The unmaking of Hong Kong

Jul 08, 2019

Sunday Business Post, 7 July 2019
In Hong Kong there is a saying that if the ground is level, the land is new.  For many years the islanders have been recovering territory from the sea, so much so that the practice is now frowned upon for fear the port might be closed over too much.

Hong Kong island itself is precipitously steep and, perhaps surprisingly, largely covered by forests.  Yet at the highest peak looking across to the bay, the tops of the skyscrapers below practically block the horizon and obscure the mighty port network which has contributed so much to Hong Kong's prosperity.  It is almost impossible to spend a day in Hong Kong without using a lift or an on-street escalator. 

Last week's civil disturbances, though by no means unusual, are all the more striking taking place as they do in such a well ordered and managed, perhaps even regimented, environment.  Tear gas and riot police are utterly incongruous in such a place.

But as one local told me the other day, the invisible hand of China has become more visible in recent years.  Since the withdrawal of the British in 1997, the unique Hong Kong identity has become increasingly fragile.  Even the tax return forms are now issued in Chinese rather than in English.  The new extradition legislation permitting more ready delivery of accused persons to mainland China, which has become the focus of the protests, is the last straw for many of Hong Kong’s younger citizens. 

There is a long tradition of official obfuscation when it comes to the running of the territory.  One of the authors of Hong Kong's economic success was Sir John Cowperthwaite who was its Financial Secretary in the 1960s while it was still under British rule.  His policies were responsible, at least in part, for Irish people of a certain age (your correspondent included) thinking that everything plastic was made in Hong Kong. 

Cowperthwaite insisted that economic data relating to Hong Kong should not be published, for fear that well-meaning but interfering businesses and officials alike would create havoc with interventionist initiatives.  The market, and common sense, would ultimately sort everything out.  His successors in governing the territory obviously think differently.

When it comes to tax, and ultimately so much of government does, the Hong Kong authorities see the tax system as a lever to migrate an economy, whose fundamentals are currently reliant on import/export models, to a 21st century knowledge environment.  Lavish direct funding by government on business incubators, on the acquisition of know-how, and on university start-ups is being matched by luxuriant research and development tax credits.  

There are no EU-style anti-State Aid rules in Hong Kong.  There, the tax authorities appear to see their role as being an out-office for industrial development.  It’s a stark contrast to the approach of European tax authorities who are more likely to nod politely and describe their role as policy takers rather than policy makers.  This Hong Kong approach has contributed to significant economic success. 

More difficult to assess is the longer term economic impact of the handling of the relationship between China and Hong Kong, and the violence which has ensued as a consequence.  Will the tensions that the “one country two systems” approach in China have engendered result in longer term economic disruption?  There is no useful precedent on this side of the world to suggest the outcome. 

Look at the relative economic successes of the UK in the past two years.  Was it despite or because of the political stagnation over Brexit, which resulted in little or no active management of the UK economy?  Look at the situation in Ireland where the combination of a minority government and a cabinet of ministers apparently disinterested in business matters still achieves embarrassingly large GDP growth.  Northern Ireland muddles through without Stormont and thus without political direction on its economy. 

However, it’s not all about economic success.  There is another aspect to engagement by the private sector in economic decisions, and that is the democratic process.  In a democracy, civil society should have a say in government decisions, without having to resort to violent protest.  One senior business representative in Hong Kong told me that he could not understand why the protestors needed to be so aggressive.  At the same time he appreciated that the protestors could see neither hope nor a future under the present government.

It may well be that the economic lesson from Hong Kong is that, like doctors, governments should above all else do no harm.  As Cowperthwaite did intentionally, and governments on these islands have done in recent times, sometimes it is best to leave well enough alone.

Dr Brian Keegan is Director of Public Affairs at Chartered Accountants Ireland