Trouble spots loom in Asia
 
International Herald Tribune
Saturday, March 2, 2002
HONG KONG The world economy may be reviving, but in those symbols of global markets, Hong Kong and Singapore, unease remains. Both are facing economic challenges which are more than cyclical. Could city states be losers from globalization? For sure, 2002 will be better than 2001, when Singapore's gross domestic product contracted sharply and Hong Kong's was static. But pick up will be slow. The bastions of stability through the Asian crisis are now lagging behind their neighbors. They are struggling equally even though their economies have diverged over the past 20 years, with Hong Kong shifting industry to China while Singapore's manufacturing flourished due to multinational electronics investment.
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Singapore's problems go beyond last year's electronics slump, and it has recognized as much by setting up an Economic Review Committee to chart new directions. Hong Kong still seems bemused that little of China's growth since the 1997 handover has rubbed off on it, but has finally realized that a dramatic deterioration in its fiscal position is more structural than cyclical. Singapore's chief concern is that local entrepreneurship may have been stifled by the dominance of multinationals and Government Linked Companies . Hong Kong remains a predominantly small enterprise, service economy.
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Hong Kong and Singapore face many other challenges, among them:
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Loss of port business to their hinterlands. Hong Kong is suffering from a move to cheaper container ports on the mainland. Singapore is feeling the same effect from Malaysia's Tanjung Pelepas.
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Easier foreign access to local financial markets has reduced the need for mediation through the city states. Hong Kong must compete with large, open Korean and Taiwan markets for portfolio investment. Singapore remains the regional hub but equity markets in Bangkok and Kuala Lumpur offer more varied attractions. Very high costs compared to neighbors. This is partly a currency issue. Hong Kong is pegged to a strong U.S. dollar. Singapore's dollar has been allowed to weaken since 1997 but not by as much as its neighbors.
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Both cities are still suffering from the property bubble of the late 1990s. Though prices have come down, they are still high. Domestic market domination by oligopolies which, critics claim, keep outside competition low.
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Exceptionally low birth rates are bringing an era of aging populations.
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Precautionary savings in Hong Kong and forced savings in Singapore have held back consumption growth.
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Neither city is sure how to relate to its neighbors. Are they complementary or competitor? Hong Kong talks about China opportunities, but closes its border at night. Singapore's main economic advantage is its geography, but for political reasons it prefers to think globally as much as regionally.
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The city states are still needed. They have that critical mass of international services that few capitals can match. But in an era of low tariffs, free capital flows, floating exchange rates, low direct taxes, and footloose manufacturing they have lost some of their unique quality. They must run harder to stay ahead and justify their high costs and high incomes.
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International Herald Tribune
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