From Protests To Economic Prosperity

13 Oct 2014

Recently, thousands of Hong Kong residents have taken to the street calling for democracy, autonomy and freedom, with protestors unsatisfied with the delayed implementation of direct election for their local government head and proposed electoral rules sanctioned by Beijing. Protestors are demanding free and open elections for the head of their local governments with Hong Kong’s constitution promising universal franchise in the elections of the head of their government.

Furthermore, talks between the protestors and the government were to supposedly begin on 10th October. However, government officials have since proclaimed the talks as “dead” after the protest groups and their political allies pledged to continue the protests and start a new phase of civil disobedience to maintain pressure on the government.

The talks were the only active avenue for resolving the dispute that has led to sit-in demonstrations that have closed roads and disrupted life in Asia’s most important financial centre.

Moreover, founder of Oxbow Advisory, Jamian Ronca Spadavecchia, believes the pro-democracy protests are ultimately about “the long term question of uncertainty" over where Hong Kong's economic future lies.

"The same fundamentals that make Hong Kong attractive to invest in are currently being challenged, and the more that these characteristics are marginalised, the less important Hong Kong plays within the greater Asia-Pacific—and within China itself," Spadavecchia said.

Dr Haishan Yuan, who specializes in political economics at The University of Queensland, said he could not comment on Spadavecchia’s statement as it was not clear what fundamentals Spadavecchia was referring to. However, Dr Yuan does not think the fundamentals for Hong Kong’s economic success are being challenged.

“Many elements make Hong Kong an attractive place to invest. Some of them are an open and efficient financial market, a business-friendly government with low corruption and a well-functioning common-law legal system. I don’t see that these fundamentals per se are being challenged,” Dr Yuan said.

Furthermore, Dr Yuan asserts that, although the protests, if they persist, might discourage investments in the short term, it’s still hard to predict what long term implications, if any, might arise from this movement.

 “Political stability such as what Hong Kong has been enjoying in the past does contribute to a welcoming environment for foreign investments. Uncertainty pertaining to the development of the pro-democracy protest might discourage investments in the short-term,” Dr Yuan said.

“Such uncertainty is partially reflected in the Hong Kong stock market’s negative reactions to the development of the protest.”

“However, it is premature to predict any long term impacts the movement might have on Hong Kong’s economic prosperity. [The] long term political risk Hong Kong faces still pales in comparison to what South Korea and Taiwan have been facing - and these two economies have been performing well despite of the geopolitical risks.”

With this in mind, Dr Yuan believes the protests in Hong Kong are unlikely to reduce economic ties Hong Kong has with the rest of China, particularly when both have benefited from each other economically.

“Hong Kong is also attractive to foreign investors for its close ties with the vast Chinese economy. One concern is that the protest, and what the protest leads to, may alienate Beijing [therefore] jeopardizing its advantageous status as the gateway to the Chinese market for foreign investors. I don’t think this is a likely thread,” Dr Yuan said.

“It is undeniable that Hong Kong’s economic growth benefits from the close economic ties with mainland China. [However], in the early stage of development, China also benefited greatly from Hong Kong investments, which brought capital, skills and entrepreneurship.”

“While China has become less dependent on such investments as its economy grows, Hong Kong in the foreseeable future will still play an important role in facilitating businesses between mainland China and the rest of world. China is still yet to develop a city to substitute Hong Kong, which has a set of institutions such as aforementioned open and efficient financial markets, and impartial and sound jurisdiction of commercial disputes.”

Adding that there “might be some short term costs”, Dr Yuan agrees with the protestor’s goals, firmly believing that free and open elections for Hong Kong’s chief executive will heavily influence Hong Kong’s long term prosperity.

“Free and open elections are crucial for holding politicians accountable to the electorate. Though Hong Kong has enjoyed a high average growth rate of GDP (Gross Domestic Product) in the last decade, the gains have not been evenly distributed among different socio-economic groups,” Dr Yuan said.

“In particular, upper income groups benefit greatly while lower income groups struggle, resulting an increasing income and wealth inequality. Economic growth which does not benefit a broad spectrum of population is generally not sustainable.”

“Free and open elections provide incentives for politicians to pursue economic policies that are beneficial to a wide segment of the society, rather than catering to a small group of political and economic elites.”

Additionally, Dr Yuan deems there is a declining public trust in the government due to the growing perception that the Hong Kong government is overly influenced by business tycoons who dominate the Hong Kong economy and have substantial investments in mainland China. He further adds that this distrust, along with declining social mobility, is harmful in maintaining a stable political environment and an efficient bureaucratic system.

“I think having free and open elections could help with rebuilding public trust in the government. It could also be conductive in improving the deteriorating relationship between Hong Kong people and Beijing,” Dr Yuan said.

“With a more responsive chief executive directly elected by Hong Kong people in free and open elections, the public is more likely to trust that their chief executive represents their interests while dealing with Beijing. Such arrangement could benefit both mainland China and Hong Kong in the long term.”