is " are these limitations so severe, so constricting, so damaging as to outweigh the advantages that the link brings to hong kong, or to outweigh the risks and uncertainties that would inevitably arise if we were to change or abandon the link? " i think that the answer has to be no. let us take the question of competitiveness first. the claim is made that, without exchange rate flexibility, our products, and hong kong generally, have become uncompetitive when compared with economies in the region that have devalued their currencies. even ignoring the fallacy of competitive devaluation, this claim assumes that the nominal exchange rate on its own is a reliable measure of an economy's competitiveness. of course, it is not so for any economy, and is still less so for hong kong, which is going through structural transformation. the nominal exchange rate is relevant, but more relevant is the real effective exchange rate ( reer ), which also takes into account the inflation rate and the trade patterns. the reer for the hong kong dollar has depreciated by around 13 % since the crisis period in 1998. during the same period, the reers for other asian currencies have appreciated by various degrees, reflecting both a rebound in nominal exchange rates as well as higher domestic inflation. hong kong's competitiveness can also be measured by our economic achievement in terms of real gdp growth over the past few years. here again the figures show that hong kong, with an annual average of around 3 % growth in gdp between 1997 and 2000, has not performed badly compared with other economies in the region. and remember, these other economies have had their currencies devalued substantially. the sharp deceleration in growth this year is due mainly to the slowdown in the major industrial economies outside the region, not because of our competitive position, and certainly not because of the strength of our currency. all of us within the region are affected to one degree or another, and some, such as singapore, taiwan and korea, have been badly affected because of their strong dependence on exports of electronics and computer parts. hong kong has done rather less badly so far, though we are still slowing down. the second claim is that, with the link we place the control of our monetary policy in the federal reserve and thus lose monetary policy as an instrument for stimulating ( or restraining ) the economy. in particular, we have, during

the life of the link so far, had the experience of low interest rates imported from the us when a tighter policy might have been more suited to our macroeconomic needs ; and, more recently, in the aftermath of the asian financial crisis, the opposite problem. but these misalignments are one of the trade - offs that we have to accept from time to time in return for exchange rate stability. at present, and more often than not, the us and hong kong economies are more or less in sync, and the interest rates we import are perhaps more appropriate for our needs than they have been at any time over the past decade. that in itself does not alter the point about loss of control of monetary policy, though it makes it less relevant and less forceful at a time like this. but the complaints about shackling our interest rates to those of the us beg the larger question of whether, if we free ourselves of that burden, we would really be able to run a truly independent monetary policy. how far, for example, would we be inhibited from reducing interest rates at times when that would be appropriate because of inflationary concerns generated by exchange rate depreciation? and how far, in any case, would we be able to avoid importing us monetary policy even in the absence of the link? the experience elsewhere in the region does not give ground for much optimism. the third question is how far the link is fuelling deflation, and how far this is detrimental to our economy. internal price deflation is indeed a part - and a necessary part - of the process of adjustment imposed on the economy under the link when there is a fall off in external demand. it is also, incidentally, a feature of our longer - term economic integration with the mainland of china. it is the counterpart of currency depreciation under a floating regime, except that the adjustments that it forces to take place tend to involve less overshooting, less instability, and more lasting restructuring. price deflation brings pain to those who see the value of their assets shrink dramatically, and, as we know, there are many in hong kong who are, sadly, in this position. but there are many more who have seen their purchasing power increase, as prices for the whole range of goods and services steadily decline. and the effect, equivalent to that of devaluation, on adding to the attraction of hong kong as a regional centre, and as a destination for tourists, can only be positive.