Simon Cartledge is a Hong Kong-based writer and publisher. A former editor-in-chief in Asia for the Economist Intelligence Unit, he is also the author of "A System Apart: Hong Kong’s Political Economy From 1997 Until Now." Read more opinion LISTEN TO ARTICLE 5:01 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Justin Chin/Bloomberg Photographer: Justin Chin/Bloomberg

Hong Kong is hurting economically. Nearly six months of unrest have severely damaged its tourism and retail industries. The Sino-US trade war and China’s slowing economy are taking a toll on its trade and logistics, finance and professional services industries. And with sentiment turning against Hong Kong in other parts of China, efforts to integrate better with the rest of the country are weakening.

The problem: remaining relevant, especially compared to Shenzhen, the city just to the north that famously was nothing more than a small border town 40 years ago, but whose economy overtook Hong Kong’s last year.

With Hong Kong now in recession and Shenzhen still growing by nearly 7% annually, a gap is opening between them. It will soon be a chasm. Within little more than a decade, Shenzhen should have an economy twice as large as Hong Kong. Remember, in the early 1990s, the city’s economy was a fifth the size of all of China’s.

While the dynamism in southern China is the main reason for this striking reversal of fortunes, it’s not the only one. Also responsible is Hong Kong’s failure to evolve since its return to China from Britain in 1997.

Despite the transformation the global economy has undergone, Hong Kong’s business landscape remains largely unchanged – the preserve of a small body of property developers and conglomerates, most of them tycoon-owned, who rose to prominence long before the handover. Indeed, one of the most striking things of the city’s history for nearly three decades has been its failure to produce a single major new business.

Responsibility can be attributed to the Basic Law, the mini-constitution that has guided Hong Kong’s governance since its return to China. Passed by China’s parliament seven years before the handover, it came with a built-in bias aimed at preserving Hong Kong’s late-colonial features: a low-tax, capitalist economy, externally very open but domestically protectionist, and overseen by an executive-led government with little formal accountability.

Being designed for the Hong Kong of the 1980s, however, left the law ill-fitted to handle the challenges of recent times. Faced with high rents and a domestic economy in which cartels and duopolies dominate many sectors, startups have struggled to establish themselves. Despite sizable government support, the technology sector remains small. Spending on R&D is negligible, and innovation remains largely confined to fintech operations. The city’s once-famous entrepreneurial spirit is now largely a thing of the past.

Hong Kong still retains its core strengths: an internationally trusted common-law legal system, a fully convertible currency, no exchange controls, and a free flow of news and other information. Its global logistics know-how and professional services expertise remain unrivaled elsewhere in China, and its status as an international financial center makes it irreplaceable as the country’s principal conduit for cross-border money flows.

Yet these have not been enough to keep Hong Kong growing at the kind of rate it had been accustomed to in the pre-handover era. Instead, graduates entering the job market struggled to find well-paying jobs, home prices rose to the point of being unaffordable even for those on good salaries, and rising inequality left nearly one in five people living in poverty.

In a city where education levels have risen markedly, the unwillingness of its leaders to move toward greater democracy – despite being promised in the Basic Law – or to prevent the erosion of its rights, freedoms and high degree of autonomy in the face of an increasingly authoritarian China has fed further discontent.

Chief Executive Carrie Lam’s effort to push through an extradition bill that would have allowed the transfer of criminal suspects to China was the final affront, launching this year’s explosion of unrest.

So far, aside from eventually shelving that bill, and despite the crushing defeat of pro-establishment candidates in last month’s district council elections, Lam has refused to concede any ground to the protesters’ demands.

Instead, she maintains that her administration’s priority remains addressing matters of livelihood, principally with various schemes aimed at easing the housing crisis. They are unlikely to help in anything but the long term.

That’s wrong. Resolving Hong Kong’s current impasse and its deeper, structural ills calls above all for accountable government – one trusted by its citizens to look after their rights and freedoms. It needs the authority to tackle vested business interests, especially those of the property sector, and be able to manage a relationship with Beijing in a way that allows for trust on both sides.

To do all that, a government needs the legitimacy that only a popular mandate can deliver. That means implementing the promise of the Basic Law to move toward having a chief executive and legislative council elected via universal suffrage.

The chances of this happening are vanishingly small. The opposition to such reforms from both Hong Kong’s establishment and Beijing would be enormous.

Yet unless a way can be found to have a government that is answerable to Hong Kong’s people, not only will political discontent continue to fester, but the economy – still the city’s principal reason for being – will also remain stifled. Hong Kong will become an also-ran, far behind Shenzhen – and far sooner than almost anyone seems prepared to contemplate.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.