When Chief Executive-designate Tung Chee-wah articulated his vision for post-1997 Hong Kong, he made many promises of a better tomorrow after the resumption of China's sovereignty of the British colony on July 1, 1997. One of these promises is to promote Hong Kong's declining manufacturing sector. "With suitable guidance from the government, entrepreneurs will be able to find a new industrial direction and rally Hong Kong's manufacturing industry," the China-appointed head of Hong Kong said in December last year.
Tung's suggestion sparked off a debate on the future of today's largely de-industrialised territory. Once famous for producing cheap plastic flowers, transistor radios and toys, Hong Kong is now a city with few factories and blue-collar workers. Thanks to a massive relocation of production to China in the last two decades, the share of manufacturing in the city's gross domestic product has shrunk, from 24 per cent to the current 10 per cent. Services, primarily shipping, trading, tourism and banking, account for the rest of the economy.
Invest in technology
The inexorable rise of the service economy has provoked fears that the territory is overly hollowed-out and needs to start making things again. Those who believe Hong Kong should strengthen its industrial base include a group of government-commissioned academics at the Massachusetts Institute of Technology, which conducted a nine-month investigation into 350 local companies. Hong Kong has a future as a great industrial power but it needs to invest more in technology, re-search and human-resources development, said the group. "We do not think Hong Kong can or should continue on the same track," says Professor Suzanne Berger, co-director of the project.
Others such as Mr Huang Zhenha, a leader of Hong Kong's largest political party, the Democratic Party, urges the government to help companies invest in high-tech industries. He notes that rival territories, such as Singapore, Taiwan and South Korea, have industrial parks, preferential tax treatment and other incentives to promote value-added industries.
On the other side of the camp are those who argue that Hong Kong should continue with what it has been doing best ? providing services and products at competitive prices ? and not opt for the high-tech route. Mr Howard Davies, an economics professor at the Hong Kong Polytechnic University, warns that Hong Kong "should not start emulating Singapore by artificially directing resources into inefficient high-technology sectors". He notes that in terms of productivity growth, Singapore ranks 63rd in a world table of 118 countries, compared with Hong Kong's sixth position. "Our rival city-state has achieved its impressive growth by injecting vast amounts of extra labour and capital into the manufacturing sector, but it has not achieved significant technological progress when measured by results," he says.
Manufacturers head north
The debate highlights the complexities in shaping the territory's next stage of growth. There was less soul-searching when Hong Kong made its earlier transformation from a manufacturing to a service-based economy. In the late 1970s, Hong Kong manufacturers of textiles, electronics and toys were facing rising costs and competition. They solved the problem by heading north, moving their factories across the border to southern China where labour was cheap and abundant.
Hong Kong was lucky. China was opening up, providing the colony not only with an industrial hinterland but also new trading business as China exported more goods overseas via Hong Kong. In China, Hong Kong manufacturers combine well-tried technology with cheap labour to produce reasonable quality products at low prices. "This mobilisation of the hitherto unproductive Chinese workforce has produced massive increases in the output of the Chinese hinterland," notes Davies.
Today, Hong Kong industrialists employ over three million workers in China, mainly in the southern province of Guangdong. Hong Kong's army of white-collar workers has swollen from 680,000 in 1990 to the current 830,000. These are in trade-related sectors, such as transport, finance, high-grade processing, quality control and design and other services needed to support Hong Kong's large industrial base in the Pearl River Delta.
Further hollowing out
In less than two decades, Hong Kong has been transformed from a cheap sweat-shop manufacturing base to a higher value-added service economy dominated by accountants, bankers, managers and other professionals. But economists warn that Hong Kong's amazing economic transformation may have reached its limits, as reflected in its recent slower growth.
Mr Richard Ligon, an economist at UBS Securities (East Asia) Limited, notes that Hong Kong's real GDP growth expanded by an average of 6.9 per cent annually during the 1980s, but managed only an annual growth of 5.3 per cent from 1990 through the first half of 1995. "Singapore, at convenient economy for comparison because of its similar structure and GDP per capita, grew 7.0 per cent and 8.3 per cent real growth during the same respective periods," he says. He believes Hong Kong's GDP growth is likely to be below five per cent annually in the long term, "well below the average rates achieved by other East Asian Tiger economies".
Slower growth aside, there is a fear that Hong Kong will be further hollowed out, not only of its manufacturing operations, but also of its services. Already, China is relying less on the city as the middleman in trade. Instead of using Hong Kong as a place to do other high value-added services, China-trade companies are increasingly using it as a mere transhipment centre. To this extent, the volume of trade passing through Hong Kong may be deceptive. While in earlier years outbound shipments from Hong Kong were growing at 20 per cent a year, in 1994 and 1995 they grew at rates of 41 and 30 per cent respectively. But the recent high growth rates disguise the fact that transhipment services generate less income than re-exports. The rise of the latter has been less spectacular, hovering at 20 per cent since 1990.
Hong Kong's declining role as a value added processor of China-sourced goods shows up in other trade statistics. The city's merchandise-trade deficit has been expanding, from US$1.68bn in 1991 to US$18.97bn in 1995. Even if imports related to the building of the new airport are discounted, the trend of a widening trade gap is clear.
What is more worrying is that new, higher value-added services such as finance, insurance and consulting, have not grown fast enough to compensate for losses in trade-related services. In recent years, higher value-added services have accounted for a steady 15 per cent of Hong Kong's total service exports. The service surplus, which has accounted for 10 per cent of Hong Kong's GDP in the past decade, therefore might not be sufficient to cover fully the future visible trade deficit.
Mr Marc Faber, a Hong Kong-based consultant running his own investment advisory service, predicts that Hong Kong will lose out more in services to other Chinese cities, notably Shanghai, Tianjin, Beijing and Dalian. "These cities' favour-able geographical location will lead them to becoming China's major shipping centres and airline hubs," he says. "There-fore, with or without the handover, Hong Kong would have lost out economically because of .China's opening and rapid modernisation."
Others are less pessimistic, pointing out that Chinese cities are still far from being another Hong Kong. In a study compiled by economists at the Harvard University, its authors point out that Shanghai faces the heavy regulatory burden associated with a history of a planned economy and an incomplete process of economic re-form. Even in shipping and finance, where Shanghai is catching up fast, "the prospect of real competition appears to be well into the future", it says.
The report, compiled over a year and with extensive studies of nine industries, adds that the so-called hollowing out of Hong Kong manufacturing has been over-stated. True, statistics show that Hong Kong's manufacturing output and employment have dropped, "but what these figures do not capture is that Hong Kong firms have developed dispersed production networks on a massive scale". By tapping into the labour potential of mainland and Southeast Asia, the output of Hong Kong's manufacturing firms is "several times greater than the Hong Kong-based statistics would indicate". More important, Hong Kong firms have retained the high value-added, knowledge-intensive activities associated with manufacturing in Hong Kong, while decentralising the lower value-added, labour-intensive activities to the mainland and elsewhere.
In short, it continues, the economic transformation of Hong Kong has not been so much from a manufacturing economy to a service economy, as from a 'manual economy' to a 'knowledge economy' and from an 'enclave economy' to a 'metropolitan economy'.
While these may be strong arguments, it will be up to Chief Executive Tung and his aides to decide whether Hong Kong needs the government to define a new industrial future, or that the old laissez-faire policies still work best for the Special Administrative Region.
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