Strategies to boost HK's economic competitiveness
Updated: 2014-05-29 06:21
By Michael DeGolyer(HK Edition)
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Hong Kong ranked first for competitiveness according to the Switzerland-based IMD business school in 2012. Then in 2013 we slipped to third. This year, we fell to fourth place.
Hong Kong has long held the Heritage Foundation's title of "world's freest economy" but the odds are growing we will drop on that list too. Doubling taxes on foreign property investment and restricting exports have surely pushed Hong Kong down a notch.
Try taking more than two cans of baby milk powder or over 15 kilograms of rice across the border and you will soon learn about trade restrictions. Anyone trying to sell in the secondary property market knows buying is at levels not seen since the time of the SARS crisis.
These are all the results of restrictive government policies - not free market economics.
Everyone knows Asia's richest man Li Ka-shing has been reducing his investments in Hong Kong of late. Li didn't make it to the top by investing in losing propositions.
Filibustering in the Legislative Council and the threat of "Occupy Central" movement protests later this year will surely push us further down. Filibustering hits government efficiency, one of IMD's criteria, while "Occupy Central" is directly aimed at affecting business efficiency, which makes up another.
Economic performance, third in the four factors which the IMD uses, is not helped by raising taxes and discriminating against mainland Chinese and foreign investment. It is not just the government that is discriminating; demonstrations and complaints about mainland tourism have become increasingly uncivil - both online and in the streets.
Even retired civil servants, who lived in Hong Kong through the turbulent times of the 1960s and 1970s, are talking about the city becoming "ungovernable".
So what to do?
Dropping trade restrictions and stopping discriminatory property taxes will improve economic performance, but are likely to make governability issues worse. Is this a case of the cure being worse than the disease? Yet this conundrum reveals connections between all these problems.
An intervening variable is at work. The government has been addressing symptoms of our various social illness while missing, or even making worse, the underlying causes of that illness.
Consider the symptoms. Filibustering concerns pensions. The MPF system has not produced returns able to support retirement amid Hong Kong's high living costs. Governability is about youth unrest and distress among the professions. Young people have borrowed more to raise their education levels and get professional degrees. But salaries for those in their 20s and 30s have, according to the census, fallen over the last decade. Rising property prices distress those trying to improve their security and provide for their old age. Longer working hours, more stress and a lack of space and money have pushed birthrates well below replacement levels, exacerbating the aging crisis. The aging crisis makes the government both less able and more unwilling to commit resources to address increased demand for healthcare, pensions and other age-related policies.
In sum, debts and family needs go up, salaries go down; aging increases, security decreases; social unrest rises.
Again, what can be done?
First, stop talking endlessly about raising the retirement age. Do it. Companies use government policy of "normal retirement" at the age of 60 to force people out or to impose pay cuts for those that want to continue working. Eliminate a "normal retirement" age, ban age/wage discrimination, and let people work as long as they are able and willing.
Second, make every MPF provider set up low overhead index funds and ETFs (Exchange Traded Funds). Research has shown actively managed funds and their high fees benefit banks, not retirees. Make part of the non-taxed basic allowance savings and investments for retirement, like the Individual Retirement Accounts (IRA) in the United States. Let investors manage their own IRAs, and eliminate fees.
Third, do a Singapore style sell-off of public housing to tenants. Hong Kong started down that road in 1998, before Singapore. The Asian economic crisis and the collapse in property values ended it. The Home Ownership Scheme (HOS) sold some public built housing at subsidized prices. It was very popular until suspended during the property crash.
Increase the HOS and sell off the public housing stock. This increases the float (supply) of housing and lowers prices, particularly for "starter" homes. It also gives poorer, mainly elderly people, an asset they can pass on to their families or cash in to move to cheaper, mainland-based retirement homes.
Give tax breaks or special housing subsidies to families trying to move closer to jobs, schools and aging parents. Family co-location, even multiple generations living together in larger flats, will help families cope for themselves. In Hong Kong, prices soar as flat sizes exceed 1,000 square feet. Government taxes go up sharply too with size. A HOS that built multi-generation housing (family-sized flats with smaller "granny flats" attached or nearby) would help lessen many of the stresses which underlie the symptoms dragging our competitiveness down.
Finally, build border area malls for tourists who want to buy goods guaranteed safe and genuine by Hong Kong's better regulatory framework. Then drop restrictions on trade and taxes on "foreign" property transactions. This will start us on the comeback trail to number one.
The author is director of the Masters in Public Administration Program and professor of Government and International Studies at the Hong Kong Baptist University. He is also director of Hong Kong Transition Project which conducts surveys on local affairs.
(HK Edition 05/29/2014 page9)