Suddenly, it’s not much fun being Hong Kong.

Riding the dragon’s tail was thrilling while it lasted. The 10 years after China joined the World Trade Organization in 2001 saw one of history’s greatest booms, one that bestowed enormous riches on the city of 7 million people. The ranks of Hong Kong’s billionaires swelled along with hubris about its central place in the Asian century.

That was until the Chinese slowdown, which almost everyone said could never happen. Data on China’s trade, production and construction paint a grim picture, as do Europe’s debt crisis and slowing world growth.

Hong Kong’s wide-open economy might have a problem that few want to admit: It may be a case study in the flaws of one brand of capitalism.

The city is more than a proxy for concerns about China. It’s a laboratory for the brand of finance-driven capitalism that not so long ago was heralded as the model for others to follow. Small, laissez-faire Hong Kong was the world’s special-enterprise zone. Now the world awaits a judgment on the Anglo-Saxon economic model.

Economic Canary

As test cases go, Hong Kong hardly looks like a breakthrough. The free-market crowd adores the city for its low taxes, unrestricted entry of foreign capital and rule of law. It is routinely ranked the freest economy anywhere. Never mind that its leader is picked by China; its currency is pegged; it is home to the only state-backed Disney theme park; and a handful of oligarchs rule the place. To the true believers, this is market-freedom central.

Yet what have Hong Kongers gotten out of their emancipated economy? The highest income-inequality gap in Asia. A widening divide between rich and poor is tolerable if it is tempered with hope that it is bridgeable. But Hong Kong’s government is failing on this front. Politically connected tycoons have enriched themselves from monopolies in power generation, real estate, transportation and telecommunications. The 99 percent are falling further behind.

Hong Kong’s plan to ride out the global financial storm was twofold: First, encourage visits from 28 million mainland tourists a year to splurge at luxury shops; second, to spur immigration by hyper-wealthy bankers seduced by beggar-thy-neighbor tax policies. It isn’t clear that the opportunities created by this strategy are empowering locals to share in Hong Kong’s growth in the long run.

Promoting itself as the center of offshore yuan transactions doesn’t look like a long-term growth strategy, either. Once China brings those markets onshore, Hong Kong may be left out of the loop.

The school system churns out well-trained young people, but Hong Kong’s job-creation machine is coming up short. True, unemployment is just 3.3 percent. But what does the average Hong Konger who can’t get a job at HSBC Holdings Plc or billionaire Li Ka-shing’s Cheung Kong Group do for work? Pouring concrete, driving a bus or selling Gucci sunglasses or Prada shoes to their wealthy mainland cousins is fine, but do these jobs fulfill Hong Kong’s promise as an economic Mecca?

Local leaders seem clueless about all this. Donald Tsang, Hong Kong’s chief executive, dismissed the wealth gap as a byproduct of capitalism. Economics 101 tells Tsang that he can no more ignore the fallout from growing inequality than residents can overlook their city’s worsening air quality.

Clueless Leaders

And then there’s Henry Tang, who thankfully lost his bid to replace Tsang come July. Tang’s “Basement-gate” scandal left Hong Kong residents aghast as they were squeezed by surging rents and living costs. His lavish and illegally constructed underground playpen enraged the masses. Not the most perceptive head in the crowd, Tang says there’s ample proof that Hong Kong’s model works: Just look at the steady influx of chief executives and bankers.

Tang’s basement, replete with wine cellar and movie theater, became a rallying cry. So might the widening ethics investigation focusing on Tsang’s overseas trips on the yachts and jets of business owners. It is feeding outrage over the collusion between politics and the corporate world, not unlike the one sweeping the mainland.

The Bo Xilai scandal is shining a bright and unsparing spotlight on official corruption in China and how it stymies much-needed economic and political reforms. The epic wads of cash being amassed by the so-called princelings, the descendants of the Mao Zedong leadership generation, are making huge waves in the Chinese blogosphere. The timing poses a challenge to the legitimacy of China’s elites as the nation’s economic outlook turns negative.

Hong Kong has its own troubles with billionaires. The arrest of the Kwok brothers in March offered the possibility that Hong Kong was finally clamping down on the rich and unaccountable. In time, we will know if the bribery case against Raymond and Thomas Kwok, co-chairmen of Sun Hung Kai Properties Ltd., is a pivotal moment.

Yet if the world’s showcase economy can’t get things right, what hope is there for China? Or Vietnam and Myanmar, for that matter? Not much when the bellwether of this version of capitalism seems to be pointing in the wrong direction.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

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To contact the writer of this article: William Pesek in Hong Kong at wpesek@bloomberg.net

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net