B. Seizing Opportunities to Expedite Restructuring

5. Over the past six years, the Hong Kong economy has been undergoing a difficult process of restructuring. Restructuring has been particularly painful and protracted for several important reasons. First, we inherited serious and unresolved old problems including a bubble economy, and a mismatch of human resources leading to an inability to move quickly towards a knowledge-based economy. Second, the sudden onset of the Asian financial crisis pierced the bubble economy, which led to a sharp drop in property prices, the evaporation of considerable personal wealth and, for many people, the problem of negative equity. The serious adverse impact this had on consumer spending contributed to continued deflation. Third, due to globalisation, neighbouring economies have been growing and increasing their competitiveness. Higher production and operating costs in Hong Kong have seen our industries relocate elsewhere, leading to job losses and reduced incomes. Fourth, the adverse economic situation has affected public finances, causing a serious fiscal deficit. If not dealt with properly, this will undermine our financial markets. However, dealing with it too hastily will seriously affect people's livelihood and the momentum of economic recovery.

6. We have carefully evaluated the challenges and opportunities posed by these changes, and fully appreciated our own strengths and weaknesses. What we have relied upon for past success is no longer a sufficient guarantee for our long-term prosperity and stability. Hong Kong must be far sighted in defining its role in order to promote successful economic restructuring and revival.

7. In previous Policy Addresses, I have explained my thoughts on economic development, and established the strategic direction of 'leveraging on the Mainland, engaging ourselves globally, capitalising on our advantages, strengthening our core industries, deploying new knowledge and new technologies and moving up the value chain'. We are promoting Hong Kong as Asia's world city, on par with the role that New York plays in North America and London in Europe.

8. In order to achieve this objective, we have, from a macro perspective, invested heavily in education to raise the quality of our manpower. We have attracted talented people to come here to work, and strived to improve the living environment. We have embarked on the road to high added-value by encouraging new technologies. We have promoted competition, lowered costs and supported innovation. We have worked hard to preserve the rule of law, the various freedoms we treasure, a level playing field, and the many other advantages we presently enjoy. At the same time, seizing upon the historic event of the handover, we have vigorously promoted exchange and co-operation with the Mainland. In the process, we will not only boost Hong Kong's economic development but also make a greater contribution to our country's modernisation.

9. Our strategic direction and positioning has been supported by the community, investors and the Central People's Government (CPG). Various policies are being implemented and are producing results. Last year's SARS attack caused a temporary setback to economic growth, but the economy has since recovered strongly.