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How Hong Kong can play pivotal role in innovation as China modernises

How Hong Kong can play pivotal role in innovation as China modernises

China’s foremost development challenge is in innovation, but more pervasive party leadership may not produce the best results. Hong Kong, however, with its uniquely encouraging institutional environment, can become China’s innovation hub

At the annual meeting of the National People’s Congress this week, the details of a government reorganisation approved at last week’s plenary session will be known. How they may address the myriad geopolitical, economic, demographic and social challenges facing China remains to be seen.

What is certain is that Communist Party leadership will become more pervasive in all areas of society – a party-led modernisation as announced at the 20th Communist Party congress last year.

China’s expressions of modernity can be traced back to Deng Xiaoping’s “four modernisations”, which marked the beginning of economic reforms in 1978. Of the four, China has made great strides in industries and agriculture. Equally impressive progress has arguably been made in defence and science and technology, although the gaps with the US are still to be closed.

In the 1980s, Deng tried to better delineate the party and the state, but it was short-lived. The question is: beyond material progress, what kind of modernity was envisioned by the party founders, many of whom had led the breakaway May Fourth Movement?

Of course, China does not need to justify its pursuit of a modernisation path different from the West’s. After the second world war, the most successful cases of modernisation were concentrated in East Asia – models of state-led development, initially under mostly authoritarian governments, followed by greater democratisation after successful industrialisation.

In many Asian economies, the market gradually took on a decisive role only with greater constitutionalism. In contrast, in places from Russia to Latin America, following the neoliberal-oriented economic prescriptions of World Bank “experts” often led to disaster.

The West is not a uniform picture of neoliberalism either. Germany has followed a model of greater state coordination to balance social needs with economic growth. Among English-speaking countries, Canada, Australia and New Zealand have adopted economic or social models that have averted the worst excesses of US-style neoliberalism.

Each country faces a unique set of challenges in its drive to modernise. Success often hinges on customising the programme to its development context. China’s top leadership has emphasised that its modernisation must strategically address the opportunities and challenges facing China in its rise.

The “West” is too broad a generalisation for the great variations and varieties among its economies. While the United States and Britain may have become negative examples, the German and Nordic models are still good role models. In moderating the excesses of capitalism with institutional innovation, some European countries appear to have attained most of the balanced objectives that China seeks in its modernisation.

There is no escaping the issue of scale in any discussion of China’s modernisation. If China were just the Greater Bay Area, it would probably have completed its modernisation already. Just the Greater Bay Area alone would rank among the world’s top 10 economies.

China’s scale is both its strength and a burden. It is difficult to bring up its inland regions to approach even a fraction of the Greater Bay Area’s level of development.

Unsurprisingly, the most successful modern states tend to be small, such as the Nordic countries and Singapore – perhaps helped by their greater ease in adaptation. But while Singapore may only have the population of a few districts in Beijing, its success should not be made light of.

People walk in an underground MRT train station in Singapore on February 13.

Smallness can also be a challenge. Singapore has a much smaller domestic talent pool compared to Beijing or Shenzhen. And importantly, it faces the unique challenge of forging a national identity from multiple ethnic groups.

From the inception of its economic reforms, China has benefited from drawing from the successes of two modern urban economies: Hong Kong and Singapore. Both cities were shaped by British-style rule of law. While China has evolved in its own path, it was partly inspired by the heritage of Britain, where modernisation first emerged.

But being the birthplace of modernity does not guarantee sustained success. Britain is expected to be the worst-performing major economy this year and Brexit was an unfortunate consequence of populism.

Still, Hong Kong’s laissez-faire style of capitalism has been outperformed by Singapore’s more interventionist state-led economy. While Hong Kong has provided significant impetus – capital, human resources and international connections – to China’s modernisation, the city’s future rests on a symbiotic collaboration with the rest of the Greater Bay Area.

With the rise of many Chinese cities, Hong Kong’s traditional advantages have diminished. Its unique strength perhaps lies in its strong rule of law in a common law jurisdiction.

Beyond being China’s hub for international law and finance, Hong Kong’s institutional environment positions it well to become an innovation centre of a much larger scale. A Hong Kong, thus reinvented, can continue to play a pivotal role in China’s modernisation.

In the context of US-led tech restrictions in the era of great power rivalry, China’s foremost development challenge is in innovation. But it is unclear if greater party leadership will produce the best results in advancing important and breakthrough innovations. In the history of science, Britain’s Royal Society, with limited state support, was arguably much more influential than France’s government-funded Académie de Sciences.

Central coordination may be good for tasks such as infrastructural development. But the right institutional environment is perhaps more important in fostering innovation.

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