(This essay was published in Hong Kong Economic Journal on 24 February 2016.)


The appearance of violent political confrontation is a new phenomenon in post-1997 Hong Kong. It is the direct result of the entry of a new type of political actor that has growing appeal among youths in the digital age and also among other alienated members in society. This type of actor is more willing to use violence in political confrontations and will lead to a realignment of political forces within and across democratic and establishment camps.


The rise of violent political confrontations has three critical causes. First, it reflects a growing socioeconomic divide in society that has deepened anxiety, insecurity and conflict in day-to-day life.


Second, the government since 1997 has failed to respond effectively to the new socioeconomic challenges and so far refused to reform the political system to enable the problems to be tackled.


Third, the rising influence of radical intellectual ideas has led a young generation to view the growing socioeconomic divide and the present political system with deep animosity and little patience. They see the system as morally bankrupt and the struggle to reform if not to overthrow it as regaining their human dignity.


All three critical causes are present in Hong Kong society today. They have yet to mature into a cohesive political movement. Although their odds for success are not good, all three critical causes cannot be addressed quickly so violent political confrontations will not cease, at least not for now.


I believe the socioeconomic divide in Hong Kong is getting quite serious, especially among the young generation. The older generation still believes that one’s position in society depends largely on one’s own effort. Among the young generation this is no longer perceived to be the case. And that is why they are far more willing to believe that the “system” is unjust.


The rising socioeconomic divide began to emerge around 1980. Two momentous events occurred at the same time. First, China began to reform and open up. Second, the world embarked on the most aggressive phase of global economic integration since the First World War. Together these two developments triggered an economic and social transformation of seismic proportions. The fact that Hong Kong is caught in the movement of tectonic plates makes the transformation uniquely contradictory.


Economic Inequality and Economic Shocks


For the people of Hong Kong the past three decades have been the best of times and the worst of times. For those who were able to benefit from the new opportunities coming from the opening of China and able to navigate the economic shocks of a more integrated world economy, it was a dream come true. But there were many who were also left behind with worsened opportunities. The net effect is an ever growing socioeconomic divide within Hong Kong.


Beginning from the mid-1980s, the Hong Kong economy boomed as manufacturing operations began to move across the border. This coincided with a weak US dollar and low interest rates. Inflation in Hong Kong reached a peak rate of 13% in 1991. Hong Kong was booming and wage rates soared as the labor market grew increasingly tight because the demographic pattern had turned and the labor force stopped growing and was ageing.


But by 1997 the economy was beginning to plunge into the worse economic recession since World War II as the Asian Financial Crisis started. Few people even today appreciate how severe this economic crisis was for Hong Kong. It lasted for six years and Hong Kong emerged from the crisis more unequal and divided.


The crisis was particularly severe because Hong Kong’s currency was pegged to the US dollar through the linked exchange rate system. All the economies in East and Southeast Asia, except Hong Kong and China, devalued their currencies to soften the impact of the negative shock. In 1997-98, Japan devalued by 7.4%, South Korea by 32.0%, Taiwan by 14.2%, Singapore by 11.3%, Thailand by 24.8%, Malaysia by 28.2%, Indonesia by 71%, the Philippines by 27.9%, and Vietnam by 11.9%.


Hong Kong, with its linked rate, had to endure a period of intense deflation. During 1997-2003, the cumulative consumer price index fell by 11.6%, the cumulative GDP deflator fell by 16.3%, nominal GDP fell by 8.5%, and unemployment reached a peak level of 8.8%. Real interest rates reached their highest levels since World War II: the real Best Lending Rate hit 12.9% and real HIBOR hit 9.8%.


These numbers were the worst ever experienced by any economy since the US Great Depression of 1929-39. In the US the cumulative consumer price fell by 18.7%, the cumulative GDP deflator fell by 19%, nominal GDP fell by 11%, and unemployment reached a peak of 24.9%. The deflation and economic output decline were comparable to Hong Kong’s 70 years later, although the unemployment impact was far less severe in Hong Kong thanks largely to the flexibility of its labor market and the negative growth rate of its youth population.


Japan’s lost two decades is almost as bad. During 1994-2013, the cumulative consumer price index fell by 1.2%, the cumulative GDP deflator fell by 19.8%, nominal GDP fell by 3.2%, and unemployment reached a peak level of 5.4%. The performance would of course be a lot more worse if only the years when year-on-year changes were negative was counted: in that case, cumulative consumer price index fell by 5.7%, the cumulative GDP deflator fell by 20.2%, and nominal GDP fell by 16.3%.


Comparing these three economies, I would conclude that the Hong Kong economy has experienced a worst time than Japan and as bad a time as the US. The chief long-term economic consequence is a permanent widening of the divide between the haves and have-nots in Hong Kong.


Although Hong Kong recovered after 2003, the problem of economic inequality worsened after the Financial Tsunami of 2008 when Hong Kong faced a weak US dollar and low interest rates. Asset price inflation resumed under the pressure of quantitative easing. This created a deeper division within the community between those with property and those without. The widening economic gap is not so much one of income but of wealth.


The wealth gap in Hong Kong today is due largely to property price inflation over the past decades that was amplified by a fixed exchange rate regime (and was briefly punctured by the Asian Financial Crisis years). These consequences were not and could not have been foreseen in 1980.


Social Inequality and Social Shocks


China’s opening up created enormous prosperity for many in the fortunate postwar generation of Hong Kong residents, who became even better off if they invested their savings in property. When Mainland visitors began to pour into Hong Kong with the relaxation of two-way visitor permits, retail property prices soared. Employment opportunities also blossomed, but landlords reaped most of the benefits.


Residents living in areas frequented by visitors had more than their fair share of inconvenience. Some radical political actors would later take them up as populist political issues to fan confrontation.  Pregnant Mainland mothers who frequented maternity wards in Hong Kong hospitals, cross-border trafficking (especially of baby milk formula), photographing at a Dolce Gabbana store, and numerous other conflicts that went viral also fanned more cross-border tension between visitors and residents.


But the most long-term and broad-based impact for society came from cross-border marriages. Most of these took place among the low and low-middle income segments of society. While cross-border marriages had the benefit of bringing the people from two sides of the border closer together, it also created social problems.


Two of the most important effects were (1) to put enormous pressure on public rental housing demand, and (2) to create many broken families as a rising number of married men from low-income households divorced their spouses and married a cross-border bride.


Today, some 40% of all households (headed by a person under 65 years of age) in public rental housing estates have members who are recent immigrants. In 1981, only 51.4% of the households in public rental housing estates had incomes below the median household income of the population, but thirty years later in 2011, this had risen to 80.0%. Public rental housing estates are now home to most low-income recent immigrant households. They are also home to children of most low-income single parent households, mostly headed by women whose spouses have left them.


At the grassroots level in the public rental housing estates, children born in the 1990s have grown up with direct experience of what China’s opening and greater global economic integration means for them. They have learned their political economy first-hand, probably interpreted for them by those who are themselves victims or losers of this era.


All these changes have happened very quickly within one generation. It is no wonder that the generation born in the 1950s and 1960s is indeed very different in outlook from those born in the 1980s and 1990s. So although the numbers of radical political actors ready to participate in violent confrontation in defiance of the law are few, their silent supporters online are not few. And it is to their online fans they are making their appeal and rallying for support.


History has shown repeatedly that violent political confrontations have economic, social and intellectual causes, in addition to political ones. They are almost always the product of a society that has experienced profound economic and social changes that have left deep scars and unresolved contradictions.


Germany between the two world wars was a devastated place economically, socially, morally and eventually politically. Fear of the communist threat eventually led the German population to accept Hitler’s rise to power under the most opportunistic set of circumstances. The consequences were devastating not only for the German people, but more so for the Jews and the rest of the world. At final count 2.6% of the world’s population died in the Second World War.


Hardly anyone in Hong Kong foresaw the appearance of a deep socioeconomic divide within one generation’s time. Frontline social workers, unionists, NGO service providers working in close contact with the grassroots population, especially immigrant families and single parent families, knew things were deteriorating, but they had little idea of the scale and scope of problems that were emerging. I believe the empirical evidence that a big problem exists out there is quite overwhelming even if it is not fully recognized. I hope the violent unrest, although heart-wrenching and deplorable, will be a wake-up call for attention.


Socioeconomic deprivation and rising inequality do not necessarily turn into political unrest, much less violent unrest. But the protests are not without sympathetic support. For this one must seek answers from developments in the intellectual and political space. This shall be the focus of my future articles.

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