Let's become a baby formula hub

If every crisis presents an opportunity, then we should look on the continuing furore over the shortage of baby formula as a transformative moment. Forget about our official pie-in-the-sky schemes to turn the city into an arts hub or logistics centre, and this and that hub. Let's declare what we have already become: a baby formula hub.

We are looking at this shortage problem in a completely wrong way. Worse, the government's non-response, led by Secretary for Food and Health Dr Ko Wing-man, is an abdication of responsibility. In effect, he is telling local retailers to behave and stop hoarding for parallel traders from the mainland. Any enforcement or monitoring? Well, he has left all that to the major suppliers such as Friso, Abbott and Mead Johnson.

Hoarding is a well-understood economic phenomenon, at least for those not indoctrinated by more than half-a-century-old theoretical models inspired by Kenneth Arrow's "invisible hand", according to which all goods necessarily clear in an efficient market.

Inefficiency arises in the distribution and production of formula for Hong Kong because it's no longer a purely local market - where all the parties have good estimates of the levels of supply and demand. There is a massive mainland demand that has spilled into the city because of concerns about food safety north of the border. Chauvinistic "we hate mainlanders" protesters and a sensational Hong Kong media feed into the frenzy, which worsens the anticipated shortage and pushes up prices. Short of banning or restricting mainland visitors, it's hard to eliminate parallel traders.

So, what to do? One way to solve the problem is to let markets believe there will be adequate supply for all. That requires serious government commitment. As a baby formula hub for Asia, we should encourage the big suppliers to use the city as a base of operation, storage and distribution - with appropriate incentives such as tax breaks and subsidised facilities. Instead of attracting unruly fly-by-night mainland traders, we will economise and streamline distribution for large importers from the mainland.

Come to think of it, we should capitalise on mainlanders' other fears about tainted food and drugs and give them what they want.