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Amy Nip

Under the oversight of Chief Executive Donald Tsang Yam-kuen, whose second and final term in office ends at midnight on Saturday, Hong Kong's economy appears to be on the right track.
Indeed, major statistical indicators from 2005 to last year - covering most of Tsang's tenure - suggest all is well. 
Moreover, the city's economy grew in every year he was in power except 2009, in the depths of the global financial crisis, with annual real gross domestic product growth averaging 4.5 per cent. 
Unemployment, after hitting a peak of 8.6 per cent in June 2003 during the outbreak of severe acute respiratory syndrome (Sars), has been declining and never topped 6 per cent during Tsang's term. 
Statistical full employment was achieved in 2008, when the jobless rate fell to just over 3 per cent.
 Despite these rosy figures, economists say no significant progress has been made in the city's transition to a high-value-added, knowledge-based economy.
Cash handouts and tax rebates announced in successive budgets may have boosted local spending and cushioned fluctuations in external trade, but they did not draw new investment to foster long-term growth, economists say.
'Tsang's policies follow a Santa Claus format ... he gave out a lot of sweets every year but not long-term policies,' said Li Kui-wai, an associate professor of economics and finance at City University. 
In budgets since 2006, the government has announced four reductions in tax rates, waived a part of salaries tax four times and waived rates for certain financial quarters another four times.
Handouts have boosted domestic demand for goods and services, making these account for a bigger part of economic growth. Last year, local private consumption comprised 65.2 per cent of GDP, up from 58.5 per cent in 2005, official statistics show. 
Yet 'a change into a home-driven economy could suffocate a small place like Hong Kong', said Li, explaining it was external investment that drove growth and bolstered employment. 
Tsang's biggest achievement, Li said, was to make Hong Kong an offshore centre for trading renminbi, China's currency. Total yuan settlement rose fourfold to 1.91 trillion yuan (HK$2.34 trillion) from 2010 to last year. 
Yuan deposits totalled 588.5 billion yuan at the end of last year, up 87 per cent from 2010. Indeed, Hong Kong remains the top destination of yuan deposits outside the mainland. 
But Tsang has done little to foster development of the 'six new pillar industries' the government identified as having 'clear advantages' for growth. 
The six - cultural and creative industries, medical services, education services, innovation and technology, testing and certification services, and environmental industries - were highlighted in Tsang's policy address in 2009, which he delivered in the wake of renewed calls for the city to diversify its economy following the downfall of American banking giant Lehman Brothers in September 2008. 
This diversification has made little progress so far. In 2008, the six industries contributed 7.5 per cent of the city's GDP; this edged up to 8.4 per cent in 2010, government statistics show. The growth was driven by the cultural and creative industries, whose share of GDP growth nudged up 0.6 percentage points. The share of GDP growth of three sectors - educational services, testing and environmental industries - remained unchanged. 
City University's Li said Tsang had done little to boost the development of the six industries since he highlighted them in the policy speech. 
In stark comparison, 58 per cent of the city's GDP in 2010 - 1 percentage point more than in 2008 - was accounted for by the four existing pillar industries - financial services, tourism, professional services, and trading and logistics. 
Tourism grew the most, with its share of GDP rising by 1.6 percentage points to 4.4 per cent in two years. The sector employed 218,100 people in 2010. But banking continued to decline, with its GDP share dropping to 9.6 per cent, down from 10.2 per cent two years ago. 
Li, however, is sceptical that tourism is the best bet for Hong Kong's development into a knowledge-based society. Tourists came and spent, but their consumption did not generate secondary spending and added little value for the city. Total tourism spending associated with inbound tourism totalled HK$210 billion in 2010, when the city welcomed 36 million tourists. But this sector's contribution - in terms of value added - to GDP was only HK$59.2 billion for 2010. 
Terence Chong Tai-leung, an associate professor of economics at Chinese University, said mainland tourists flocked to Hong Kong because of the heavy taxes levied on consumer goods on the mainland. Any change in the mainland's tax regime could reverse this trend, he said.
'Mr Tsang has the mentality of a civil servant. He focuses on crisis management,' he said. 'He won't return to the way Mr Tung [Chee-hwa] did things ... establishing long-term goals doesn't really help popularity ratings.' The lack of long-term planning raises concerns about Hong Kong's relative competitiveness. 
According to the Legatum Prosperity Index, a global study covering prosperity levels and life satisfaction in 110 countries and regions, Hong Kong has fallen behind Singapore. In terms of overall performance, Hong Kong was ranked 19th and Singapore 16th in last year's study. The difference in average life satisfaction ranking was bigger: 54th and 29th respectively. 
Even so, the Southeast Asian country's economic model of active government intervention would hardly work in Hong Kong, said Dr Billy Mak Sui-choi, associate professor in finance and decision sciences at Baptist University. 'It's not practical for a liberal society like Hong Kong to follow Singapore's parental model,' Mak said. 'The local government is not executive-led, and it remains in a deadlock when it comes to implementation of policies.' 
On a positive note, Tsang could be credited for the growth in tourism, a sector essential to support local employment, Mak said. For instance, the first berth at the Kai Tak cruise terminal is expected to be operational next year, which will boost the city's cruise tourism sector. 
'Low unemployment is achieved as catering and retail sectors, all requiring lower academic qualifications, are backed by vivid inbound tourism,' he said. 
Although there was average inflation of 2.5 per cent over the past seven years, Mak said it was at an acceptable level, given that people still have secure jobs. A bigger problem is the widening wealth gap, which Tsang has admitted failing to narrow. 
While other countries use taxation as a means of redistributing wealth, this would not work in Hong Kong because many families are exempt from taxation. And given the city's bulging budget surplus, the government has no reason to raise taxes for high-income earners, Mak said. 
But with the failure of the 'trickle-down effect' - an economic theory which says economic growth will eventually benefit the poor - the incoming administration will face a welfare problem, rather than an economic one, when looking for ways to help impoverished Hongkongers.
58%
The proportion of 2010 GDP from the four traditional pillar industries, a sign Tsang's 'new pillar industries' don't pull their weight



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