Proposals for 2010/11 Budget - "Six Industries" versus offering horizontal support to all industries
14 January 2010
The Honourable John Tsang Chun-wah, JP
Dear Mr Tsang,
Proposals for 2010/11 Budget
We would like to submit our views for your 2010/11 Budget.
Overall, we believe that it is time, given the current relatively positive development of the economy, for the Government to better define its role in economic development. While the Government should definitely provide public goods that cannot be provided by the private sector such as low cost housing, education and infrastructure, there has been in our view a dangerous drift toward naming winning industry sectors.
It is not the role of the Government to attempt to push the economy in a particular direction or to support one industry against the others. Committing Hong Kong to move towards such narrowly defined strategy based on a single economic study commissioned by the Central Policy Unit(1) without broad discussion in the community is dangerous. Such a strategy, which has roots in central economic planning, is ignoring many other sectors that are in the equally good or better position to make best use of the special characteristics of Hong Kong as a unique territory of China, including: Hong Kong's separate legal and administrative system, free flow of information, an international outlook, a liberal environment, a bi-lingual population and a strong "bridging" and integration role between China and the West.
The economic and political price to pay for adopting a strategy is many business sectors will be left struggling because they fail to get on the Policy Agenda and many who are not favoured will feel disenfranchised, ignored and left out by the Government.
Rather, the Government should be looking at the experience of the more developed economies and seek to support all industries and sectors "horizontally", under the concept of a "Knowledge-based Economy", an economic development strategy adopted by the European Union since the year 2000(2). For this reason, we are pleased to see the Government mentioned this strategy at the beginning of the economic development section of the Chief Executive's latest Policy Speech:
However, there did not appear to be any contents in the Policy Speech or the Policy Agenda that support further development of the "Knowledge-based Economy" strategy. We recommend that consideration be given now to fleshing out the Knowledge-based Economy idea.
Further the Government should devote resources to supporting those in our society who cannot adequately support themselves, and providing opportunity for the disadvantaged. The Government should also continue to provide public goods without which the market economy cannot function. These public goods include, laws, regulation, security, enforcement, universal health care and education, and so on, and ensure through the establishment of an appropriate supervisory framework the provision of transport and other infrastructure.
In a developed economy such as Hong Kong, the Government should also look into building the "Soft Infrastructure" (also referred to as "Soft Technology" in the Mainland) - rules and regulations, business infrastructure, broader and more in-depth economic research, training - and Government's role in integrating such resources in the economic development process.
We hope that our views are helpful to you in formulating a role for Hong Kong in the context of China's economic development (e.g. the China-ASEAN Free Trade Agreement and the six-month window still opened to you to give input to the 12th Five Year Plan of China) and in formulating your budget.
Alan Ka-lun LUNG
Attached: Responses to key questions
(1) "A Further Study on the Future Development of the Hong Kong Economy, consolidation and enhancement of Existing Core Industries and Development of Economic Areas with High Potential in Hong Kong", 8 June 2009 by The Chinese University of Hong Kong. The research was adopted as output and recommendations by the Task Force on Economic Challenge (TFEC) in April 2009.
(2) The European Council in March 2000 set out the Lisbon Strategy to create in Europe "the most dynamic and competitive knowledge based economy in the world."
1. The Task Force on Economic Challenges identified six industries with good potential: education services, medical services, testing and certification services, environmental industries, innovation and technology, cultural and creative industries. How can the Government and the private sector work together to facilitate the development of these six industries?
As stated in our letter, we do not agree with the idea of Government identifying key industries. Government should respond to the activities within the economy, not the other way around. Government's job is to facilitate the operation and development of the economy as a whole, not to favour particular sectors.
If the Government wishes to pursue the "Six Industries" identified by the Task Force, we suggest that Hong Kong should look at those "vertical" industries from the perspective of their value-added potential and from the perspective of a "horizontal" support strategy such as the "Knowledge-based Economy" adopted by the European Union. Otherwise, the "Six Industries", together with the four pillars (of tourism, financial services, logistics and producer/professional services) already identified, constitute in total ten areas of the economy, which seems too large a number for meaningful focus. Moreover, the ten are of different sizes. Innovation can apply in any industry, as can technology - innovation is not restricted to R&D and investment in technology alone. The notion ‘Culture and creative' industries is likewise in need of definition, possibly by the newly established CreateHK office.
2. How should we position ourselves to ensure a more sustainable economic recovery?
In the short run, the Government has scope to manoeuvre in fiscal policy. Over the longer term, the Government should adopt a more broad based economic development strategy - such as making best use of Hong Kong's uniqueness and integration role - to attract inbound investments from Mainland China as well as from the West to transform Hong Kong from a traditional "Trading Hub" into an international "Knowledge-based Economy Hub" to service the Mainland and international firms that would like to do business with China. Other than that, we do not think that the Government can do more than try to perform its own role, as stated in our letter, namely to provide the public goods that are necessary to the proper functioning and development of the economy, and to support those in need.
3. We need to address the challenges posed by the volatile nature of our revenue. Broaden the tax base? Increase our fiscal reserves to cushion against economic uncertainties? Other suggestions?
The revenue has been volatile in nature but more than adequate, in fact excessive, in amount. It is therefore not necessary to increase our fiscal reserves; in fact, it would be appropriate to reduce them to a more reasonable level and return the unneeded portion to the people. Public discussion is needed of what the rationale for our fiscal reserves is, what the appropriate level might be, and whether the resources can be put to better use to meet the needs of our society.
Flowing from the above, the tax base does not need to be broadened at this stage.
4. We need to prepare Hong Kong for the challenges of an ageing population. How can this be achieved?
We suggest that part of the fiscal reserves be used to fund an old age pension scheme for Hong Kong people (see our proposal at: http://www.hkdf.org/pr.asp?func=show&pr=175, http://www.hkdf.org/pr.asp?func=show&pr=172).
Much of Hong Kong's institutional and physical infrastructure has been designed with a young, self-reliant and transient population in mind. Meeting the needs of the rapidly growing proportion of elderly will require a transformation of this infrastructure. Obvious changes are needed to physical infrastructure, such as arrangements for crossing roads, accessing buildings and transportation. Extensive development of housing and social facilities for elderly is needed. Medical and health services need adjustment in the direction of care for the chronically ill. In terms of soft infrastructure, attitudes in the workplace and throughout society need to change to recognise the value that elderly people are capable of adding.
We suggest, in fact, that services to the elderly - if anything - should be a key industry to be promoted and developed with government support, since there may be a ‘public goods' element in it, i.e. market forces alone may not generate sufficient supply of such services.
Extensive research needs to be done to scope out the issues of the rising numbers of elderly and the adjustment that they will require to our society.
5. How can we encourage Hong Kong people to work together with Government to make a better Hong Kong?
Ultimately, the only effective way to encourage people to work with their government is to empower the people to choose that government through the democratic process. Only then can government become the people's government. From an economic and financial point of view, as well as a human rights point of view, we urge that universal suffrage for the election of all legislative councillors in 2020 and the Chief Executive be introduced in 2017.
In the meantime:
Reproduction of this paper is permitted with proper attribution to the Hong Kong Democratic Foundation