CIAO DATE: 04/02

Hong Kong and the Pearl River Delta:
"One Country, Two Systems" in the Emerging Metropolitan Context

Now, more than at any point since 1949, Hong Kong's economic future is tied to that of China. This commonplace observation must be coupled with the less obvious, but equally fundamental point that Hong Kong's future with China is based largely on activities that arise in or pass through the Pearl River Delta. This region, however, is cut in half by a sovereign border and governed by a patchwork of political authorities.1 The Delta as a whole is rich with opportunities, but it is increasingly apparent that these can be realized only if integration moves forward, both in a metropolitan and regional sense. This prospect is currently marked by serious uncertainties.

The essential question of how to proceed with regional integration–the pace, the strategy, the ongoing limits, and the political arrangements–has, as yet, no ready answer. Nor does the formula of "one country, two systems" offer much guidance. Hong Kong (the Special Administrative Region, or SAR), the Beijing authorities, the Guangdong Provincial Government, and the many local governments appear interested in working out the complex problems involved, but have barely begun to do so. How do these separate parties interpret the risks and opportunities involved? What opportunity costs do they face? Which interests argue for proactive integration and which for a cautious approach? What are the key political questions to be resolved on each side of the border? This paper seeks to underscore the import of these questions and to examine some possible answers. Transborder arrangements are pivotal. Put simply, in geographical, cultural, economic, and environmental terms, the Delta is inherently a single space. At the same time, the border is also a significant barrier, which preserves a number of highly valued circumstances, namely, 1) the political status quo, 2) major differences in factor price markets, and 3) Hong Kong's demographic stability. The border, in other words, preserves and stabilizes some important and potentially threatening differences, yet economic development is generating numerous forms of pressure for further opening and greater cross-border cooperation. While careful calculations have yet to be made, it is apparent that a policy of maintaining the status quo carries a significant price tag in lost opportunities. These arise, for example, from a host of unrealized regional synergies, rising inefficiencies in transport systems, loss of comparative advantage to other Asian metropolitan regions, and from the remedial costs of ultimately having to correct for lack of coordinated planning.

The region has only begun to realize the potential represented by its dynamic set of economic complementarities. On the one hand, Hong Kong possesses wealth, international ties, highly skilled entrepreneurial resources, international technical and marketing expertise, and a thriving business service industry. China, on the other hand, boasts a labor force that is bright, young, and almost infinitely expandable. Given this combination, the outlook for ongoing growth in the Pearl River Delta is impressive. With the costs of land and labor on the Guangdong side a fraction of those in Hong Kong,2 continued development–via the interaction of a first world business center with third world factors of production–is a certainty. Some technological upgrading is also underway, thereby enhancing the prospects for an evolution from labor-intensive manufacturing to higher value-added activities. Less clear is how Hong Kong might effectively bring cross-border market differences to bear on its own exceptionally high real estate and local labor costs. Equally interesting is the challenge to find cost-effective means for dealing with an aging population, by shifting some medical, housing, and other retirement costs across the border. Finally, one wonders whether the SAR's recent advance into high technology will necessitate a set of new regional arrangements in the areas of higher education, human resources, and IT infrastructure. Guangdong, Beijing, and the SAR share major interests with respect to integration. However, the way in which each calculates what it stands to gain or lose from the process is significant and distinct. The many country and municipal governments that have some autonomous power to join or resist complicate the picture further.

Hong Kong has long prospered from the ambiguity of its relationship with China. In the early days of the colony, for example, its merchants simultaneously petitioned London and Beijing for special tariff treatment, arguing to the former that Hong Kong was not a part of China, and to the latter that it was a Chinese city. From the beginning, such skillful exploitation of the border has been integral to Hong Kong's identity and prosperity. Destined to face two ways, it must be both a key part of the Chinese economy, and an international city distinct from it in order to succeed. Reversion may have called this distinctiveness and separateness into question, but it is the integration of the Pearl River Delta that presents the immediate, and ultimately, the greater challenge. Potentially, the Pearl River Delta could match New York or Tokyo in global significance. Currently, however, the economic profile more closely resembles a rich city coupled with an offshore foreign domestic investment (FDI) situation–such as exists between, say, Taiwan and Fujien–than that of a great urban region.

How might Hong Kong proceed to change its relationship to the Pearl River Delta? No one denies its current place as the leading city of the region, and there is considerable, albeit quiet debate in the city itself as to how it will participate in the emerging metropolitan area, particularly how it can assume a leadership role. The author is not well informed about the attitudes in Beijing and among the various authorities in Guangdong on this question, but one has to assume that a similar level of cautious interest exists in the face of such uncharted terrain. While careful advancement seems the most predictable course–defined largely by adhering strictly to the political status quo and the "one country, two systems" formula– real and mounting opportunity costs are involved.

Full Text of Discussion Papers Article (PDF, 36pgs, 240 Kb)