The Performance and Prospects of Hong Kong’s Economy

Are Hong Kong People Correct in Their Current Pessimism?

Hong Kong People are Depressed About Our Economy

What did you say at the beginning of the semester? High unemployment Deflation Falling share and property prices/negative equity Threat from Shanghai Poor quality of HK Government Government deficit

How Can We Judge Our Economy?

The Most Basic Judgment Concerns Macro-economic performance !!! Output per capita, measured in $US,

(and its growth)!!!Unemployment Inflation/DeflationBalance of Payments

How Can We Judge Our Economy?

Macro-economic performance is closely related to the institutional and micro-economic setting Is the structure of markets competitive?Does the legal system protect property

rights and contracts? Is there a culture of corruption or fair

dealing?

Output per capita?

Output is measured as NATIONAL INCOME, with slightly different concepts and bases for measurement GDP – Gross Domestic Product – the value of all

goods and services produced in HK – the output of the HK economy

GNP – GDP plus NET PROPERTY INCOME FROM ABROAD – the income of Hong Kong residents

‘At factor cost’ or ‘at market prices’ ‘At current prices’ or ‘at constant (1990) prices’

Output per capita?

GDP at constant (1990) prices 1996 -$HK 790bn 2001 -$HK 895bn 1996-2001 growth – 13% over 5 years 1996 – $HK122,718 per head = $US15,733 2001 – $HK133,026 per head = $US17,054 1996-2001 growth – 8.4% over 5 years

Is that poor performance? Remember this is also $US performance!

Where Does Our GDP Come From?

GDP = Gross Domestic Product – the value of all goods and services produced in HK

Calculate by adding all EXPENDITURES together

Component $HKbn

1996 2001

Consumption 532 571

+ Investment 270 261

+ Govt spending 60 69

+ Goods exports 1323 1582

- Goods imports 1431 1644

+ Service exports 218 267

- Service imports 132 140

GDP 790 895

GDP/head 123k 133k

Where Does Our GDP Come From?

GDP = Gross Domestic Product – the value of all goods and services produced in HK

Calculate by adding all OUTPUTS together (at current factor cost)

Component % 1996 2001

Agri and Fish 0.1 0.1

Manufacturing 7.3 5.9

Elec, Gas, Water 2.4 3.0

Construction 5.8 5.3

Wholesale/Retail/ IMPEX/Hospitality

26.7 26.1

Fin & Bus Services 25.1 23.2

Transp&Comms 9.8 10.3

Social services 17.6 21.2

Ownership of premises

13.1 12.9

What To Conclude So Far?

Total income growth has been good

Per capita income growth has been lower but reasonable

Note the relative unimportance of property in the make-up of national income – it contributes through construction and the services imputed to ownership of property

Property is an asset, the stock of property yields a flow of services which are part of income

What About Unemployment?

Unemployed persons 1996 - 82,000 – 2.6% of the workforce 2001 – 210,000 – 6.1% of the workforce

What causes unemployment? MACRO-ECONOMIC LEVEL

Too little spending in total – either spending must rise or all wages fall

MICRO-ECONOMIC LEVEL Enough spending in total to employ everyone at current

wages but mis-matches in the labour market ‘Structural’ unemployment – supply of a few types of

worker exceeds demand and skills not being developed

Which Type Do We Have?

HOW TO TELL?Simultaneous unemployment and vacancies

suggests ‘structural’ unemploymentEmployment has been rising rapidly

-74,300 extra jobs July-Dec 2002Some categories of vacancy are difficult to

fill Immigrants from the Mainland are often

unskilled

What About Inflation/Deflation?

Prices for consumer goods have been falling at around 1-2% p.a. for 3-4 years.

Asset prices have fallen much moreProperty down 60% since 1996HSeng Index down ?? from peak

Why Do We Care About Inflation/ Deflation?

Tell me why you worry about INFLATION – personally I was very grateful for it!!TELL ME WHY!

Tell me why you worry about DEFLATION – personally I am very grateful for it!!TELL ME WHY

Why Do We Care About Inflation/ Deflation?

Tell me why you worry about INFLATION – personally I was very grateful for it!!

My first house in England went from ₤12,000 to £40,000 and my second from £40,000 to £200,000.

Tell me why you worry about DEFLATION – personally I am very grateful for it!!

My PolyU housing allowance allows me to rent a much better place than before

Why Do We Care About Inflation/ Deflation?

Why Do We Care About Inflation/ Deflation?

INFLATION OR DEFLATION would not matter very much if price changes were perfectly anticipated by markets, and fully reflected in all wages and prices.

IMPERFECTLY ANTICIPATED INFLATION OR DEFLATION shifts income and wealth between creditors and debtors. We care about it when it hurts ourselves!

INFLATION erodes the value of savings, DEFLATION increases it.

Why Do We Care About Inflation/ Deflation?

INFLATION AND DEFLATION shift the timing of spending in ways that may exaggerate macro-level problems

IMPERFECTLY ANTICIPATED INFLATION OR DEFLATION reduce the information content of prices, thereby increasing transactions costs and reducing the efficiency of market economies

Should We Be Concerned About HK Deflation?

Falling consumer prices are good for those on fixed incomes and those with savings

The “delay spending” effect is not so large that it is creating a real macro-level problem (unlike Japan)

Why be concerned about those who bought property as a calculated business proposition? They chose to gamble and they lost!

BUT

Should We Be Concerned About HK Deflation?

Falling share prices reduce the wealth and therefore income of shareholders

Imposing negative equity on owner-occupiers is a social problem and a major reason for the government’s loss of legitimacy – hurt the middle class at your peril!

Stable general price levels are to be preferred but we do not have a disaster on our hands if deflation continues at current rates

What About The Government Deficit?

It is a cause for concern because:Government deficits can lead to balance of

payments deficits and then either Link rate collapses as in Argentina OR Local prices and wages must fall further

If the Government has to borrow to finance its deficit interest rates may have to rise significantly

But fiscal reserves are very large and there are signs that action is being taken

What Needs to Happen?

Hong Kong has never really been the ‘low tax’ place we think of – but the taxes were collected via the property sector and were hidden in high property prices

Widen the tax base – the activities and groups that attract tax.

Salaries tax is paid by a tiny % of the workforce – expand it

Sales taxes are easy to collect Cut government expenditure – but see this week’s

report from Civic Exchange (Feb 24 2003)– we need spending on education and infra-structure

What About Shanghai and the PRD?

The PRD is a major source of support for Hong Kong.

Shanghai competes for inward investment but remember the basics – places trade with each other in order to develop and trade is not a zero-sum game

What About Structural Matters?

Do we have competitive or contestable markets with easy entry and exit? YES for the traded sectors NO for the non-traded sectors We need a competition policy

Do we have a sound legal structure which protects property rights YES, it is a major asset

Do we have a corruption-free culture and set of institutions? YES, it is a major asset

So Why Be So Depressed?

We can reasonably expect steady growth, as long as China remains stable

We can reasonably expect to stay in employment

We can reasonably expect levels of inflation/deflation that are not too damaging

Even if asset prices never return to their previous levels mortgages will be paid off out of increasing incomes

The Conclusion?

CHEER UP, HONG KONG!!(but not so much that people

refuse to accept lower wages and prices when they are needed)