Good evening, ladies and gentlemen. It is a great honour to be invited to give this keynote speech this evening, given as it were from beyond the grave of retirement from Hongkong Bank.

I hope you are not too disappointed that I am substituting for Richard Branson. I am afraid I make no claim to be so colourful. I have never even been in a hot air balloon, let alone try to circumnavigate the globe in one. I do not have the marketing flair that can create an enormously successful service empire from a name, Virgin, that catches everyone’s attention, from lots of derring-do, and of course, from lots of attention to detail.

There must be a lesson in this for us in Hong Kong. Promotion of services will depend as much on flair and imagination as it does on mega investments or systematic campaigns.

Much of the material I have read in preparing for this speech gives the implication that the remarkable migration over the last 15 years of Hong Kong from a manufacturing economy to a service economy was somehow planned. Nothing could be further from the truth. Rather, Adam Smith was hard at work with the hidden hand of innumerable decisions made by individuals and companies organising their affairs as they judged to be in their own best interests. Products could be made more cheaply in the Pearl River Delta with the low wage costs there, so factories were relocated. Processes that required skills unavailable in Guangdong were retained here in Hong Kong. With the low tax regime and offshore profits being tax-free, of course, everything was re-invoiced through Hong Kong, with financial control naturally being exercised from here. The principals did not move with their factories. Why not? I suspect it has as much to do with the schools for their children, the freedom to travel, the freedom to transfer money wherever, the general state of good order, and dare I say it, the ready availability of Philippine maids as much as it had to do with any master plan to “move Hong Kong up the valued added chain”.

What we are seeing here has, to a similar degree, already happened in the rest of the developed world. With modern technology and methods, it takes relatively few people to grow or manufacture the goods that humanity needs to enjoy a very high standard of living. At the same time, going to work seems to be a necessary social activity and the only way humanity has found satisfactorily to distribute money in a modern society. The average man in the street is not very good at organising his leisure and needs the discipline of regular employment. Since we are unwilling to throw away perfectly good products before they are worn out, or indeed to get poor value for money by buying products with built-in obsolescence, the only outlet for the surplus employment energy is what we call services.

I have just spent 10 days in the town of my birth, Hastings, on the South Coast of England. The economy there must be nearly 100% services. Hastings has no natural advantage for manufacturing, so next to none is done there. It serves as a shopping centre for the surrounding countryside, which is used to grow food. But even that production relies on European Union subsidies, without which it would probably migrate to Hungary or Morocco. The necessary employment is thus provided by every one providing services to every one else, supplemented by a generous dose of bureaucracy. This process is happily aided by the ageing population. Elderly people not only need care and attention, which is expensive, but they also have rather more time to consume products and services.

Concurrent with this migration to services is a high level of unemployment. Ten per cent is common in Europe, Canada and Australia, although the USA has managed, at least today, to achieve rather lower levels. At the same time, this is against a background of ever-lengthening education. A far greater proportion of the population in developed countries enjoys tertiary education than in the past. In Sweden and Germany, it is quite normal for tertiary education to extend to age 27. Indeed, for one reason or another, two of my three sons, then based in the United Kingdom, were not on the job market until that age. By way of contrast, Japan seems to have addressed the same problem, albeit as a result of cultural accident rather than a calculated plan, by a large measure of under-employment. Although the famed Japanese export industries achieve world class levels of efficiency and productivity, huge swathes of the economy, including retailing, agriculture and financial services, are highly inefficient and labour-intensive. Arguably, this is a key clause of the present malaise in the Japanese economy and global forces of competition are driving them to adopt more efficient practices, as they have and are driving the command economies of the USSR and China to do the same.

One solution to the problem of providing sufficient employment that has been adopted a couple of times this century has been to start a war. This is most effective both in reducing the labour force and in increasing consumption. Thankfully, one of the by-products of today’s improved communications and education is that it is now rather more difficult to fire up a population to believe that war is in their long-term interests, in spite of issues of patriotism, abuse of human rights or naked aggression. Nonetheless, we must not be complacent. The Balkans, the Middle East, Cambodia, Iraq and many parts of Africa show us how easily local conflicts can erupt and suck in the involvement of the major powers. With relevant decisions being taken by leaders apparently to distract public attention from affairs with their mistresses, not even the most secure and stable democracies are immune from capricious outcomes.

I am approaching the promotion of services in Hong Kong from this perspective, because I believe it is important that we clearly see the background against which we are operating and recognise the inevitability of the forces that are affecting us. Hong Kong’s success in the past has rested on a happy coincidence of history and geography, ignited by the cream of China’s entrepreneurs who came here as immigrants. It has been demonstrated in many countries, not least the United States, that there is high correlation between immigrants and initiative. Those who are willing to suffer the disruption of uprooting from their home base and making a new life elsewhere are much more likely to be entrepreneurially successful in the country of adoption. Hong Kong under a colonial government happily provided a sound and neutral base on which our entrepreneurs could operate, and indeed, from which they could spread their influence and empires around the globe.

The scene today is, of course, very different. For the first 35 years of the modern era in Hong Kong, which I take as starting in 1949, the territory’s primary motivation was insecurity. Hence the willingness of our people to work incredibly hard. Hence the high savings rates which provided the funds to invest in the development of the territory, channelled through the banks which made lending decisions properly based on the financial viability of the activity being financed rather than on Government direction. Hence the focus on education which gives security to the next generation. Hence the immigration from Hong Kong, which has deprived us of much talent but which at the same time has given us many friends overseas. Hence the investment overseas which gives a diversified lower risk portfolio.

This insecurity has now largely gone. Government provision of health, education and welfare services are comparable to developed countries. Many people now have an employer-provided retirement benefit scheme, own their own residence, and have reasonable saving, to say nothing of a son or a daughter with a respectable degree from a Canadian university. At the same time inward immigration has to all intents and purposes stopped. It would be naive to assume that there will be no consequences of these demographic changes. The willingness to work long hours will inevitably weaken where not motivated by significant material reward. Quality of life issues will loom larger in people’s assessment of what it is important. People will want more say in how their lives are governed, leading to more involvement in politics. Dealing from a secure base, people will be more willing to espouse causes to promote particular issues, a trend that has led to the weakening of national purpose and the semi-paralysis of coalition government commonly seen in Europe.

We see all these things happening in Hong Kong but we tend to ascribe the blame to the transfer of sovereignty, or to the limited democracy that’s been introduced, or to executive-led government or to the Asian financial crisis. The reality is that all the symptoms are readily recognisable consequences of our becoming a richer, more confident and better educated society.

So what do we need to do to promote services in this environment?

I believe that we all recognise the provision of services to the Mainland is a crucial component of Hong Kong’s future prosperity. Today, there remain many impediments to that provision. There are time and capacity restrictions on movement across the border of Shenzhen and Zhuhai. There are customs restrictions on the flow of goods. There are licensing restrictions on professional practice and the provision of financial services. Even when licenses are granted, permitted operations are often circumscribed. Hong Kong must bring to bear its most skilled negotiating resources to attempt to speed the removal of these barriers. The matter should be tackled on all fronts, in Shenzhen, in Guangzhou and in Beijing on the basis of the mutual benefits that will accrue as a result of an improved two-way flow.

In deciding what to do to promote services in Hong Kong, we must recognise what has been successful in the past and to reinforce it in the future. Every article I have read on the subject lists the level playing field, the rule of law, the low income and profits tax, clean government and its generally non-interventionist stance, so I will not dwell on them. I was however pleased to read Andrew Li’s comments at the opening of the legal year ceremony on Monday earlier this week. The legal system here may well be fair and impartial. It is also very expensive and very slow. Although it undoubtedly sets an appropriate style and a tone for the conduct of business and behavior, the cost and delay puts it beyond the reach of most people and companies, forcing either disputes to remain unresolved, or the acceptance of middle-way mediation, whatever the merits of the case. At the same time, the cost to the taxpayer of the legal infrastructure and of the SAR putting its case for the prosecution, sometimes seems way out of proportion to the benefit of the result achieved.

I do however, notice a subtle change in Hong Kong’s creed as periodically enunciated by our leaders. Today we hear of “a non-intrusive but effective regulatory regime”. In the glory days of Hong Kong hugely effective period of wealth generation, we paid little attention to regulation by Government. Today’s regulatory regime is very much more intrusive than it used to be. It is in the very nature of the beast that regulators are only happy when regulating things; and, indeed, when looking for more things to regulate. Only the very resolute action can hold the regulators back against the countervailing pressures of the special interest groups I mentioned earlier. Even light regulation acts as an impediment to the small and medium-sized enterprises that most economists now recognise as the real engines of wealth creation and modern technologically oriented economies.

The other change that we now hear of is Hong Kong’s “market-oriented economic policy”. This replaces the creed of non-intervention of the past. The distinction may be fine, but I suspect that being market-oriented permits a rather higher level of intervention; as we are indeed seeing, with the small and medium-sized enterprise guarantee scheme, the international events fund, the mandatory provident funds, the applied research funds, the industry support fund, the applied research fund, the industry support fund, the mortgage corporation, the innovation and technology fund, science parks, business parks, the applied science, technology and research institutes and industrial technology centres. Although these schemes are all eminently worthy, they all suffer from one common weakness. They assume that Government, or the people appointed by Government, will spend other people’s money more wisely than the individuals or corporations will if left to themselves to spend their own money. Arguably, Hong Kong’s success in the past has been more a result following Adam Smith and the beneficial effect of many small decisions taken on the basis of self-interest than of judgments made by government on what areas of endeavour should be subsidised.

The second lesson from the past must be that government is most effective in providing infrastructure and eliminating impediments to enterprise. I put education into this category. We must clearly strive to improve the education of our children and our young people. Our present system has room for improvement in the development of the initiative and the independent thought which is so necessary if we are to stimulate innovation. In doing this, we must not neglect the wishes of parents. Whilst teaching in Cantonese, as recommended by the professionals is questionably more effective than English, I cannot help feeling that somehow, the message that parents opting for English language teaching are trying to send is being missed. Maybe what they’re really saying is that in their view, the advantages of using a phonetic alphabet and a common written and spoken language outweigh the disadvantages of teaching in a second language, when compared to the alternative.

At the same time, the world continues to get more complicated and the skills needed to thrive prosper with it continue to grow inexorably. Superior levels of education just must be part of any recipe for our success in the future.

While on the subject of education and the promotion of services, I must say that I believe we could be doing rather more to develop Hong Kong as a regional centre for education. This matter was covered thoroughly in the break-out sessions this morning. Why should not wealthy Asians send their children to secondary school or to university in Hong Kong rather than England or America? I was fascinated to learn this morning that in Po Chung’s youth they were doing exactly that. Why should not wealthy Europeans or Americans wishing to keep their sons and daughters off the unemployment roles before age 27 send them to learn about Asia in Hong Kong? Extending the same subsidy to foreign students as we extend to local students and providing for their accommodation would undoubtedly cost money, but in my opinion the long-term goodwill that would accrue and the benefit to our own students of studying in a multinational community would more than compensate. Lee Po Chun United World College in Shatin is setting a splendid example. All we have to do is to emulate it and learn from it.

Much the same argument applies to medicine. Dr. Yeoh and this team at the Hospital Authority have done a splendid job putting in place some excellent medical facilities, albeit largely crowding out the private hospital sector. We should really exploit this by setting out to become a major regional medical centre so that once again wealthy Asians can come here for their check-ups and their treatment, rather than having to go to London or to the Mayo Clinic in Minnesota. Arguably, the taxpayer subsidy in Hong Kong today for medical treatment is too high, and I believe the Hospital Authority is coming to that same view. I would, however, be happy to see a reduced subsidy extended to everyone including foreign patients, again in the belief that the goodwill and the ancillary benefits would outweigh the cost.

Given where I come from, I must say a few words about information technology. I am pleased to see that the Government now appreciates that Hong Kong’s exploitation of IT is entirely respectable, rather than materially deficient. Now they need to recognise that if the Government initiatives with respect to IT are to be credible, they must first demonstrate that they themselves can fully exploit IT and at the same time take the pain of the many low-level paper pushing positions that will be eliminated. This full exploitation must include the welcome proposal to allow the public to access all possible services provided by the Government through the Internet. This would set a splendid example, and coupled with appropriate exhortation, could make a real contribution to position Hong Kong as a city at the leading age of exploiting technology. Beware, however, of that little word “access”. It could all too easily be taken to mean acceptance of requests from the public electronically rather than full completion of the transaction on the spot with any unavoidable documents being mailed. What a missed opportunity it will be if after submitting an electronic request, one then has later to present oneself to queue up to make a payment to collect a piece of paper.

I must confess to being rather more skeptical about the other IT initiatives that are being proposed. Clearly we must have best teachers of IT that we can find at our schools and universities. Clearly they must have the hardware, software and communications tools they need to do their job. Authoring multi-media products for computer assisted learning and for broadcasting on the Internet will be a particularly important skill. Beyond that I rather doubt that throwing money at the technology has any real prospect of turning Hong Kong into another Silicon Valley. Or put another way, if Hong Kong has any such prospect, it will be as a result of its natural entrepreneurial talent, with lack of public funds unlikely to present any real obstacle. No initiatives with respect to networks, electronic commercial standards are likely to be useful or cost effective. Wiring up everyone’s homes with broadband links that the occupants are unwilling to pay for themselves, is just the sort of project that’s caused the Asian financial crisis. We are too much of a minnow to be able to influence the infrastructure for electronic commerce or the standards under which it will operate. What we must do is exploit these tools. This takes imagination and initiative rather than money.

I cannot miss the opportunity of this platform to make one final point. I think that everyone agrees that quality of life issues will play an important part in the promotion of services in Hong Kong. We must be a place where skilled and talented people want to live. Only with these people we’ll be able to deliver the very high value-added services that will ensure our prosperity. Hong Kong has much natural beauty. It must not be spoiled by allowing encroachment upon our country parks. It must not be spoiled by air pollution. Both are real problems. We never seem to get clear statements about the air pollution. Is it locally generated? Or is it exported from Guangdong Province? If the source of the pollution is local, then the world’s strictest emission control standards should be imposed forthwith, with assistance grants if necessary to facilitate speedy implementation. If the pollution comes from Guangdong then we should be lobbying with all the resources at our disposal in Beijing and in Guangzhou for action to be taken to eliminate the sources. I am sure we would be playing to a receptive audience. Financial assistance could again be justified.

In this speech, I have treated the subject of promotion of services with some licence, ranging very widely. This is because the conventional approach to the subject has been thoroughly addressed many times. The TDC’s excellent publication, Hong Kong’s Competitiveness in Services, is a good example. This morning’s sessions at the forum all usefully developed important issues. My challenge has perhaps been to put a slightly different perspective on the matter. Thank you.