The Hong Kong Rule of Law Debate

Jun 28, 2024

You don’t need to be an economist to understand the importance of economic growth, unemployment, or inflation. In the same sense, you don’t need to be a lawyer to understand the economic significance of the rule of law. From contract enforcement and resource allocation to considerations of fairness and equity, to matters of civil order and leadership accountability, the rule of law is a key pillar of governance that undergirds the basic integrity of any economic system.

That’s true irrespective of a nation’s ideological and political orientation. It’s also the case for hybrid arrangements such as the “one country, two systems” framework that binds Hong Kong to Mainland China. While the two-systems-aspect of this arrangement is purposely vague, it was always intended to provide support for the special role that Hong Kong plays as China’s window into international capital markets. As a leading world financial center, it is safe to say that the essence of Hong Kong’s economic vitality requires its rule of law to conform closely with legal frameworks of those nations funneling their capital into China.

In Hong Kong’s rapidly shifting post-2019 political climate, the rule-of-law debate has a new urgency. That is certainly the message that can be taken from the recent resignation of a prominent foreign judge, Jonathan Sumption, from Hong Kong’s Court of Final Appeals. The title of his June 10 opinion piece in the Financial Times, published a few days after his resignation, said it all—“The rule of law in Hong Kong is in grave danger.” Predictably, Sumption’s article, as well as the concerns that I have raised over the economic significance of his warning, have been attacked by pro-Beijing politicians—namely, Tu Haiming vice-chairman of the Hong Kong Liaison Committee of the Chinese People’s Political Consultative Conference (CPPCC), and Regina Ip, convenor of Hong Kong’s Legislative Council (LEGCO). Their blatant ad hominem allegations include baseless charges of UK political manipulation, as well as unfounded claims of obsessive biases of economists (like me) who have the audacity to comment on a variety of factors—economic, legal, social, and geostrategic—that affect Hong Kong’s future.

Fortunately, there is a large body of independent data that is quite helpful in addressing a key aspect of this problem—namely, the possibility of convergence between the rule of law of the two systems, Hong Kong and the People’s Republic of China. The Worldwide Governance Indicators (WGI) program of the World Bank provides well-defined metrics of governance for over 200 countries and city states over the 1996 to 2021 period. In addition to the rule of law, the WGI looks at five other pillars of governance—voice and accountability, political stability, government effectiveness, regulatory quality, and corruption. To the extent that governance matters in shaping the fate of nations, or in this case, shaping the fate of the two systems that are embedded in one nation, WGI metrics offer clear-eyed objectivity to an increasingly fraught emotional debate.

The chart below illustrates the Hong-Kong-PRC comparison of the rule of law component of the WGI; it shows percentile rankings—in effect, where each fall in the distribution of 200+ countries/ city states. It only goes through 2022, which predates some very important developments on the Hong Kong legal front in 2023 and 2024. Nevertheless, through the end of 2022 there was a strong hint of a shift toward convergence—a modest decline in Hong Kong’s rule-of-law ranking accompanied by continued improvement in the PRC position. As a result, by late 2022 the still-large gap between the two rankings was the smallest it has been for any year since the inception of the WGI system in 1996—the year before the Hong Kong handover.

[NOTE: The WGI’s Rule-of-Law indicator is based on a variety of components that are combined through the statistical analysis of an Unobserved Components Model. For both Hong Kong and the PRC, that includes representative data on violent and organized crime, judicial fairness, confidence in police force and judicial system, degree of security, contract enforceability, speediness of judicial outcomes, confiscation, human trafficking, and the protection of intellectual and private property rights. Data sources include the Economist Intelligence Unit, the Gallup World Poll, IHS Markit World Economic Service, IMD, US State Department, World Economic Forum, and the World Justice Project.]

And that takes us to the big question: Have the two lines converged further since December 2022? Based on recent developments, there is good reason to believe that is the case. At least, that’s the conclusion that can be drawn from ongoing sedition trials of the “Hong Kong 47,” the widely publicized case of Jimmy Lai, the closure of several newspapers, bookstores, and other media outlets, the hasty March 2024 enactment of Hong Kong’s Article 23, and the severe prison sentences recently handed down for 14 activists on charges of seditious subversion under the Beijing National Security Law imposed on Hong Kong in 2020. In light of these visible manifestations of what Jonathan Sumption has dubbed “judicial patriotism,” there is good reason to believe that the Hong Kong’s WGI-based rule of law metric has fallen sharply further since 2022.

That leaves little doubt that the legal structure of the one country-two-systems model of Hong Kong governance is now undergoing an increasingly rapid transformation toward one system. This evidence-based conclusion stands in sharp contrast to the polemics of what has become an emotional debate of charges and countercharges by opposing political factions.

Clearly, there is more to the effective governance of any system than just the rule of law. The table below provides the raw scores and percentile rankings for all six pillars of Hong Kong’s 2022 WGI governance assessment; the maximum score for any one indicator is 2.5. As can be seen, Hong Kong scores highest in government effectiveness, regulatory quality, and corruption control; conversely, its lowest scores are for voice and accountability as well as political stability. Up until 2018, Hong Kong’s scores on the rule of law were comparable to its high scores in the three categories noted above. Beginning in 2019, however, that began to change. If I am right in my assessment of trends in 2023-24, as noted above, Hong Kong’s WGI-based rule of law assessment is likely to have worsened significantly relative to the remaining strongest attributes of its system of governance.

All this is not to say that the western perspective is the only way to look at this key issue. As He Weifang, the renowned Chinese legal scholar, points out in his extraordinary 2012 treatise on Chinese legal reform, In the Name of Justice, the Chinese perspective is very different. To underscore this point, He draws on the early 20th century work of Wu Tingfang, who stressed the contrast between a leader-centric Chinese legal tradition of more than two thousand years and the more modern Western perspective based on the premise “… that the judiciary is the central pillar on which the whole country’s governance rests …” In other words, while the rule of law is a make-or-break consideration for Western governance, it’s a very different matter in Xi Jinping’s leader-centric China.

We in the West were fine with Hong Kong’s one country, two systems model of governance. But now, as Hong Kong’s western-based rule of law comes under pressure and the two systems blur into one, Hong Kong’s role as a financial bridge between China and the West can be drawn into serious question. Legal-based governance is central to the free flow of international capital. Hong Kong doesn’t qualify for a special exemption.

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