36th Storey, PSA Building, 460 Alexandra Road, Singapore 119963.

Tel: 3757794/5

___________________________________________________________

During my yearly visits to Hong Kong over the last thirty years, I was struck by the upbeat, can-do spirit of its people. However troublesome the situation, such as the noisy demonstrations of the imitators of the Red Guards in 1966/67, or the economic downturn caused by the sudden quadrupling of oil prices in 1973, Hong Kong people were not dismayed or despondent. So when I spent a few days in Hong Kong at the beginning of June this year, I was surprised by its completely different mood. The people I met seemed frustrated at finding themselves in a situation where the solutions were not obvious. Much of the present malaise in Hong Kong arises from the problems of a transition that proved more difficult than expected. In part it was because of the five years of the last governor’s policies, aggravated by the Asian financial crisis. Until the territory has come through this transition phase it is not possible to make any long term forecasts on Hong Kong’s future.

In the five years from 1992 to 1997, Hong Kong boomed when China and East Asia were prospering. Hong Kong was taken through a crash course in democracy and human rights conducted by Chris Patten and supported by the Western, especially the US and UK, media. The prevailing concern was that the heavy hand of China would negate everything that Hongkongers valued of its old system.

The British believed they could etch in the minds of Hong Kong people the sanctity of the principles of freedom of expression especially of the press, popular elections with the widest franchise to a representative assembly like LEGCO, a Bill of Rights to protect fundamental liberties, the rule of law and the independence of the judiciary, and hand over to China an irreversibly democratic Hong Kong. Then Hong Kong people would resist losing what they had learnt to value. It was assumed that the economy would look after itself and all would be well. In other societies like Singapore, the first concern and primary responsibility of a government is to provide for the people’s wellbeing: that means food, shelter, health, education, and an economy that will provide the jobs and the wherewithal for survival, and if possible a comfortable life. The first thing we, as the government in Singapore, had to do was to get the people to understand why they had to work together with the government, management and unions to make a living for everyone, i.e. get the economy going.

In my lecture at the University of Hong Kong in December 1992 I had compared the political evolution of Singapore with that of Hong Kong:

"Singapore had a leisurely 17-year transition from the first elections to the Legislative Council in 1948 to independence in 1965. In 1955, Singapore had our first partially elected government with an elected Chief Minister. In 1959, Singapore had complete internal self-government with no British officials in the Legislative Council or in Government. Singaporeans replaced British officials in all key jobs within a few years but these local civil servants had already had some time to grow into their jobs.

Hong Kong’s transition is short and will be swift. The first elections to Legislative Council were in September 1991, less than six years before the end of British rule. The next elections are due in 1995, only two years before the end of British rule. Only the Chief Justice and the Commissioner of Police are Hongkongers. In just over four years, many important heads of departments must be Hongkongers. The transition will not be easy. It will be dangerous to assume that morale, discipline and standards can be maintained if there is no climate of confidence. So the politics of the transition has to be sensitively handled."

I then went on to spell out what I thought was important for Hong Kong, namely to prepare for this transition:

"Within the next four years, Hong Kong’s Governor must in consultation with his PRC counterparts, decide on the men who will take over the administration. They must have the ability to run the system in Hong Kong and also have a deep, almost instinctive, understanding of the Communist Mandarin mind. Otherwise one country, two systems, will not work smoothly.

I believe finding the right men for these jobs is more critical than whether Hong Kong has 20 or 40 or more members who are directly elected to the Legislative Council (LEGCO). Hong Kong has never had self-government. It has always been ruled by appointed Governors. And when they were good, Hong Kong prospered.

British governors were accountable to the Secretary of State for the Colonies in London, not to the people of Hong Kong. Under Article 43 of the Basic Law, Hong Kong’s Chief Executive is "accountable to the Central People’s Government and the Hong Kong SAR". Article 73(5) empowers the LEGCO "to raise questions on the work of the government".

Instead of working towards convergence and co-operation with the mainland, Hong Kong was set on a contrary course, to entrench contemporary British political attitudes and practices in the people of Hong Kong. Governor Patten held endless press conferences so that people came to expect the next Chief Executive to be as open and accountable. Many in Hong Kong began to believe that these practices would preserve their previous prosperous way of life. In fact, it polarised the people of Hong Kong, between those who were ideological, and those who were pragmatic.

To compound Hong Kong’s problem, the government embarked on welfare reforms. In my 1992 lecture at Hong Kong University, I said:

"From the late ‘60s, I have visited Hong Kong almost every year, to study and to understand why Hong Kong people work with so much more drive and vigour than the people in Singapore, and to learn something from them. They paid for their education, they paid for their medical services; the government owed them nothing and provided only law and order. They made their own housing in little shanty huts on the hillsides. They paid their way, and built modern Hong Kong.

Through Hong Kong watching, I concluded that state welfare and subsidies blunted the individual’s drive to succeed. I watched with amazement the ease with which Hong Kong workers adjusted their salaries upwards in boom times and downwards in recessions. I resolved to reverse course on the welfare policies which my Party had inherited or copied from British Labour Party policies. I scaled back on subsidies except where they made the person more productive through better education, better health and better housing.

Had there been party politics in Hong Kong competing for the right to form the government, economic and social interest groupings and trade unions would have emerged. Then pressures for redistribution of wealth and subsidies for welfare would have been irresistible.

Whatever the reasons for past success, the future promises more anxiety and uncertainty largely because of the uncertainties of the politics of China."

I recognised easily why Hong Kong was more competitive than Singapore. But Hong Kong has now become different; its people expect the Hong Kong Chief Executive to deliver the good life. Whether it is chicken flu, or red algae killing fish, or the property and stock values going down, people expect the government to make amends.

The Chief Executive now faces a LEGCO that has more to gain by taking an opposition stand. Opposition is the easy way to win popularity and get re-elected in the next round. Then there was Mr Li Ka Shing warning that he would not invest US$10 billion in a project because an opposition party was demanding that he should not exercise his rights under the law to take people to court for not meeting their mortgage payments. These are teething problems and can be resolved. Over time, Hongkongers will have to arrive at a social contract between competing social and economic groups: first to co-operate and increase the economic pie, next to redistribute the shares of the pie and make more equitable the results of free market policies. In other words how much of the GDP should the government take, in what kinds of taxes, and how much of the taxes should be spent on subsidies for education, health, housing, recreation and leisure facilities, to make more equal the chances of the next generation. Employers and workers must reach an accommodation on how the economy can best work so that enterprises stay competitive and pay the best wages they can afford to their employees. When Hong Kong was confronted with rising costs and over-high wages as a result of currency devaluation in the region, the employers were not able to get the unions and workers to agree to any reduction of wages.

People feel frustrated that the old system where everybody worked hard for himself and everybody succeeded (more or less), is now not working. However, there cannot be a return to the old system. Expectations and attitudes have changed. In the longer run, a LEGCO which is oppositionist and shoulders no responsibility, cannot contribute to good governance. The way to bring a sense of reality to populist politics is to saddle the political leaders with the responsibility of fulfilling their promises. If they know that after winning and assuming authority they have to deliver on their promises, then they either change policies and slogans, or they will be out on their heels. You will have to find a solution to this because so long as Hong Kong electoral politics is responsibility free (something you could afford during the tail end of colonial rule), much energy and resources will be wasted.

Hong Kong needs to adapt and adjust its system of government under the Basic Law to fit its circumstances. To make democratic representative government work effectively in Singapore, we had to make adjustments to the constitution the British left us. No system can be taken off the shelf and made to work, just as a coat off the peg has to be adjusted to suit the length and shape of a person.

During my visit in June, I also found Hong Kong people uneasy about their new identity. Polls carried out by the Hong Kong Transition Project at the Hong Kong Baptist University disclosed that the older generation of Hongkongers refer to themselves as "Hong Kong Chinese", the younger generation as "Hong Kong people". And when parents were asked about a proposal to sing the Chinese national anthem and to raise the national flag every morning in school, 85% of parents polled did not approve of this. These figures reflect their unease at being absorbed into a different entity of China Chinese. Hong Kong’s self-identity has to be defined and crystallised. You are a part of China, but for the next 48 years, you are a special sub-group known as the SAR Chinese, or Hong Kong Chinese. Unless you realise the importance of this issue, it will be difficult to forge that solidarity necessary for a new social compact between the SAR Government and Hong Kong people. Until Hong Kong has come through this transition phase, any forecast of its future trends can only be tentative. The Hong Kong of old is history. The Hong Kong of the future depends upon how the people of Hong Kong together promote their group interests.

In the last two decades, China's policy of opening-up has brought prosperity to Hong Kong. Business activities with China have made Hong Kong one of the world's top ten trading nations. And your financial centre has a large China component.

Hong Kong's economic integration with China accelerated its transformation from a manufacturing to a service-based economy. When your low-end manufacturing activities relocated to Guangdong to take advantage of lower land and labour costs, it freed resources for the service industries. As a result, the proportion of manufacturing activities in Hong Kong's GDP fell to less than 7% in 1997, compared with 24% in 1984. The share of services ballooned to 85%, led primarily by growth in financial services. Today Hong Kong’s service-based economy is the world's 9^th largest exporter of commercial services.

Hong Kong academics and economic planners have asked whether you should now build up a manufacturing sector by going into high tech, especially IT products. Manufacturing provides a certain ballast to the economy. In Hong Kong’s new situation it is useful to re-examine your economics policy options, always not forgetting that in the past, leaving all initiatives to the private sector has worked well.

Unlike Hong Kong, Singapore has decided to maintain a core manufacturing base of about one-quarter of GDP for a safer balance. To remain competitive, we continually upgrade our manufacturing production to higher-value added activities.

Hong Kong can maximise its links with China. There is vast potential in high-tech manufacturing. Skills of Chinese engineers and Hong Kong entrepreneurs are complementary. Hong Kong's entrepreneurs have the savvy and ability to commercialise innovations by Chinese scientists and translate them into profits. The Chinese electronic dictionary is one example of this synergy. The technology that translates whole English sentences into Chinese, had already existed in China for some time. But Group Sense, a Hong Kong company, was able to capture the technology and commercialise it, by forming strategic alliances with Chinese research centres.

China's economy can achieve 5-7% growth annually for the next 25 years. The Chinese pie will continue to grow. Hong Kong's China-related businesses will increase. However, many Chinese coastal cities are trying to develop capabilities similar to yours. Hong Kong will not always be the only business and financial centre and trading port on the south China coast. Some companies have moved their regional headquarters from Hong Kong to Shanghai or Beijing, to be closer to their markets and to develop local staff. Nestle has relocated its regional headquarters from Hong Kong to Beijing, while Philips Electronics has moved to Shanghai. In shipping, Hong Kong faces competition from China's developing ports in Tianjin, Shanghai, Ningbo, and Shenzhen.

Shanghai - once Asia's most cosmopolitan city - is the testing ground for many financial reforms. China wants to develop the Lujiazui Finance and Trade Zone in Pudong into a world-class financial centre. Restrictions are being relaxed and incentives offered to attract foreign financial institutions and multinationals. In 1997, Pudong for example became the first place in China where foreign banks could conduct renminbi transactions. By end of September 1999, there were 19 foreign banks engaged in local currency activities in the city.

Your value to China lies in being different from other Chinese cities. Hong Kong has a lead over Shanghai and other cities in China in legal infrastructure, strong institutions, management expertise, and the sophistication of its financial markets. The rule of law, the transparency of all government legislation and regulations, a level playing field for all players plus its cosmopolitan lifestyle, with ease of communication in the English language, are features Hong Kong’s leaders and people must ensure are retained. Shanghai’s drawback is its inadequate legal system, and poor work attitudes in its service sector.

Hong Kong has to resolve two contrary pulls. To be useful to China, it must be able to work with Chinese officials who have different social, economic and political systems. But it is of value to China because it is not just another Chinese city. The difference between Hong Kong under British rule and other Chinese cities was what made it a valuable intermediary between China and the world. Unfortunately one country, two systems, means that not all the features of old Hong Kong can be retained. Defence and foreign affairs have moved from British to Chinese control. Hence the Pope was denied a visit and US warships and planes are from time to time denied entry. But as many as possible of the characteristics that distinguished Hong Kong from other Chinese cities should be assiduously cultivated and retained.

As two business hubs in Asia, Singapore and Hong Kong compete with each other for a number of business and financial services. It is not a zero sum game. Both can grow and profit together. Rivalry between the two cities spurs each to strive to be the best in competitiveness and relevance. The market is big enough for both economies to thrive. Furthermore, technology-led changes in the financial services sector open up opportunities for co-operation and synergy between us.

The global capital markets have been undergoing structural changes in response to the forces of technology. New competitors, many non-traditional like electronic communication networks (ECNs) and software providers, are challenging the franchise of exchanges. The time zone franchise that Asian exchanges have owned risk being eroded by the extension of processing hours by dominant Exchanges in other time zones.

We are responding to these changes. Both Singapore and Hong Kong are working to demutualise and integrate their stock and derivatives exchanges. This will make the exchanges more commercially oriented, giving greater value to their investors by offering a wider and more interesting range of products, besides increasing liquidity, and creating efficient and convenient cross-border trading capability through alliances with other exchanges.

Singapore and Hong Kong, premier exchanges in the region, have a unique opportunity to work together and help spur the development of the regional capital market. We can integrate liquidity pools, lower cost of capital for regional issuers, lower trading costs for investors and provide a sound and transparent regulatory infrastructure.

For instance, a growing number of Asian, high-tech start-ups now seek funding, which can be met by the exchanges. Some Asian exchanges have responded quickly to meet these needs by setting up small market capitalization or "high growth" boards. Unfortunately, individually, these boards lack critical mass when compared to Nasdaq. The Singapore and Hong Kong exchanges can link up trading in these boards to create greater liquidity and appeal to cross border and regional investors. A common capability that integrates liquidity pools provides benefits for issuers, investors and Asian capital markets.

There is ample room for collaboration in communication and information technology, a new growth area in both our economies. We can strengthen our institutional links by cultivating the on-going exchanges between our officials.

Singapore and Hong Kong share similar histories. Both were former trading outposts of the British Empire. After World War Two, Singapore was separated from its economic hinterland. We became an independent nation in 1965, and had to find our own way in the world. Singapore’s challenges are totally different. Thrust into nationhood on its own, Singapore had to make hard decisions on its political, economic and social future. Our businesses had to adjust to periodic changes in the region’s political and economic conditions. As a result, our businesses have diversified their export markets and cast their nets wider. Our manufacturing production network spans Southeast Asia and our markets are international.

Hong Kong never had the prospect of independence or of nation-building. Instead, it has reverted to China, but with full autonomy in all internal matters for the next 50 years. With your reversion to China, our political destinies have diverged and will take different paths. The political and economic challenges we face will be different; hence the strategies and policies we have to work out will not be the same. Nevertheless our long established ties will be valuable. The practical co-operation between officials of our two governments do not bear out media stories of deadly rivalry. Both of us are rated at the top of world competitive tables. Both score high marks for honest and efficient government that uphold the rule of law, and are committed to free markets. Both have much to gain from sharing information and experience as we co-operate and compete against the world in a globalised economy.