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The price of accountability in Hong Kong

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A man walks between stalls in an alley in the Central business district in Hong Kong, 22 August, 2019 (Photo: Reuters/Thomas Peter).

In Brief

It was a year like no other for Hong Kong in 2019. At its core, Hong Kong has been riven by a dispute over government accountability: should Hong Kong’s government be accountable to the people it governs, or only to the central authorities in Beijing? Failing to resolve this question has exacted a high price. Continued failure will only see that price grow.

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The crisis had dual triggers — the extradition law and the violent police crackdown against mass peaceful protests. But the underlying issue is accountability. The Special Administrative Region (SAR) government serves mainly at the discretion of the central government in Beijing where candidates for the Chief Executive (CE) role are approved prior to elections. The CE-led government therefore focuses on satisfying perceived central government interests. Conversely, limited accountability to local people allows the government to largely ignore their concerns. This issue of accountability was the explicit focus of tensions leading to the 2014 umbrella movement.

This simmering governance-failure allowed the right triggers to spark an eruption of discontent, the price of which includes deepening recession and widespread business closure. Mercifully, the death-toll remains low, though that does not mitigate the tragedy of those who have lost their lives or been seriously injured. The full cost may never be tallied since elements such as trauma, the health effects of chronic or juvenile CS gas exposure, loss of social trust and lost opportunities for cooperation with the mainland are all difficult if not impossible to quantify. Attribution is confounded by other economic headwinds — most notably, US President Donald Trump’s trade war.

But economic indicators do help convey the scale of the price exacted so far. Conditions deteriorated significantly in the third quarter of 2019, with real GDP down 2.9 per cent relative to the third quarter of 2018. Year-on-year, every component of expenditure was down in the third quarter except government consumption. This included private consumption (down 3.4 per cent), investment (down 16 per cent), imports of goods and services (down 11 and 4 per cent), and exports of goods and services (down 7 and 14 per cent).

Business confidence is at its lowest level since the global financial crisis. Consumer-facing sectors have been hit the worst — accommodation and food were down 14 per cent. Almost all surveyed retail managers reported losses since June. Luxury stores selling jewellery, watches and gifts recorded sales during August–October that barely exceeded half those of the year before.

Store closures have become common, especially among large retailers that have been frequently vandalised. These stores are often targeted for representing Hong Kong’s transition into an economy servicing the mainland — to which the government is accountable — rather than local people. A ‘Buy Yellow’ trend has emerged, where people encourage friends and family to support businesses identified as supporting democracy. ‘Yellow’ businesses tend to be single-outlet locally-oriented stores.

Visitor arrivals slowed substantially toward the end of the year. Hong Kong recorded over 50 million arrivals in the year to October (down less than 5 per cent from 2018) while October 2019 saw barely more than half the number of arrivals compared to October 2018. The fall was steeper in arrivals from mainland China (down 45 per cent) than elsewhere (down 36 per cent).

Especially worrying for the economic outlook is the fall in investment, the scale of which grew in each successive quarter from 5.8 per cent in the fourth quarter of 2018 to 16 per cent in the third quarter of 2019. Significantly less domestic credit was issued in 2019 than 2018, with loans for retail down 9 per cent and loans for manufacturing and trade financing also falling. Only property-related lending continued to grow.

The employment-cost of Hong Kong’s governance failure has been limited so far. Unemployment, under-employment and the participation rate have all worsened, but only by about 0.3 per cent each. Job losses were highest (around 5 per cent) in ‘construction’ and ‘retail, accommodation and food services’ sectors.

The recent crisis was triggered by Chief Executive Carrie Lam’s introduction of an extradition bill, her dismissal of clear local interests and significant abuses of police authority. But its foundations were laid over many years of weakening institutions of local accountability (restricting political participation, public assembly and judicial independence), truth (introducing ‘patriotic education’ and extending mainland enforcement of political crimes) and transparency (attacks on journalists).

The authorities believe economic symptoms such as extreme rents and poor career prospects are the fundamental cause of the political crisis. They see economically frustrated youths seduced by Western ideas being manipulated by United States and Taiwanese ‘black hands’ into causing trouble for China. Their failure to understand Hong Kong was epitomised by their shock at the results of the district council elections in November 2019.

But Hong Kong people mainly see that their economic problems are caused by misaligned political incentives. That is why the process for appointing the CE has been so contentious, and why cheaper rent was never one of the ‘Five Demands’ of protestors.

2019 exacted a high price for accountability. If authorities continue believing they need not be accountable to the people they govern, 2020 is only likely to add to that price.

Dominic Meagher is an independent economist and Chair of the Australasia Strategy Group.

This article is part of an EAF special feature series on 2019 in review and the year ahead.

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