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Following is the transcript of the speech and question and answer session by the Chief Executive, Mr Tung Chee Hwa, at the Leadership Series Luncheon organized by the American Chamber of Commerce:

Dick, Frank, Michael, ladies and gentlemen,

Thank you very much for those introductions. I am delighted and honoured to be invited by the American Chamber to kick-off this important leadership series.

You might want to ask me what my preoccupation has been recently. I tell you, the most important decision I have yet to make is this: that my oldest son asked me, "If you close your eyes, dad, right this moment what would you like to do most?" and I said, "What I'd really, dearly love to do is to take my oldest granddaughter for a visit to Disneyworld." And the difficulty is, really, the decision is, really finding the right time to do it because one is really so preoccupied these days with so many issues here.

But as most people would have it, the Year 2000 should be a great year. It did start that way and the much feared Millennium Bug had no bite. The launch of the Euro was smooth; even its subsequent fall became fuel for an already bullish European economy which depended heavily on exports. The US economy continued to march forward from strength to strength. But then late in Spring, the flow of good fortune suffered a setback. The major securities markets turned bearish, with some correcting by more than 20%. US interest rates edged upward, joined by the Euro rates, as the spectre of inflation sent fears throughout the world. For Hong Kong, the pattern was much the same, beginning with a lot of good news, among them clear signs of a long awaited economic recovery. In March, we were even able to report an actual budget surplus, correcting an earlier deficit estimate. But after that, good fortune has receded somewhat, or at least on the surface.

The change was quite abrupt. Anyone who has been observing politics in Hong Kong for the past two months or so would have been rather despondent. There was a string of incidents, thick and fast, beginning with the "Short Piles Affair", the decline of residential property prices, followed by the scuffles in late June outside the Central Government Offices, the high-profile march of negative equity home-owners, some civil servants and students. More recently, we have the issue of academic freedom, the arson attack at the Immigration Department offices in Wanchai. Was it a turbulent and chanced meeting of a depressed economic air mass with a high pressure zone of political emotions? Or was it more serious, was it deep seated discontent?

We in the Government do not decry storms or storm warnings. We know that they often give clues to how some people, or sometimes even many people, are thinking or feeling about Hong Kong and the HKSAR Government at a particular time. We diligently decipher what the sound and the fury signifies. What we understand from them we translate into our work and our policy thinking, short term or long term. But perhaps for these warnings, more short term than long term. Storms, after all, do eventually subside.

I am sure some of my friends here today are relative newcomers to Hong Kong. They may be a bit awed by the intensity or the volume of the storm signals. They may be wondering if the SAR Government is not a bit embattled, and that the ship that I skipper is not sailing in confused seas. But those of us who have been here longer are not queasy. We have seen moments much more trying. In the 60's, we saw Hong Kong distressed by politics that translated into prolonged confrontation. In the post-war years we have had to cope with massive influxes of new immigrants. The early 70's saw deep economic depression brought on by the global oil crisis, when unemployment rates reached 9 per cent, all the while without the cushioning effect of a CSSA programme that our society today enjoys. Then came the 90's when there were uncertainties as to how "One Country, Two Systems" could be successfully implemented in Hong Kong. We braced ourselves and lived through all these moments. Indeed, we have come out stronger each time. Of course, in those days, we did not have election politics. Today, the seas are certainly a bit rough and winds are sending up white crests here and there, so we move our sails and proceed more carefully. But we are not flustered.

On the economic front, we are recovering from the recession brought on by the Asian Financial Crisis. Led by strong growth in trade, tourist arrivals, activities of the financial markets and consumer spending, we have double-digit growth for the first quarter and we are going to have more good news for the whole year; not just this year but most likely for next year as well. The prognosis is very good. The unemployment is declining and residential property prices have stabilised. However, this is not to say that the good news is being shared by everyone. As in all free market economies, recovery from recession is always uneven. You and I remember this: in the last US recession of the late 80's and early 90's, California was one of the last States to recover; but when it did, it was one of the most robust, and Californians rich and poor had felt the strong push of the recovery, right up to this day.

For us this time, I hope some of our most hard-pressed, negative-equity homeowners will feel some relief within a few years, and many lower-income people will have pulled themselves out of deep water. With self-help and our help, they will pull through.

Yes, one or two other places in Asia have recovered faster than we have. Yes, the spread of their recovery may have been more even, especially in places where manufacturing is significant. But we are probably the only place in Asia where recovery has been matched with genuine reforms conscientiously carried out, both in the financial and public spheres. We merged and demutualized the securities exchanges and the clearing companies. We strengthened the law on insider trading. Through public sector reforms and improvements in the delivery of services, which began one and a half years ago, we have saved $2.6 billion in expenditure. We are setting up administrative bodies to ensure that development policies are compatible with sustainability. Just to name a few.

In the private sector, people are also wisely backing-off from the bubble economy and are taking the hard route towards a knowledge-based economy. It would have been easier for all of us, in the short run, to ease back into another bubble economy built on asset price inflation, and supplementing them with heavy doses of Keynesian fiscal and monetary stimulus. But let me tell you, we are definitely not taking that route. Instead we have embarked on another that will perhaps take longer, involve more hard work, and certainly more learning ¡Ð one that perhaps imparts more pain in the short term as well, but is ultimately healthier.

We are not blind to the fact that, on our way to embracing the New Economy, some of our less fortunate people, those who have fewer skills than others or those whose skills served the bubble economy well but not now, are in danger of being left behind. The Government will be providing financial resources to help retrain those who can and want to be retrained. The Government will also make sure that the long term unemployed or displaced workers - primarily late-middle aged people - will be able to find basic livelihood while still being useful people.

These structural unemployment problems, we believe, are also transitional. The way to solve them is not to go the route of a welfare state. In the West, that has already been proven to be a blind alley. Instead, since the 80's and the 90's, a new approach has appeared to solve the twin problem of unemployment and poverty. This involves combining strong government leadership and pinpointing programmes for the less fortunate, compatible with self-help and self-esteem.

This effort can be best complemented by a dynamic, non-government, Third Sector which provides, among many other things, a wide spectrum of relief measures supported by volunteers. The US and the UK are the best models of this two-pronged approach, and we can learn a lot from them. It is, I believe, the right approach to maintaining a small government and still solve transient, but sometimes serious problems of unemployment and poverty.

Now, you may wonder why Hong Kong, the paradigm of laissez faire in the eyes of a person no less than Milton Friedman, may have to learn this approach from elsewhere. However, on this issue, our administration is already well-developed; and on the non-government side, with our contingent of NGOs and numerous volunteers, we are strong, but nevertheless there is much potential for further development.

Contrary to some pessimists, we believe that the knowledge-based economy will be a great social equalizer when compared to the economies of the past where bequests and physical capital were sure passports to success or a good life. In a knowledge-based economy, younger people from all social strata, be they middle class or blue collar, when given adequate and stimulating educational opportunities and a decent environment in which to live and learn, can rise to the top in a generation or less, alongside those who may be more fortunate. Indeed, we are beginning to see some of that happening now, especially in the IT sector, but not confined to it.

On the political front, with the growing aspirations of society, that there have been voices in the community that demand more accountability of our senior civil servants. Today, unlike the colonial era, the political system is much more open and understandably there is greater demand for accountability. I expect as we gather new experience, a satisfactory institutional framework can be found that is compatible with our needs.

On the electoral front, the Basic Law has given us 10 years from 1997 to 2007 to gain the necessary experience for developing a political system that is compatible to Hong Kong's needs. In the meantime, the process for the second Legislative Council Elections is warming up. According to the provisions in the Basic Law, we will be replacing four of the original ten election committee seats with directly elected ones to be returned by the geographical constituencies. In the third Legislative Council Elections, to be held in 2004, the remaining election committee seats will be similarly replaced.

Aside from electoral politics, there are other forms of participatory democracy that we are promoting. The SAR Government welcomes contributions of ideas, comments and criticisms from individuals and organizations on all matters and aspects of government. At present, the Government receives policy ideas from statutory bodies, committees and commissions, with participation from a large number of private individuals, mostly on a gratuitous basis. The structure and composition of these bodies have remained basically the same since 1997. We are looking out constantly for active, civic-minded people to take part. I hope members of the AmCham and other chambers will continue to give ideas and suggestions on public policies and to agree to serve on these bodies when called upon to do so.

My friends, it has been three years since this Government came into existence. This three years is not a very long time, but with the support of the Central Government and the people of Hong Kong, we have come a long way. Some people have pointed out, and I think many others would agree, that the achievements of the SAR Government since 1997 have been important and many ¡Ð principal among which has been the smooth transition from colonialism to Chinese sovereignty under "One Country, Two Systems". Besides, there is also the resolute preservation of the rule of law as guaranteed under the Basic Law; the safeguarding of our economic system during the Asian Financial Turmoil; the successful implementation of a series of reforms such as the environment, the financial sector, the civil service, the promotion of information technology and delivery of municipal services. Most of the achievements do not require any qualification. Some, especially the reforms, as we would expect, are more controversial.

Let me take this opportunity to say a few words about reform. Indeed, questions have been asked of me: Why are we carrying out these reforms? The fact is that soon after the beginning of the Sino-British discussions on Hong Kong's return, controversial programmes that needed to be carried out, especially those which straddled 1997, were in fact left untouched. If we are to move with times, if we are to remain competitive, and if we are to sustain our economy, reforms are necessary.

In carrying out the reforms, the Government always pays close attention to the planning of the reforms. Expert studies are augmented with rounds of public consultations. We try our best to invite comments and criticisms from major stakeholders. We try our best that the final decisions are thoroughly explained to the public. The sequence of these reforms and the pace with which we push individual ones forward are carefully determined. Yet, I must admit, in spite of the hard work and the care that we put in, there are bound to be imperfections in their design, more particularly, in implementation. And as the nature of reforms goes, there will be stakeholders who benefit, and others whose interests are adversely affected.

It is often quite impossible to please everybody. So, for various reasons, some of the reforms have generated discontent. Some of this is inevitable, but some could indeed have been avoided. Thus, in spite of all our achievements, and in spite of the fact that just about everyone in Government has been working tirelessly for the past three years to move things forward, we in the Government certainly recognise that we can and should do better. The expectations that the public have placed on us are many and strong.

So, I am looking forward to a fine autumn and beyond. The wake of the economic recession will soon wash over. The long view ahead is clear. We are revamping our educational infrastructure. We are proceeding with major initiatives to improve our environment. We are moving full steam ahead to get a handful of major transportation, telecommunications and other infrastructure projects finished on time. We are helping everyone to get equipped to benefit from the era of globalization - including encouraging and helping many people to learn better English, both in schools and at the workplace. We are busy fostering economic integration with the Mainland, especially with the nearby Pearl River Delta. We are working hard to take advantage of the enormous opportunities that will arise after China has joined the WTO towards the end of this year. We are also moving as fast as we can in the IT sector, a new economic driver, not only as a means to improve economic efficiency but also as a way to improve the quality of life of all our people. These are all tasks with long range ramifications. The Government is committed to doing the very best to make them work.

My friends, we are gathered here today to think of the important subject of leaders and leadership. What is one of the most important qualities of a true leader? I think it is the capacity and the ability to manage change, and to work with and guide others through important changes. Changes and reforms are never easy, especially those coming at the turning points of history. But it is precisely in managing such changes of historic dimensions that the mettle of a leader is tested. To guide the changes and call forth and channel the energies of a community, a leader must first of all have a clear, solid and well-defined vision, as well as a strong team of dedicated executives who share the same vision. Next, leader and team must work together to plant the vision and the romance in the hearts and minds of the people, so that they, too, see and espouse the same goals, feel the same enthusiasm and dream the same dreams.

The people may be sceptical about putting in the hard work up front. The solution for that lies in communication, persuasion, and listening to the people. If you explain a task to the people well, and let them know the compelling reasons for doing it and their stake in it, win their approval and trust with your sincerity, they will then support you, and together you can accomplish the task.

This Government has, over the last three years, together with the people of Hong Kong, managed a number of great political and economic changes, accomplishing the passage from colonialism to One Country, Two Systems under Chinese sovereignty, from a bubble economy to solid enterprise. I can assure all of you here today, that the same Government and the same people will be able to accomplish other important and necessary tasks in the future.

Ladies and gentlemen, we are at the beginning of a new era. The challenges are great, but our resolve is strong. I firmly believe that the year 2000, in spite of all the ups and downs, will turn out to be truly a great one. Together, we will make that happen.

Thank you very much.

Question: ... they may move to Shanghai and Beijing. Would that be a concern of yours and would you have any advice to give to the joint chambers in this room of what we can do to keep them all here?

Mr Tung: Firstly, I've got to make sure Caterpillar stays in Hong Kong. I was in Shanghai in June and when I came back I told many friends - in fact I made these remarks in the legislature - that I was delighted but I was also worried. Delighted that the city is moving so well, a tremendous sense of purpose, and the citizens of Shanghai, when you talk to them you get a feeling that they are very proud of what they are trying to do and that it is in a nation building mood. Things are really going well in Shanghai. I said I am happy because I have always said that the more China prospers the better it will be for Hong Kong. But on the other hand, I said I am worried - why am I worried? Because we have got to really keep on running to stay ahead, otherwise other cities in China, on the Mainland of China, as well as in the region, will catch up with us.

And this is why we are doing what we are doing. We have to move ahead with reforms. We have set our goals to make Hong Kong as one of the major cities of China, but also as a world city of Asia, and we are moving ahead with all the reforms so that we can stay ahead, whether they be in education, in environment, we need to move ahead. We are moving ahead well. We do have a first class infrastructure, which I think will be difficult for others to match.

And then, part of the "One Country, Two Systems" - you know it's the "Two Systems" aspect of it. And the importance to maintain the rule of law, our way of life, the freedom, and many of the privileges we enjoy today need to be preserved. So all these things, we will work very hard at to make sure they will be preserved, and in doing all these things, hopefully we can stay ahead.

Over the last few weeks I have spent a lot of time looking at the education issues and recognising that we are behind on education, whether I am comparing with Shanghai or Singapore or other countries in this region, and we need to do a lot in that area. So we know what our strengths are, we know what our weaknesses are, and we just keep on working on our weaknesses to make sure Caterpillar stays in Hong Kong.

Question: Thank you for your comments, Mr. Tung. I am just pondering, as a leader of Hong Kong, what do you see as the biggest challenge you face in the remaining time you have in your current term as Chief Executive?

Mr. Tung: I think there is no one single challenge. There is really a whole series of challenges out there. I think one of the things I said earlier on is to continue to carry the community with you in the various reform programmes you are trying to accomplish, which is really important for Hong Kong's long term future.

I think, you know, there are people who ask me: Are you worried about international community's confidence in Hong Kong - if you turn on the television and see all these demonstrations and so on and so forth? My answer to that is that the proof is in the pudding, and what we need to be doing is to consistently deliver what we've promised to deliver. And so long as we can do that, we will be fine. And from all the figures I see, from all the contacts I have, the people I meet every day from overseas - and I think Dick will probably agree - that for instance, the international community's confidence in Hong Kong remains very strong. So these are some of the challenges we are trying to deal with every day, and I think we will succeed.

Question: Thank you, Mr Tung. In your Policy Address last year you showed real leadership in environmental issues and as we have moved along the environment, of course, we have been able to see it deteriorate in some ways, we have been able to see it improve in other ways. We have recently looked at what has been happening across the boundary, in the environment, and I wondered what you envisage as Hong Kong's role on improving the environment, particularly as it impacts across the boundary into the Pearl River Delta?

Mr. Tung: I want to tell you something else first. When I was preparing for this speech I was trying to figure out how much do I say, because in less than two months or in about two months, I will have a Policy Speech, and the easiest thing for me to come up here, is to spend, actually, 30 seconds to tell you: Sorry, please listen to the October Policy Speech.

I could have done a bit more but some of the things are left to the Policy Speech, I'm afraid. Environment is very important and there are really three areas - one is air, the other is water, and the third, of course, is the treatment of solid waste. All these are top priority issues for the Government. You were referring specifically to air and I will make some comments about it.

The Government is very determined to get on with what we promised we would do, whether it is in terms of changing the taxis from diesel to LPG or importing low-sulphur diesel, and the whole series of things we have already begun to do. But I did say in my Policy Speech that unfortunately, for results to come through it will take a bit of time, and I said it will be by 2005, 2006, the air quality, hopefully, will be the same as New York or London. But we are working very hard on all these areas because we know how important this is for Hong Kong.

Cross-border relations, cross-border dialogue on environment is very, very important, and I was sitting here talking about it at this table, how important it is for us to be working together. There is now a tremendous recognition across the border on the importance of the environment to Guangdong also, and I hope that is the basis for us to move forward more rapidly in the future, and I have every confidence this will happen.

End/Thursday, August 10, 2000

Photo:The Chief Executive, Mr Tung Chee Hwa, speaking of the Government's role in paving the way for Hong Kong's transformation into a leading knowledge economy in Asia when addressing guests at a luncheon hosted by the American Chamber of Commerce in Hong Kong at noon.

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