Hong Kong cannot afford a city state of mind

Overhaul of the tax and education systems will help improve city's entrepreneurial opportunity

PUBLISHED : Monday, 14 April, 2014, 11:14am
UPDATED : Tuesday, 15 April, 2014, 12:15am

No one would dare suggest that Hong Kong should secede from the mainland and declare itself an isolated city state, but since the 1997 handover, the city's collective socioeconomic psyche has manifestly done just that.

Hong Kong's political and business leaders have driven themselves into an intellectual cul de sac that prevents the city from advancing beyond the old pre-1997 economy.

It reveals profoundly disturbing trends that cripple our ability to compete and innovate in areas like technology and carve out a leading role in the mainland's development. Protests against visiting mainland tourists are only a symptom of a defensive posture that stifles reform, entrepreneurship and innovation.

Heading into the 1997 handover, Hong Kong business and political leaders exuded a misplaced sense of superiority. They actually thought they would be leading the mainland's economic development.

Hong Kong business and political leaders exuded a misplaced sense of superiority

Aside from supplying manufacturing skills and property development, Hong Kong has exported little intellectual capital or corporate leadership to the mainland despite its early advantages. Stagnation is the best way to describe what has happened after 1997.

Meanwhile, the mainland's runaway growth since has combined the accelerating effects of the early-20th-century American industrial revolution, the post-second world war increase in consumer spending and, most recently, the rise of free-wheeling e-commerce.

This latter point is particularly telling. China is challenging the hitherto US dominance of e-commerce. Alibaba's coming listing is the clearest expression of that. Chinese technology developers are building the world's fastest-growing e-commerce market. And no, or few, Hongkongers are to be found among their ranks.

Indeed, aside from Hong Kong's regulators basically forcing Alibaba into New York's arms, this city has played an inconsequential role in the mainland's internet development.

In its most recent budget, our government proposed forming a Ministry of Technology, as if that would solve the problem.

But instead of thinking of how to throw billions at incubating and retaining technology companies, policymakers must ask why the likes of Alibaba, Weibo, Tencent and Baidu were started by mainland, not Hong Kong, entrepreneurs.

The reasons lend scathing insight into the city's intellectual and class problems that prevent it from renewing and transforming itself with a new entrepreneur class.

First is that by refusing to play a larger and more adventurous role in mainland society, Hongkongers will never understand the particular local factors on the mainland that create opportunities in social media or e-commerce. Meanwhile, ambitious mainlanders increasingly consider Hong Kong irrelevant to their business plans.

Second is that too much Hong Kong money, talent and economic activity is anchored to property development, oligopolies and the financial services industries that orbit them.

Rent-seekers do not have to fight to survive, which means the dominant holders of capital accrue profits while contributing little innovation. They perpetuate the rational economic behaviour that any of us would engage in if we owned an office building in Central.

But at such a critical juncture in such an underdiversified economy, Hong Kong needs more than rational economic behaviour. The city needs a revolution in its education system so it turns out students able to innovate, grow businesses and move up the value chain.

A study by the Hong Kong Institute of Education conducted last year showed the city's richest teenagers had 3.7 times the chance of enrolling in a university that the poorest had.

Education with equal opportunity is an important vehicle not only for social mobility but also for regenerating our entrepreneurial class.

The question then is how to fund an education system to deliver that.

Nationalising, expropriating or encouraging our economic rent-seekers to change their behaviour is either unlawful or impractical.

A dramatic reform of the tax system is the cleanest way forward - progressive taxes on capital gains, dividends and inheritance could fund much-needed reforms to modernise our public education system and improve entrepreneurial opportunity.

Without it, Hong Kong's city state of mind will only get worse.

Peter Guy is a financial writer and former international banker