Hong Kong’s economic history can be divided into four periods. Each period is characterised by distinct features that mark them apart from other periods. One can claim that each period has its own economic model, which I shall describe. Hong Kong’s changing economic interactions with the Mainland and the external world are studied as they evolve from period to period. Both political and economic factors determine the shifts from one period to another. At the same time, there are also deep continuities from one period to another. Long persistent factors like its external connectivity have continued to shape Hong Kong’s economic history. Both change and persistence are important for understanding the city’s economic future.
To glimpse into the future, I draw attention to some persistent features in the past, and pick out features that appear in the present. The method used here follows Peter Drucker, who was careful to point out that the method does not amount to predicting the future. No one can predict the future. Perhaps by examining the historical circumstances of what transpired and revealing their underlying economic logic, I hope to highlight what has changed and persisted in each historical period. I hope such an exercise might tell us something about the city’s economic future.
Before 1842
A census in 1841 put the inhabitants on the island of Hong Kong at about 7500. But long before the British arrived, the waters and the area to the west of the island was a natural crossroad between East and West and a gateway to China. This fact is borne out by archaeological findings and written records that date back some two millennia.
The earliest archaeological discovery made in Lei Cheng Uk Village is an Eastern Han dynasty (25-220) tomb believed to be of a salt official attached to the local garrison. Historically, the Pearl River estuary region was well known for its salt pans. After the Han conquest of Nanyue in 111, an imperial outpost to administer the salt monopoly was established in Panyu, to the northwest of present-day Hong Kong.
During the Tang Dynasty, trade flourished in the city of Guangzhou, which had a monopoly over foreign trade, and a reported colony of foreign traders over 100,000 strong. For many centuries the Tuen Mun area served as an outer port for Guangzhou, a naval base, a center for religion, and a production center for salt. The garrison at Tuen Mun was definitely in place by 424-453, when the monk Pui To (杯渡) established a hermitage on the mountain behind the anchorage. As a religious center, Tuen Mun played host to Buddhist monks and Islamic mullahs. It is therefore not accidental that today’s Tuen Mun and Lantau are still renowned for their Buddhist, Taoist, and Catholic monasteries. The naval and customs headquarters at Tuen Mun date from the early Tang dynasty.
During the Song Dynasty the administration of the government salt monopoly was relocated to present-day Kowloon City next to the old Kai Tak airport, known at the time as Guanfu (官富). In 1197, the authorities deployed some 300 of the water-borne soldiers from the garrison at Guanfu to end constant revolts on Lantau staged by the local population. After 1898, when the New Territories was leased to Britain, the garrison area remained off limits to British rule. It developed into the ungoverned Kowloon Walled City that was demolished in 1993 and converted into a commemorative park by agreement between the British and Chinese governments.
The Tolo Harbour and Sai Kung areas have a vibrant pearl industry operated under an imperial pearl monopoly. Pearls are valuable, and the risk of theft and smuggling was clearly very high. The pearl monopoly thus had a large garrison of some 2,000 soldiers that patrolled the area with the local pearl monopoly headquartered at Tai Po. The soldiers also convoyed the pearls gathered up to Canton.
The Tuen Mun area went into decline after the Mongols successfully invaded China and founded the Yuan Dynasty. In the war against the Mongols, the Tuen Mun area was ravaged for having supported the ill-fated last Song emperors in its final resistance. The customs points were moved from the Tuen Mun area north up the Pearl River to Huangpu, and Tuen Mun was reduced to a mere anchorage.
The subsequent Ming Dynasty was extremely insular and banned all forms of foreign trade except tribute trade for many years. This led to the growth of a large illicit trade in the area, coastal piracy, and numerous military adventures. Trade was finally legitimised because it was impossible to stamp out piracy, but the Tuen Mun and Guanfu areas did not recover. A navigation map from this period kept at Oxford University’s Bodleian Library showed detailed sea routes between Quanzhou, Fujian and the east coast of Africa. The map was bilingual in Chinese and Arabic, suggesting shared use by seamen engaged in trading activities.
The worst was yet to come during the Qing Dynasty, when the Ming loyalist Zhen Chenggong retreated to the Island of Taiwan. He continued to harass the China coast, forcing the Qing court to adopt a policy of “moving the territories” in 1622. All land within twenty-five kilometres of the sea coast was abandoned. The population had to be evacuated and the buildings demolished so that no food or assistance would be available to the loyalists. Most of present-day Hong Kong was affected. The policy of “moving the territories” was abandoned in 1669. The population grew again, but most who came were the Hakkas.
Trade was restored in a number of coastal cities but was later restricted to the city of Guangzhou and the Macau settlement. Tuen Mun and Guanfu ceased to be an outer port for Guangzhou and became mainly a lair for pirates who preyed on the lucrative trade. The British opium traders in particular used Hong Kong waters for moorings and relied on the migrant Hakkas and the Tankas for their trade.
Ruminations
From this limited record of Hong Kong’s early history three points stand out. First, the territory has been a natural crossroad for trade and cultural intercourse since time immemorial by virtue of its geographic location and natural environment. A modern-day observer may well marvel at the fact that Hong Kong’s container and river boat terminals are located in the same Tuen Mun area. Indeed, today’s international airport at Chek Lap Kok is also situated in this location.
Second, the sovereign state was able to derive significant economic revenue from harvesting salt and pearls in the region to be worth stationing a significant military garrison in the territory to protect these activities and maintain law and order.
Third, the territory thrived during the Tang and Song dynasties, when the central government in China pursued a policy of openness to the outside world, and it declined during the Yuan, Ming, and early Qing dynasties, when the policy became insular.
From Barren Rock to a Home for Migrants
The establishment of British rule provided Hong Kong with a certain degree of insulation from central policy decisions in China. Hong Kong could pursue its own natural advantages in trading activities with limited interference from Chinese authorities. It also coincided with British interests to use Hong Kong primarily as a trading post. Given the importance of trade to the British, it is not surprising that Hong Kong was declared a free port. The opium trade dominated at the beginning. As entrepôt trade with the Mainland expanded, and the role of opium was eclipsed by other merchandise trade.
One of the challenges of trade with the Mainland was the difficulty of navigating its customs bureaucracy and penetrating the domestic market. British traders relied heavily upon Chinese middlemen, even for the opium trade. The Chinese merchant class grew rapidly both in numbers and in wealth. A survey conducted in the late 19th century found that Chinese families far outnumbered all others among the wealthiest group in the territory.
In the period from 1842 to 1942, the population flow between Hong Kong and the Mainland was unrestricted except during the war years. The size of the sojourner population rose and fell with the boom and bust of entrepôt trade that depended on world market fluctuations. Relatively unfettered population movements between the Mainland and Hong Kong suggest that there were no significant differences in the living standards of workers between the two places. This suggests that although there were many Chinese families who accumulated huge fortunes as a result of their trading activities, it is unlikely that the vast majority of the laborers prospered. Indeed, life in Hong Kong was far less colourful and exciting than in Shanghai, which was clearly the leading industrial and commercial center of China in that era.
Most of the inhabitants were sojourners, primarily men, who came for the work and returned to their ancestral home when work ended. It was only much later that some of their families started to join them. The earliest available records show that in 1845, out of an estimated total population of 23,817, there were 19,201 men, 2,862 women, and 1,754 children. It was not uncommon for 10 to 20 per cent of the population to leave Hong Kong and return to the mainland in any one year, and in some years the figure was as high as 35 per cent.
The predominance of sojourners within the population generated very few demands on the government to provide public assistance or services. Private charities and missionaries were the main sources of social support and services. On the whole it was both possible and expedient for the government to adopt a light handed approach to social intervention. Public expenditure and revenue were kept simple, and for many years the government opium monopoly provided most of the public revenue. Indeed, the only well-organized group that stood up to defend their special status, land rights, and land use, extant to this day, was the indigenous rural inhabitants in the New Territories. They had fought the British Empire in 1899 in the Six-Day War, suffering 500 dead on the Chinese side with two wounded on the British side.
Hong Kong’s economic fortune in this period was entirely determined by external factors to which merchants and labour had to adjust. To survive and thrive, Hong Kong had to compete and adapt quickly to changes in faraway world markets and also to close neighbours. Hong Kong’s emergence as an entrepôt was dictated by unique historical circumstances. To maximize merchandise trade value and to economize on the cost of managing customs, Hong Kong became a duty free port (except for the opium trade). The practical outcome was a flourishing of trade values that would eventually eclipse Guangzhou as the monopoly centre for China’s trade with the West. The history of this period showed that free trade in Hong Kong trumped regulated monopolistic trade in Guangzhou.
The future of Hong Kong took a dramatic turn at the end of the World War II, when migrants escaping the ravages of a civil war on the Mainland streamed into Hong Kong. The population rose from 500,000 at the end of 1945 to 2.36 million in 1950. After the People’s Republic of China was founded, the border became effectively closed on the Chinese side and the population of Hong Kong evolved from a city of sojourners to permanent residents that would eventually call it home.
The migrants who arrived were mainly laborers and farmers from Guangdong province, but they also included entrepreneurs and industrialists from Shanghai. These businessmen and professionals brought management, technical know-how, and market acumen from one of the most advanced economic centres in Asia. They would in time start numerous new industries, including manufacturing, retail business, banking, movies, shipping, and the professions. This concentration of skills was much broader than the trading activities of a port city.
Eclipse of Entrepot Trade and Rise of an Asian Little Dragon
In 1950, Hong Kong’s unique advantage in entrepôt trade was abruptly halted with the outbreak of the Korean War, and the United States and the United Nations imposed a trade embargo against China. The combination of two external events, civil war in China and the Korean War in the Pacific, turned Hong Kong into an economically standalone autonomous territory. By relying on its new found comparative advantage in manufacturing production and its long trading experience with the outside world, export-oriented manufacturing production replaced entrepôt trade as the city’s primary economic activity. Manufacturers were able to obtain credit from Hong Kong banks and to work with the British trading companies to enter the Commonwealth market and later the North American market.
Both as a matter of necessity and out of conviction[1], the government continued to pursue a light handed approach to economic policy and allow Hong Kong’s business community to pursue economic gains by following and adapting to the needs of the world market. The fact that these new entrepreneurs and industrialists were recent migrants also reduced the level of business lobbying, which would otherwise have led to more government intervention. British businessmen arguably had better access to government and dominated the more regulated services.
The positive non-interventionist view[2] that the Hong Kong British government adopted had little interest in indulging in grandiose schemes to promote economic development[3]. The government’s short-term horizon also sat well with local residents who acquiesced so long as they were left alone to their own business. Her Majesty’s government in Westminster was probably more eager that Hong Kong would not become its fiscal burden. The British Foreign Office also recognized that its mandate to govern was in the final analysis at the pleasure of the Chinese authorities. And, finally, Pax Americana after World War II provided the most favourable global economic environment for Hong Kong’s embrace of positive non-interventionism to thrive.
The contrast between Hong Kong and Singapore cannot be more stark. Singapore’s natural advantage, like that of Hong Kong, was in entrepôt trade. But, unlike Hong Kong, Singapore did not receive an infusion of entrepreneurial talent and workers on the eve of its independence. It also never lost its advantage in entrepôt trade as Hong Kong had during the Korean War. But finding itself in a difficult neighbourhood, Singapore chose to industrialize its economy. As a young and independent state struggling to find its proper place among suspicious neighbours, the government had to forcefully embrace interventionist policies at its Singapore Economic Development Board to target and attract foreign investments in manufacturing. It also had to finance such investments with forced savings mobilized through an onerous Central Provident Scheme with mandatory contributions of some 30 to 40 per cent of earnings, on top of a 15 per cent income tax.
The renowned entrepreneurial spirit of the Hong Kong business community may well be the result of the self-selection of a migrant population, the absence of mandatory contributions, and the minimalist policies of the government that provided clear, simple, and non-onerous predictable rules of the game.
The British government’s greatest folly in this period was the introduction of rent control on pre-war housing within two years after World War II to protect existing tenants. The long lasting consequences were broad and deep for Hong Kong. Its immediate result was to nearly halt urban redevelopment at a time when Hong Kong’s population swelled from massive migration. An extreme shortage of housing ensued, fuelled by overcrowded living conditions in private rental housing that spilled over into illegal squatter housing. A similar folly also occurred in Singapore, but the situation was much less severe and also much better tackled by Lee Kuan Yew’s government, which provided publicly subsidized Housing and Development Board homeownership units with permanent long-term benefits. These units had accommodation space that were 2 to 3 times larger than Hong Kong’s public sector ones and were mostly for rent units.
The extreme housing shortage in Hong Kong created mounting pressure to remove the hurdles to evicting tenants in the old pre-war housing stock for redevelopment. Cheung (1979) showed that the massive overbuilding in the years 1962-65 was the inadvertent consequence of the haphazard manner of regulatory change to relieve redevelopment pressure[4]. He estimated that had all redevelopment applications been approved, one-third to one-half of the pre-war structures in the city could have been torn down for rebuilding.
The anarchy of over-demolition and over-construction were catastrophic. Hong Kong experienced a bank run, numerous developers became insolvent, many projects were never completed, and large numbers of evicted tenants from demolished units crowded into existing structures, spilled onto the streets, and overwhelmed squatter areas. Hong Kong society was filled with despair, anxiety, and ripe for unrest. Wong (2017a) argues that one of the underlying causes of the 1966 Star Ferry Riots and the more severe 1967 Riots was the folly of rent control and the resulting extreme housing shortage[5]. Hong Kong’s massive public rental housing program and the development of satellite towns in the 1970s are the permanent by-products of the follies of this era, according to Wong (2017b)[6].
More Ruminations
The closing of the borders between Hong Kong and the Chinese mainland ushered in an era in which Hong Kong’s economic development was quite insulated from the Mainland and its role as the gateway to China receded in importance. There were four important sources for Hong Kong’s post-war economic miracle. First, a highly supportive institutional and policy framework provided the economic logic of positive non-interventionism. The light handed government economic policy manifested itself in low taxes, minimal regulation, open competition, free trade, and export led growth. It presented a stark contrast to the failed dirigiste import substitution policies practiced in the rest of the developing world.
Second, Milton Friedman had championed Hong Kong’s free market approach for other nations to emulate. For many decades Hong Kong became the exemplary model for developing countries everywhere. This helped entrench positive non-interventionism as the guiding light on economic policy. Nevertheless, the city’s success might not have been possible without the post-war influx of new migrants. The historical arrival of vast amounts of entrepreneurial talent and manpower created the necessary practical domestic conditions for realizing the free market approach.
Third, the US-dominated post-war world trading economy under General Agreement on Trade and Tariffs (GATT) rules created a favourable environment for export led growth. It provided the external conditions for a British colonial enclave to develop. Hong Kong emerged as one of the four Asian Little Dragons. Until somewhat recently, the Mainland also benefitted from this favourable trade environment for several decades.
Fourth, the disruptive and social pains of economic development in this era were alleviated in part by the composition of Hong Kong’s industries. While most sectors were spearheaded by key leading companies, the city was supported by a vast cluster of highly competitive small and medium enterprises. They were the bedrock of the city’s dynamism and created an economy operating under free entry and open market conditions of shared prosperity and a society with upward social mobility from one generation to the next. Hong Kong’s famous “Lion Rock Spirit” describes this era. Some of the extreme inequalities and deprivations were contained by an array of progressive social policies in housing, education, health care and social welfare that were put in place in the 1970s after the 1967 Riots. Public spending was limited and deficit financing avoided by adhering to a prudent fiscal philosophy. Populist pressure on the budget could be resisted because politics in the city was tame enough to allow positive non-interventionism to be pursued.
China Opens and Structural Transformation
The world economy in the 1970s began to experience rising protectionism. The implementation of the first Multi-Fibre Agreement 1974-77 was quite adverse for Hong Kong manufacturers since many were in textile and garment industries. There other pressures: the Vietnam War resulted in stagflation; the suspension of the US dollar’s gold convertibility ended the Bretton Woods arrangement; and the Volcker Fed’s high interest rate policy to break inflationary expectations exported recessions to our shores. The future of Hong Kong’s industries, like those in Japan, faced fairly strong headwinds in the turbulent world of the 1970s that the US dominated.
In 1977, the Hong Kong Government appointed an Advisory Committee on Diversification. It recommended technology upgrading for industry and diversification of both industries and markets. The report published in 1979 became immediately obsolete, however, with the opening of China in the previous year. The entire economic landscape in the city would soon be transformed.
The impact of China’s opening on Hong Kong was immediate. Within a span of eighteen months between 1980 and 1981 some 400,000 individuals crossed the border into Hong Kong. The impact on labor market conditions was swift. Real wages failed to increase for several years, but the competitiveness Hong Kong’s labor intensive manufacturing industries was restored with the increased supply of workers.
Manufacturing industries soon started to migrate north and substantially expanded to take advantage of lower land and labor costs. At its peak, Hong Kong companies employed 10 million workers across the border. Initial public offerings (IPOs) on the Hong Kong Stock Exchange was dominated by the city’s manufacturing companies in this period. Full employment in the labour market was preserved by the flexible labor market during the entire period.
The hollowing out of manufacturing production transformed the city into a service economy. It is very significant to recognize that the growth of the services was predominantly in producer services, i.e., services that were used by firms to produce output, and not consumer services to meet the consumption demands of the local population[7]. In an important sense, manufacturing did not die in Hong Kong. Rather, firms in the city were managing their production operations across the border. Many of them were registered in Hong Kong as importers and exporters, not manufacturers. They were producer service firms with manufacturing operations across the border.
The clients of Hong Kong’s producer services were not limited to Hong Kong’s manufacturing industries across the border, but also other foreign invested enterprises and Chinese enterprises. The division of labor between the manufacturing base on the Mainland and the producer services hub in Hong Kong emerged naturally. Local government authorities on the Mainland were keen to create the institutional and policy environment to enable such economic collaboration. For Hong Kong, it was the natural expansion of its enterprises and aligned well with the government’s free market policy.
Hong Kong’s logistics management services grew rapidly with China’s opening and became once again the entrepôt for China. Financial services also became one of the fastest growing services. The Hong Kong Stock Exchange became the IPO centre of many Chinese enterprises wishing to raise international financial capital. This helped the city become one of three major international financial centres in the world.
But the recommendations of the 1979 Report of the Advisory Committee on Diversification were forsaken. As her manufacturing industries moved across the border, Hong Kong did not have to invest in new technologies to be profitable. Production could be scaled up easily at lower land and labour costs. The need for manufacturers to diversify into different manufacturing industries and new markets was no longer pressing. For some time, Hong Kong believed that producer services alone would be sufficient to sustain the city’s economic prosperity.
Over time, this became increasingly difficult. Firstly, the mix of Hong Kong manufacturing industries operating across the border remained essentially the same and made it increasingly difficult to grow new demand for her producer services. Official barriers of entry existed in many local service markets on the Mainland that were often challenging for Hong Kong’s service providers to overcome. Secondly, as the working population stopped growing, it became increasingly difficult to grow producer service capacity in many areas. Hong Kong failed to expand the size of its workforce and invest in human capital to upgrade its productivity. The growth of Hong Kong’s service economy stagnated except in financial services, where it was possible to import talent from overseas.
Public investment in schooling and higher education had made very slow progress in recent decades. The average years of education of the Hong Kong population fell behind South Korea, Singapore and Taiwan. Without an adequate pool of human capital, Hong Kong lost its appeal as an attractive place to invest for new firms, local or overseas. As a result, industry investment in innovation and knowledge, and research and development, fell behind many other places. While this has been recognized for some time, the policy attention has focused on encouraging industry investment rather than improving the quantity and quality of human capital in the workforce.
After the hollowing out of manufacturing production, many industrial buildings and properties became inefficiently used. There were long delays in converting and redeveloping these buildings and properties into other uses. The real culprit was the very formidable regulatory restrictions on land use conversion and redevelopment[8]. With hindsight, these added to the opportunities lost to new economic activities.
In one respect, Hong Kong’s free market approach to labour markets was very successful. The massive structural transformation was completed in a very short span of time and without any perceptible increase in unemployment[9]. This was an incredible demonstration of the efficiency of flexible labour markets in facilitating the transformation of a manufacturing into a producer services economy.
In the 1980s and 1990s, Hong Kong became more productive by moving her manufacturing production across the border to take advantage of a larger lower cost labour market. Producer services located in Hong Kong supported the larger production base on the Mainland. By allowing such a specialization and division of labour between Hong Kong and the Mainland, productivity increased in both places. This would not have happened without China’s opening and market reforms. The economic results that followed were spectacular. Producer services became Hong Kong’s domestic economic activity and manufacturing her cross border activity. This was her new economic model. Positive non-interventionism was not displaced as government policy.
China Becomes the World’s Largest Manufacturing Base and Consumer Market
Two watershed events changed both China and the world.
The first watershed event was in 1978. China opened its economy and started to reform. Hong Kong’s market institutions became a natural role model for China to learn from. The building blocks for creating market institutions were transplanted first into Shenzhen. They were then mimicked by other special economic zones and later spread throughout the Mainland.
A second watershed event occurred around 1990. The world economy entered a new stage of hyper-globalization driven by innovations in information and communication technology (ICT)[10]. This followed the triumph of Milton Friedman’s free market liberalism in the US, UK, and beyond. Economic production around the globe was transformed. Production processes within the factory were reconfigured into geographically dispersed global supply chains using extensive outsourcing enabled by the ICT revolution.
By 1990, China had in place a reasonably well functioning set of market institutions. The world discovered not only a place with abundant low cost labour, but a business friendly market economy pieced together by learning from Hong Kong’s institutions and practices. This quickly made China a very attractive place for foreign investments. China’s international trade leaped forward in the age of economic hyper-globalization. The connectivity of China with the world economy paved the way for her ascension to the World Trade Organization in 2001.
In short, there was a convergence of a number of factors, including, (1) China’s opening in 1978, (2) the rapid diffusion of Hong Kong’s market model in the decade following, (3) the arrival of hyper-globalization after 1990, and (4) the rise of Milton Friedman’s free market liberalism in the years 1980-2005[11]. These influences helped turn China into the world’s largest manufacturing and trading nation. The Chinese economy grew rapidly. China’s manufacturing value added today has reached USD4 trillion and is equal to the combined sum of US, Japan and Germany put together. China also has the world’s largest consumer market. In 2019, China’s consumer market was worth USD6 trillion while the US market was at USD5.5 trillion.
The vast scale of China’s economy presents an enormous business opportunity for Hong Kong. In 2003, the Closer Economic Partnership Arrangement (CEPA) was formally announced. CEPA is a free trade pact between the Mainland and Hong Kong proposed by the C. H. Tung government. Its immediate aim in the recession years following the Asian Financial Crisis was to revive the Hong Kong economy through greater economic integration with the Mainland.
CEPA’s promise of free trade in services should play to Hong Kong’s advantage in producer services. But genuine progress, with the exception of tourist visitors coming to Hong Kong, has been modest. Local governments on the Mainland are slow to open their service sectors. By 2011, the State Council became impatient with the slow progress and confirmed that 2015 would be the deadline for full ‘liberalization of trade in the services’. Hong Kong Legislator Christopher Cheung Wah-Fung, representing the financial services constituency, described the obstacle as, “the big door has opened but the small door remains shut.” He added, “That is to say, Hong Kong companies were allowed in name to go to the Mainland for jobs and business opportunities, but in reality, they have no way to carry out such activities.” The 2015 deadline came and went. The task of greater economic integration of the Mainland and Hong Kong remains a project in the making.
The great obstacles are local barriers and the lack of a unified domestic market on the Mainland even after decades of market opening. In April 2022, Beijing released new guidelines to “step up building a unified national market that is highly efficient, rules-based, fair for competition and fully open” which had been approved by President Xi Jianping in December 2021. Perhaps progress would be faster now with the new emphasis on “dual circulation” with the deterioration of US-China relations.
As the scale of economic activity on the Mainland expanded enormously, Hong Kong’s capital and financial markets were enlisted to bring savers and investors together directly. In order to mitigate the considerable risks of trading with strangers, it had to be based on deep trust in the integrity of capital and financial market institutions in the city. Trust that these institutions were supported by high quality professional services, impeccable standards of integrity, and effective legal protection of shareholders and senior creditors to limit the extent of expropriation of such investors by corporate insiders, the state, corrupt government officials and politicians.
Hong Kong’s common law system underpinned this trust. It provided assurance of robust contract enforcement and property rights protection. Compared to the civil law system, the common law system is well known to provide much more favourable institutional environment for financial and capital markets to develop[12]. The world’s leading international financial centres are all found in common law jurisdictions. Hong Kong offers China an exceptional legal and institutional advantage in supporting her long term capital accumulation and financial innovation through access to international financing.
Unlike the previous period when manufacturing production crossed the border, the growth of producer services and economic integration with the Greater Bay Area has been slow in the current period. The growth of Hong Kong’s producer services has been quite modest despite the rapid rise of the Chinese economy. There are both demand and supply side challenges. On the supply side, Hong Kong’s workforce has suffered from slow growth in both numbers and productivity. Real wage growth have been slow to stagnant. The bright spot in producer services has mostly been in the capital and financial markets.
On the demand side, economic integration with the Greater Bay Area has been more limited because regional and local authorities across the border have been slow to open their service sectors. This has not worked to the advantage of Hong Kong’s service economy. But, the incentives to do so for regional and local authorities are not high today given the relatively small scale of Hong Kong’s service economy.
Interestingly, this means regional and local barriers in the service sector will have to come down to support economic growth in the future as the international economic environment becomes less open. China will be shifting her policy attention to domestic circulation and efficiency. Deregulation and competition in services should be getting more attention from regional and local authorities. Properly executed, they will benefit the Mainland economy. Hong Kong may also gain as a consequence. Regulatory and public authorities in Hong Kong should unshackle and galvanize our services sector.
Imagining the Future
In the face of growing international headwinds starting with former US president Donald Trump imposing tariffs on Chinese exports and pushing hard for decoupling in areas of strategic concern. These policies have continued under US president Joe Biden. As the international environment worsens, China’s emphasis on “dual circulation” and a unified domestic market makes good economic sense. China has a huge population and a large manufacturing base to support domestic circulation. A rebalancing towards more consumption driven growth provides support for its manufacturing base and will help restore the proper division between investment and consumption for more sustainable growth.
In a more unified domestic market, regional and local governments on the Mainland may be more inclined to liberalize their service sectors and open its many small doors. Economic efficiency on the Mainland could improve significantly. As the small doors open it will release new sources of demand for Hong Kong’s producer services. Closer economic integration within the Greater Bay Area will be achieved by unifying and opening up markets on the Mainland. When this happens it could be like the return of 1978 again for Hong Kong. But only this time it will be in services and not manufacturing.
Hong Kong should be prepared to boost its knowledge workers through attracting overseas talents and investing in local ones. Relaxing entry visa requirements to attract overseas talent should be a matter of top priority. Increasing investments in research and education opportunities would benefit further economic integration. The city must also bring in major anchor companies to set up operations in Hong Kong to allow new industries to appear after a long period of neglect.
What kind of companies should we have in Hong Kong for the future? The best companies in advanced economies are increasingly characterized by the accumulation of intangible capital rather than tangible capital[13]. In 2020, the value of intangible capital assets among the S&P 500 companies amounted to 90 per cent of total capital asset value. Intangible capital assets, include ideas, designs, research, and the like are growing and have eclipsed investment in physical assets.
An intangible investment assets list in most highly productive companies in advanced economies would cover (1) computerized information (software, database); (2) innovative property (R&D and mineral exploration, creating entertainment, literary, or artistic originals, design); and (3) economic competencies (training, market research and branding, business process re-engineering). Tangible investment assets would be buildings and structures, IT equipment, non-computer machinery, equipment and weapons systems, and vehicles. Almost all intangible capital assets are accumulated with the use of high value added producer services. They have been found to be the key drivers of productivity and innovation.
Integrity, professional standards, intellectual property rights, and branding matter greatly to the customers and clients of these companies. Being rich in intangible capital assets is a sign of quality, innovation and productivity. A wide range of professional services fall under this category, including medical and health care, tertiary education and training, academic and scientific research, product and process innovation (for manufacturers, inventors and creative artists,) hospitality and personal care services, cultural, media and entertainment services. The most innovative and creative companies are the most intensive users of producer services, and make heavy investments in intangible capital assets.
Developing Hong Kong into a high value added producer services centre represents a long term commitment to enhance the city’s ability to attract and nurture talents, build up the capacity of our academic and research communities, and enhance innovation and productivity of our existing and new industries. Tomorrow’s best companies will have an abundance of knowledge workers, invest heavily in intangible capital assets, and pursue high standards of integrity. Their work are the producer services.
Ensuring standards, supporting innovation, invention, discovery and creativity has historical relevance in a world economy where hyper-globalization has peaked and the threat of geopolitical and ideological contests after the close of the Cold War is rearing its head again. It plays to Hong Kong’s economic logic where the key competitive advantage is in human capital, professional services and integrity standards, various kinds of intangible capital advantages, and supported by a robust legal system.
Unlike manufactured products that have to face international open competition, most services only compete in regulated markets dominated by local stakeholders. To promote high value added services in financial and capital markets, real estate markets, professional services, and innovation and creation services, Hong Kong should adopt an active policy to promote open market competition under a regulatory regime that protects private property rights, contract enforcement, and economic efficiency. Ensuring this proper mix of regulation and competition will be essential for advancing a high value added services economy.
To fulfil its role as a door for China to the world and the world to China, the city draws on its strength as an open and free market capitalist economy supported by the rule of law. It also needs an aggressive and deliberate set of policies to accumulate human capital and intangible capital, uphold integrity standards, and promote efficiency and competition in our producer services. These are areas where it can draw on its experiences and practices from all four periods of our past economic history.
All this would require considerable private and public capital investments. Financing can be raised in Hong Kong’s capital and financial markets and through the sale of its vast stock of public rental housing to sitting tenants at a discounted price. The latter would narrow the huge disparity in wealth among the city’s inhabitants, promote homeownership, and represent a critical step towards shared prosperity and social stability.
Another critical factor for future economic growth is to address the rapid ageing of Hong Kong’s population. The massive influx of migrants in the period 1945-50 and the post-war baby boom birth that followed created a 21st century inverse population pyramid. There is now a large and growing population of retired persons, but a small and declining population of working age persons. The city urgently needs a population policy to grow its knowledge workforce. This would lay a better foundation for future economic growth. Otherwise, it would be a fatal drag on the city’s future economic prospects.
The city must be willing to imagine a future metropolis that would be home to a population of 10 million inhabitants in the next 25 years with valuable talents and competencies. The city should seek to attract more talents. A metropolis of 10 million means attracting 100,000 per year for the next 25 years – a small challenge when compared to the experience of accommodating 372,000 per annum in the period 1945-50. A bigger and greater metropolis would add to the vibrancy and dynamism of the city’s economy that it deserves and China should have.
References
Richard Baldwin, The Great Convergence: Information Technology and the New Globalization, Belknap Press, Cambridge, MA, 2019, 344 pages.
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[1] See Monnery (2017)
[2] See Haddon-Cave (1980)
[3] See Monnery (2019)
[4] See Cheung (1979).
[5] See Wong (2017a).
[6] See Wong (2017b).
[7] See Wong (1996) and Tao and Wong (2002).
[8] See Glaeser, Gyourko, and Saks (2005).
[9] See Chan and Suen (1997).
[10] See Baldwin (2016).
[11] See Shleifer (2009).
[12] See Glaeser and Shleifer (2002) and La Porta, Lopez-De-Silanes, and Schleifer (2008).
[13] See Haskel and Westlake (2017).