Model behaviour

Hong Kong and Singapore have achieved stunning economic growth over the past decades; but through different approaches. Hong Kong's growth has been driven by the private sector, while Singapore has used a state-led capitalism model.

The two economies are roughly the same size, but Singapore definitely has the momentum. In the past decade, Singapore's per capita gross domestic product surged 136 per cent (in US dollar terms), whereas Hong Kong's rose 37 per cent. During the decade, Singapore's GDP grew 196 per cent; Hong Kong's, 45 per cent.

Singapore's per capita income is about 40 per cent greater than the average Hongkonger's.

But as both cities struggle to continue to deliver high economic growth in the increasingly volatile and complex global environment, they seem to have taken to learning the secrets to each other's success.

Both started off under British rule as trading ports, during which time the governments mainly focused on providing law and order, health, and education, and left commerce in private hands.

Things changed in Singapore when it gained independence from the British, in 1965, under the leadership of Lee Kuan Yew. Lee was elected based on, among other things, a social contract under which Singaporeans gave up certain civil liberties in return for economic prosperity and stability.

Singapore in the 1960s was a poor economy with limited industries and foreign investment. The withdrawal of British troops after independence created huge unemployment and labour unrest.

As such, Lee adopted a more interventionist economic approach.

To alleviate unemployment, the Singapore government set up the Economic Development Board (EDB), which succeeded in attracting multinational companies (MNCs) to set up manufacturing in the city to tap into its low-cost, English-speaking workforce.

As unemployment eased and labour markets tightened, Singapore shrewdly moved away from labour intensive industries (in which it faced fierce competition from its even lower cost neighbours). It targeted foreign investment for high-end manufacturing, with a focus on capital-intensive industries in technology, services and research.

Still today, the Singapore government actively identifies the industries the city ought to be involved in, sets up supporting infrastructure, and attracts the necessary talent and investment.

The second leg of Singapore's industrialisation drive in the '60s rests with the various government-linked companies (GLCs), set up to spearhead development in favoured sectors. For example, DBS was set up to provide development financing, Neptune Orient Lines was started to capitalise on the city's strategic shipping location, and Keppel Corporation was created to kick-start the ship building industry.

As a result, MNCs and GLCs could now account for a large part of Singapore's economy.

Even though this model has worked well and probably still has some more steam left, the city faces increasing competition in attracting foreign investment, in particular from the mainland.

During a recession in the mid-1980s, the Singapore government realised it needed a new growth engine, and recognised the potential contribution from small and medium-sized enterprises (SMEs). In typical Singaporean fashion, it introduced a raft of incentives and programmes to encourage entrepreneurship, which was a good start.

But the economic model has resulted in generations of risk-averse Singaporeans aspiring to professional jobs in the MNCs and GLCs, rather than setting up their own businesses. Changing this mindset will be a monumental task.

Singapore has always looked at Hong Kong's army of entrepreneurs with envy, wondering how it could replicate that model.

In contrast, Hong Kong continued its laissez-fair private-sector driven economic model under the British.

With the influx of commercial talent, capital and refugees fleeing from the civil war on the mainland, Hong Kong was able to get its industrial development going with the textile sector in the '50s, before gradually expanding in the '60s to manufacturing clothing, electronics, plastics and other labour-intensive products for export.

Unlike Singapore, which went after big businesses (out of necessity then, as it did not have the business talent and capital pouring in from the mainland), Hong Kong's economic development was led by SMEs. SMEs still employ more than 48 per cent of the city's work force (as at end 2011, according to government statistics).

When the mainland opened up in the late '70s, Hong Kong firms recognised the potential and moved their labour-intensive activities there to capitalise on lower labour costs. Hong Kong dramatically transformed into a service-based economy dominated by commercial and financial services.

At the end of 2010, the services sector accounted for almost 93 per cent of Hong Kong's GDP and employed over 70 per cent of its workforce. Singapore still depended on manufacturing for over 22 per cent of its GDP in 2010.

Over the years, some home-grown SMEs have graduated to large global firms representing a large proportion of the market capitalisation of the Hong Kong stock exchange.

Since the handover in 1997, the Hong Kong government seems to have taken a more hands-on approach to the economy, with mixed results. It adopted a more interventionist approach partly to burnish its legitimacy (given the lack of popular vote) and partly as a response to calamities such as the 1997 Asian financial crisis and Sars flu epidemic in 2003.

This, perhaps, is Hong Kong's version of the social contract: to make up for a lack of democracy, the government makes life better with growth and job creation.

It set up Invest HK (with similar functions to EDB in Singapore) in 2000 to attract foreign direct investment. Invest HK attracted some HK$5 billion of investments in 2011, creating over 2,700 jobs, according to Invest HK.

Like Singapore, the Hong Kong has resorted to identifying promising industries. This has not turned out as well for Hong Kong.

Cyberport, intended as an information technology hub, was mired in controversy when development rights were awarded to Richard Li Tzar-kai, son of tycoon Li Ka-shing, without tendering.

Another case in point is Hong Kong Disneyland - the government financed more than 80 per cent of its development cost in return for only a 57 per cent equity stake. Underperforming and still unprofitable after more than six years of operation, it will face more competition when Shanghai Disney Resort opens.

To diversify Hong Kong's economy, dominated by financial services and property, the Chief Executive, in his 2011 policy address, said he wanted to promote medical services, environmental industries, testing and certification, education services, innovation and technology, and cultural and creative industries.

Just as Singapore cannot make entrepreneurs overnight, it will take the Hong Kong government time to hone its skills in industry targeting.

Despite the rivalries between the cities and their historical differences, Hong Kong and Singapore may end up being more similar as both seek to find a balance between the role of the state and private sector in their future economic development.

Khor Un Hun is a former investment banker who was born in Singapore and is now resident in Hong Kong