Supervision and regulation are necessary to head off systemic threats to our financial sector, and are best handled by an impartial authority. Government also ensures a fair and level playing field, and no one questions the need to strive for the eradication of corruption.

A question that has long plagued policy makers and their critics is the degree to which government needs to take a direct, hands-on approach. The issue usually crops up when things are going badly, and the pressure is on to find politically palatable solutions. We find ourselves in such a situation now, and need to consider thoughtfully the degree to which government should lead markets.

At one time, Hong Kong was a highly competitive maker of a wide variety of consumer and industrial products. Others got into the game, and rather than go head-to-head with lower cost centers, we put more energy into services. Our grasp of design, quality, service, markets and customers give us an edge. We understand that buyers do not want a shirt made in the No. 888 Factory in Dongguan, but the right shirt, at the right price, sent to the right store. Hong Kong provides that service, regardless of where the buttons are sewn or the workers paid.

CEPA, our new free trade agreement, is a clear case of government doing what business alone cannot, and we believe it is a strong step in the right direction. Our manufacturing sector is a niche producer, not a mass maker. Over the years, we have moved from metal bashing to higher value services, where our talent better matches our costs. Under CEPA, manufacturers have new opportunities, as do service providers.

What to make and where to make it are decisions with which business wrestles every day: where to invest, how to judge competing alternatives and when to cut the losses. Maximising returns on investment is what business does best, which is why our economy has evolved from space- and labour-intensive activities to those that require more brain than brawn. Foot for foot, the floor of the New York Stock Exchange is far more valuable than Silicon Valley. And, it did not require government subsidies to achieve its success.

Should government now take further steps, such as restricting land sales, establishing export-processing zones or subsidising specific industries? Would the best strategy be to let our excellent service sector manage on its own, and focus our efforts on re-establishing a strong manufacturing presence? And, if this is the direction we wish to go, how will we choose which industries deserve support and which do not?

More than 40 years ago, the then Financial Secretary, Sir John Cowperthwaite, coined the concept "positive non-intervention." While the phrase suggests sitting on one's hands, it is really far more than that. It requires a proactive effort to head off misguided attempts to tinker. Sir John was so determined to minimise the role of government that he even resisted collecting statistics, believing that the information would tempt government to act upon it.

Not everyone would agree with this approach and most observers would agree that despite the cry of "big market, small government" the Hong Kong Government has become significantly more interventionist in the last few years, mainly in response to the much weaker economic performance.

Others would say that effectively the Hong Kong Government has always been involved in the property market by its own low cost housing programs, by choosing the timing and location of sites for sale and deciding for example to grant substantial development rights to the MTR to subsidise railway construction. In my view, what is needed is a clear and consistent government policy but it is unrealistic to expect this to be pure "non-intervention."

The flip side of this issue is to look at what existing publicly owned operations can be privatised and what new projects can be funded by private finance initiatives. Each case, including the recently announced plan to privatise Chek Lap Kok Airport, needs to be examined on its own merits, taking into account also the interests of the users. But this principle has widespread support both for the likely improvement in the efficiency of operations and for the beneficial effect on the problem of our large fiscal deficit.

One of the ways in which government can promote new industries while leaving the real business decisions to the private sector is in procurement. Last year, our public sector outsourced some HK$1.7 billion worth of IT services, some 90 percent of the total. By acting as a market stimulator, rather than an investor, government facilitates the rational development of industry.