“You never let a serious crisis go to waste … It’s an opportunity to do things you think you could not do before.” This was the advice given by Rahm Emanuel, the chief of staff to then US President Barack Obama, at the height of the global financial crisis in 2009. Within nine months of the collapse of the Lehman Brothers investment bank, Obama introduced proposals for a “sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression”. This eventually led to the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010. Despite some criticisms (especially from the financial industry), Dodd-Frank is generally regarded to have bolstered the US’ financial stability and resilience against future crises. No troops, no concessions, no end in sight for Hong Kong unrest Crises are a valuable opportunity for leaders to remake long-held organisational habits that are no longer fit for purpose. The administrators at the US space agency Nasa had tried for years to improve the agency’s safety protocols and routines, but they succeeded only after the space shuttle Challenger disintegrated in 1986. The cockpit design of commercial aircraft, runway procedures and air traffic controller communications routines were overhauled only after the Tenerife airport disaster of 1977 that killed 583 people. The current protests in Hong Kong represent the city’s most serious political crisis since the leftist riots of 1967. Just as those riots served as the catalyst for social reform by the colonial administration at the time, so too must the current administration respond to today’s crisis by embarking on far-reaching socioeconomic policy and institutional reforms. While specific policy measures in areas such as public housing, retirement financing and health-care provision are urgent and necessary, these should be underpinned by a fundamental rethink of the government’s ideologies and habits (not least their habits of mind) in at least three ways. STATE AND MARKET First, the Hong Kong government needs to seriously reconsider the relationship between the state and the market. Since coming to Hong Kong early this year to teach economics and public policy, I have been struck by how public officials and university students alike seem to valorise the free market, often in quite naive, simplistic ways that ignore the complexity of markets and the pervasiveness of market failures. Some Hongkongers also seem to take perverse pride in the city being ranked every year as the freest economy in the world by the Heritage Foundation – a partisan, right-wing think tank in the US that has very little credibility among mainstream economists. After the 2008-2009 financial crisis that exposed the excesses of free, largely unfettered financial markets, Hong Kong’s market fundamentalism is not just inexplicable, but it also risks hurting the city’s capacity to respond intelligently to emerging threats and opportunities. How the Hong Kong protests inspire Macau’s youth – and teach their government to be wary While many observers have pointed out that unaffordable housing is one of the underlying causes of the youth disaffection that is fuelling the protests, few of these observers mention the fact that the housing crisis is, in fact, the result of market fundamentalism. This market fundamentalism ignores the fact that the housing market is unlike most other markets. It is prone to speculative booms and busts; an increase in prices may generate more demand instead of dampening it. In such instances, markets have a destabilising, self-reinforcing dynamic rather than a self-correcting one. The conclusion of neoclassical economics – that competitive markets with no monopoly power or other market failures produce efficient outcomes – is far too simplistic and ignores the role of emotion and herding (or what John Maynard Keynes called “animal spirits”) in financial markets. Besides the obvious threat to housing affordability, market fundamentalism also holds back Hong Kong’s ability to take advantage of opportunities created by the fourth industrial revolution – the convergence of technologies such as big data and data analytics, artificial intelligence, the internet of things and blockchain. Often, these opportunities can only be exploited if the state takes the lead, not just in setting vision and broad goals, but also in using policy tools to create demand for a thriving, home-grown technology sector. Without such state activism, a new industry is unlikely to take root in an expensive city like Hong Kong. Scepticism of the free market does not mean that we should subscribe to the opposite ideology: central planning, statism and faith in big government solutions. Rather, the Hong Kong government should think pragmatically (without the ideological baggage of laissez-faire economics) about how it can use the policy tools at its disposal to create, regulate, stabilise and legitimise markets. One China, two different worlds: how the great political divide is on full show overseas amid Hong Kong chaos REDUCING INEQUALITY The second reform imperative is to legitimise markets by reducing inequality. Even if they produce efficient outcomes, markets hardly ever produce just outcomes. This injustice can easily harden into a lack of social mobility, breed resentment among the young in particular, and provoke a nativist, anti-establishment and populist backlash. Indeed, one can already see signs of such a backlash in the current protests. If we care about preserving markets, we should care as much about legitimising them. This means giving everyone a stake in the hyper-capitalist economy that is Hong Kong. And the most salient fact about the Hong Kong economy is how income is very unequally distributed and how wealth is highly concentrated. The solution to the high inequality in Hong Kong is not one-off cash transfers to the young or the economically vulnerable. Rather, the entire fiscal system of taxes and spending needs to be re-examined, and parts of it have to be overhauled. For instance, given how differences in wealth (or the ownership of capital) are a far greater source of inequality than differences in labour income, I have argued previously that Hong Kong should tax wealth more. Tackling inequality also requires the Hong Kong government to engage the city’s residents on the kind of society in which they would like to live. Historically, Hongkongers have favoured low taxes and low (social) spending over a much more redistributive and activist state. This “equilibrium” is clearly under threat; the government needs to expand social security and welfare provision. But there is also likely to be significant middle-class resistance to the higher taxes that would be needed to finance a larger, more redistributive welfare state. Carrie Lam can defuse the Hong Kong protests by taking on the property tycoons Higher taxes are much easier to introduce if society at large – and especially the middle class – trusts that these taxes will be used to finance public goods and services that benefit a broad segment of society, not just the poor. This points to a radically different approach to social spending than has been the case in Hong Kong. In particular, it means moving away from targeted transfers (to the poor) to universal services that benefit everyone. REBUILDING TRUST IN GOVERNMENT Rebuilding trust in government is the third reform imperative. How can this be done? Democratic accountability is commonly cited as the main way in which trust in government is created and sustained. If the government has to seek the population’s mandate in regular, free and fair elections where all adults have a vote, that should (in theory at least) engender trust in the system of government, even if people’s trust in any particular government is low. This trust in the system of government is also what engenders political stability. In Hong Kong’s context, the struggle for democracy – defined here as universal suffrage – is likely to be a long-term one with no guarantee of success. But this does not mean Hong Kong cannot become (more) democratic in other substantive ways. While Hong Kong may not be a formal democracy, it can strive to be a substantive democracy that gives its residents a high degree of voice and accountability. Indeed, given that its residents do not really have a vote, it is critical that they have a voice in government decision-making and that the government is responsive and accountable. What this means is that the Hong Kong government has to develop sophisticated platforms that engage Hongkongers on a sustained basis, solicit and aggregate their (policy) preferences, and influence the decisions made by government. This, of course, represents a major overhaul of the way the Hong Kong government has operated so far. For instance, it means jettisoning the top-down, elitist processes that have characterised policymaking in the city. It also means moving to a system of decentralised governance that taps on the collective wisdom of citizens, and leverages the tools of social innovation, co-creation and crowdsourcing. This model of collective governance places new demands on the government to develop far stronger public engagement, communications, and network management capabilities. Above all, it requires the Hong Kong government to be far more networked, adaptable and fluid. Just as the protests are a highly networked social movement that seeks to “be water”, so too must the government strive to do the same if it is to respond effectively – not just to the current protests, but also to the future challenges of governing Hong Kong. ■ Donald Low is Professor of Practice in Public Policy at the Hong Kong University of Science and Technology, and Director of its Leadership and Public Policy programme. He is also the co-author of Hard Choices: Challenging the Singapore Consensus.