It has been a bitter two years for Hong Kong. On July 1, 1997, the British Crown Colony reverted to the mainland amid an outpouring of pride and Chinese nationalism. The celebrations were short-lived. The very next day, the Thai baht imploded, launching Asia on a downward economic spiral from which it has not yet recovered. Hong Kong was sucked into the maelstrom. If that trial was not of its own making, other tribulations were. A series of missteps have eroded confidence in the administration of Chief Executive Tung Chee-hwa, and forced many people to ask what the Special Administrative Region now stands for. Two years after beginning a new life, Hong Kong’s very identity is in question.

Once touted by economist Milton Friedman as the finest example of pure capitalism in the world, the government’s decision last year to intervene in the stock market tarnished that reputation. The purchase of $15 billion worth of shares was designed to scare off speculators, and it worked. But a dangerous precedent has been set. Ten months after the intervention, the government still owns the shares and has yet to explain how it will sell them without sending prices tumbling. The government suspended property sales for nine months to try to firm up land prices. The letting of the $1.7 billion Cyberport project without a public tender is another worrying indication. Each has stained — perhaps permanently — Hong Kong’s image for international investors.

Those economic worries have been compounded by the soaring cost of doing business in the city. Manufacturing has fled to cheaper locales in the region. At the same time, Singapore is taking aim at Hong Kong’s role as the region’s financial center. Shanghai is offering a similar challenge as a gateway to China. The result is an economy that seems to be without foundation. The regional crisis is chiefly to blame for Hong Kong’s troubles — the economy shrank 5.2 percent in 1998 and is expected to contract another 0.9 percent this year — but the government seems unable to offer a vision for the future.

When the colony reverted to China, the mainland promised to maintain “one country, two systems.” Beijing has honored that pledge and refrained from interfering in Hong Kong’s affairs. Unfortunately, Mr. Tung’s government has not been as adroit. It failed to prosecute a politically well-connected publisher for breaking the law, claiming that it would cause difficulty. The opening of the lavish new airport was a mess, and the officials responsible seemed to spend more time pointing fingers than fixing problems.

The most troubling fumble came last month, when the government asked China to overrule a decision by Hong Kong’s Court of Final Appeal. The government argued that the decision, which permitted immigrants from the mainland to stay in the SAR, would swamp the city. Critics questioned the government’s numbers, accusing it of playing a scare game. Although technically legal, appealing to Beijing to overturn the decision shows a disturbing willingness on the government’s part to bend the rules when it cannot otherwise prevail. It is a dangerous gamble because it strikes at the heart of Hong Kong’s success: the comfort that comes from the rule of law.

Mr. Tung is already paying a price. Confidence in his administration has tumbled from 42.7 percent in 1997 to 25 percent today. Forty-three percent of Hong Kong residents surveyed in a recent opinion poll said the situation had deteriorated since the handover, a figure that has more than doubled in the last year. Of course, the economy is the main reason for the dissatisfaction. Unemployment is at a record-high 6.3 percent, and prospects are not good. They are unlikely to improve if the government continues to flounder; foreign investors already harbor doubts about its commitment to the go-go capitalism that made Hong Kong the gateway to China and the most dynamic city in Southeast Asia.

A core problem is the SAR’s reliance on real estate to prop up the economy. Prices have fallen 40 percent to 50 percent since their peak, and no sustained recovery is possible until they firm up. But high land prices will force businesses out of Hong Kong, making the base of the local economy thinner still. It is a vicious circle and one that must be broken. The Cyberport project was designed to nudge Hong Kong into the 21st century, but only seems to have made things worse. If anything, Hong Kong suffers from a failure of imagination — a failure to think creatively about the problems it faces and an unwillingness “to step out of the box” to fashion solutions. It is a damning judgment, and one that is unworthy of Hong Kong’s history.

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