(This essay was published in the South China Morning Post on 28 February 2018.)


I have written very little about Hong Kong’s fiscal role in the economy except to reaffirm the general soundness of positive non-interventionism in delivering inclusive economic growth and civil liberties.


Many of my friends think this is simply my Chicago School bias. But intellectually I was not a capitalist as a student. I only became a convert after witnessing Hong Kong’s incredible economic success on the ground in the 1970s and some of the follies of government positive interventionism by our neighbors.


I also became acutely aware in the 1980s that the political support for sustaining positive non-interventionism made feasible by colonial rule, would be eroded after 1997 by a more open and contentious political system.


I thought this process would not be a rapid one. But in retrospect, two unforeseen factors severely quickened this erosion: China’s hugely successful economic opening, and technology-driven economic hyper-globalization. Together they precipitated a total structural transformation of Hong Kong’s economy within a very short span of time.


China’s opening in particular eroded a considerable portion of Hong Kong’s competitiveness because industries moved north across the border and less skilled immigrants came south.


There were no new industries or young captains of industry to replace the losses and I believe the single most important reason is the stagnation and ageing of the labor force.


The male labor force has not grown since the 1990s, although the female labor force continues to increase as women become better-educated and cross-border marriages bring in new female immigrants.


A shortage of manpower, both skilled and unskilled, holds back a prosperous and vibrant economy. Hong Kong boomed after World War II when it received a wave of immigrants from the Mainland, but today it lacks the infusion that arrives through immigration. Moreover, our indigenous youth labor force lacks the critical mass to jumpstart the economy.


What can the government, with its massive fiscal surplus and fiscal reserve, do in light of this shortage of labor and talent? It can invest in enhancing the human capital of residents and it can attract newcomers who possess talent and know-how and can bring in new industries.


The former will take time and money, but the latter needs strategy more than money. A policy decision must be taken to bring in newcomers and, where necessary, forge a political consensus behind this decision.


Otherwise, more demand-side fiscal spending to stimulate economic activity is not going to produce much effect in a labor shortage condition unless there is a complementary policy to increase the supply of manpower.


Another burden Hong Kong faces is a regulatory burden. The industries that most successfully deliver high value-added services have been lightly regulated and less protectionist-oriented. Inward-looking, protectionist industry fail to keep up with the demands of society and the economy, as the following examples illustrate.


In healthcare, where the heaviest demand is in the public sector, distorted incentives in the allocation of manpower mean half the profession works in the private sector. These incentives also prevent any meaningful response to unmet demand.


Hong Kong’s air services agreement is far less liberal than many cities in the region, we lag behind in developing budget carriers, and suffer prolonged delays in expanding our airport.


Many of our old buildings need repair and renovation, but owners are compelled to pay exorbitant fees charged by approved contractors, suggesting the regulatory scheme fails to prevent bid-rigging.


The under-supply of housing, office and commercial space is so staggering that we are the more expensive city in terms of real estate. Yet the supply side fails to respond. Why hasn’t land reclamation advanced over the years? The real culprit is delays due to a complex regulatory process.


The list goes on. Hong Kong is facing rising costs and long delays in getting things done. The economy is inevitably becoming less efficient than before, as productivity growth slows and new job opportunities become fewer.


Similar to the labor shortage, the regulatory burden cannot be tackled primarily by spending money. This is not to say money is not relevant. But there is a need for a population and manpower strategy and an across-the-board rethink of our regulatory landscape, so as to enable market forces to operate more freely.


So what should we do with our huge fiscal surplus and fiscal reserve? I believe the most logical thing is to return part of it to the people – partly to those whose livelihood can greatly benefit from more funds, and partly to taxpayers.


In so doing, we can address some of the failures of non-inclusive growth that have surfaced as a result of our economic and social transformation. This would at least allow people to decide what to do with the money at a time when government spending will not make much difference in a full employment economy beholden to vested interests.

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