THE LEGATUM PROSPERITY INDEX™ 2016

Bringing Prosperity to Life

Hong Kong

Ranked 23rd of 149

At a glance

Ranks

23 rd on the Legatum
Prosperity Index™

20th
4th
27th
21st
7th
11th
45th
53rd
98th

SUB-INDEX RANKINGS

In the Prosperity Sub-Index rankings, Hong Kong performs best on Business Environment and Health and scores lowest on the Natural Environment sub-index.

Visit our Rankings table to see how Hong Kong compares to other countries.

Prosperity Gap

The ‘Prosperity Gap’ takes a country's GDP and uses it as the yardstick to measure a nation's expected Prosperity Index ranking.

Hong Kong retains a small prosperity surplus, indicating that it is broadly delivering the prosperity expected from its wealth. However, this surplus has shrunk by 79% over the last decade.

Note:
In the chart above, each dot represents a country. The curve shows the general tendency with which prosperity increases as GDP per capita increases. If a country falls below the curve, then we can say that compared to all other countries, it is under-delivering prosperity for its citizens. Likewise, if a country rises above the curve, then we can say that it is over-delivering prosperity for its citizens. Learn more about the Prosperity Gap here.

Alternatively, have a look at the Prosperity Gap view on our Rankings table for a full list of countries and to see how each of them are performing on the various sub-indices.

Commentary

Promised continued stability and a brighter future under guaranteed autonomy from the “One Country, Two Systems” principle, Hong Kong in 1997 was ready to set sail for the title of the most prosperous place in Asia. A decade later, things still looked positive. Hong Kong ranked 23rd in the Prosperity Index; one of the safest and healthiest places in the world, with the best business environment.

The ensuing decade, however, witnessed this brimming optimism gradually erode into disillusionment. This culminated in 2014 to spark the largest protests in the city’s history. The Prosperity Index captured slow deterioration in citizens’ perceptions of key issues like the honesty of elections, confidence in government, and freedom of choice years before the demonstrations. Trouble has been brewing for a while, reflected in the gradual decline of performance in the Governance and Personal Freedom sub-indices. The problem for Hong Kong’s prosperity is that the fallout of this has been felt most drastically and suddenly in the Business Environment, and to a lesser extent Economic Quality, sub-indices.

Prosperity in Hong Kong since 2007 (2007=100).
Governance and Personal Freedom decline preceded mass protests in 2014 while Business Environment suffered most afterwards

Whether before or after the sovereignty handover in 1997, the rule of law and a governance system characterised by transparent and effective policy making and implementation have always served as the cornerstone of the territory’s cherished position as the financial and business hub in the world’s fastest growing region. Hong Kong is one of the few countries that excels in the three structural governance indicators, namely government effectiveness, rule of law, and regulatory quality. To the surprise of many, Hong Kong’s performance in these indicators remained stable, and indeed even improved, in the years preceding the so-called “Umbrella Revolution” in 2014.

However, most indicators reflecting people’s confidence in, and satisfaction with, the government suffered a sharp decline in the same period. The same surveys conducted respectively in 2008 and 2013 revealed a 29 percentage point slump in people with confidence in the honesty of elections and another 22 percentage point loss in confidence in central government. These subjective indicators offer a better barometer of the extent of citizens’ disillusionment with the status quo.

Despite the continuous delivery of high-quality governance, the Index offers some clues as to the abrupt plunge in public satisfaction. Transparency in policymaking, an important measurement of public monitoring and the linkage between government and citizens, fell between 2010 and 2012. Possible causes of this decline include the resignation of five pan-democrat legislators in 2010 in protest of the lack of progress in planned universal suffrage, and the election of the unpopular Leung Chun-ying as Chief Executive by a pro-Beijing committee in 2012, to the frustration of pro-democracy opposition.

These incidents, coupled with the patriotic education promoted by Beijing and tightened restrictions on religious issues, amplified a sense of frustration weakening autonomy at the hands of an ever more interventionist central government. This merely sparked increasing control over the territory by Beijing, concerned at the growing disquiet.

These political fluctuations sat against a challenging economic background. Already facing mounting pressures from regional competitors suchlike Shanghai, Hong Kong was hit badly by the global financial crisis and only managed a lacklustre recovery since the initial bounce. Although unemployment has been successfully reduced, the labour participation rate has never come back to its pre-crisis level. More alarmingly, the wealth generated by the recovery has not reached all. In 2014, the proportion of people satisfied with their living standards and comfortable with their household incomes were both four percentage points lower than before the crisis.

Concerns over diminishing autonomy notwithstanding, the biggest victim of the political turmoil has been business. The Umbrella Revolution was followed by two years of economic slowdown, and an increasing lack of confidence in the city as a global hub for business. Despite a more flexible labour market and better protection over intellectual property, 5% fewer Hong Kongese think the city a good place to start a new business. Their pessimism was not helped by the outdated infrastructure and overhyped housing market, nor by the realisation that social mobility was being dashed by moneyed interests, co-opted by the government. The proportion of people believing that working hard can get someone ahead fell from 77% in 2013 to 63%, the current level.

From the disappointment of the last ten years come daunting challenged for the former British colony. In the short term, the government must address citizens’ legitimate frustration and anxiety left by years of economic hardship and a confusion over group identification. The territory’s special autonomous status must be reiterated and restraints on local elections gradually loosened to ameliorate political tensions. In the longer term, when stability and business confidence are restored, rising inequality must be curbed and reversed and urban deprivation eliminated so that the entrepreneur spirit innate in Hong Kong’s society can be unleashed to drive economic growth and prosperity.


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Data

How to read this graph:
When comparing multiple countries on a spider chart, data points that appear
further away from the center represent a better performance to the points that are closer to the center.

Special Analysis

Special Analysis

OVERALL

Despite the mass demonstrations in 2014, Hong Kong continues to be the fourth most prosperous place in Asia, behind Singapore and Japan. Whilst it has slipped two places since 2007, the underlying decline in prosperity has been slight.

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Areas of Success
Areas of Success

Consistently strong performance in the Health sub-index should be noted, despite performance being relatively stable over the last decade. This is due to high life expectancy and vaccination rates. Elsewhere, absolute improvements have been made. Although Hong Kong has declined in relative terms in the Natural Environment sub-index, falling from 93rd to 98th in the last ten years, the environment in the territory has improved. While it still has some of the most severe air pollution in the world, rising environmental awareness has helped to drive policy change. Wastewater treatment has risen noticeably, as have citizens’ perceptions of the government’s action to preserve the environment.

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Areas of Little Change
Areas of Little Change

Despite economic slowdown and political disruptions, Hong Kong’s performance in Education (21st) and Economic Quality (20th) remain relatively stable in global terms, though both have declined in real terms. Economic openness, captured by trade barriers, has declined, as has satisfaction with living standards. However, this has been offset by falling unemployment to keep Hong Kong’s Economic Quality rank stable. In Education, some decline is recorded between 2009 and 2010, but rank has been static since. Within this sub-index, there is some shift in the balance of human capital away from tertiary education and towards secondary education.

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Areas of Improvement
Areas of Improvement

Notable real term decline has been recorded by the Index in the Personal Freedom, Governance, Business Environment and Economic Quality sub-indices. Rather than the weakening of structural governance indicators, it was declining confidence that was responsible for the lower Governance score. A similar pattern is seen in the Personal Freedom sub-index where, despite more progressive social attitudes towards marginal social groups, tighter control over media and religion are driving sharp decline in both absolute and relative terms. The uncertainty caused by the prolonged mass protests in 2014 no doubt severely undermined the city’s business confidence, but more worrying are underlying negative trends in the structural business environment, including logistics, customs procedures, start-up costs, and insolvency practices.