01 March 2015
Hong Kong can be hell

Hong Kong can be hell

Milton Friedman once famously said "If you want to see capitalism in action, go to Hong Kong". But Hong Kong's brand of capitalism has led to inequality, poverty, and social unrest.

Nobel prize-winning economist Milton Friedman once famously said "If you want to see capitalism in action, go to Hong Kong".

In "Free to Choose: a personal statement", Friedman wrote that Hong Kong was perhaps the best example of a free market economy, the economic system of which he was the world's leading advocate.

From the great free market in the sky, Friedman must have scratched his head, as he watched the 2014 umbrella protest movement, which called for greater democracy in Hong Kong. The territory's brand of capitalism has generated massive social divisions, which highlight capitalism's potential for self destruction.

The protest movement, led by students, is fighting against the Chinese government's position that all candidates for the 2017 chief executive elections should be nominated by Beijing, rather than by Hong Kong's citizens. Some 800,000 people participated in an unofficial referendum on the system for nominating candidates for chief executive; 90% voted for the citizens, rather a Beijing-selected committee, selecting nominees.

These protests have taken many economists and commentators by surprise. Hong Kong had long been lauded as an Asian miracle economy. Together with Korea, Singapore and Taiwan, it followed Japan's post-war renaissance, in laying the foundations for the Asian Century. Along with these economies, Hong Kong is one of Asia's richest countries in terms of GDP per capital.

In pursuing its miraculous development, Hong Kong implemented most of the policies that Friedman and the Washington consensus club advocated. Hong Kong has topped the Heritage Foundation's economic freedom index for the past twenty years. It has the world's best infrastructure, according to the World Economic Forum.

Hong Kong is the world's second easiest economy in which to do business, just after Singapore, according to the World Bank. It is regularly ranked as the world's third most important global financial center, after New York and London, and operates the world's biggest offshore centre for the renminbi (the Chinese currency).

The territory ranks 16th in the world for the rule of law, ahead of the US which is placed 19th, according to the World Justice Project. It also ranks very well at 17th on Transparency International's Corruption Perceptions Index.

Hong Kong is assessed to have one of the world's best educated populations. It is ranked third in the world, after Shanghai and Singapore in the OECD's PISA study (Programme for International Student Assessment), which measures the numeracy, literacy and scientific capability of 15 year old students.

In short, Hong Kong appears to be the perfect economy for doing business -- especially given its proximity to fast-growing China.

Herein is the essence of the Hong Kong syndrome, which has caused so much discontent among its youth and others. While Hong Kong is heaven for its pro-Beijing business elite, it is hell for much of its citizens.

Hong Kong combines great economic freedom, with limited political freedom. Under its current political system, only the well-heeled elite oligarchy has a say in politics. And yet, surveys have show for years that three-fifths or more of the Hong Kong population favors democracy.

Back in 2009, then Chinese Premier Wen Jiabao raised the issue of Hong Kong's "deep contradictions" when he pushed then chief executive Donald Tsang to do better in maintaining "Hong Kong's harmony and stability". But if anything, things have since gotten worse, rather than better.

Hong Kong was the world's 3rd most expensive city in 2014 (up from 6th in 2013) according to Mercer's annual cost of living survey. London was ranked 12th and New York 16th in the same survey.

Some 20% or 1.3 million of Hong Kong's population is living in poverty, according to official estimates. One-third of these is aged 65 and over, many being widows living alone. The next largest groups are children and youth. Against that, the richest 10% of the Hong Kong population control 78% of the territory's wealth, according to Credit Suisse.

Over the past few decades, income inequality in Hong Kong has risen dramatically. It now has the highest inequality of all advanced countries, higher than Singapore, the US, Japan and even mainland China. Its Gini coefficient of 0.537 is well above the 0.4 level, considered to be a trigger level for social unrest.

The average income of the poorest 10% of Hong Kongers fell 16% over the decade to 2011, while the income of the richest 10% rose by 12%. But there is more to inequality than income. The Hong Kong Institute of Education found that youngsters from rich families are nearly four times more likely to enrol in a university than those living in poverty, a much wider gap than 20 years ago.

Hong Kong is home to 45 billionaires, including four of Asia's richest men, Li Ka-shing, Lee Shau-kee, Lui Che-Woo and Cheng Yu-teng, who reportedly have a combined net worth of $90 billion. But workers have few rights -- no collective bargaining rights, no unemployment benefits and no pensions. And the minimum wage, introduced in 2010, is less than US$4 a day.

What is driving Hong Kong's inequality?

Over the years, Hong Kong has outsourced most of its manufacturing sector to mainland China, and become a financial and logistics hub for Southeast China. This has meant lots of big bucks in the financial sector, especially for expatriates. This is on show for everyone to see in the form of fancy cars, and luxury hotels and restaurants.

The other side of the coin has been a decline in the demand for lower skilled labor, as one million manufacturing sector jobs were lost. This has led to stagnating and declining incomes for poorer people, which has been made worse by an influx of lower-skilled workers from mainland China.

The rapid aging of Hong Kong's population has also exacerbated inequality. The territory's seniors receive very few retirement benefits from the government. There are now many cases of older people stealing food to survive.

The lack of affordable housing is a widespread problem. Poorer people have taken a hit from rising housing prices, which have tripled over the past decade. Prices have been driven up by purchases from mainland China, and are now 30% higher than New York.

But the government has also played a nefarious hand in housing prices, as it functions as a "property state". The residual owner of much of the territory's land, it uses sales of land as an important source of government revenue. And in doing so, it releases land to the market only slowly in order to keep prices high, and maximize its revenue. Up to half of government revenues comes from the property sector.

And while government real estate policy has contributed to inequality, it has also been conducted in collusion with Hong Kong real estate tycoons, who make many of the millions through real estate development.

True, Hong Kong does have extensive public subsidized housing, with nearly half of Hong Kongers living in these facilities. But government housing is often squalid and miniscule. And with a waiting list of 10 years, growing numbers (especially retirees) live in cage homes, small metal cubicles consisting of a bunk bed and not much else.

As growing income inequality has been hitting countries the world over, many governments have responded through the provision of social welfare. But Hong Kong, which is very proud of its very low taxes to attract international business, has very weak social welfare systems. In other words, it has been government policy to accept and tolerate inequality.

Despite Hong Kong's free market pretensions, its domestic economy is in reality dominated by cartels, monopolies and oligopolies. They control everything from supermarkets to drugstores, electricity supply to ports and buses, and construction. This pushes prices up and quality down, and results in low environmental standards.

It is thus not surprising that Hong Kong topped the "crony capitalism index" developed by the Economist magazine. Hong Kong politicians and businessmen have their hands deep in each other's pockets.

Air pollution has been a long-standing issue in Hong Kong and will remain one of its biggest sustainability challenges, according to Civic Exchange, a think tank. Poor air quality has been undermining people’s health, causing premature deaths, and imposing direct and indirect costs on society.

While everyone is affected by this pollution, the rich are able to buy air purifiers, and also travel overseas on holidays to breath some fresh air. They can also park their families in clean locales like Australia and Canada, whose migration policies attract rich Hong Kongers.

Hong Kong's protesting students clearly believe that the don't have a fair deal or a decent future. Moreover, they don't see the present Hong Kong government or Beijing as representing their interests, especially given the growing influence of Beijing over Hong Kong politics and media. Nor do they like having to compete for jobs with their mainland compatriots.

Hong Kong's youth are now discovering their own political voice, and many believe that Hong Kongers should govern themselves.

The clumsy, heavy-handed and incompetent responses by the Hong Kong authorities -- including liberal use of pepper spray and tear gas -- have only served to undermine their reputation. And the comment by Hong Kong Chief Executive C.Y. Leung that democracy would give poor people too much power was the most visible sign of the arrogance of Hong Kong's leadership.

There is also a strong anti-mainland Chinese sentiment, with Hong Kongers referring to mainlanders as "locusts". This is driven by the visible presence of mainland tourists snapping up luxury products, emptying local stocks of infant formula and giving birth to their children in the territory so they can have Hong Kong residency. Other factors include rising housing prices, Chinese Communist Party plutocrats using Hong Kong as a playground, and the creeping corruption since 1997, when Beijing took over Hong Kong.

Hong Kong's business elite is happy to fall in line with Beijing's restrictions on democracy. They of course benefit from the Hong Kong system, enjoying wealth, power and privilege. Interestingly, the Hong Kong protests have reportedly attracted participants from mainland China.

Hong Kong's elite is most concerned that democracy could lead to demands for redistribution, and higher taxes. Hypocritically, most of them have passports from the UK, US, Canada or Australia, which means that they can always escape to democracy whenever they want.

If there is one lesson of history, it is that authoritarian states must have a strong social contract with their citizens. To minimize the risk of social and political unrest, their citizens must believe that they have a "fair deal". This is quite clearly not the case in Hong Kong today (nor is it the case in neighboring Macao, which has also seen recent social unrest). Hong Kong's social unrest will likely continue until the today that the government takes seriously its citizens concerns.

Blaming "foreign intervention" (meaning US and UK) for stoking up social unrest (as Beijing and Hong Kong leaders have done) is to refuse to face the reality of the genuine grievances of Hong Kong citizens, and divisions in Hong Kong society. Hong Kong's churches have played a quite but important role in the city's protests, offering food and shelter to demonstrators, with some organizers and supporters citing Christian values as inspiration in their fight. "Christians, by definition, don't trust communists," said Joseph Chan, a political-science professor at Chinese University of Hong Kong.

"We don't see good prospects for our future," said Katie Lo, a 21 year-old Hong Kong student. "Over the years we've had a lot of rallies to solve all these social problems, but the government is not elected by us, so they do not listen," she continued. "I want a government that listens to me."


John West
Executive Director
Asian Century Institute
Tags: china, hong kong, umbrella protest movement, inequality in hong kong, poverty in hong kong

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