ENG-1998 — Page 29

CHAPTER 1 HARD LESSONS AND

RADICAL REFORMS

The Financial Secretary, the Honourable Donald Tsang, JP, reviews one of Hong Kong's most difficult years

EXPERIENCE can be a harsh teacher and 1998 gave us all plenty of lessons. Hong Kong had its poorest economic result for more than 20 years, slipping into recession in the second quarter.

The rest of the world experienced at least one bout of recession over those two decades, but Hong Kong maintained a remarkable growth rate through unprecedented political and economic upheaval. Fortune then turned and, by late 1997, the Asian financial crisis swept Hong Kong into a monetary maelstrom.

Although the financial crisis posed real dangers, it also opened up new opportunities. We undertook radical reforms that in less difficult times would have been impossible. The crisis made them essential. Ten years from now I believe historians will see our actions as far-sighted. Widening our monetary base, removing doubts over short-selling and improving the monitoring of capital flows, are just some of the measures. The financial markets readily accepted them as sensible

moves.

Our incursion into the stock and futures markets in August was the most controversial action. But that, too, was no more than an exceptional measure to combat exceptional circumstances.

The sequence unfolds

Many of the world's finance ministers and central bankers met at the World Bank/International Monetary Fund Annual Meetings in Washington DC, in October. They agreed we were facing one of the greatest economic, political and social challenges of the past 50 years. We were all in the same boat, caught by the same swift tide.

Just over a year earlier, on July 1, 1997, Hong Kong had returned seamlessly to China. The next day, the Thai Government devalued its Baht. In the 18 months that followed (to end-1998), the Asian crisis became a crisis with global implications. Governments fell, leaders changed and poverty descended on millions of people. It was a distressing end to an unparalleled era of growth.

What caused it? How can we fix it? Is this the end of the free market? These are matters of critical concern for small, open economies such as Hong Kong's. These events have shown that a free market involves more than we had previously believed and promoted as dogma.

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