How the Tung Government Failed the Test

By David Dodwell

For Hong Kong, the summer of 2005 will be remembered for one of Asia's most glacially slow and anticipated political upheavals - the replacement of Tung Chee Hwa as the city's first post-colonial Chief Executive.

In typical Hong Kong style, within just a few months talk and memories of Tung have disappeared from the public domain. From the point of view of local and international media, he has simply evaporated from view. All attention has transferred to his successor, Sir Donald Tsang, who can claim strikingly to be the only senior leader in China who is both Catholic and a Knight honored by the British government.

Yet there is a critical need to learn from the transition over which Tung presided. This eight-year period was extraordinary not only because of the unique challenge of managing a change from British colonial rule to Chinese, nor because of the practical difficulties in giving substance to the commitment that Hong Kong should have a high degree of autonomy under the "One Country, Two Systems" formula crafted by the late Deng Xiaoping. Above all else, it was extraordinary because it spans a profound transformation involving much more than merely transferring sovereignty: Hong Kong has been reinventing itself for the third time in six decades. Or to be more precise, external changes have forced reinvention upon it.

The transition: a difficult Sino-British legacy

Eight years after the transfer, it would not be unfair to say that Hong Kong has been through the toughest few years of its recent history. Ironically, the causes were almost entirely different from naive predictions about a Communist takeover and occupation by the Chinese People's Liberation Army. After eight years, few people have seen a PLA soldier and Beijing has quite rigorously honored its commitment to provide Hong Kong with a "high degree of autonomy". Hong Kong people today rule Hong Kong, and the media are as defiant and cantankerous as any in the west. Courts remain robustly independent of government pressure. And the steady traffic in public demonstrations suggests a feisty population still vigilant in the protection of their rights and freedoms.

Some of the difficulties come directly from the Sino-British Joint Declaration of 1984, which papered over one central issue because resolution proved impossible. Drafters agreed that Hong Kong's future Chief Executive would be chosen "by election", but remained far apart on what this phrase should mean. Subsequently, Hong Kong's tortuous passage towards democracy has been haunted by this agreement to disagree, and the ghost is no nearer being put to rest today than in 1984. The issue not only divides the community, but perhaps more importantly has stolen critically important time and energy away from bread and butter issues of material importance to the economy.

Tung assumed office on July 1, 1997 with two over-riding mandates: to ensure a stable transition, and to demonstrate the workability of Beijing's preferred model of political development - an "executive-led" model. Eight years later, his efforts to build a credible form of executive-led government clearly have failed. The clamor for universal suffrage and the development of party politics continues to strengthen.

Tung's other mandate - to ensure a stable transfer of sovereignty - seemed sensible at the time and the public agreed there could not be a safer pair of hands. But within months this strength proved to be a major liability. After a surprisingly smooth handover, Tung was confronted with a series of external challenges that required not safe hands but policy imagination, flexibility and fleetness of foot.

The first and significantly largest challenge was the crash of Asia's financial markets, which begin in Thailand just a day after the 1997 handover. News of it was initially received in Hong Kong with a sense of superior indifference. After all, problems at the heart of the crisis - mountains of hidden debt linked with overvalued currencies and property assets - were nowhere to be seen among Hong Kong's well-capitalized and comparatively transparent companies. This mood quickly evaporated as dozens of offshore banks withdrew or collapsed, and as regional financial markets froze and financial flows along with them. It became clear that Hong Kong's vitality rested firmly on the management of these financial flows; as they died, so did thousands of jobs in Hong Kong's massive financial services sector.

The next trauma, triggered by the crash, was the dramatic puncturing of Hong Kong's property bubble - a problem clearly recognized by a departing Chris Patten (the last British governor) but one his administration had no intention of tackling. Within months, property values had halved, as did share prices on the Hong Kong stock market - leaving the two main stores of wealth for Hong Kong people in ruins. Negative equity haunted a large proportion of property owners. As unemployment leapt to unprecedented highs, the capacity of families to cope with their debts tumbled.

While the public suffered, a government traditionally reliant on revenues from property lease sales faced its own revenue crisis. Hong Kong was plunged into what came to be seen as a "structural budget deficit". Add an orchestrated attack on Hong Kong's currency, pegged to the US dollar since 1983, plus an onslaught from avian flu, and the sense of gloom was palpable. It was all the deeper when contrasted to the hubris of the bubble years preceding 1997.

For a government faced with such an array of crises, Tung's mandate for stability was clearly wrong. A skill set chosen for the best of reasons was suddenly a liability, and very little could be done to change it without Beijing appearing to interfere unjustifiably in Hong Kong's affairs.

Tung's "Comedy of Errors"

Tung and his administrators were clearly ill-fated to face such major challenges so soon after assuming control of this young Special Administrative Region. But there followed a series of policy missteps which first led to sarcasm and cynicism, then created a chronic sense of negativity, and later led to gridlock and defiance to government efforts to drive new legislation into law.

There were at least three attempts to intervene in the local property market to shore up prices. These only deepened and protracted the property sector collapse. The more the government tried to shore up the market, the more investors recognized that the "natural" floor had not yet been reached, and the market froze as investors waited for a true bottom to appear. Instead of a short and very sharp crash, the bottom - with prices reaching one third the levels of the 1997 peak - came only in 2003.

Then came several initiatives intended to lift morale and kick-start the flagging economy. First among them was provision of land for, and investment in, the first Disneyland in Asia outside Japan. The second was untendered approval of Cyberport, a property development that was packaged as an initiative to put Hong Kong on the global "high tech" map. Then came efforts, given impetus by a special Commission on Innovation and Technology, to attract high-tech industries despite clear evidence that a specialized services economy offered few competitive advantages for such manufacturing. These official efforts to create synthetically a high-tech industry base, so out of character with the laissez faire principles that have for decades underpinned Hong Kong's flexibility and economic strength, mercifully came to little. Efforts to win government subsidies for a silicon wafer fabrication plant (dubbed Silicon Harbour) failed when Shanghai agreed to throw even more taxpayer revenue at the project. So did "Medicine Port", an effort to win government subsidies for the development and manufacture of Chinese traditional medicines.

These government efforts to guide the economy, while perhaps well-meaning, implied an administration lacking confidence in the free market principles so fiercely defended for many years. They also fostered an impression of collusion with "big business" which came to dog Tung during his remaining time in office.

The next, and perhaps fatal, misstep followed his July, 2002 appointment of a team of ministers. Introduced to tackle a very real problem - the need to have a political appointee in each bureau answering to the Chief Executive and responsible for policy formulation - the concept was not ill-conceived. Tung began well by delaying his annual policy address while he built a ministerial team and forged agreement on policies and priorities. He held a well-publicized retreat for the team and senior civil servants. But he then dropped a bombshell that wholly derailed this process by announcing plans to implement at Beijing's request an anti-subversion law in compliance with Article 23 of Hong Kong's mini-constitution, the Basic Law. This highly controversial initiative drew fire from across Hong Kong's political spectrum and dominated Hong Kong's political agenda for the following six months. By the time Tung gave his policy address in January, 2003, the community was at loggerheads over Article 23, almost all other policy business was stalled, and a unique opportunity to forge ministerial consensus was lost.

This was damaging enough but by March, 2003 Hong Kong was traumatized by SARS. What began as a grave medical crisis quickly became a governance and communications crisis as the government catastrophically attempted to wrestle with the issue behind closed doors. An alarmed community, anxious to be involved in the solution, was left to self-help initiatives.

This failed effort, not the Article 23 debate, may well have been the primary stimulus for the massive July, 2003 demonstration that proved fatal to Tung's political career. It provided an emphatic vote of no confidence in the Chief Executive, and the failure of his administration to anticipate its scale was taken badly in Beijing. Not only was Tung shown to be out of touch, so too were officials of China's Hong Kong & Macau Affairs Office, as were "patriotic" Hong Kong advisers in the National People's Congress and the National People's Political Consultative Conference (NPPCC).

From this point forward, there was a general view in Hong Kong that Beijing believed Tung should resign. The only question was when. Since the poisoned chalice issue of Article 23 remained unresolved, it was widely believed that no plausible successor would step forward at that point. Beijing also may have felt that the absence of an obvious successor made immediate action ill-advised. This strategy appeared to improve the mood in Hong Kong - by shelving Article 23, trying to stimulate the economy and grooming as speedily as possible a credible successor. The process became urgent after Legislative Council elections in September, 2004, which selected an unprecedented number of legislators with a genuine mandate to represent their constituencies. This affirmation of political legitimacy enhanced their sense of power, and made them even more obstructive of government initiatives. Legco passed an average of 74 bills between 1997 and 2001, and 36 yearly between 2001 and 2004, but just 20 in the 2004-05 session. By early 2005 it was clear that policy gridlock had set in, and Tung had become a lame duck leader. Faced with two painful years of stalemate before the 2007 election of a new Chief Executive, or a significant loss of face implied by asking Tung to step down, Beijing chose the latter - to Hong Kong's benefit and everyone's relief.

Providing balance and context: a kinder view of Tung's term of office

Over time, it may be possible to take a kinder view of Tung's tenure. The challenges faced after July 1, 1997 - from the unsustainable bubble left by Britain's colonial government to the Asian financial crisis to avian flu to SARS - would have tested even the most competent and experienced of leadership teams. But the reality that Hong Kong was by 1997 moving at speed into a major transformation that created challenges never properly tackled because they were not clearly perceived or understood.

This was only partly caused by the 1997 change in sovereignty - though the complications of having Hong Kong people rule Hong Kong have been more profound than many anticipated. It had much more to do with restructuring the financial services industry in the wake of the Asian financial crisis; the building of a technology economy based on IT and the Internet (always more relevant to a powerful service economy than to the technology manufacturing industries that captured Asian imaginations through the 1990s); and the deepening interaction with the strong and populous Pearl River Delta economy next door.

There also was one less expected element in this cocktail of changes - the demographic revolution that has reshaped Hong Kong's populace. Hong Kong has since 1997 been transformed from a classic refugee community into one that appears ready to regard Hong Kong as its long-term home. Fear of living alongside, and as part of, Mainland China has subsided as the melodrama of 1997 fades from memory. After great pressure from 1989 to 1996, emigration from Hong Kong has tumbled - from an average of more than 50,000 annually to barely 10,000 a year at present. Set against this is a powerful influx from three separate sources - each of which helps reshape the character of Hong Kong. The first is the "family reunion" flow, mainly from the Pearl River Delta. This comprises mainly mothers with young children with few workplace skills who are being united with Hong Kong-based fathers. This creates new challenges for Hong Kong's public welfare system, and increases demands to train these unskilled women for jobs in Hong Kong's services economy. The second influx consists of managers and professionals returning from Canada, Australia and other countries adopted as safe havens during the 1980s and 1990s. These returnees are seeking careers; they are concerned about pensions; they care about the environment; and, having grown up in countries like Canada and Australia, they regard democratic participation as natural and normal. These returnees have given new voice to Hong Kong's pro-democracy movement. They also conspicuously lack the entrepreneurial nerve that famously characterized Hong Kong when it was providing shelter for refugees from a turbulent China.

For Hong Kong's future entrepreneurial sprit, it will be necessary to look to the third main inflow: Mainland professionals and entrepreneurs settling in Hong Kong, or seconded to the city, as Chinese companies intensify their involvement in global business.

This profound demographic transformation has left the Government flat-footed in shaping appropriate policies. The pressure for democratic participation has been underestimated and mischaracterized. The pressure for a cleaner environment has been wholly underestimated. The need for enhanced welfare has created significant challenges. The civic and community-based institutions associated with normal long-term communities only now are being built. The fact that Tung and his team failed to grasp the scale and implications of this transformation led to policy missteps, an erosion of public support and perceptions of an administration out of touch with the public need.

Where does this leave Hong Kong today?

As Hong Kong emerges from its torrid political summer and eight bumpy transition years, the hubris of the 1990s has gone. Much conflict is still latent in the city's slow march toward an operating democracy and universal suffrage. But what remains is a vibrant city with close and deepening links to the Chinese mainland and the Pearl River Delta in particular. As Asia's primary hub for multinational headquarters and the specialized services they need - banking and financial, legal and accounting in particular - Hong Kong is more plausibly "Asia's World City" than any rival. While challenges remain in kindling entrepreneurship, improving the environment, strengthening the health and welfare sectors, and in general terms adjusting policies to accommodate the massive demographic changes, it can be reasonably argued that the transformation is being successfully managed.

Donald Tsang entered office with a stronger economy and lower unemployment. More importantly, he has shown more political savoir faire than his predecessor, and a greater awareness of the need for strong communication across the community. More than two decades as a senior civil servant give him an ability to recognize this need and ensure the effective operation of the civil service that Tung always lacked. In local eyes, he is less "Beijing's man" despite strong backing from China, in part because he is devoutly Catholic - an uncomfortable reality for China's Communist Party leadership - and in part because he already has on several occasions shown a willingness openly to stand up for Hong Kong interests. Tung may have fought hard for these interests as well, but not in public.

So while Tsang may prove more effective as a Chief Executive, it would be naïve to believe he can quickly sweep aside the challenges that dogged Tung. As a senior official inside the previous Government, he bears direct responsibility for many policies that currently attract criticism. Hong Kong's political system has serious shortcomings that a change in Chief Executive does nothing to address. Legislators retain a strong sense of their political mandate, and will remain as feisty as ever in challenging the administration. Tsang's position is weakened by the need to seek re-election in mid-2007. If he is to build a credible track record - in both Hong Kong and Beijing - he has little time during which to end Hong Kong's troubled "transition years".

About the Author
Michael E. DeGolyer is Professor of Government & International Studies at the Hong Kong Baptist University and director of the Hong Kong Transition Project, an analysis group. He is author of more than 100 research papers and commissioned reports, 60 research articles and book chapters and five books. Dr. DeGolyer also contributes to quarterly reports on Hong Kong by the Economist Intelligence Unit.

01/01/2006