Declining Hongkong Economy

▽ Hongkong Economy Flat on Its Back = According to the International Institute for Management Development (IMD), Hongkong had been ranked in the third in World Competitiveness Yearbook in 1997, but it was ranked in the ninth last year.

Deficit of Hongkong for the first eight months in 2002 fiscal year amounts to 70.8 billion Hongkong dollars (approximately 9 billion dollars), 60% bigger than the government`s expectation for the whole year.

Hongkong has suffered from deflation for four years. After Hongkong`s return to China in 1997, the real estate prices have dropped over 60%. As the half of property of Hongkong inhabitants is real estate, this means that home property has shrunk 360 billion dollars. The unemployment rate reached its peak last summer and home monthly income median recorded its lowest since 1995.

The overestimation of Hongkong dollar due to the fixed exchange rate system makes the economic recovery slower, and makes Hongkong a target for speculative attack in money market.

As Shanghai and other cities are highlighted, Hongkong is threatened to lose its status of the gateway for investment on China. FT compared Hongkong to Venice which declined after losing its monopolistic strength for Asia trade in the fifteenth century.

▽ Incompetent government = Many are criticizing that this is because the government lost confidence due to the maladministration of the chief executive Tung Chee-Hwa.

According to Hongkong policy research institute, political confidence and ability for policy practice of minister Dung recorded the lowest last August. FT criticized him that what the new cabinet has done for a few months after its inauguration last year is failing in policy and apologizing for that.

Hongkong was known as “the world`s most free economic zone” because of its characteristics such as low tax rate, the principle of laissez-faire, and small government. After 1997, however, Mr. Tung insisted on an active intervention on the market.

In 1997, Mr. Tung raised expected supply for housing and made the real estate prices collapse. After that, he also used measures for real estate market stimulus such as freezing disposal of land but it did not work. Moreover, MPF which was performed forcefully by government made people`s life harder who already suffered from the low income.

The cabinet did not make a clear decision on the possible devaluation of Hongkong dollar and made the currency policy astray so it made the money market unstable, some pointed out.

One of the reasons for the mistrust is that Mr. Tung was not elected by people but appointed by China and was made a puppet of China government. As people worry about China`s encroachment of self-government and self-control which was promised by China in 1997, general confidence of Hongkong has dropped and economic activities such as consumption and investment are shrinking.

Moreover, Hongkong has a plan to make an act against activities for overthrowing effective on China`s demand. The business world, labor unions, civil institutions in Hongkong criticized that this act will control criticism and communication of information, and as the result, Hongkong will lose its freedom suitable for its status as a center for international business.

Seung-Jin Kim sarafina@donga.com