The success of Hong Kong's economy holds lessons for our own, writes Marc Coleman, Economics Editor

If governments ever decide to twin economies the way town councils twin towns, Hong Kong and Ireland would be good candidates. Despite its stark differences with Ireland - it has 6,380 people per square kilometre compared to 56 here - Hong Kong's economy has unmistakable similarities with ours.

Among the two of the world's most globalised economies, Hong Kong is definitely the older sibling. As far as being a Tiger economy, it has been there and done that.

And, unlike Ireland to date, it has been tested by crisis. The Asian financial crisis, followed hard on the heels by the SARS epidemic, brought a two-decade run of Irish-style growth rates to a halt. As if that wasn't enough, along came China with its vast low-cost labour force, a challenge against which Ireland's equivalent competitiveness "threat", from EU accession states, pales by comparison.

Far from getting cold feet, Hong Kong has picked itself up, dusted itself down and continued with the growth story. Its economy grew by 7.3 per cent last year, ahead of but in the same excellent league as Ireland's 5.5 per cent.

At about 4.5 per cent, Hong Kong's unemployment rate is, like Ireland's, among one of the lowest rates in the world.

The reasons for a strong economy are also similar to Ireland's. "Hong Kong's incentive structures are its key advantages. Number one is Hong Kong's tax system," says Dr Mark Michelson of Invest Hong Kong, Hong Kong's equivalent of IDA Ireland.

Other advantages include a common law system, a tough approach to corruption by the government and the fact that half the world's population are within six hours' flying distance.

But doesn't the availability of a large pool of low-cost labour in neighbouring provinces of China undermine those advantages? "Competition for business within China comes from Beijing or Shanghai but much of that is complementary," says Michelson.

Likewise, neighbouring Guangdong province offers more collaboration than competition. "You have to look at the situation from a bigger perspective.

"As China keeps on growing it needs more knowledge workers. Even Hong Kong is not able to supply all of them," says Kwok Chuen Kwok, the Hong Kong government's chief economist. Two living examples of the new synthesis between the two different parts of China are SGAI and Peace Mark Holdings.

SGAI manufactures consumer electronic devices for western clients, leveraging Hong Kong's pool of highly skilled workers with the supply of millions of workers from Guangdong.

With clients ranging from Hornby toys to Grohe showers, many of SGAI's products combine embedded software in electronic devices which are partly assembled from outsourced components. "We don't subcontract design work to outsiders. We make software to a stage where the manufacturer can use it but can't decode it. That way the customer retains ownership of what it pays for," says SGAI's chief operations officer Dr Ken Chow.

Once safely developed behind Hong Kong's high legal walls, the software goes to Guangdong province where SGAI's joint-venture partners, the AML group, perform the manufacturing at a far lower cost than could be the case in Europe, the US or Hong Kong.

The arrangement benefits western clients in another way, according to Dr Chow. "We can finish work on specifications by four or five o'clock and e-mail them to European clients who then have them the next morning. In effect, we get two work-shifts a day."

Peace Mark Holdings has blended a similar strategy for producing watches for a range of several international brand names, including Umbro, Morgan and Swiss brand Milus.

Under the Closer Economic Partnership Arrangement (Cepa), the company combines access to Hong Kong design and marketing skills with modern but low-cost manufacturing operations in Longhua, not far from Guangdong city.

It also exploits its knowledge of mainland China to help major international luxury brands - Tag Heuer, Piaget and Gucci to name a few - target China's growing class of high-income earners.

But with all those low-paid workers producing electronic devices and watches for the super-rich, doesn't that add up to exploitation? SGAI workers, for instance, earn significantly less than the managers and engineers. On the other hand, they also earn significantly more than they did under China's old economic system.

Among the more progressive employers in China, SGAI employees participate in a bonus scheme while Peace Mark workers are provided with free accommodation for its largely young workforce.

As a result of companies like SGAI and Peace Mark, Hong Kong's economy is now 90 per cent services based. Despite this, unemployment remains low and growth is strong.

The financial services sector is also doing well, particularly the asset management industry where Hong Kong has an unrivalled pool of skilled workers.

Again, taxation is a factor: Hong Kong's government has exempted offshore funds from taxation and has also abolished estate duty.

But while these two companies show what can be achieved, they remain top-drawer operations: As well as being ISO and Six Sigma compliant, SGAI has won the Hong Kong industry award two years running while Peace Mark has been awarded the Q-Mark certification.

Guangdong province has its fair share of sweatshops and low value-added operations. Despite the fact that many of these moved from Hong Kong years ago, they continue to affect Hong Kong in another way.

Insufficient electricity supply has caused many smaller manufacturers to resort to generators to ensure continuity in electricity, mostly using dirty heavy oil.

"Air quality issues have been hitting the headlines for some time now," says Hong Kong's environment and transport secretary Sarah Liao.

Both Hong Kong and Guangdong, which surrounds it, have agreed formal targets to cut industrial emissions, build more natural gas stations and achieve EU standards for car exhaust emissions.

On one point, however, Hong Kong can be proud of its environmental record, according to Liao. Car ownership in Hong Kong, at just half a million, is considerably lower per head of population than other even larger cities in China, despite Hong Kong's greater wealth. Its spatial efficiency facilitates a public transport system - privately owned and competitively provided - that carries 95 per cent of Hong Kong's residents wherever they need to go at low fares.

Perhaps Martin Cullen should take a trip to Hong Kong.