The resource curse and Hong Kong: Why the city has stagnated |Dr Michael Lawson

Published (HKT): 2020.11.01 11:26

City-states are some of the most dynamic places for businesses anywhere in the world. Places like Monaco, Singapore and Dubai have managed to surpass their neighbouring peer cities in the same region by specialising in high value-added industries, such as financial services and catering for high net worth individuals. One city amongst this group, however, has stood out lately - Hong Kong.

Hong Kong’s economy grew incredibly rapidly in the postwar period, but has tended towards stagnation over the past couple of decades, as several former mainstays of the economy have stagnated, such as shipping, or disappeared altogether, such as filmmaking and manufacturing. Given Hong Kong’s status as having a high degree of autonomy, it seems an oddity that its economic status would diverge to such a large extent from other city-states, but Hong Kong has a key resource that is frequently overlooked: China.

As Hong Kong went through the Asian Tiger economic transition in the second half of the 20th century, it did so at a time when the mainland was closed to almost all foreign trades and businesses. The opening up of the Chinese economy over the last 40 years has been a boon to the average Chinese person, but has provided Hong Kong with a unique role. Hong Kong, with its own system that was much more open and less restrictive than the mainland, had been an unparalleled place for money to flow between mainland China and the rest of the world.

Furthermore, the steadily rising incomes of mainland Chinese have enabled enormous flows of tourism into Hong Kong. Until the Covid-19 crisis, hotel room numbers in Hong Kong lagged significantly behind demand, making owning a hotel almost a license to print money until Covid happened.

Although these developments look rosy on the surface, they have contrasted with the actual performance of the Hong Kong economy. This is because in many ways Hong Kong is now suffering in the grip of a resource curse, where the opportunities from catering for finance and tourism for mainland China have crowded out almost all other areas of the economy.

It has often been said that Hong Kong is a very bureaucratic place, where trying to do anything new is almost impossible without multiple government approvals. This can be seen from the lag in adopting electric buses, the ban on electric bikes that is unique in the world, and the strange rule prohibiting tandem paragliding. This is because due to easy access to income sources which require little innovation, there has been no pressure to let anything change or develop in the Hong Kong economy. Like the rulers of other resources cursed countries, the nettle of economic reform is not grasped and vested interests are allowed to divide up the spoils.

In fact, it is noticeable that the decline of the film and manufacturing sectors of the Hong Kong economy has neatly coincided with the rise of China as an economic powerhouse, with many of the established industries in Hong Kong willingly moving their operations there before being overtaken or taken over by more nimble mainland firms.

In this manner, the economy of Hong Kong has great similarities to the oil-rich Middle Eastern countries, in which the economy outside of the oil industry is highly unproductive. This is mirrored in the oligopolistic nature of competition of doing business in Hong Kong, where almost all sectors, such as land or fast food franchising, are dominated by a small number of giant companies.

This shift in the opportunities of Hong Kong is irreversible, as it is obvious that the development of the Chinese economy is here to stay, but the shift in the focus of the economy does not have to be permanent. An illustrative example is that of Norway, which has managed to keep good governance and a diversified economy in contrast to other “resource-blessed” countries. Hearteningly, many economists think this is due to well-developed governance that was present before resources were discovered, something in common with this city. Hong Kong would be wise to follow the example of Norway, and put government effort into diversifying the economy.

Heavy reliance on only Chinese businesses and tourists have kept the Hong Kong economy in relatively small niches, but Hong Kong has the necessary ingredients to break out of this and recreate its former diversification. All tech hubs in the world are centered around excellent research universities, of which Hong Kong has several, and Hong Kong still has a great many celebrities who could be lured back into local film production with the right incentives. Hong Kong has seen a great many changes over the past 30 years, but throughout its history has always been able to reinvent itself. If the Hong Kong government can realise the road it has wrongly taken, and works to counteract the powerful forces shaping the economy, then a bright future is possible.

(Michael Lawson is an Electrical and Electronic Engineering PhD graduate from Imperial College London. He is currently working in Hong Kong as an educational consultant.)

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