The View

Hong Kong’s hi-tech hopes rest on regulatory response to rent-seeking

Government’s failure to deregulate and liberalise an increasingly ossified regime has prevented economic growth through innovation and technology

PUBLISHED : Tuesday, 15 December, 2015, 12:39pm
UPDATED : Tuesday, 15 December, 2015, 12:39pm

The Innovation and Technology Bureau has just been established. This is no small achievement as it is the first major government administrative reform initiative in years. But to make an impact on future economic growth, it will have to produce a policy strategy anchored in a deep understanding of how business opportunities are created.

One of the most important things it must do is recognise that the government’s own failure to deregulate and liberalise an increasingly ossified regime has prevented economic growth through innovation and technology. This is reflected in three inter-related factors.

First, companies would only adopt new technology if it were profitable. Companies in Hong Kong prospered by applying cutting-edge technology in such areas as finance, shipping, container ports, air cargo terminals and supply chain management. But many others still prospered without adopting new technologies.

Second, the most important technology today by far is digital and information technology, which is impacting all industries much like the discovery of electricity did. The government needs to ensure the proper incentives are in place to encourage appropriate infrastructure investment in digital and information technology.

Rent-seeking harms economic growth by providing returns to unproductive activity, crowding out productive activities and discouraging innovation

Third, many entry barriers still exist because our regulatory regime was established for a previous age, and covers hundreds and thousands of specific industries. The development of new technology for economic growth requires a liberal regulatory regime to create platforms that can be accessed by all with ease and without barriers.

The task of taking down barriers will be daunting and require years, if not decades, of hard work. It will also require the new bureau to work with other bureaus.

A model for the new bureau could be the Independent Commission Against Corruption, which has a research arm that examines existing rules, regulations and practices to identify and remove the opportunities and incentives for corruption.

The new bureau should likewise identify, liberalise and deregulate rules and regulations that act as barriers to economic value creation by innovating firms.

Inevitably there will be overlapping jurisdictions between bureaus and departments that need to be identified, some quite urgently. Consider the situation of health care.

There is a compelling case not only to invest in local health care manpower, but also liberalise the regulatory regime to allow trained personnel from abroad to work here. Once a critical stock of professional and scientific manpower is in place, it will spawn the rise of biomedical and related technology industries. But this situation straddles several policy bureaus – Food and Health, Education, and Security – and each must be involved in finding a solution.

Regulatory barriers are also the enemy of innovation and technology because of the political economy of rent-seeking activities.

Rent-seeking activity works through political processes – lobbying, stealing, taxation, corruption, etc – and it is enormously costly to economic growth because it wastes resources, deters innovative activities and, as a purely redistributive activity, adds no economic value to society.

Rent-seeking harms economic growth by providing returns to unproductive activity, crowding out productive activities and discouraging innovation.

In private rent-seeking, rent-seekers go after existing stocks of wealth, such as land, output, capital and the like. Bandits steal goods, lawyers sue deep-pocketed corporations and armies invade resource-rich countries.

In public rent-seeking, corruption can arise because innovators need government-supplied goods, such as permits and licences to set up business, import quotas for key personnel and so on, much more so than established businesses. If government is not flexible and supportive to their needs, then newly created businesses, as outsiders without established lobbies and not part of the government power elite, will have a hard time entering the market in the absence of an appropriate regulatory framework.

The enemies of innovation and technology can also be broad, loose coalitions of interests that possess a shared purpose or ideology, for example, local professionals who oppose an immigration policy that brings in foreign talent.

The Innovation and Technology Bureau will succeed if it focuses attention not only on a narrow set of scientific and technological issues, but also on lowering the barriers to market entry for new, innovative businesses and increasing the supply of new talent and skills in the workforce.

The successes of Singapore and Israel as innovation and technological hubs were kicked off by large influxes of talented manpower that set in motion a virtuous circle of supporting policy initiatives. Pulling oneself up by one’s bootstraps is not a winning strategy, building a virtuous circle is.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong