Of course, Hong Kong will not change its capitalist system; or its Common Law legal system. The Basic Law specified the "One Country, Two Systems" principle to maintain these two macro and meso systems. However, when the West was discussing varieties of capitalism - the Anglo-Saxon versus the German and the Japanese varieties, and emerging markets are experimenting with even more varieties of market capitalism, there is no fixed and orthodox interpretation of capitalism designated in the Basic Law. I do not think the National People's Congress will ever be tempted to give one either.

More importantly, the Basic Law did not freeze-frame Hong Kong's society, economy and policy at the moment of the handover on July 1, 1997. As a constitutional document it sets out only basic principles and allows flexibility and change within the basic framework of principles. If one misinterprets "One Country, Two Systems" to remain unchanged for 50 years as opposition to whatever changes are introduced in Hong Kong, either he/she is naive and ignorant, or an ultra-conservative loyal to the colonial order imposed by the British before the handover. Many elements and institutions of that order have remained intact since that historical date.

It is unfortunate that the central government had not critically evaluated the colonial order it inherited and made a better institutional blueprint for the post-colonial city. Unlike former colonies around the globe that actively pursue a process of decolonization, Hong Kong and probably the central government have never been seen to contemplate the need for some decolonization in Hong Kong. On the eve of the handover, the colonial capitalism was regarded as capitalism per se, not a distorted version. The inherited system has therefore dominated the developments of Hong Kong in the post-colonial era, and is probably responsible for the many structural problems which have damaged both local growth and stability.

Confirmation of the influence of the colonial legacy has been the city's concentration in the financial services and property sectors despite the occurrence of two financial crises in 1997 and 2008, which depressed the prices of financial services and properties. De-industrialization, which started in the 1990s, has accelerated and related industries such as logistics and business services including producer services have also seen gradual erosion over the years, despite the huge expansion of the industrial processing trade across the border they have been servicing.

The role of the SAR government in the sectoral concentration in the period seems to be the most important factor. Financial liberalization has been accelerated from measures introduced by the colonial government in the early 1990s. Land sales have been curtailed and public housing has been drastically reduced. Together the government has served to limit supplies in the local housing market, changing the balance between supply and demand and pushing prices high. Few large infrastructural projects have been undertaken since 1997 by the government with regard to ports and logistics, or local urban development. Research and development spending remains low by global standards and little structural support has been given to manufacturing industries to upgrade and continue operating in Hong Kong.

The main focus of the SAR government in the post-1997 period has been on tourism - the construction of the Disney theme park and the Ngong Ping 360 cable-car system, the expansion of Ocean Park, and the Individual Visitor Scheme for mainland tourists. These measures and projects have been successful, attracting over 40 million tourists to Hong Kong last year, uplifting tourism as a pillar industry of the city. Following examples in the residential and commercial property sector, hotels and tourist facilities, like retail space, have not been increased to accommodate the large influx of tourists and their purchasing power. Strains in the market have again pushed up prices with a spillover effect on the non-tourist sector creating asset inflation and general inflation.

The outcome of such a sectoral concentration includes a polarization in the local labor market. Financial services and the property sectors have created too few high-paid jobs to compensate for the reduction in middle class and professional employment because of the shrinking of manufacturing and producer's services. Tourism, and in particular the purchasing power of mainland visitors, has helped boost retail businesses, but apart from large profit margins that retail property owners reap, especially in the luxury goods segment, it creates low-paid service jobs. Yes, the expansion of low-paid service jobs has seen Hong Kong achieve almost full employment, but, the pay has been so low that many workers still live in poverty, although the introduction of a minimum wage has helped ameliorate the situation. The shrinking of the middle classes or the lack of upward mobility in the local labor market has reduced local consumption and its multiplying effects on economy. Many university graduates are trapped in junior jobs that offer little chance of improving their living standards through promotion or salary increases.

Excessive concentration in finance and real estate has also made the local economy vulnerable to the volatile global financial system. Social polarization has led to social tension and political conflicts, the severity of which was not seen in colonial times.

Against these trends, the central government has repeatedly warned against the weakening of local economic competitiveness and urged the SAR government to be more proactive. Judging from recent international experience, no economy can overcome structural problems and upgrade by relying on market forces - especially when those forces are dominated by vested interests which are the cause of the structural problems. Only government with its huge resources and its independence from vested interests can break the lock-in effect of path dependence. The case of Hong Kong is no exception, and the SAR government is the only political and economic force that can lift Hong Kong from its current economic, social and political impasse.

The author is head of China Business Center, Hong Kong Polytechnic University.

(HK Edition 05/08/2013 page9)