness of the present political system. The civil servant’s natural instinct, on the other hand, is to hunker down and defend the status quo and to grudgingly give in only to the loudest voice clamoring for populist relief. This is not a pretty picture. A new balance between the economic and social policy agendas cannot be forged in such an atmosphere, and both agendas are suffering from drift and impasse. The old delicate balance is untenable, but in the absence of a new acceptable balance, public opinion swings between condemnation and defense of the old agendas.

 

My essay next week shall consider why the fragmentation of views and interests over the social and economic policy agendas has been overtaken by the political divide over democratic elections and what this means for Hong Kong’s future development.

 

(To be continued)