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Hong Kong's Economic Development - Considerations for Policy Formulation

INTRODUCTION

There is a general feeling that Hong Kong's economy has entered a slow-down phase, with higher unemployment, a falling property market, falling retail sales, lower wages growth and, in at least some cases, lower business profits. There is pressure on the Government to do something. Accordingly, Financial Secretary Donald Tsang has set up a Task Force of key Policy Secretaries with a mission,

"...to come up with new policies and new institutions to promote the service industries. This work will include an assessment of Hong Kong's strengths and weaknesses as a service economy, the strategies and priorities for the future, and how to create a domestic environment conducive to further development of services."

His speech also refers to "two transitions", the first from manufacturing to services, the second from British to Chinese sovereignty.

The purpose of this note is to set out considerations in the formulation of a Foundation position paper on Hong Kong's economic development for presentation to the Government and other relevant parties.

1 IMPORTANCE OF INFORMATION

Policy-making must start with good information, yet the available information on the Hong Kong economy is limited.

1. At present, the Government compiles only the GDP figures, which show steady 5% growth for the last few years. However, these figures do not correlate with the general sense of a booming economy in 1992-93 and the current sense of slowdown. Perhaps when GNP figures are available (expected end-95), they will show a more accurate picture, e.g. while GDP grown remained steady throughout the period it is possible that GNP growth changed sharply from a high figure to a much lower figure as net returns on our investments in China declined.
   
   
2. Demographic changes have been dramatic with surges in population in recent years. The Government has paid little attention to these [a Foundation question on the effects of the 1993 population increase was dismissed]. Yet the surge in immigration surely has some effect on unemployment, while the strain on schools, housing, etc., must also be acute.
   
   
3. Is Hong Kong's culture of secrecy in ownership of assets and the financial position of private companies compatible with its current developed status? (Beneficial ownership rarely needs to be disclosed, while private companies do not have to file accounts.) While secrecy has advantages for the individual it imposes costs on society as a whole that may not be beneficial overall.
   
   
4. Information on Hong Kong's manufacturing and other investments in China is limited, yet Hong Kong's future may depend to a great extent on its economic relationship with China.
   
   
5. The Government could play a useful role in gathering, analysing and distributing better data on the Hong Kong economy.
   
   

2 THE "TRANSITION" FROM MANUFACTURING TO SERVICES

Tsang assumes (1) that the Hong Kong economy is in transition from manufacturing to services, and (2) that this is desirable and should be promoted. However neither of these assumptions may be valid.

As regards (1), in a sense Hong Kong is still a major manufacturing power - in fact larger an ever - but the manufacturing has just moved out of town. As regards (2), it is doubted that any sizeable economy can make do with services alone.

Further considerations are:

2.1 Services are extremely diverse. Banking, tourism and fast food are all services. There are not many policies that can "help the service sector": it is just too diverse. It is also likely to be very difficult to find strategies to promote all service sectors together. Therefore, a TDC-equivalent for trade may not be able to achieve very much. It may be better to develop individual institutions for each of the major service sectors. However trade associations, such as the HKTA, may be preferable to Government organisations.

2.2 Tradeability of services. Some services, such as loan syndication, are tradable: the service can be sold to customers offshore. Others, such as fast food or haircuts, are not tradable and can only be sold onshore. However, in developed economies, an increasing range of highly sophisticated services such as education, medical care, research, can become tradable to a certain extent, and can be sold either to persons who visit the territory for the purpose or via licensing arrangements to persons in other territories. Improvements in communications make exports of such services more possible.

2.3 The "hollowing out" of Hong Kong's service sector has been happening - e.g. the transfer of Cathay Pacific's data processing to Sydney - but so far only to a limited extent. In most service functions it is important to meet the customer face to face. Nonetheless, advances in communications technology make offshore sourcing of services more and more possible, so in view of Hong Kong's extremely high cost base this could be an accelerating trend.

2.4 Price-elastic/price inelastic services. Tradable services are also price-elastic, i.e. demand for them changes sharply in response to a change in price. Airline services are price-elastic: if Cathay charges more than BA, passengers switch to BA. The providers of tradable services are therefore subject to extreme price pressure in Hong Kong's high cost environment, and it is no surprise that Cathay has been one of the most innovative in sourcing overseas supplies of its internal service functions.

2.5 Our manufacturing is becoming less competitive. The stability of Hong Kong's export prices over the last several years has been cited as positive evidence that we are maintaining competitiveness in world markets and are not "really" experiencing inflation. However, perhaps this also means that we are not upgrading our goods but are relying on low cost production facilities in China in order to cling on to our traditional low end markets in toys, garments, etc. In the meantime, other Asian countries are rapidly moving upmarket. Hong Kong has basically neglected its industrial development and its current path may not be sustainable. However, whether anything can be done about this is another question.

2.6 Specific measures to help the service sector.

• Promote "quality of life" factors as far as possible, e.g. while collar workers value the environment, low pollution, political rights and freedom of expression;
  
  
• Update relevant legislation, e.g. Company Ordinance (this is already in progress).
  
  
• Co-ordination between regulators of the service sector.
  
  
• Possibly creation of a permanent Government body to monitor the service sector.
  
  

3 ECONOMIC ADJUSTMENT PROCESS

Rather than talking in terms of manufactunug and services, it is probably more relevant to consider the broader economic adjustment process.

3.1 Capacity of the economy to adjust. The capacity of the Hong Kong economy to adjust has traditionally been one of its most remarkable features. Factors conducive to adjustment have been the flexible labour force (the immigrant and "sojourner" mentality), absence of welfare benefits, relatively free immigration of both blue collar and managerial/professional labour, low tax, low bureaucracy, absence of tradition, absence of government intervention and industrial policy, weak trade unions, entrepreneurial culture, etc. The question is whether these factors are still sufficiently strong for the economy to adjust quickly again.

3.2 Impediments to adjustment:

1. Labour attitudes. Inevitably, as Hong Kong grows richer, the labour force becomes less flexible, welfare spending increases, people are no longer willing to work in order to survive but pick and choose, or cling to existing jobs in order to maintain pension rights, call for restrictions on competition (no labour imports).
   
   
2. Market structure. Monopolies and cartels can impede the adjustment process. Hong Kong, although basically a free economy, has numerous monopolistic arrangements, some being an inheritance from early days as a developing colony. The Government has had a predilection for granting monopoly franchises. Areas where market imperfection still exists include:

• Bankiing
• Power
• Gambling
• Telecoms (although being liberalised)
• Property development
• Air services
• Legal services
• Fuel supply

Consideration should be given to "antitrust" or competition-promoting legislation. [Legco, with the support of the Foundation, voted against the introduction of such legislation in February 1993.]

3.3 Unemployment is one of the symptoms of adjustment, and politically sensitive.
But one should treat the disease, not the symptoms.

1. Unemployment cannot be solved by direct measures. Current debate on unemployment in Hong Kong could have been drawn from Europe in the 1970s and the measures proposed - retraining for older workers, jobmatching, restrictions on immigrant workers, etc. - are no more likely to be successful here than they have been during the last two decades in Europe. Direct measures to help existing unemployed find work are unlikely to be successful because, by definition, the existing unemployed are precisely the group most difficult to help. Indirect measures, such as facilitating the adjustment of the economy generally (see 9 below) are more likely to lead to a general increase in employment which will soak up the existing unemployed.
   
   
2. Employment is actually growing. Contrary to popular belief, total numbers employed are actually increasing; it is only because the numbers available for work are increasing faster still that unemployment is rising (see l(b) on demographic trends).
   
   
3. Unemployment cannot simply be due to the labour importation scheme. The rise in Hong Kong's population from 0.5 million after the war to 6.1 million now would presumably have led to vast unemployment if this were the case. Labour importation can actually create jobs.
   
   
4. Welfare payments to the unemployed need to be considered, notwithstanding that these are controversial in Hong Kong and probably damage the incentive to work. They may be a necessary cost of developedcountry status.

4 ROLE OF GOVERNMENT

There is great temptation for the Government to "do something about the economy or about unemployment. However, it may be better for the Government to do less directly and more indirectly.

4.1 Government intervention. While Hong Kong's Government has basically had a non-interventionist policy, it nonetheless intervenes massively in certain areas:

(a) Government-dominated industries

• Public housing. The Housing Authority is the world's largest, with [2.4] million people under its control.
  
  
• Hospital services. The Hospital Authority is crowding out the private sector hospitals.
  
  
• Various utilities: port authority, water.
  
  

(b) The property market. The 1994 intervention by administrative measures to combat "speculation" was a inconsistent with the free market philosophy, and created uncertainty which has probably resulted in fewer flats being built than would otherwise have been the case.

(c) Land, where the Government manages auctions so as to keep premium income as high as possible.

Such intervention should cease, or where it exists be reversed, e.g. by privatisation.

4.2 Government accumulation of excessive reserves may impair economic efficiency as the resources could be better utilised by the private sector.

4.3 Government's role in helping economic adjustment.

• To collect, analyse and disseminate better information on what is happening, so that private sector decision-making can be better informed (see 1);
  
  
• To maintain, and where possible improve, all the elements of the Hong Kong environment which are conducive to business: low taxes, rule of law, relatively efficient and corruption-free administration, sound money (US dollar peg), etc.;
  
  
• To review areas of market imperfection with a view to removing impediments where possible (see 9);
  
  
• To remove itself as far as possible from business decision-making, e.g. by privatising industries under Government control;
  
  
• To plan for and create necessary supporting infrastructure that the private sector will not create;
  
  
• To improve primary and secondary education, which have been neglected while the tertiary sector has been force-fed.
  
  

However, the Government should not try to direct private investment into favoured sectors, to pick winners or to develop industrial policy.

4.4 Should the Government provide a fiscal stimulus to the economy, by taxing less or spending more?

It is likely that the Government will "naturally" post a lower surplus than expected, or an actual deficit, as land-related revenue and profits tax receipts are liked to grow at less than the rate of spending. So the question is whether the Government should (1) accept this (a neutral position), (2) try to avoid it by raising taxes or cutting spending (a 1930s recession-inducing position), or (3) actually increase the boost by doing the reverse (a Keynesian position).

5 VISION OF TO FUTURE

Prepare for post-industrial society? A crucial question is whether Hong Kong is in fact a post-industrial society - as suggested by the economic data - or whether it is in fact still a low-tech industrial society with the industry merely located out of town. If Hong Kong is a post-industrial society, a possibly relevant model would be New Zealand, a small developed economy that following grim restructuring during prolonged recession now seems to have embarked on a golden age of economic growth driven by continuous radical market reform. Key themes are empowerment of the consumer citizen by transparency, break-up of monopolies, privatisation, simplification of laws, etc. If on the other hand Hong Kong, because of its role in serving the very undeveloped Chinese economy, is likely to remain low tech and low skilled for the foreseeable future, then a more paternal "colonial" style of economic management may be more suitable. This issue is crucial to the vision Hong Kong has of itself.

Hong Kong Democratic Foundation
24th October, 1995