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Competitiveness Study

21 May, 1998  

Mr Gordon Siu Kwing-chue  
Head, Central Policy Unit  
2/F, West Wing  
Central Government Offices  
11 Ice House Street  
Central, Hong Kong  

Dear Mr Siu,  

COMPETITIVENESS STUDY  

We note from the South China Morning Post report of 11 May 1998 that the Central Policy Unit has commissioned three studies on Hong Kong's competitiveness. I am writing to express the Foundation's strong interest in participating in this important project.  

Hong Kong's economic competitiveness is a subject to which the Foundation has devoted continuous effort since its establishment in 1989. Accordingly, we have a body of accumulated experience and expertise in this area which we could quickly mobilise to focus on this project. To give you some idea of the contribution we could make, we have prepared the attached note illustrating the approach we might take to a project of this kind.  

The note sets out our tentative understanding of the project and its objectives, a possible conceptual framework, hypotheses to be tested, our approach to the study including deliverables and timeframe, and further details on the Foundation.

The enclosed note is of course based only on the very limited information currently available to us. If you are able to provide us with more detailed information on your requirements, we would be able to put together a formal proposal for consideration.

I hope that the attached is helpful. If you require further information, please do not hesitate to contact us. In the meantime, may I express again the Foundation's strong interest in supporting the development of Hong Kong through participating in research studies of this kind.

Thank you for your attention.

Yours sincerely,

Alan LUNG Ka-lun
Chairman

[1] OBJECTIVES OF STUDY

• To evaluate Hong Kong's current competitive position vis a vis other economies in the region, in view of its role in the global economy;

• To identify how this position may change over five, ten and twenty year timeframes;

• To identify policies and actions that the Hong Kong Government may take in the near term and longer term to boost Hong Kong's competitiveness.

[2] CONCEPTUAL FRAMEWORK

It will be necessary to develop a model for approaching the whole question of competitiveness. The model will include the following considerations.

1. Definition of "Competitiveness". The competitiveness of one economy in the global network is not like that of an individual runner in a race. Whereas only one runner can win the race, all economies can "win" if they contribute optimally to the global network, and each economy can is more competitive than all the others in some activities². The global rankings of competitiveness produced by the World Economic Forum, the Economist and others are thus conceptually crude (although useful as broad indicators). For the purposes of this study, competitiveness is defined as

• The extent to which an economy is focused on those activities for which it is optimally endowed;

• How well it pursues such optimal mix of activities.

2. Complementarity. In line with the above, other economies, although competing with Hong Kong, are also Hong Kong's partners. For example, Singapore competes with Hong Kong to a certain extent in certain financial services, but at the same time, Singapore companies are major investors in Hong Kong. The study should also take into account not merely competitive threats but also opportunities for cooperation and coevolution.

3. Geographic scope. Studies have been commissioned of (1) mainland China; (2) Taiwan, Japan and South Korea; (3) Singapore and South east Asian countries. However,

• With the exception of mainland China and perhaps Singapore, these economies compete with Hong Kong only to a limited extent. For example, in relation to the important US market, Mexico is an important competitor.

• Secondly, none of these economies are relevant role models for Hong Kong. With the exception of Singapore and Japan, Hong Kong is more developed and richer than these economies, and Japan has a vastly different resource endowment and culture from Hong Kong, while Singapore has a very different social and economic model. More relevant role models may be provided by the smaller developed "western" countries, for example, Holland, New Zealand, Switzerland, although these are also not a perfect match.

[3] HYPOTHESES

In order to focus work, the study must develop major hypotheses about the Hong Kong economy at an early stage, for testing in the main body of the work. These hypotheses would be top down and bottom up. Examples could be as follows (the actual hypotheses would be one important area on which we would seek input from the CPU and the Strategic Planning Commission).

1. Top down hypotheses: Overall model for the Hong Kong economy.

• Hypothesis (A): Hong Kong is essentially an intermediary between developing China and the developed world (See Appendix 1 for stylised chart). On this view, Hong Kong merely needs skills that are good enough for use in China, and does not need leading edge skills. The Government should mainly try to keep out of the way, leaving maximum freedom to Hong Kong's entrepreneurs.

• Hypothesis (B): Hong Kong is a piece of the twenty-first century that fell miraculously into the twentieth. Hong Kong's borderless style of economic operation, coordinating resources and activities in several countries, drawing on whatever skill sets it needs, establishing a network that encircles the globe, is how successful economies will be organised in the future³. On this basis, deep investment should be made e.g. in education, institution-building and government effort to understand, enhance and promote the "Hong Kong model" not only locally and within China, but globally.

2. Bottom up hypotheses: areas that need attention for future competitiveness

Regardless of the outcome of the top-down hypotheses, there are certain aspects of the Hong Kong economy that are likely to need attention in any event. Some of these are as follows:

• Land policy. One of the major structural weaknesses of the Hong Kong economy is its concentration on property. This unhealthy focus appears linked to Government policies on revenue-raising and land use.

• Non-competitiveness of the internal sector. While Hong Kong's external sector is highly competitive, its internal sector is quite restricted. There are numerous monopolies, cartels and price fixing arrangements, in e.g., bank deposits, brokerage commission, rice importation, gambling, while other areas such as property development are not very contestable⁴.

• Government dominance of certain sectors. Government-owned enterprises and Government-run operations dominate large sectors of the economy, e.g. housing, hospital services, vocational training, transport, mail services and water supply. This appears unhealthy, especially since some of these areas - education and health, for example - are likely to be major areas of future growth.

3. Hypothesis on Role of Government.

There must also be hypotheses about the role of Government. Few authorities now support the idea that a Government should intervene in the market development process, e.g. by picking industries that are likely to be "winners". And Hong Kong has virtually no experience in this area. However, even if Government's role is to facilitate rather than lead economic development, it must take a view on what it is to facilitate, and how.

[4]    APPROACH TO STUDY

Given the fundamental nature of the study's objectives, it appears that less emphasis should be given to conducting primary research, e.g. on individual industries, and more effort on developing a higher level framework for economic policy making. This will involve modelling and conceptualisation, drawing on existing research for industry data rather than creating it from scratch. Such "top-down" approach will enable resources to be applied where they will add most value to the study's objectives. This approach does not preclude more detailed primary research on individual industries at a later stage when such work can benefit from a strong conceptual and policy framework.

[5] PROCESS, DELIVERABLES AND TIMEFRAME

We would envisage a three level approach to the work process.

• At the operating level, the Foundation's researchers through their work would develop papers, notes and other material that would constitute the content of the project,

• At the executive level, a team of senior Foundation members would provide continuous input and guidance to the researchers. In this they would draw upon external advisers, who would be relevant specialists, from academia or business, from Hong Kong or overseas.

• At the policy level, input would be sought from the CPU and the Commission. Such input could take the form of periodic meetings at which the material developed to date would be reviewed and discussed, giving high level direction for the next phase of work.

The deliverable would be a comprehensive report giving the recommendations relating to each objective, with supporting justification, consideration of alternatives and supporting data, and an agenda for action.

The timeframe would depend very much on the requirements. However, we believe for studies of this large scope, with complex political ramifications, should take around nine months to one year to complete. Strict confidence would be maintained by the Foundation team during the study. However, it would be necessary for public expectation to be appropriately managed during the study period, perhaps by the CPU.

[6] FOUNDATION CREDENTIALS

The Foundation was established in 1989, and has been actively engaged in the development of public policy proposals since then. We have produced more than 170 policy statements, many of substantial length involving original research, and/or involving cooperation with other groups. We attach a list of economic related statements for your reference as Appendix 2.

In addition to its accumulated experience of public policy issues, the Foundation is notable also for its breadth of coverage, addressing issues relating to the economy, public health, social welfare, international affairs, constitutional reform among others. This would bring a richness of perspective to our work on Hong Kong's economic competitiveness.

The Foundation's charges would depend entirely on the scope of work involved. However, the charging structure would consist of three elements: the direct costs of the research staff, fees for external advisers, and an administrative charge. Other out of pocket costs would be additional.

4. Report of the Consumer Council, "Competition Policy: The Key to Hong Kong's Economic Success", November 1996.

Hong Kong’s economic intermediating role between China and the world (1) Static view
"Order"	Boundary region	"Chaos"

Dynamically, Hong Kong tends to migrate over time towards higher value added services as China’s gradual but progressive opening makes these viable areas of activity.

Hong Kong’s economic intermediating role between China and the world (2) Dynamic
"Order"	Boundary region	"Chaos"

Over time, Hong Kong migrates from lower value-added to higher value-added services as China is able to source the former for itself and moves progressively to open up space for the latter. The boundary between China and the world changes over time and Hong Kong migrates to the regions of highest figures on this changing landscape.