(This essay was published in Hong Kong Economic Journal 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. Hong Kong’s economic success cannot be accounted for merely by the hard work and creativity of its people. Positive non-interventionism had to be a big part of the story in fostering an enabling market environment and providing the incentives for work and innovation.


Many of my friends think this is simply my Chicago School bias. But my training at Chicago was based on scientific reasoning and empirical analysis, not ideological ranting. Intellectually I was not even a capitalist as a student, much less an “unrepentant free market capitalist roader.”


I 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 began to appreciate why a picture is always worth more than a thousand words. By the mid-1980s, the recipe for Hong Kong’s economic success was being replicated on the Mainland with enormous success.


I also became acutely aware in the 1980s that the political support for sustaining positive non-interventionism made feasible by colonial rule (under administrative absorption of politics) would be eroded after 1997 by a more open and contentious political system. But I thought this process would not be a rapid one. This has been proven wrong.


In retrospect, two factors have severely quickened this erosion that were not foreseen at the outset: first, China’s hugely successful economic opening, and second, the technology-driven economic hyper-globalization, which together precipitated a total structural transformation of Hong Kong’s economy within a very short span of time.


The first factor eroded a considerable portion of Hong Kong’s competitiveness because industries moved north across the border and less skilled immigrants came south. The second factor greatly facilitated China’s rapid ascendancy, making it the greatest beneficiary of the post-war liberal international economic order.


These two factors failed to deliver inclusive economic growth and contributed to a widened gap between the “haves” and “have-nots.”


The legitimacy of positive non-interventionism further eroded with the ending of the colonial era. The 1997 transition triggered a governance change that empowered many organized interests. As the balance of political power shifted, it became more difficult to exercise effective and decisive leadership. At a time of rapid economic and social transformation, it has been a high price to pay.


Labor and Talent Shortage in a Full Employment Economy


In the process of economic transformation, only the very best companies in our manufacturing sector that have continued to innovate are still thriving and few new manufacturing industries have emerged to take the place of those that vanished (often across the border). The great captains of industry today are still mostly those of yesterday. Many are today’s rentier class, mostly property owners who are supported by income derived from their real estate.


Why haven’t new industries and young captains of industry emerged since the 1990s? I believe the single most important reason is the stagnation and ageing of the labor force. Anyone who has taken a look at our population age structure will realize that the 1960s and 1970s were the fastest period of growth of our youth labor force. This growth has slowed right down since the 1990s.


The male labor force has not grown at all, while the female labor force has continued to increase thanks to higher women’s education levels and cross-border marriages that have brought in more new immigrants.


A shortage of manpower, both skilled and unskilled, holds back a prosperous and vibrant economy. Cities need an abundance and concentration of talent if they are to develop innovation economies – see, for example, Shenzhen, Silicon Valley, and Boston. Hong Kong after World War II benefitted immensely from the wave of immigrants who came from the Mainland, bringing new talent, know-how, and industries. These ingredients combined and blossomed in an enabling market environment nurtured by positive non-interventionism. But Hong Kong today lacks this infusion of new talent, know-how, and industries.


Back then, Hong Kong’s trading companies’ knowledge of foreign markets and ability to reach them complemented the talents of the new immigrants. Today, Hong Kong’s connectivity with the rest of the world is even better, but it lacks that kind of infusion that arrives through immigration. Moreover, our indigenous youth labor force lacks the critical mass to jumpstart the economy, especially one that has experienced a massive structural transformation.


What can the government, with its massive fiscal surplus and fiscal reserve, do in an economy that has a shortage of labor and talent? To invest in the future, it can enhance the human capital of residents and attract newcomers who possess talent and know-how, and can bring in new industries. The former will take decades to yield results, so a shorter-term solution must also be considered.


Hong Kong desperately needs a population and manpower strategy. If public money is to be invested in promising sectors, then mutual complementarity with its manpower strategy is essential to improve its chance of success. Policies that are conducive to nurturing, attracting, and retaining talent must be put in place.


In a word, since Hong Kong is short of people who can contribute to our economy and jumpstart growth, the most worthy activities that the government can spend its money on is to enhance and increase our labor force. In this matter, money is very often not the most important factor. Rather, a policy decision must be taken to bring in newcomers and, where necessary, to forge a political consensus behind this decision.


I believe that in a full-employment economy with a labor shortage, more demand-side fiscal spending to stimulate economic activity is not going to produce much effect unless there is a complementary policy to increase the supply of manpower.


As home prices have risen higher and higher in the private market, society demands government step in and supply more affordable public housing. Nearly two decades ago, the Housing Authority was asked to deliver a massive housing construction program that sadly ended with its Chairman having to step down following a massive short-piling scandal – thus haste makes waste. The challenge can only be worse this time given our even tighter labor market, especially in the construction industry.


One of the economic woes of Hong Kong is that its difficulties cannot be addressed by throwing money at the problem. When there is a general labor shortage, then spending on one sector may improve the problem in that sector, but its additional resources will attract workers from other sectors and merely worsen the shortages there. At the end of the day, the overall economic condition does not experience any fundamental relief. Budget priorities provide at best near term relief and reflect primarily the influence of populist issues and the lobbying power of particular interest groups.


Burden of Regulatory Barriers


The most successful knowledge-intensive professions and service industries delivering high value-added services are those that have been lightly regulated and less protectionist-oriented. Those that have become increasingly inward-looking and protectionist have failed to keep up with the demands of society and the economy.


Even within the financial services sector, which has benefitted enormously from Hong Kong’s rule of law, free open markets, and common law system, there are still many regulatory barriers that retard innovation and competition.


In healthcare, where the heaviest demand is in the public sector, still half the profession is working in the private sector. Healthcare services are severely supply-constrained. This distorts incentives in the allocation of manpower between the public and private sectors, and prevents any meaningful response to unmet demand.


As the best location to develop an air services hub in East Asia, our air services agreement is far less liberal than many cities in the region. The development of budget carriers lags behind competitors in other cities. The prolonged delays in expanding our airport can only delight our competitors.


Many of our old buildings need repair and renovation, but owners are compelled to pay exorbitant fees charged by approved contractors that are short in supply. Apparently the regulatory scheme is failing to prevent bid-rigging.


The under-supply of housing, office and commercial space is so staggering that we are without doubt the more expensive city in terms of real estate. Yet the supply side still fails to respond. Some blame this on an oligopolistic property development industry. But why then hasn’t land reclamation made any advance over the years? The real culprit is delays due to a complex regulatory process. The development approval process is long, cumbersome, complex, and completely hostage to aggressive special interests, rent-seeking lobbies, administrative fears of thinking out of the box, and policy timidity.


The list of regulatory burdens that our economy suffers from goes on and 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.


These problems cannot be addressed solely by throwing money at them. A government rich with budgetary surpluses and fiscal reserves cannot spend its way out of economic problems that originate in complex restrictive regulations that hold back economic activity. If money were our only economic challenge, then our difficulties would have been solved already.


Hong Kong needs bold rethinking of the government’s regulatory approach in many different areas to revive the free market, promote competition, and stimulate growth. Failure to do so thus far has rendered positive non-interventionism a stale apology for non-action. Its true spirit is that government should intervene to shore up the free market when it is not functioning properly.


What To Do?


I have identified two main issues, which I believe are Hong Kong’s deep-seated contradictions. First, the labor shortage, and second, the regulatory burden. Both problems cannot be tackled primarily by spending money. This is not to say money is not relevant. But it first needs the heavy lifting to be performed by a population and manpower strategy and an across-board rethink of our regulatory landscape, so as to enable market forces to operate more freely.


What then 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 those taxpayers who have contributed to these surpluses and reserves by providing some needed tax relief. In so doing, we can address some of the failures of non-inclusive growth that have surfaced as a result of the economic and social transformation we have been through.


Returning some of the money directly to the people in a judicious manner, would not add pressure to full employment economy with a labor shortage. It is sound economic judgment, requires minimal effort, and produces the full benefit of every dollar that is transferred to those most deserving in the population with almost no wastage going to intermediaries. It would at least allow people to decide what to do with some of 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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