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Prisoner’s Dilemma in the case of Hong Kong

A few weeks ago, I talked about the housing market of Hong Kong, and how China played a big role to its current situation. Interestingly, the relationship between Hong Kong and China has always been a topic of conversation, moreover, it all started when Hong Kong was still in British hands. The recent death of former UK Prime Minister Margaret Thatcher has inspired me to look into Hong Kong’s history, and here are my findings regarding the relationships among Hong Kong, Britain and China.

In the early 1980s the future of Hong Kong has become a concern, not just for Hong Kong residents, but for the British government as well. The Prime Minister of the United Kingdom of the time, Margaret Thatcher, visited China in 1982 to negotiate regarding the sovereignty of  post-1997 Hong Kong, and in the eyes of game theorists, the negotiation should quickly became a classic case of Prisoner’s Dilemma :

Strategies for UK: Compromise, stay tough. Strategies for China: Compromise, stay tough

Payoff for (UK, China): (C,C)->(R,R), (S,C)->(T,S), (C,S)->(S,T), (S,S)->(P,P), where T>R>P>S

(Note that Hong Kong locals did not play a role in the negotiation, and this was something that some HK locals are angry about to this very day.)

However, most people forgot about one fact at the time: Despite the UK emerged as victorious in the 1982 Falklands War against Argentina, China did not care about any of that. As a growing superpower, China was determine to have HK back, even if it meant sacrificing  Hong Kong’s prosperity (note that this may seem irrational to an outsider, but it made complete sense for China, as China had nothing to lose, hence topics like credible threats and cheap talk do not need to be studied in this case), which made the UK the weaker side of the conflict. Hence, the payoff chart should be modified in the following way:

Strategies for UK: Compromise, stay tough. Strategies for China: Compromise, stay tough

Payoff for (UK, China): (C,C)->(R,R), (S,C)->(T-f,S), (C,S)->(S,T), (S,S)->(P-f,P), where T>R>T-f>P>S>P-f.

The beauty of game theory lies in the fact that it can easily be modified to suit real life situation. In this case, the final result of the negotiation was the Sino-British Joint Declaration, where Hong Kong would be handed back to China in 1997, although it could retain its democratic system and have its own form of government. Note that it is merely a model that I propose; there are multiple models out there that fit the situation as well (once again, the power of game theory).

This new system has worked relatively well for many years, despite causing occasional troubles (such as the housing market that was discussed before). However, these troubles slowly built up, and now there is a new Prisoner’s Dilemma coming along: Hong Kong residents are demanding a 100% open democratic election system, whereas China is only allowing one with pre-screened candidates (possibly pro-China) to run. Once again, this is not going to be your classic Prisoner’s Dilemma because:

  1. Hong Kong is extremely weak in this conflict; The only bargaining chip that Hong Kong has is its massive contribution to China’s economy. However, China prefers control over money, while China is relying less and less on Hong Kong’s monetary contribution due to its tremendous growth over the years. In addition, HK relies heavily on China’s supplies such as water, while it is geographically surrounded by China as well.
  2. There are lots of cheap talk going around (players threatening to play strategies that do not lead to Nash Equilibrium); However, this is not coming from the government, but rather from Hong Kong extremists.
  3. There is a possibility of a correlated equilibrium (equilibrium caused by the interference of outside parties); Hong Kong has been a strategic location for many western countries, as it is the only place in China that allows democracy, freedom of speech and the rule of law. There exist organizations in HK that are funded by western government, and no one knows what these organizations are capable of.

What would be the final outcome? No one knows yet, as the whole story is still ongoing. However, as students we should appreciate the power of game theory, because it remains a tool that enables us to look at the world in a logical and scientific way.

Sources:

http://www.scmp.com/comment/insight-opinion/article/1227015/hong-kong-people-cant-just-wait-around-democracy-they-must

http://www.japantimes.co.jp/news/2013/04/13/asia-pacific/china-lauds-thatchers-biggest-compromise-over-hong-kong/#.UY0syLXSSBY

http://en.wikipedia.org/wiki/Sino-British_Joint_Declaration

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