Singapore versus Hong Kong

Singapore has been scoring points in recent weeks.

But Hong Kong's setbacks say more about its failure to plan than anything else

By Tim Healy

RELATED: Heritage types ignore Singapore's socialism

THE BATTLE BETWEEN HONG KONG AND SINGAPORE seems to be entering a new phase. In October, oil giant Caltex said it would move its global headquarters from the U.S. to Singapore, completely shutting out the frontrunner for at least some of the operations, Hong Kong. Last month, Singapore's International Monetary Exchange (Simex) resumed trading futures contracts based on Hong Kong stocks - over the strong objections of the Special Administrative Region. Singapore in the last few weeks has announced sweeping cuts in airport landing fees, shipping terminal charges and employer contributions to employee pensions - all with an eye toward boosting competitiveness. Hong Kong made headlines when employees of Hongkong Telecom protested planned bonus reductions, which were subsequently modified. Hong Kong's economy, already in worse shape than Singapore's, is in danger of continuing downward at least in the first half of next year. Some economists think Singapore will lag Hong Kong in recovery, but optimists see Singapore growing positively in 1999.

This week came the topper. Whatever else happened, Hong Kong could always point to its superior record of laissez-faire government policy toward business - the World's Freest Economy. Now the Heritage Foundation, a conservative research institute in the US, says Singapore will replace Hong Kong at the top of its rankings next year if the SAR doesn't retreat from its stock-market intervention four months ago. Is Singapore set to eclipse Hong Kong as a business center?

Don't be ridiculous. Hong Kong still has more than twice as many people as Singapore and a gross domestic product that is 78 percent bigger. Its stock market capitalization is more than three times as big. It handles more containers than any other port in the world (Singapore is No. 2). And while Singapore has forged ahead of Hong Kong in some niche financial services like private banking, the SAR remains far ahead as a regional center for loans, money management, insurance and bond trading. None of which mentions Hong Kong's greatest advantage: its position as the prime conduit to the huge China market. As for world competitiveness, Hong Kong's Financial Secretary Donald Tsang Yam-kuen noted in a speech to business leaders shortly after the Heritage Foundation's announcement that his government hasn't ordered wage cuts, a thinly disguised dig at Singapore.

That is the good news. And if some of it suggests a certain defensiveness - like a recent retiree defending his accomplished but stale résumé - that is no surprise. This Crisis year has laid bare fundamental economic problems for Hong Kong that will not be solved easily. Singapore's relative success in navigating turbulent economic waters while still planning for the future has further exposed Hong Kong's shortsightedness. Hong Kongers like to ridicule Singapore's paternal government, the supposedly acquiescent nature of its people, and their unwillingness to take risks. But in recent years, Hong Kong has become the anti-Singapore - a territory full of get-rich-quick addicts who display no stomach for the long haul. This, then, is a story not so much of the competition between Singapore and Hong Kong, but of the former's proven ability to chart a course for future success and the latter's failure to effectively boost education or invest in research and development for the future.

Both cities are former British colonies, and both are predominantly Chinese, but their similarities don't extend much further. Hong Kong has generally kept its hands off business development. Singapore has been a planner's paradise. It broke from the British empire in 1959, merged with Malaysia briefly, and in 1965 became independent for good. The government has steered the economy resolutely, providing sectoral incentives or simply ordering business to take certain directions. It has even run major corporations and banks. Business took its cue from the government, and the state was unabashedly authoritarian in its management of people's lives.

Hong Kong always had the reputation of being nimble. In the early 1980s, it transformed itself from a center of low-cost manufacturing to a financial services center mostly providing a doorway to China, a meeting point where Western and Hong Kong capital could meet wanna-be mainland entrepreneurs. "The opening of China in 1979 was a godsend," says Victor Fung, chairman of Hong Kong's Trade Development Council. "Frankly, we were becoming increasingly uncompetitive."

BUT HONG KONG DID not handle success well. Newly wealthy entrepreneurs found they could turn their first million dollars into $10 million and more by investing in property. Thus has Hong Kong's considerable wealth been too often poured into non-productive assets. Tien Chang-lin, former chancellor of the University of California, Berkeley, and now chairman of Hong Kong's new Commission on Innovation and Technology, cites one example: He says the SAR's spending on research and development has been dismal. Consider the investment in science and technology R&D as a percentage of GDP: Singapore and Taiwan both are now at 2.5 percent and aim for 3 percent. The U.S. is at 2.7 percent; Japan is between 2.7 percent and 3 percent. Where is Hong Kong? A lamentable 0.3percent.

Tung Chee-hwa, the SAR's first chief executive, has been maligned for his poor communication skills and ineffective Crisis-response strategy, but to his credit he has tried to push for Hong Kong to develop its own technology industry. Critics have said it is too late for Hong Kong. But Tien argues that Hong Kong should not aim to become a technology-products manufacturer. He says the focus should be on creating infrastructure to allow for rapidly catching the next wave - online commerce or bioelectronics or whatever it turns out to be. That means, says Tien, developing education institutions, research organizations and a venture-capital market to encourage investment. "Hong Kong must define its destiny for the next 50 years," says Tien. "Even now, Hong Kong does not have an overall strategy."

Contrast this with Singapore. Last year, the government launched a $1.2- billion "IT master plan" to integrate computers into school curriculums from the very beginning of a child's education. The plan aims to provide one computer for every two students by 2002. The government has begun a public-relations campaign to impress upon people the importance of developing Singapore's "knowledge economy." Said Minister for Information and the Arts George Yeo Yong Boon recently: "This historical evolution toward a knowledge-based economy is not bad for [Singapore]. We are a resource-poor nation. All we have are people, organization and culture."

No such grand vision has been articulated for Hong Kong. To the contrary, many SAR parents see the school system regressing. Last year, Tung announced he was speeding up a switch from English to Cantonese as the primary language of instruction in the SAR - except for a tier of 100 or so top schools. The move had originally been proposed while Hong Kong was under British rule. Tung insists that the change will not result in reduced English proficiency. Indeed, there are many good reasons to embrace mother-tongue education. But there seemed to be little public discussion before the fact and a dismal effort to promote the change after.

The overarching agenda for Tung in this change to mother-tongue education is complicated. A continued emphasis on English education could be a reminder of colonial domination. Adding to the complexity is the fact that Hong Kong's fate is tied closely to China's, and English instruction would relegate the mainland Chinese dialect of Mandarin to a politically incorrect third position of importance in Hong Kong schools.

Hong Kong can hardly neglect to emphasize its single most important economic relationship. More than one-third of Hong Kong's commerce is with China, and 90 percent of trade moving through the SAR is either coming from or going to the mainland. So far, China has sustained strong growth despite the regional recession, a fact that has undoubtedly helped prevent Hong Kong from enduring an even worse recession than it already has.

In contrast, Singapore's closest neighbors have drags. The Asian Development Bank recently said that the economies of Indonesia and Malaysia will shrink in 1998 by 16 percent and 6 percent respectively. Next year is expected to bring additional, smaller losses. "Singapore is pretty close to the bottom while Hong Kong has a long way to go," says Manu Bhaskaran of SG Securities (Singapore), who tends to be relatively optimistic about both economies. He is predicting a 4.5 percent contraction for Hong Kong next year while Singapore might actually grow as much as 2.5 percent. Bhaskaran's caveat: "China might become a source of unpleasant surprises. If that happens, Hong Kong will suffer."

SINGAPORE'S DEFTNESS IN DEFLECTING the effects of the regional turmoil is testament to its preparedness, says Arup Raha, chief economist for Citibank in Asia. "Singapore has handled the Asian Crisis very well by moving some of the burden of adjustment to the exchange rate first so its exports would retain competitiveness," he says. "Hong Kong could never have done that because its hands are tied with the peg [the Hong Kong dollar's fixed exchange rate with the U.S. dollar]."

Singapore enjoys other structural advantages. The very fact that it can mandate a broad strategy to improve competitiveness - the cut in provident fund contributions, for example - requires an authoritarian government with corporatist leanings. The Hong Kong government has no such power: "Our wages are adjusted by market forces," says Tung. "The government has no intention whatsoever of issuing instructions. Hong Kong is a free market." The response from Hong Kong's semi-autonomous Airport Authority to news that Singapore is lowering landing fees 10% is typical of the situation: It says Hong Kong will not match Singapore's cuts. It is not Tung's style to order a reduction, despite the airlines' complaints. Says Peter Sutch, chairman of the Swire Group, which owns Cathay Pacific: "Unless we get our cost base right, we'll lose our position to other hubs in the region."

Similarly, the Hong Kong government is also not likely to do anything about grade-A office rents, which are the highest in Asia according to the U.S.-based real estate brokerage Cushman & Wakefield. That remains true after an almost 40 percent correction in rents, says the company. Raha points out that because the Hong Kong dollar did not devalue, asset prices such as property were bound to fall. Assets have borne the entire burden of the region's currency devaluation in Hong Kong, the economist says. Antony Leung, Chase Manhattan Bank's managing director in Hong Kong, says Hong Kong lost its direction as the asset bubble expanded: "People were euphoric and got blindsided. Now, we are seeing a better attitude. In the long run, this period of adjustment will be a good thing."

That is because, in areas such as financial services and regional headquarters, Hong Kong still competes directly with Singapore. "Hong Kong has much to offer, but demand for services is, in economists' language, 'price elastic.' If the cost is too high, customers will find an alternative," says Bank of East Asia Chairman David Li Kwok-po. That's why relative costs between the two cities continue to be important.

Raha says a global recession, especially one that includes the U.S., would hurt Singapore more than Hong Kong because the former's economy is much more dependent on manufacturing, especially electronics. But even on this point, Singapore has effectively mitigated the potential downside by pursuing a more diverse economy. Services make up 86 percent of Hong Kong's output. Services are also important in Singapore, but manufacturing contributes a quarter of GDP.

One of the real oddities of the Hong Kong-Singapore rivalry is the way the two opposites are converging - in their approach to economic issues at least. Hong Kong's $15-billion-stock-market intervention in August to punish currency speculators was unprecedented. Singapore has made moves to liberalize its finance and banking sector, suggesting it intends to be more like, well, Hong Kong.

But even if they gradually become more like each other, the challenges of the two economies are much different. Singapore need only continue doing what it knows best: invest in the future and anticipate change. Hong Kong must seek to diversify an economy that has become perilously narrow and dependent on China. And it must break its addiction to speculation in favor of forward-looking investment in things like research and education. It need look no further than Singapore for a model of how some of this can be accomplished. Presumably, the Heritage Group would approve.

- Reported by Alejandro Reyes, Assif Shameen, Law Siu-lan, Alexandra Seno and Andrea Hamilton