Don’t be fooled by the free-market mantra. Hong Kong’s economic fortunes have changed dramatically in 25 years

For 25 years running, Hong Kong has been rated the “world’s freest economy” by the US-based Heritage Foundation. Subjected to intense media flagellation over one mishap or another, our leaders can be forgiven for clinging to this accolade as a constant reminder of the city’s sterling achievement in better days.

Back in 1994, at the first-ever high-level dialogue between OECD countries and four Asian “dynamic non-member economies” – South Korea, Taiwan, Hong Kong and Singapore – in Tokyo, Hong Kong’s free-market economy was widely admired for working miracles for the city, despite low taxation and the government’s limited role. While most members of the Organisation for Economic Cooperation and Development agonised over their recurrent fiscal deficits, Hong Kong officials had the opposite problem of worrying about how to spend their embarrassingly large surpluses.

Hong Kong’s often-touted principle of “small government, big market” and laissez-faire approach to the economy appeared to work perfectly for the city, and no other credo was deemed necessary.

Today, Hong Kong continues to have large, recurrent fiscal surpluses, and a growing political problem of how to spend them. Beyond that, Hong Kong’s economic fortunes have changed profoundly.

First, Hong Kong faces a demographic challenge. It can no longer be assumed that it can take care of its aged and infirm in the long term without substantially augmenting revenue or mandating a universal pension scheme.

According to the Census Department’s projections, 36 per cent of the population will be 65 or older by 2064, while the workforce will dwindle to 3.11 million, or 39.8 per cent of the population. T hus, even with fiscal reserves of over HK$1 trillion, the government will not be able to cope with the twin spectres of a public health-care meltdown and inadequate retirement protection.

Second, the government’s expenditure on education has soared in recent years, from HK$79 billion in 2015 to HK$124 billion in 2019. Massive funding has been pumped into the school system to reduce class size and improve teachers’ pay. The education participation rate at post-secondary level reached 70 per cent in 2015-6, including 45 per cent at degree level. Yet tales abound of the widening gap in educational attainment, while demand for places in expensive, international schools seems insatiable.

In spite of the spike in educational investment, Hong Kong students’ performance lags behind their Singaporean counterparts in standardised international tests. Blue-collar, manual work is shunned by graduates, and employers can no longer count on the “can do” spirit of the workforce as they did in the post-war years.

Hong Kong’s entrepreneurs have earned a reputation for responding quickly and adapting nimbly to changing market conditions. Yet today, this flexibility is not leading to creation of new value. Instead, entrepreneurs have jumped on the bandwagons of providing mini-storage warehouses (which resulted in a tragic fire killing two firefighters); squalid subdivided housing units for those at rock bottom, zero-fee tours and parallel goods outlets for tourists from mainland China; and super-expensive micro flats for homebuyers.

Lately, at the prompting of the government, tech-based enterprises, especially in the area of fintech, have thrived. But the jury is still out on the extent to which such efforts could truly help restructure Hong Kong’s economy.

The reality is that the world has changed radically since Hong Kong was first named the freest economy. Capital and technical progress have become the prime determinants of long-term economic growth. As cities on the mainland zoom ahead in the use of new technologies, Hong Kong cannot partake in the race without strong government backing, which current Chief Executive Carrie Lam Cheng Yuet-ngor is finally providing. The tired slogan, “small government, big market”, is less and less relevant, but the government lacks the courage to officially retire it and come up with a new credo.

In fact, to rekindle hope, the government needs to play a much bigger role in overcoming two immediate problems holding back economic growth – the shortage of land and housing, and the labour crunch.

In the past year, the government has added 6,700 civil service posts to meet rising demand for services, the highest year-on-year increase since 1997. This trend is likely to continue as our community, with high expectations, relies more and more on the government to meet their needs.

The government also needs to face up to the reality that inequality in income and wealth is rising; market concentration is growing in many sectors (such as the control of retail and parking facilities in public and subsidised housing estates); lack of competition is harming the performance of key providers of public services (most noticeably the MTR); and space for small and medium enterprises is closing in.

The old mantra of “small government, big market” is stale. The government needs to think bigger – and harder about giving itself more regulatory power to tame runaway markets, reduce rent-seeking, and help small and medium-sized enterprises. Otherwise, if individual and small entrepreneurs continue to be squeezed, Hong Kong’s free market will ultimately kill hope, and hurt the political sustainability of its government.

Regina Ip Lau Suk-yee is a lawmaker and chairwoman of the New People’s Party