Saturday February 4, 2012

A conscientious budget

THINK ASIAN By ANDREW SHENG

Financial Secretary John Tsang's fifth and last budget of the current-term Hong Kong government delivered on Wednesday was a model of fiscal design, the envy of most governments.

Which government around the world can boast a surplus of HK$66.7bil (RM26.68bil), against a forecast deficit for 2011/2012 of HK$8.5bil amid a year of crisis in Europe and global slowdown? Which government indeed (perhaps with the exception of Singapore) can claim fiscal and foreign exchange reserves equivalent to 35% of GDP or 22 months of government expenditure? And which government can claim to have pure government debt (excluding statutory body debt) of less than 2% of GDP?

Finance ministers in Europe who are struggling with their debt crises can only shake their heads at the ability of Hong Kong to increase tax allowances, cut property taxes and waive some profit tax. All these goodies, and the forecast deficit for next year is (only) HK$3.4bil. We should nominate Tsang for the post of commissioner for fiscal reform in Europe.

The financial secretary is correct to warn about potential shocks from global crises and growth in real terms in 2012 is forecast at 1% to 3%, but the medium-term average is projected at 4% for the period 2013 to 2016.

Tsang on Wednesday announced a surplus of HK$66.7bil against a forecast deficit for 2011/2012 of HK$8.5bil for Hong Kong. — AFP

In his concluding remarks, Tsang labelled himself as as having worked conscientiously as a financial secretary and I cannot agree with him more. Having steered the economy through some tumultous times, it has not been easy to navigate the most open economy in the world amid such huge turbulences. But Hong Kong has been lucky to be part of the fastest growth story in the 21st century and to be located in the right neighbourhood.

The financial secretary spent a fair amount of time reflecting on how to capitalise on Hong Kong's competitive edge, mentioning specifically China's 12th Five-Year Plan having a dedicated chapter on Hong Kong and Macao. He has identified the importance of further liberalisation of the mainland economy for Hong Kong to develop, promotion of cross-straits relationships, further linkages to Asean and BRICS countries and the promotion of more parent companies to locate in Hong Kong.

I commend his analysis of the strategic need to develop social capital, urban renewal and his concentration on promoting and supporting the four pillar industries, namely trade and logistics, financial services, business and professional services and tourism, and six industries where Hong Kong has core competitive advantages cultural and creative industries, medical services, education services, innovation and technology, environment industries, and testing and certification services.

What I missed from the budget speech was a discussion of what role Hong Kong will play in the global game, when there is a perceptible shift in economic power from West to East and how Hong Kong needs to position herself to facilitate that shift so that this will be achieved without huge conflicts and volatility.

Coming back from recent visits to Saudi Arabia, Indonesia and India, my perception is that the whole emerging markets in Asia are now looking at different models of growth. One trend that is emerging is that the future of competition may be less of nations, but between cities.

The reason is very simple. With 55% of global population in Asia and mostly in rural areas, one path for development is through urbanisation. The United Nations estimated that by 2025, Asia's urban population will be more than 50% and by 2050, the proportion will be two-thirds. The McKinsey Global Institute has estimated that just 380 cities in the advanced countries account for 50% of current world GDP. China and India are urbanising very fast, and the new mega-cities will all be searching for solutions to deal with jobs, environment, traffic congestion, education, medicare and social welfare.

No one can question the fact that one of Hong Kong's core competencies is that it is one of the most successful cities in Asia, if not the world. That knowledge alone can be exploited to engage in new partnerships with other cities to bring economic opportunities to these partners and to Hong Kong.

What does that mean for planning for the future? The current paradigm of economic theory, based on neoclassical thinking and free-market ideology, is too simple and flawed to help us think through such complex, non-linear and evolving challenges.

Eric Beinhocker, in his book The Origin of Wealth, suggested that wealth creation is really through the interaction between three forces Business Plans, Physical Technology and Social Technology.

It is clear in my mind that Hong Kong's comparative advantage is not in Physical Technology, not because modern cities cannot buy or attract the technology or hardware, but because of scale. Hong Kong's real comparative advantage is her vibrant entrepreneurial business models that are flexible and competitive at a global scale and her Social Technology, which is defined as methods and designs for organising people in pursuit of goal or goals.

In other words, Hong Kong does not have hard power, but soft power. Competition and innovation in the future will be less about more hardware (of which Hong Kong infrastructure is already at the forefront), but about the software of people, skills and experience and how to organise them both at the business and the government level.

Hardware driven innovation (especially in Physical Technology) thinks that helping guys in garages to make the next Microsoft or funding large R&D labs and science parks will create the next break-through in wealth creation. For large countries with large resources, this may be true. But for cities like Hong Kong, the real breakthrough, which is already happening although perhaps less recognised, is the innovation in business plans and social technology that Hong Kong is very good at.

Facilitating the next phase of innovation in social technology and business plans for Hong Kong to maintain not just her hardware leadership but her thought leadership globally will be the real challenge for the next generation of Hong Kong leaders.

l Think Asian Tan Sri Andrew Sheng is President of the Fung Global Institute (as@andrewsheng.net)

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