Risk of complacency for HK, Macao, Taiwan

The old growth engines of Hong Kong, Macao and Taiwan are decelerating. The new ones are predicated on deeper economic ties with the Chinese mainland.

The governing Kuomintang Party recently suffered a landslide defeat in local elections in Taiwan. As a result, Kuomintang head Ma Ying-jeou resigned as KMT chairman. In Hong Kong, protesters are divided about the future of "Occupy Central", which almost paralyzed Hong Kong's financial district in the fall. As Macao has been preparing for celebrations for the 15th anniversary of its return to the motherland, Macao Chief Executive Fernando Chui Sai-on has to address its dependency on casino revenues.

In the West, these events have been reported as the dissatisfaction of the residents of Taiwan, Hong Kong and Macao with mainland ties. Realities are more nuanced.

Understandably, the residents of Hong Kong, Macao and Taiwan feel proud of their distinctive identity after decades, even centuries of colonial rule. But set aside the issue of identity and ask these residents whether they would be better off without the mainland. Most would respond in the negative.

The simple reality is that today Hong Kong, Macao and Taiwan are more integrated with the mainland than ever before. The Chinese mainland and Hong Kong together absorb more than 40 percent of all exports from Taiwan. In turn, Taiwan's impressive current account surplus includes massive private sector investment on the mainland, while its financial sector is increasingly exposed to the mainland's financial institutions.

The mainland and Hong Kong absorb more than 70 percent of Macao's exports. Macao would not survive without millions of visitors from the mainland and Hong Kong.

More than half of Hong Kong's exports go to the mainland and over 75 percent of its inbound foreign direct investment and foreign visitors come from the mainland.

Identity matters but so do living standards.

In the past 14 years, Hong Kong, Macao and Taiwan have benefited hugely from the mainland's expansion, through trade, investment, tourism and financial services. These growth rates are reflected in the compound annual growth rate, which was 3.1 percent for Hong Kong and 2.6 percent for Taiwan during the period.

Starting from a far lower base, the mainland's growth rate was 14.9 percent. It is this extraordinary growth record that supports the mainland's structural reforms, amid the shift of its growth model toward innovation and consumption.

The same does not apply to Hong Kong, Macao and Taiwan. In each case, the growth model remains similar and structural reforms have been deferred.

Hong Kong continues to rely mainly on its financial sector, even as it is struggling with soaring property markets, inadequate housing, rising inequality and aging population. While Macao has become the world's largest gaming center, its industrial structure has not been diversified, even though gaming revenues will moderate, the huge financial sector is exposed to external shocks, and an aging population means rising spending needs.

Taiwan's sustained growth is predicated on the 2010 Economic Cooperation Framework Agreement with the mainland and its complement, the Cross-Straits Service Trade Agreement, which would open the mainland's industries to Taiwan's investment.

To thrive in the future, Hong Kong and Macao need structural reforms and deeper integration with Guangdong province and the Pearl River Delta region, while Taiwan needs deeper integration with the mainland as a whole. The challenge for the mainland, Hong Kong, Macao and Taiwan is to advance economic integration, while respecting unique identities, which reflect the resilience of Chinese culture and local responses to the history of Western colonialism.

Conversely, the risk of complacency - deferred structural reforms, inadequate diversification and decelerating growth - would be erosion of economic growth and falling living standards.

That is not in the economic interest of Hong Kong, Macao and Taiwan, for even unique identities thrive on sustained living standards.

The author is research director of International Business at India China and America Institute (US) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).