There is a dilemma in Hong Kong's embrace of the New Economy. Even as local entrepreneurs celebrate China's likely World Trade Organisation (WTO) entry and build online product exchanges, the question of how a city selling 'middle-man' services stays relevant remains unanswered. Having toughed out the Asian crisis with its currency intact and banks relatively unscathed, the SAR's economy is bruised but still battling. Robust exports and inventory re-stocking means gross domestic product (GDP) growth is forecast to grow a perky 8.5 per cent this year. House prices may have fallen 50 per cent, severely denting consumption, but deflation has cut business costs. China is again targeting 8 per cent growth as private-sector exporters churn out big surpluses. Reform of state-owned enterprises remains a politically charged affair, but the demands of WTO membership leave Beijing little choice but to privatise, or at least rationalise, loss-making industries. A local adage runs that Hong Kong thrives when the mainland opens to the world. As such, WTO entry promises to bind Beijing to a rules-based trading system. That should mean more trade, investment and most likely an open capital market some way down the track. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong reckons entry will add 0.5 percentage points to the SAR's annual GDP growth. Contrast this with Singapore, which despite getting so much right finds itself marooned in a sea of economic isolation. If nothing else, the SAR benefits from international investors' attention on North Asia, with Greater China at the epicentre. Yet Beijing's WTO entry also poses threats. Hong Kong thrived as a gatekeeper extracting economic rents from foreigners and mainlanders alike. Local firms provided risk capital, manufacturing know-how and marketing savvy. This ensured big profits, much of which were invested in an under-supplied local property market. That economic model has been under threat for some years, but WTO entry will accelerate the trend as foreign firms do business directly with mainland entities. Perhaps even more significant for an economy based on 'middle-man' services is the potential of business-to-business e-commerce. For optimists, a globally networked economy offers Hong Kong the chance of becoming the Asian information hub, managing hardware, software and business services linked to e-commerce. The flip-side is it becomes a supply-chain outpost while most buying and selling goes online. In such a 'friction-free' environment, the SAR's famously flexible entrepreneurs should have a competitive edge. Yet, looking a little deeper, Hong Kong appears decidedly Old Economy. Family-controlled conglomerates dominate domestic industries while cartels and restrictive practice are subject to neither administrative nor legal redress. Elsewhere, competitive pressure is forcing firms to slim down to core competences, but Hong Kong's jack-of-all-trades mega-conglomerates continue to extend their reach and share of economic activity. The Government reacted to the financial crisis with big projects such as Disney and Cyber-Port, but mercifully chose not to directly fund new industrial projects. As yet, a more interventionist administration has not articulated a core set of economic values beyond lip service to the 'positive non-intervention' mantra of the colonial past. Recession has focused attention on bread-and-butter issues such as worsening income inequality. Some economists worry an emerging welfare-dependent under-class will dampen the SAR's future growth prospects. Certainly, talk about a knowledge-based society is premature when 16 per cent of school-leavers fail every subject in their Hong Kong Certificate of Education exams. Residential property prices remain the key barometer of domestic confidence. After sharp falls during the early summer, the Government performed an embarrassing about-face by cancelling sales of its subsidised Home Ownership Scheme (HOS) flats. Together with an improved interest-rate environment, this stopped the price slide and recent strong sales suggest a market bottom. The Government has promised in future to make a consistent supply of land available. Yet with the administration still dependent on land revenues for up to 50 per cent of its tax receipts, there has been little by way of fundamental reform. As such, the SAR remains locked in a high-land-price bargain with its citizens. Next year will see the roll-out of the Urban Renewal Authority, with sweeping compulsory-purchase powers across districts of urban blight. The Government can either parcel land and sell it to private developers or continue as a builder of mass housing. It must also decide how to manage more than 100,000 HOS flats that will start coming on-stream. The choice is one of increasing the supply of public rental units or sticking with the stop-start privatisation process through right-to-buy schemes. If it decides to essentially get out of house building, the high-land-price policy effectively would be jettisoned. If this translates into more price falls, the damage to household finances rules out a rapid consumption-led recovery. Privatisation represents a significant development. Utilities such as the Kowloon-Canton Railway Corp and Airport Authority may follow the Mass Transit Railway Corp with share offerings. With huge capital spending on new rail projects over the coming five years, the Government is being forced to seek new sources of finance. Few think 1990s-style growth can be repeated. The mainland's economic opening provided local businessmen with extraordinary returns for doing fairly ordinary business. Hong Kong's property market may boom again, but the reality of Shenzhen flats selling at a 10th the price eventually must be factored into the overall structure of prices in southern China. This still feels like a recession economy. Unemployment may have improved but more corporate down-sizing seems likely. The recovery has been driven by a one-off inventory restocking and statistical comparisons with a period of sharp deflation. Looking forward, Hong Kong's strength has been its ability to rapidly restructure - jettisoning old industries and embracing the new. It has never created much that was original but cleverly adapted efficient technologies. This year saw a mini-stock market boom in Internet concept stocks come and go. Those gold-rush months were more about traditional Hong Kong financial engineering than a genuinely new economy. Yet among the detritus a few good companies will emerge. More important is the widespread realisation that old ways of working cannot last. Sustainable recovery will depend greatly on good policy-making. The preceding bubble economy has left many people without the skills to participate in the emerging industries. Flexible immigration policies - encouraging the right people - and education-sector reform must rank as some of the most pressing objectives.