Hong Kong's reunification with the mainland in 1997 is a source of immense pride for our nation. Our national leaders have scrupulously honoured their hands-off approach. Not only that, they have been extremely supportive in helping Hong Kong address some of the economic difficulties that have demanded so much of our energy over the past five years. It is easy to overlook just how successful that transition has been, although I would not try to conceal the fact that we have had to deal with some difficult issues. We will most likely face some tough challenges in the future too. But ''one country, two systems'' is working and we do enjoy the promised high degree of autonomy to run our own affairs. Hong Kong's peaceful reunification with the mainland after more than 155 years of separation was, in my view, one of the most significant geopolitical events of the last century. Never before has an entire economy and community of almost seven million people made such a dramatic, yet almost seamless, change. All of the key institutions that underpin our development as a free and pluralistic society have remained in place. Its commitment to freedom is part and parcel of what makes Hong Kong such a vibrant and cosmopolitan society and liberal economy. It is about having the freedom to read what you like, whether it be in a newspaper, a magazine or on the Internet. It's about speaking your mind, whether it makes sense or not. It's about having the freedom to come and go as you please, and it's about settling your differences in court with a tried and trusted legal system. It's about going to the mosque on Friday, the synagogue on Saturday, or the church on Sunday without fear of attack or reprisal. It's about being able to walk home at night without being mugged. It's about many things. So it is hardly surprising that some of these issues are often debated quite vigorously in our rambunctious and unfettered media, particularly if it is felt that these freedoms may be compromised or curtailed. Seen from afar, these lively exchanges might sometimes be regarded as evidence that our system is under considerable stress. But this type of frank and open debate is the glue that binds our society together. Heaven help us if the Fourth Estate becomes less forthright. Over the past few months there has been much debate about a topic that many regard as a litmus test for freedom in Hong Kong, that is, Article 23 of our Basic Law. This states that Hong Kong shall enact laws, on its own, to prohibit any act of treason, secession, sedition and subversion against the central government. Laws are also required on the theft of state secrets and to prohibit political activities by foreign political organisations in Hong Kong. This matter goes to the very heart of the interface between ''one country'' and ''two systems''. How do you reconcile the differences between the social, political and legal systems of Hong Kong and the mainland, while at the same time protect the legitimate rights of any country to national security and sovereignty? Elsewhere in the world, these are national laws. But because of Hong Kong's special status, the Basic Law empowers our legislature to enact our own laws on these sensitive issues. That in itself is a vote of trust in Hong Kong. Five years after reunification, ''one country, two systems'' has taken root, and we have seen a blossoming of contacts and co-operation between Hong Kong and the mainland. As we enter the second five-year term of the chief executive, now seems as good a time as any to tackle this issue. I know that there are some in our community who argue that new legislation is unnecessary. But in view of our obligation under the Basic Law, we should, in my view, get on with it and remove any niggling doubts about the government's intentions once and for all. At first glance, the government has taken care to develop proposals that seem generally balanced and reasonable. National security laws in other jurisdictions have been assessed and taken into consideration. There is a clear understanding that whatever we do must dovetail with our commitments to the international human rights covenants that apply to Hong Kong. The government has heeded the advice of the legal profession and other interested parties to, wherever possible, draw on existing laws when formulating the legislation needed to implement Article 23. Few new laws will be required. And to protect fundamental human rights and freedoms which are guaranteed in the Basic Law, in particular the freedom of expression that is so important in Hong Kong, very tight definitions of offences have been formulated. In short, there must be a use of force, or a threat of force or violence, or acts of a grave criminal nature for many of the offences to take place. Nevertheless, a number of proposals will cause disquiet. I am sure our community will make full use of the three-month consultation period to express these concerns. But in looking ahead, and in trying to assess whether the proposals are balanced and fair, there are two points worth bearing in mind. One, our own legislature will debate this matter fully and comprehensively. They will no doubt be well aware of their constituents' views, as well as the keen eye that the international community will be keeping on Hong Kong as consultations progress. Two, the laws that are eventually passed will be interpreted by our own courts, which draw on a long history of common-law experience. They have shown themselves to be fully cognisant of the international legal benchmarks by which Hong Kong is judged, and I have every confidence that they will continue to do so in the finest tradition of an impartial and independent judiciary. Article 23 legislation is arguably the most important and sensitive legislation we have had to face since reunification. Its impact on our freedoms and our lifestyle is far-reaching. We should encourage the widest possible debate. But to achieve the best results, this debate needs to be conducted with an open mind and in a calm, rational manner, free of emotion and rhetoric. Government has assured the public that it will consider carefully all views expressed. But as we all know, the devil is in the detail. We would all find it reassuring if the government was to agree to publish a ''white bill'', that is the draft legislation itself, for further consultation before it goes to our legislature. It is important to get the legislation right rather than to rush to meet a deadline. Article 23 is one of two ''outstanding'' issues in the Basic Law that needs to be dealt with. The other is our democratic development. Since 1997 we have been moving ahead within the Basic Law's prescribed 10-year framework of democratic development. We have held two legislative council elections and a district council poll, all of which were hotly contested by candidates from all political persuasions. Since July 1 this year, a new ministerial-style system of politically appointed officials has been introduced to make government more open and accountable. The next district council polls will be held in 2003. This will be followed by Legislative Council elections in 2004, when the six seats from a grand electoral college will be replaced by directly-elected members from geographical constituencies. At this point, half of our legislature will be directly elected by universal suffrage, with the other half elected by functional constituencies representing key economic and social groupings in Hong Kong. After 2007, it is up to Hong Kong people to decide the best way forward to achieve the ultimate goal of universal suffrage for the election of the legislature and the chief executive. As you can see, we are not standing still, but moving forward steadily. Now I know that our friends in the US and elsewhere sometimes find it hard to understand our electoral arrangements in Hong Kong, or why such an open and free-wheeling society is not yet a fully paid-up member of the democracy club. Certainly, there are people in Hong Kong who believe that we should have a popularly elected chief executive and legislature, and that we should have it now. Equally, there are others who believe we should move more slowly. Clearly it is important to forge a consensus in the community on the pace of democratisation. Hong Kong is not quite like any other place. We have a unique geopolitical context and a unique relationship with our sovereign. What we need is to construct a home-grown system of democratic government from the building blocks that we inherited on July 1, 1997. We need to encourage the further development of responsible political parties and greater public interest in participating in the political process. Until we reach our ultimate goal of universal suffrage, it is incumbent upon the government to go the extra mile in exercising its authority in the most transparent and accountable manner possible. The civil service will continue to have a crucial role to play in the good governance of Hong Kong. Of course, the civil service must change with the times. But what must not change is its commitment to certain core values. By that I mean integrity, political neutrality, intellectual honesty and rigour, fair play and the courage to speak the truth. The interplay between ''one country'' and ''two systems'' is also being brought into sharper focus by China's rapid economic development. The question facing us in Hong Kong is how a relatively small and congested community of seven million can maintain its relevance and market niche. The answer lies in making the most of our differences as a special administrative region to enhance our role as an international city and an Asian hub, as well as a window on the world for China. I know that there are many in the mainland who believe that they have much to learn from Hong Kong - in corporate governance, in professional practices and standards, in law enforcement, in fighting corruption and in the rule of law. There is now a flurry of activity in Hong Kong to cope with the rapid opening up of a mainland market now more closely aligned to the world's rules-based trading system. Efforts are being concentrated on two broad fronts. On one front, we are enhancing competitiveness by adding value in key economic drivers such as financial services, transport and logistics, tourism and producer and professional services. We have always excelled in these areas but now we must further hone these skills and attractions to more closely gel with the needs of the mainland market and the international business community that is also looking for a foothold there. On the second front we are boosting the economic synergy with our prosperous hinterland, the Pearl River Delta, by working to smooth the flow of people, goods, cargo and services across our land and sea boundaries. The delta, including Hong Kong and Macau, is the fastest growing and most affluent region in China, with a population approaching 50 million and an annual GDP of US$258 billion (HK$2 trillion) that puts it among the world's top 20 economies. It has specific advantages and great potential as a consumer market, a trading hub, a manufacturing base, a services market and as a destination for investment. More resources will be devoted to hastening the flow of people and goods through such initiatives as co-located Customs and immigration checkpoints, the development of an electronic cargo clearing system and the opening up of new road and rail routes between Hong Kong and the Pearl River Delta. There are plans for further co-operation in the logistics and transport sectors to provide more integrated services between major port and industrial cities in the delta region and our airport and container port. All these initiatives will enhance the export efficiency of the delta region and Hong Kong's ability to serve that extra trade. In moving forward with these plans, we must be mindful of the need to protect our ''one country, two systems'' advantages, in particular our own stringent Customs and immigration regimes. What has transpired over the past five years, and what will transpire five years hence, and 40 more after that, will ultimately determine whether ''one country, two systems'' is judged a success. We in Hong Kong must understand that what we do now sets the tone for the future. We must continue to guard the rights, freedoms and advantages that we have been promised and enjoy as an SAR. And we must have the courage to speak up if we see any attempt to dilute these freedoms. We will not serve the best interests of our country, nor those of our children and grandchildren, if we allow them to be gradually chipped away for the sake of expedience, or as a short-sighted solution to a far-reaching problem. In plotting our course, we should stick to the basics, that is, the guiding principles of the Basic Law and the basic fundamentals on which our success as an economy and a society have been built. This is especially vital now, at a time when Hong Kong is facing such great change in the economic and political spheres. We have much to be proud of in Hong Kong. Admittedly, we are going through a difficult patch at the moment with the continuing restructuring of our economy and the associated cost adjustments. These have painful consequences, but we must face up to them. There are no quick fixes. As in the past, we should recognise change for what it is. It is both a challenge and an opportunity. Since the end of World War II, we have pulled ourselves up by the bootstraps and faced down serious challenges in every decade since, to create one of the most remarkable and prosperous cities on the planet. We can do so again. Our legendary ''can do'' spirit may be a little under the weather but it has not died. I am confident we will emerge from our present difficulties stronger and better able to benefit from mainland China's steady growth. We will also be ready to exploit the opportunities that will follow from a rebound in the world economy. Our medium to long-term prospects remain good. So for those who are ready to write off Hong Kong, let me recall the words of the New York Times: ''No one has ever made any money betting against Hong Kong.'' Anson Chan Fang On-sang retired as chief secretary for administration of Hong Kong in April last year. This is an abridged version of her speech yesterday to the Heritage Foundation in Washington.