(This essay was published in Hong Kong Economic Journal on 22 February 2017.)


Hong Kong’s rapid economic ascendancy into one of the major metropolitan centers of the world has made most individuals of the older generation in the city prosperous. But the stellar growth has slowed in the past two decades. As a consequence, a growing share of the younger population is failing to prosper.


What lessons can be learned from Hong Kong’s past that are worth sharing with my children – and yours – as they try to figure out how to work towards a prosperous life in the next half century? Some of the lessons have implications for governments and charities too, in terms of why they can promote prosperity (and especially support the disadvantaged) to the benefit of all members of society.


Certain variables are more relevant here. A person’s prosperity in life, and that of his family, after a lifetime of effort depends on his starting position, work and savings behavior, prudence in investment, and luck. This economic calculus provides a neat framework to consider the key factors that play critical roles in determining one’s future prosperity – occupation, schooling, health, family formation outcomes, and where one lives and works.


Put in economic terms, these are the four kinds of capital that can be augmented through investment – business capital, financial capital, human capital, and property capital.


Business and Financial Capital


Most new businesses require an entrepreneur to be creative and possess business skills, accumulated over time from experience in high-level positions. Such individuals also need a good track record, which takes time to build, before investors and creditors are convinced of the worthiness of the new business. The ability to secure financing is a critical step in the launching of any new business.


The young are more likely to be entrepreneurs if they grow up in families that are entrepreneurial. They have a head start in acquiring knowledge and even experience from a young age, and perhaps may receive financing from their families or on account of their families.


Entrepreneurship requires creativity and business acumen. Business skills increase with experience in high-level positions, but creativity declines with age. Having too many old workers in society slows down entrepreneurship. Not only are old workers less innovative, but more significantly when older workers occupy key positions they block younger workers from acquiring business skills.


As a consequence, the age structure of the population matters. Younger populations are more entrepreneurial than older ones. Demography patterns explains why Hong Kong was more entrepreneurial forty years ago than it is now, and why Shenzhen is more entrepreneurial than Hong Kong today.


The startup window for innovative and creative businesses to fulfil their promise of big returns is now much smaller than in the past as a result of financial market innovations, which have lowered the barriers of entry for new entrepreneurs.


Financiers – venture capitalists, angel investors and private equity funds – are seeking exceptional returns that justify taking the higher risks.


But such financing is not applicable to most businesses where returns are less lucrative and more normal. Banks seldom provide these businesses with financing so they have often relied on supplier credit or friends and relatives for financing. In modern day Hong Kong, where families are small, the circle of relatives is no longer an important source of financing.


The prospect of raising funds may eventually depend on innovative financial technologies, like cloud financing, that enlarge the circle of “friends” through the reach of digital platforms. But this is an area where Hong Kong is lagging behind the United States and the Chinese Mainland because of regulatory barriers.


My advice to the young aspiring entrepreneur is as follows: if you have great lucrative ideas, then try your luck. If you do not have great lucrative ideas, then see if you can raise funds from willing traditional sources like parents, relatives and friends. If not, marry someone who can bring or help bring such financing. And if all these fail, then pray fin-tech will soon blossom.


Historically, there is a time-honored tradition of finding solutions through marriage. My own research of Hong Kong in the 1970s found that those who wished to be entrepreneurs married younger because they could immediately gain the help of a spouse. So marriages and entrepreneurship are complementary. Yes, marriages are made in heaven, but prudence is a virtue much extolled in the likes of Jane Austen’s Pride and Prejudice.


A final point is that success in starting a new business is not guaranteed. Not all circumstances can be foreseen, not all risks can be mitigated, and not all businesses can stay profitable and sustainable. That is why only a small fraction of those who try are successful, and an even smaller fraction bother to attempt at all.


If you do not think starting your own business is to your advantage or liking, then you can always choose to ride on the coattails of the others’ successes. This can happen if you are able to invest in the financial market and benefit from the rise of asset prices. There is no lack of licensed professionals in Hong Kong who can offer you advice, especially if you have lots of money. But beware, they charge hefty fees for not always profitable advice.


It is possible that artificial intelligence will usher in an era of robots that can provide advice at lower fees. For most investors with only modest amounts of money, this is pretty much all they need. So if you do not have great ideas, have few relatives and friends that you can count on, and are unmarried, then there still is financial technology made possible by the greatest invention of all – capital markets.


You can of course choose to take the advice of Professor Eugene Fama of the “efficient markets school” and simply buy a fund that tracks the entire world market and charges you the cheapest management fee. You then just have to decide what proportion of your savings to set aside each period for investment in financial assets. And if you think you are really smart you can try picking your own investments.


Human Capital


For most people, their most important source of income is their own work. They rely on their own human capital to make earnings. And the higher the stock of human capital one possesses, the higher is one’s income.


Schooling and health are the most important investments in human capital because they raise the productivity of an individual in work and play. Play is actually work without pay and should be considered as voluntary work. Sometimes play (or voluntary work) raises the productivity of paid work.


This is obviously true of games like sports that enhance one’s health either by making one more energetic and focused, or preventing illnesses and days lost at work. Games that teach teamwork, competitiveness, discipline, character building, public speaking, interpersonal and soft skills, and many others also enhance productivity in paid work, in addition to being just fun.


A person with more schooling and better health is obviously more productive in both paid and voluntary work. In the past two centuries, the productivity of most types of paid or market work has increased phenomenally.


As a result, we are today spending less and less time each year in working for pay, and more in voluntary work. Increased life expectancies have also increased the total proportion of years in one’s lifetime in non-paid work. This implies that an increasing share of economic activity in the future will occur outside the market economy.


In a crucial sense, the future society will be more important than the future economy because an increasingly smaller proportion of our population will be working in the new economy for pay and a growing proportion will be working in the non-profit sector, where workers will include both voluntary unpaid workers and paid workers. These will likely be part-time and casual workers, especially those above the age of fifty.


The for-profit sector will be highly and increasingly productive, hiring relatively fewer workers. These will be mostly skilled workers who will still work predominantly on manual tasks but will need considerable skills and formal training to qualify. Nurses, laboratory technicians, technologists, repairmen, construction workers, security personnel, and many other occupations will need proficiency in handling sophisticated tools and understanding smart systems.


Knowledge will be the key resource of the next economy, and knowledge workers its most dominant workers. These workers will identify themselves as professionals even when a large part of their time is spent doing manual work with their hands. Knowledge is borderless and travels effortlessly across national borders. Every organization will have to be globally competitive even if it serves a local market because customers will have access to knowledge worldwide. Managing organizations composed of knowledge technologists to compete effectively will require a new mindset and incentives.


Upward mobility will be available to all those with formal training. While anyone can acquire knowledge provided there are sufficient opportunities for all, not everyone will succeed. In the past, knowledge guaranteed success, in the future knowledge will be a necessary condition to having a try. In a world of knowledge technologists, soft skills will play a greater role in determining success. What we call soft skills today would be known as virtue or ethics in a previous era.


All of this means that measures of market activity, such as GDP per capita and the distribution of income and other well-being indicators, will become increasingly inadequate ways of showing prosperity experienced by a person and its distribution in a society.  A better proxy measure of prosperity and its distribution will be the human capital (like education and health) a person possesses and how that is distributed in society.


Human capital has two unique features that make it different from other forms of capital. First, it is not possible for a person to indenture himself to finance human capital investments if he has inadequate resources. Unlike other forms of tangible assets a person cannot collateralize himself. So a person who is disadvantaged because of family background and has no resources to invest in human capital is stuck; his talents cannot be fully developed and will be wasted.


Second, human capital is embedded in a person so he must spend his own time to make human capital investments. It is not possible to hire someone else to learn or exercise for him. At best, hired help can only assist him to study and train more effectively. This limits how much human capital a person can accumulate in a given period. Children have to study for years before they have acquired sufficient skills to become productive in a modern economy. When a person dies, his human capital normally also “dies” with him. So unlike other forms of capital, he cannot bequest it to others.


Because of these two features, investments in human capital have to be made for every generation and there are pervasive problems of capital market imperfections that impede market financing. Markets are not always able to solve such problems well or fully.


Families play an important role in nurturing children especially when they are young. If a young child accumulates more human capital, he becomes not only more productive, but his ability to learn also advances. This produces a compounding effect that accelerates earnings growth because learning lowers the cost of acquiring more human capital by making future learning more effective. This means it is important to invest in children when they are young, and the earlier the better.


Children born in families with good backgrounds have the advantage of being able to finance their human capital investments with parents’ help. They have an advantage over those from poor backgrounds. This factor alone justifies the case for intervention by government and concerned members of the community to support disadvantaged families to invest in their children, especially when they are young, to promote upward mobility of willing and talented children from poor backgrounds.


A well-known phenomenon found in many societies is the rising incidence of divorce and single parenthood. A broken family compromises the ability to provide human capital investment in children, especially in the critical early childhood stage. A broken family is not only bad for children, it is also often bad for parents. Both spouses fail to get each other’s support. I mentioned earlier that entrepreneurs often choose to marry early in life to get the support of a spouse in their enterprise.


So my most valuable advice to my own children is to honor your own family, choose who you marry with care, and invest lots and lots of time in keeping your family together. The most important reason why many low-income families often fail to prosper and middle-income families sometimes sink downwards can often be traced to family break-up.


In this respect high-income families do much better, and that is why they are successful and prosperous. Inequality and even poverty have been so difficult to eradicate through social policy interventions because families make choices on their own volition that impoverish themselves – in a sense they choose to be poor. I hope my own children, and all young men and women, will avoid doing so and stay successful and become prosperous.


For those who are disadvantaged early in life because of family background or related reasons, there is an implication they will fall further behind those with favorable backgrounds. This is another compelling case for intervention and especially early intervention to enhance investment in human capital for those who are disadvantaged in life.


The challenge is to do this smartly. Many social interventions have thrown a lot of money at the problem without much result. At the end of the day, individuals and families have to want to be successful and prosperous in the first place, and know what it takes to make it happen – the former is a matter of attitude, the latter of knowhow.


Property Capital


Property capital is under most circumstances one of the easiest ways of investing for prosperity. People who are unable to accumulate a great amount of human capital because of weak learning abilities, poor family backgrounds, or sheer bad luck, and who also lack a risk appetite for business and financial investments, can still benefit from investing in properties.


Property will usually be an excellent long-term investment in any major economic city where human, business and financial capital are abundantly concentrated, because the appreciation potential will be larger. Better still if the city is under common law jurisdiction so that private property rights are well protected. In particular, if decisions to transfer and lease properties are convenient and safe for the investor (and without undue penalty and delay), then property markets will be liquid and dense.


Mortgage loans provide buyers with a low-cost option to buy property by leveraging on their lesser resources with smaller down payments. This helps more individuals to be able to invest while their incomes are low and benefit from the productivity of others in a successful community. The market for mortgage loans in fact functions better in liquid property markets because banks will be more willing to offer more attractive loan facilities.


A person would be very fortunate to live in a major economic city under common law rule. He can then be both an owner and occupant at the same time. Investment and consumption decisions will then be unified. This will be convenient for young households starting to build a family and career. These would then all be complementary activities.


In Hong Kong, however, the role of the mortgage market as an institution for helping young individuals to save and invest property ended in the 21st century with the imposition of increasingly high down payments. Only individuals who can get financing from parents are unaffected. This has distressed young individuals as their lifetime prosperity prospects have been adversely affected.


For many, their interest has turned to public housing together with resentment at society. Parents can do little to help unless they have equity value in their own property or other kinds of assets.




Four pieces of advice for my children: work hard and play hard, invest in human capital, get married and stay married (not only for your children but also for yourself), and if you are smart start a business; otherwise buy property in Hong Kong.


Three pieces of advice for those in power and with influence: help families and young people to invest in human capital, don’t make it difficult for smart young people to start businesses through overregulation, and introduce policies to mitigate the adverse affects of high down payments to correct capital market imperfections in financing property purchases.


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