Hong Kong’s budget won’t fix core problems of dominant cartels and lack of competitiveness
Hong Kong’s recent budget creates its own unconventional version of Freakonomics: the morality of how bureaucrats imagine the city works versus the economics of how it actually works. Despite pumped up welfare and social spending, the government’s failure to address structural economic and marketplace reform will only mean that the quality of living and competitiveness standards will only worsen.
The government can easily spend more billions when it has control over reserves that are almost a trillion dollars. But it won’t be able to spend its way out of Hong Kong’s dominant cartel and competition problems.
“Hong Kong is facing grave challenges. We must develop a high, value-added and diversified economy,” said Chief Executive Carrie Lam Cheng Yuet-ngor. True, but if she is serious, then she will have to do much more than more of the same as her predecessors. The difference between administration and governance is that the former is about working within the status quo and the latter is about pursuing a political vision against all odds.
In Hong Kong, the state is absent by historical design. Today, it doesn’t look after its peoples’ housing needs and economic future. A defiant oligarchy has taken hold. Hong Kong’s prosperity is also undermined by the very uneven spread of wealth. The prosperity we do have is highly dependent on property and related activities.
So lower profits taxes are inconsequential for economic transformation because Hong Kong’s taxes are already among the lowest in the world. And new businesses rarely generate a significant profit in their early years so reduced taxes are not an incentive.
More government spending in funding technology is crippled by the difficulty that not enough start-ups are being qualified because co-investment with venture capital funds is required. Government officials are going to have to make and take more direct risks in funding new ventures.
Doubling spending on research and development is a black hole for government. Ideally, Hong Kong’s private sector should be investing in this area, but I can’t imagine an economy dominated by property developers and landlords doing much research and development. This accounts for Hong Kong’s low ranking in R&D.
More grants in university research only benefit a small clique of scientists in specialised areas. They will not create large numbers of jobs because Hong Kong does not have industries that can make direct use of these patents. Ultimately, it only vaults the profile of local scientists onto the international stage where they will be hired by companies or universities outside Hong Kong.
The government plans to increase housing supply, but analysts have already said the results will require five or more years to materialise. It is far easier to confront the property developers and expropriate their land, control who, how and when they can sell flats than to feed more land supply into a property cartel that maximises its own profits at a huge cost to society.
Restoring the rent controls that former CE Donald Tsang stripped away to favour landlords would have been an easy step for the government. Or banning the development and sales of flats smaller than 500 square feet for the simple reason that it is inhumane and immoral would have inspired hope that the government is for the people.
The government will only know it is fixing the market when the property developers complain loudly. So far they are quite content to offer for sale a hundred or so 150 square foot flats on a weekend to hapless buyers.
Hong Kong must realise that it is not an economic powerhouse waiting to be liberated. It is a city of mediocre education and limited skills whose preening vanity has prevented us from truly understanding our failings. China has been propping us up with their economic success. The core narrative of the Hong Kong story for the past 20 years has been that we are stable and politically predictable. And now we are directionless, cowardly and stuck in a mess.
Peter Guy is a financial writer and former international banker