Random Thoughts at Year's End

Random Thoughts at Year’s End (This essay was published in Hong Kong Economic Journal on 31 December 2014.) The day before Christmas I spent an afternoon walking around Central. It was busier than ever. The offices were mostly closed but the shops were open. My visits to Central are invariably to attend a business meeting or have a business lunch. I usually hurry through and hardly ever pause to take in the place and enjoy the experience of being on the streets of Central. But on this day before Christmas I had plenty of time. Fast paced, opulent and cosmopolitan, Central exudes Hong Kong’s vibrancy. I enjoy the busy crowded feeling of people hurriedly pushing their way to their destinations. I don’t live or work in Central, but since childhood I have always felt its heartbeat powering my city. Central is not just a photo on postcards sold in tourist shops. It is Hong Kong’s soul. A city I grew up in and one of the world’s proudest international economic cities. I have been told that many people today, including young people, no longer feel this way about Hong Kong. They don’t know Central and hardly ever go there. As our city has grown, our population has spread out to the New Territories. The city’s population center of gravity is now somewhere between Shatin and Taipo. Many children, perhaps as many as half of them, grow up in remote housing estates and never come into Central until past their teens. For them, such a day-trip is a luxury that is not always affordable; perhaps more importantly, there is no obvious reason to make the trip. Central is far too remote from their lives. In the past 30 years, the Hong Kong economy has prospered, but growing numbers in the middle-income classes have been left behind, not to mention those in the low-income classes. Income inequality has risen in all the rich nations, but the situation is simply more serious in Hong Kong. The underprovision of education opportunities means the income gap has failed to narrow as economic and technological advances increasingly reward those with more human capital. In 1976, the typical university graduate earned 2.5 times as much as a secondary school or matriculation graduate. By 2011, this had widened to 3.5 times. The most devastating impact has come from rising property prices. Society is now divided into the “haves” and “have-nots” separated by property ownership (half of households are without property). The very wide gulf between the two will have negative consequences for long-term economic and intergenerational inequality. Distance, isolation, income gaps, and a community divided by ownership of assets is leading a growing proportion of those living in Hong Kong to feel that Central is alien to their experience of the city. This sense of alienation is being reinforced by the rising number of visitors from the Mainland whose purchasing power has not only bid up retail rents in many parts of the city, including and especially Central, but also now dictates what the shops sell and display in their windows. Chinese visitors of course bring employment for our service workers, but the value-added reaped by landlords is far more obvious and concentrated than that gained by the hired help. This further worsens the income gap and asset ownership divide. Feelings of alienation have occasionally flared up and been exploited by radical nativists, who seize on hostility towards Mainland visitors. Examples include stopping photographing outside a Dolce & Gabbana store on Canton Road and restricting people from taking milk formula across the border. It is a puzzle why more shopping malls and outlet stores haven’t been allowed to develop in new areas to provide relief for these congested spots. People in the know have told me that land is so scarce and the political cost of getting every stakeholder to agree to either development or redevelopment with acceptable compensation so formidable, that no government official dares to propose such projects. A similar puzzle is why the large number of industrial buildings in older areas haven’t been allowed to be converted into other uses. This is all the more odd because most of our industries left two decades ago. I still recall this question being raised by a number of well-known figures when Hamish Macleod was Financial Secretary. Today there is some very belated progress in Kwun Tong, but many other old industrial areas still lag far behind. Related to that is the most puzzling case of Old Flatted Factory Estates operated by the Housing Authority. Why is Hong Kong still subsidizing these sunset operations from yesteryear, especially when many are not even in operation but instead using the space for storage? There are about 325,000 square meters of such floor space. The answer, my friend, is blowing in the wind. Hong Kong, some smart people tell me, is now in the clutches of tyrannizing minorities. They are incredibly powerful and well organized. They have sympathetic friends in the media and can whip up an ethical case that humbles politicians and bureaucrats. These fierce minorities might even have silent supporters. Yet in addition to education policy, the efficient utilization of industrial and commercial space is one of the key elements for rebooting economic development in the post-industrial service economy. The supply of residential space as both shelter and savings vehicle for the middle and low-income classes, is another great puzzle. Living conditions have become increasingly cramped in Hong Kong. The “haves” and “have-nots” are increasingly polarized in terms of asset ownership. And yet to the naked eye, there is much land that cannot be developed because of political resistance from all kinds of narrow special interest groups. In Singapore, over 90 percent of the land has been developed yet hardly anybody complains that it has a more cramped living environment and poorer environmental condition than Hong Kong, where less than 25 percent of the land has been developed. When I was a university student in the 1970s the role of minorities was portrayed in a much more positive light. The diversity of minorities was considered to be the foundation of a pluralistic society. This argument was found in Alexis de Tocqueville’s observation of the role of civil society as a sphere of private and civilian affairs in Democracy in America. Pluralism created a diversity of elites to provide the necessary checks and balances to make democracy function properly. This view of democracy has increasingly been eclipsed by developments first on the European continent and now increasingly in the Anglo-Saxon world, where minorities have gained political power at the expense of majorities. The advantages minorities have over majorities are twofold. First, it is easier to organize a smaller group of individuals than a large one for the simple reason organizational costs rise with the number of people you are trying to organize. Second, any policy measure that harms a large group of individuals by a small amount can add up to a very large benefit for each individual in a small group. For example, taking $1 each from a million individuals and giving the proceeds to 100 individuals benefits each by $10,000. Each individual among the million has very little incentive to oppose such a policy measure. The converse policy measure of taking $10,000 from 100 individuals and giving $1 each to a million beneficiaries is unlikely to be supported because the 100 individuals who are harmed will put up a very stiff resistance, while the 1 million beneficiaries would not care very much about the outcome. Society therefore tends to support policies that give substantial benefit to minorities while producing a small amount of harm to each individual in a large majority. If most policy measures that are adopted by society end up helping small well-organized minorities at the expense of the defenseless majority, then democracy ceases to be a workable political system that serves the majority while protecting the minorities. Democracy in such a situation will become eventually delegitimized as a form of government. Democracy is intended to be an inclusive system for all. But it is increasingly being hijacked by minorities – robber barons, conservationists, cyclists, unionists, environmentalists, chicken farmers, and what not. This is not healthy for an inclusive system. As I walked around Central just before Christmas, I noticed there were different kinds of shoppers. There were keen ones and not very keen ones like myself, but we all took up approximately an equal amount of street space. I walked without spending a lot of money but created the same amount of congestion as others who spent more on shopping – I was not making as effective use of Central streets as the more enthusiastic shoppers. I was wasting street space without paying sufficiently for it by spending more. An economist would say: I have produced an externality for others by being in Central. Democracy is analogous: everyone has an equal vote, but different voters feel differently about an issue they have been asked to vote on. Their views on an issue may be the same but their feelings for it may have different intensities. Some voters will mildly support an issue while others will feel very strongly about it. Attitudes toward the Occupy Movement differ not only between supporters and opponents, but also in their intensities for or against it. “One person one vote” does not take into account this difference in intensity that people feel for an issue when votes are counted. If we can fix the Christmas shopping problem, we may perhaps be able to also fix the difficulties of democratic voting.