Diagnosis

5. For many years, Hong Kong's fast economic growth, high levels of income, near-full employment, stable financial market, general affluence and abundant opportunities have been the envy of others. These strengths, however, seem to be disappearing. Why? What could have caused such profound changes in our economy? How did the internal and external forces interact to produce these results? If we wish to improve our situation, what strategies and measures will enable us to succeed in the new economic contest?

6. The rapid growth of our economy in the past two decades has been due mainly to our seizing the opportunities provided by the opening up of the Mainland. The relocation of Hong Kong's manufacturing sector across the boundary enabled our successful transformation into a service-oriented economy. At the same time, a bubble economy emerged, characterised by soaring asset prices. It was at this time that a significant change in the world economy occurred, marked by globalisation and the rise of the knowledge-based economy. These have led to a re-definition of productivity and changed the rules of economic competition. Whoever possesses an optimised economic structure and a workforce superior in technological know-how would be more able to seize the initiative in the New Economy.

7. For various reasons, a bubble economy emerged in Hong Kong at that time and gave rise to superficial prosperity - a phenomenon not based entirely on increased productivity, but mainly driven by the combined effects of surging asset values, wages and prices. This in turn led to inflated costs, which seriously affected people's livelihood and weakened Hong Kong's competitiveness. Many of our citizens speculated on stocks and property and this "quick money" mentality undermined their entrepreneurial spirit. No place on earth, however well endowed, could sustain a growing bubble over a long period of time. The question was no longer whether a crisis would strike, but when, how serious and for how long. The Asian financial crisis in 1997 punctured the bubble, precipitating our economic reversal.

8. As a small open economy, Hong Kong owed its past economic miracles to a number of inherent institutional factors and a hardworking, persevering and enterprising population. But we cannot discount special circumstances and other external factors. From the 1950's to the 1970's, Hong Kong was able to achieve industrialisation early and establish itself as the bridge for regional economic and trade co-operation through its geographical location. One of the main reasons for our success was China's closed-door policy and, excepting Japan, the less advanced state of development in the Asia-Pacific economies in general. Even in the 1980's, we were able to deploy our strengths gainfully, when the Mainland was at its initial stage of reform. Our past successes were therefore attributable largely to our neighbouring economies, particularly the Mainland, not fully exploiting their inherent competitiveness. Now, the task of restructuring our economy has been complicated by the emerging economies around us.

9. In short, the advent of globalisation, the move towards a knowledge-based economy and the rapid rise in the competitiveness of our neighbours have posed obvious challenges to our traditional advantages and position. Other latent weaknesses, such as a weak technological base and a mismatch in human resources, have begun to surface and create an impact. With the bursting of the bubble economy, cyclical fluctuations in the world economy, price differentials between Hong Kong and its neighbours and persistent deflation, Hong Kong now finds itself in a prolonged economic downturn. The community is suffering from the pains of economic adjustment, with rising unemployment and falling wages for many.