HK business parties fail on economy
By Gary LaMoshi

HONG KONG - Hong Kong's government can't stand prosperity. Even when reporting Hong Kong's brightest economic skies of the millennium, the financial secretary dragged in a dark cloud. That deficit in understanding real economic concerns - far more crucial than Hong Kong's budget deficit - looms large in the September 12 legislative election, since the government's allies stake their claim for votes on their economic expertise.

First, the good news. Statistics released last week showed that Hong Kong's economy grew at 12.1% in the second quarter, its best performance in four years. As elsewhere in the region (see What's love got to do with it?, August 26), the figures were juiced by comparison to last year's dreadful numbers in the wake of the severe acute respiratory syndrome (SARS)outbreak. To tout the good news, Chief Executive Tung Chee-hwa stepped into the spotlight he generally shuns and raised growth forecasts for the year from 6% to 7.5%.

Hong Kong also claimed it had slain the menace of deflation. For the first time in 68 months, July prices rose on an annualized basis. Statistics reported the up-tick as a scant 0.9%, fueled largely by higher utility costs due to rising oil prices, but Tung's administration declared victory. "The prolonged period of consumer price deflation prevailing over the past five years or so has thus come to an end," according to a government news release.

Taxing times
After the announcement, Financial Secretary Henry Tang told reporters that the economic revival meant it was time for Hong Kong to consider a sales tax to help balance its budget deficit, expected to run to HK$40 billion (US$5.1 billion) for each of the next two years. Tang admits that a sales tax would be a "radical" step that flies in the face of Hong Kong's tradition of low taxes and no tariffs, and it would face a difficult road to approval in the legislature.

A sales tax would also be certain to reduce consumer enthusiasm, a key factor to producing a lasting recovery in this consumer-driven economy. (Japan's experience of raising its consumption tax at the first hint of recovery indicates that the expected pre-tax spending boomlet doesn't materialize, but long-term sentiment flags.) It's also a regressive tax that would hit hardest the people at the bottom of the economic ladder. Tang gave Hong Kong people, especially its working class, a reason to be apprehensive about recovery despite the flood of good news.

Tang's statement outlines a bigger problem with the government's economic vision, or lack thereof. Nearly six years of deflation might have presented Hong Kong an opportunity to attack one of its key competitive problems, high costs. Japan has not succeeded on this front either, so Hong Kong can consider itself in good company.

But Singapore - the most similar case, although half the size of Hong Kong - and other economies in the region have shown steady recovery punctuated by occasional stumbles. While China has driven regional recovery with the highest growth rates on earth, Hong Kong under Tung, Beijing's chosen leader for the territory, has shown steady stagnation, with occasional stirrings of a jobless recovery, fueled in large part by free spending visitors from the mainland. The Hong Kong government's economic policies have been a series of economic mistakes that hit the city's millions of working people, not the small circle of business leaders and Beijing supporters who elected Tung, and political gaffes that undermine international confidence in Hong Kong's high degree of autonomy from the mainland.

What really hurts is that Hong Kong's government and its political party supporters claim to be the economic experts. Tung represents the tycoon class; never mind that he took the helm of the family shipping business and ran it aground. The government's principal backers, the Democratic Alliance for the Betterment of Hong Kong (DAB) and the Liberal Party, also represent leading business interests. Those parties consistently voted for government policies that failed to create a sustainable recovery or to find a winning long term formula for Hong Kong's economy since 1997.

Three of out Tien
Moreover, neither party brings fresh ideas to the election campaign. At a candidates' forum two weeks ago, Liberal Party chairman James Tien, a lawmaker since 1988 and a former member of Tung's Executive Council, was asked for his top three ideas to boost economic growth and employment. Tien asked for the time to think over the question and groused about being asked for so many ideas.

After his time out, Tien managed this answer: dealing with the budget deficit, quicker economic integration with the mainland, and government leaving business alone. The first answer echoes the concern of sales tax advocate Tang, a former Liberal stalwart.The party claims it's against a sales tax but not against the government investigating implementing one, and there's no argument that this regressive tax would have its greatest impact not on Liberal backers, but on the people who work for them.(see Maid in the shade, Hong Kong style, March 14, 2003) The second idea is a paradox for the government allies, and the third reflects a durable myth with a telling corollary.

All major political parties, including the opposition Democrats, favor closer economic ties with China, hoping that some of its magic will rub off on Hong Kong. The DAB, for instance, calls for "enhancing Hong Kong's role as China's window to the world", even though today's mainland can open its own windows. Tung's government and its allies have been more successful at expanding China's window for influence in Hong Kong. A Hong Kong that's more like the big motherland, where rule of law, rights and freedoms are negotiable but costs are higher, won't attract international business service companies that want to serve the Chinese market but remain apprehensive about the risks of a mainland address. Those are precisely the companies that fueled growth up to 1997.

Hong Kong's pro-business parties aren't just pro-Beijing parties through their support for Tung. Despite Hong Kong's reputation as the freest on earth economy where government plays the smallest possible role in the economy, the truth has always been that Hong Kong's big business has relied on the kindness of political leaders. (See Hong Kong politics: business as usual, April 7, 2004) The myth requires ignoring government control of land, Hong Kong's most valuable asset and the source of most fortunes. Government has a huge impact on business even while showing its laissez faire face: Hong Kong's lack of an effective competition law - championed by the Democrats - lets incumbent cartels team up to destroy challengers to their cozy dominance, stifling innovation and creativity crucial to lasting expansion.

Stand by me Big business in Hong Kong doesn't want government on the sidelines, just on its side. Today, that means currying favor with Beijing, just as it once meant sucking up to the British colonial rulers. Government has always been grateful for support of such leading and influential constituents. Neither of Hong Kong's ruling powers has shown interest in expanding democracy, except for a brief moment before the sunset of British rule as part of a power play against Beijing. Business interests don't oppose democracy outright; they oppose anything that might force government to listen to voices other then their own.

There's one more Hong Kong myth that suggests the parties of business are unlikely to provide a formula for economic revival. Since Hong Kong lost its manufacturing base, much of the wealth in town has come from speculation in property and, to a lesser extent, the stock market. Middle class families invested their life savings in properties, sold them and bought more, a strategy that worked well enough until the market collapsed after the 1997 regional crash. Today, consumers who have seen their life savings held in the form of an 800-square-foot apartment depreciate by half, fear about their jobs, and see no vision for the future, remain reluctant to spend.

But the real story is that it's been a long time since Hong Kong business expanded wealth by something other than having the right friends or having a cabin on the ark in a rising tide. Some observers paint that as entrepreneurship or enterprise. But Hong Kong's richest man Li Ki-shing is famed for trading stocks and influence, not his original thinking.

Hong Kong's business leaders and their political allies, such as "Give Me a Minute" Tien, have produced no notable innovations. The latest numbers don't outweigh the past seven years in which these leaders have not delivered economic performance, and they have even less to offer on the policy front. If it wasn't the broth that made the owners of the noodle shop wealthy but owning the flat upstairs and having the right connections, why pay attention to their recipe?

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