Moreover, the structure of Hong Kong’s economy is flexible and efficient, encouraged by a small government5 with a strong commitment of public policy towards free markets. This enhances Hong Kong’s resilience in absorbing external shocks and its ability to adjust quickly. The best example is the labour market. Owing to massive relocation of manufacturing processes across the border to the southern part of the Mainland of China, employment in the manufacturing sector had declined by nearly 65 percent from 870,000 in 1986 to 310,000 in September 1997. In most economies, one would have seen a jump in structural unemployment and much politicized demands for government intervention. But not in Hong Kong. In fact, the labour market is so flexible and efficient in relocating workers to the service industries6 that the unemployment rate in Hong Kong has remained low throughout at between 2 and 3 percent. 2 During the past 14 years under the linked exchange rate system, the Hong Kong economy achieved an average annual growth rate of 6.1% in real terms. Inflation rate, measured by Consumer Price Index (A), averaged 7.5% during this period. In the tradable goods sector, inflation was more subdued, with the unit price of exports rising by around 2.2% per annum. The unemployment rate stayed at a low level of 2 to 3% throughout the period.
This may be easier said than done as leveraging can bring transient prosperity and euphoria to everyone. To avoid committing such mistakes and the pains of de-leveraging in the future, we must stay alert and discipline ourselves not to over-spend;  (b)  Beware of wrong signals resulting from market failures, which may induce borrowers to wrongly believe that access to low-cost funds will never be cut off and prosperity and affluence funded by borrowing is legitimate and sustainable;  (c)  Strengthen market regulation to reduce the risk of market failures. Major reforms to be introduced include enhancing the policy functions for maintaining financial stability; implementing appropriate counter-cyclical regulatory measures when necessary; strengthening bank capital and liquidity requirements (Basel III); and increasing the regulation of credit rating agencies. Most of these reforms are still at various stages of implementation and may not be ready remedies for the current debt crisis in the US and Europe;  (d)  Understand and accept that there is no clever or easy way out of the trap of excessive leverage. While innovative financial derivatives may facilitate borrowing and leverage, or even conceal them, no financial engineering can reduce debt and achieve de-leveraging without the required reduction in public spending and the economic and social pains that the de-leveraging process generates. (e)  While the government should step in to help if the financial system or the whole economy gets into trouble, this is feasible only if the government has the fiscal headroom to foot the bill.