HONG KONG AFTER 1997—AGONY AND ECSTASY

By Regina Ip
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Take a snapshot of Hong Kong in March 2010, 13 years after its return to China, and the picture isn’t pretty. The Hong Kong Special Administrative Region (HKSAR) of China has failed to re-structure its economy, with the result that few jobs in new industries have been created to fill gaps left by the migration of manufacturing industries to the nearby Pearl River Delta. The neighboring province of Guangdong, rightly seized of a great sense of urgency to upgrade its economy, is charging full steam ahead to develop high-end professional services, a strategy bound to present new challenges to Hong Kong’s services-oriented economy. Although Hong Kong’s nominal per capita gross domestic product has increased, the numbers employed in the lower income brackets in 2008 were higher than in 1998. Faced with less room for upward mobility than their forebears, angry young people have staged demonstrations that threaten to derail Hong Kong’s infrastructure development. The government’s modest constitutional reform proposals, intended to advance the implementation of universal suffrage, hang in the balance. What went wrong?

It would be over-simplistic to blame Hong Kong’s stagnation on any single factor, whether it be the constitutional stalemate or exogenous forces beyond control, such as the Asian financial crisis of 1998 or the global economic crisis of 2008. A confluence of factors—historical, institutional, personal and cultural—combined to make the implementation of “One Country, Two Systems” and “Hong Kong People Rule Hong Kong” less of a success than was hoped. But an examination of some of the forces that inhibit Hong Kong’s transformation as a SAR throw interesting light on what it takes to succeed.

Semi-democratic and Executive-led in Name Only
        
Hong Kong officials never cease to emphasize that the Basic Law, the Chinese legislation that serves as a de facto constitution, provides for an “executive-led” government. Yet the reality is that, following political reform ushered in by British authorities after the 1984 signing of the Sino-British Joint Declaration on the future of Hong Kong, local politics have experienced a sea-change. Hong Kong remains “executive-led” to the extent that legislation and expenditure proposals can only be initiated by the government's executive branch. However, once introduced into the public arena and the Legislative Council (Legco), the passage of any legislative or expenditure proposal is subject to the slings and arrows of public opinion, and the outrageous whims and games of politicians—as in any democracy. Whereas in colonial days the legislature was a sub-set of the executive branch, an increasingly assertive legislature now is filled with vote-seeking politicians ready to flex their muscles whenever an opportunity arises. Yet unlike as in most democracies, the administration is not underpinned by a ruling party and led by campaign-hardened veterans with organic ties to the legislature.  

Granted, the administration can still rely on sufficient votes from pro-government parties or groups to ensure passage of its annual budget and key infrastructure projects—but not without debilitating delays and hurtful hassles which sap the morale and confidence of the hitherto proud and high-minded elitist bureaucrats-turned-ministers. The government suffers from low approval ratings. Its low credibility with the people hinders efforts to push its agenda (if any) and from undertaking vital structural, political and economic reform.

Half-baked Political Reform Backfires

In 2002, the administration attempted to broaden its sources of talent by launching a political appointee plan. Under this “accountability” system, candidates from both the civil service and the private sector have been chosen to manage major government departments, in effect as ministers. However, because they usually lack public service experience, either administrative or political, few appointees from the private sector have functioned effectively as de facto ministers able to combine professional knowledge with political acumen. For example, none of those appointed in 2002 have survived into the current administration, and it has only one appointee from the private sector. A further extension of the scheme in May, 2008 added undersecretaries and political assistants to the list, triggering a slide in Chief Executive Donald Tsang’s approval ratings. The system continues to be a source of embarrassment and recurrent criticism.

Colonial Heritage and its Discontents

Hong Kong's colonial masters bequeathed the city an effective rule of law, open markets, plus predictable and transparent governance. These no doubt contributed enormously to Hong Kong’s success, and continue to set it apart from the rest of China. Yet this colonial legacy also created a distinct set of problems not shared by the other little “tigers” or “dragons" of East Asia (Taiwan, the Republic of Korea and Singapore). Because Hong Kong was annexed in the first instance for the purpose of trade and flourished as an entrepot without much government help, the British not surprisingly saw little need to do much other than keep taxes low, the port duty-free and government interference to the minimum.

The much-lauded doctrine of “positive non-interference” embraced by financial secretaries of the colonial era was as much a strategy of conscious economic choice as of pragmatic political considerations, bearing in mind the colony’s inherent transitory nature as a “borrowed place” living on “borrowed time”. For these historical reasons Hong Kong’s government had remained small; its elitist administrative service, staffed mainly by British officers, did not undergo a significant expansion until 1973. By that time, Hong Kong’s increasing affluence, thanks to its successful transformation into a light manufacturing center, and the arrival of British diplomat Sir Murray MacLehose as governor, led to policy changes focused on substantially improving Hong Kong’s housing and other social services.

The slow start of compulsory free education in Hong Kong, delayed until the late 1970s, caused Hong Kong to have a much higher percentage of adults with low education attainment levels (45.9%) in 2009 than in developed economies like the United States and Japan (14.8% and 26.1%), or even when compared to other newly industrialized economies like Singapore (41.2%) and the Republic of Korea (36.2%). Conversely, the percentage of adults with high education attainment levels (15.2%) was lower than in Singapore (19.6%), the Republic of Korea (23.4%), Japan (30%) and the US (36.2%).1 Against this background, it is not hard to understand why Hong Kong has suffered from a shortage of top-notch talent whenever there is a surge of demand, while large numbers of less-skilled workers with lower education attainment experience a mismatch between their training and the demands of a modern, highly developed society.

The espousal of a laissez faire free-market philosophy also inhibited Hong Kong’s policy makers from long-term thinking or planning (other than for physical infrastructure), or leading the territory into technology-based enterprises. In this respect, Hong Kong’s lack of interest in technology-based innovation, plus its reluctance to take risks, contrasts sharply with Asian competitors that seem determined to climb the technology ladder, as do Taiwan, the Republic of Korea and Singapore. Hong Kong’s R&D expenditure stands at a measly 0.8% of its GDP, compared to 7% in Shenzhen, the technologically savvy and ambitious Chinese special economic zone just north of Hong Kong. Hong Kong’s continuing inability to restructure its economy, plus its heavy reliance on services as engines of growth—particularly tourism and financial services—render it highly vulnerable to the risk of marginalization as other parts of China advance in the technology and services modernization race.

Resource Constraints the Root of All Problems

Although talk of resource constraints might sound wrong in the case of an economy sitting on such large fiscal and foreign exchange reserves, Hong Kong has a narrow tax base, with only 1.4 million tax-payers in its workforce of 3.5 million, making it susceptible to wide revenue swings. Those swings undermine the government’s ability to ratchet up spending significantly on R&D or education, two of the most important drivers of long-term growth. Constrained by a time-honored tradition of keeping public expenditure to 20% of GDP or less, the government has little room to maneuver even as it attempts to develop new “industries”. Rather than invest in expansion of high-quality, publicly-funded tertiary education services, it instead has decided to meet the shortfall by granting land to sundry educational institutions to establish private universities. The fear of incurring recurrent expenditure is so strong that the administration opted to support the development of education and health-care industries by making one-off grants of land and issuing loans. But such ill-conceived, short-term efforts are misguided and more likely to backfire than succeed.

An obvious option for any serious-minded administration would be to reform the tax structure and find new sources of revenue to meet rising demand for all manner of social services needed to take care of the underprivileged and infirm. Yet after one half-hearted effort to introduce a goods and services tax in 2006, the administration has backed away from any further attempt to stir the hornet’s nest.

Hong Kong Stands Still as Others Leapfrog

In addition to historical and institutional factors, it has also been suggested that Hong Kong’s stagnation is attributable to a lack of far-sighted political leadership. Neither Tung Chee-hwa, a shipping tycoon, nor Donald Tsang, a veteran civil servant, has proved quite up to the job as the government's chief executive. Add to that Hong Kong people’s lingering identity problems, which continue to plague its collective psyche notwithstanding the resurgence of its motherland. Such questions as “Who are we? Are we Chinese, Hong Kongers, or Chinese with strong Hong Kong characteristics?” all pose identity issues that reverberate and surface whenever legislative or infrastructure proposals raise the sensitive question of Hong Kong’s relationship with the mainland. A furore in January, caused by opposition to connecting Hong Kong to China’s express rail network via a costly rail link, is a case in point. Although mainstream public opinion was supportive, fears and doubts about the benefits of integration loomed larger in the minds of skeptics than did the huge price tag of US$8.5 billion.

Against this backdrop, it is small wonder that the government has found it so hard to make progress on issues of fundamental importance—whether for democratic reform, economic restructuring or restoring the public's self-confidence. On the constitutional development front, strong signals are being sent by moderate members of Legco's pan-democrat camp and from academia in favor of direct dialog with authorities in Beijing—a sign of the lack of authority and low standing (in their eyes) of the SAR government.

Like its motherland, Hong Kong will have to work hard to find its way forward and create its own paradigm—whether in the political or economic arena—within the confines of the Basic Law. Assuming that the government’s pending political reform package will come to a vote before this summer's legislative recess, the next few months will be crucial in indicating which way Hong Kong will go.
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Regina Ip Lau Suk Yee is an elected member of Hong Kong's Legislative Council and chairperson of the Savantas Policy Institute, an independent policy research organization she founded. Previously, she spent 28 years in the Hong Kong civil service, including as director of the immigration department and Secretary for Security.

04/01/2010