Over the past 30 years, the Hong Kong economy has evolved in response to an everchanging environment and has achieved a growth rate among the highest in the world. As the political uncertainty due to the 1997 lease issue has at last been settled, it is now a good time for researchers to explore the future development and the likely structure of the Hong Kong economy in the coming years.
With that objective in mind, this study investigates Hong Kong’s changing economic structure and domestic exports during the last twenty years, and further discusses their future directions of development, with special emphasis on export activities. Taking into consideration the volatile environment of international trade and the imminent political changes, the study, after utilizing various data sources, has arrived at the following findings:
(1) Among Hong Kong’s many competitive advantages, those derived from the labor and wage structures are especially pronounced. The growth rate of real wages during 1971–81 was 3.72 percent annually, which was even lower than that for 1961–71 (6.49 percent), a decade of high immigration. Overall wage increases during the last two decades in Hong Kong have been milder than in Asian competitors such as Taiwan, South Korea, and Japan. This has contributed significantly to Hong Kong’s competitive edge.
(2) There was a decline in the relative importance of the manufacturing sector vis-a-vis the financial and business services sectors in terms of contribution to GDP during the 1970s. The traditional service sector (including retail & wholesale trade and import-export trade industries, restaurants, and hotels) remained relatively stable. However, the manufacturing sector was still the largest provider of jobs, absorbing almost one-third of the employed labor force. The traditional service sector was next. This trend, observable during the past few years, is expected to continue.
(3) Following a foreign exchange panic in 1983, the introduction of the linked exchange rate system in October of that year restabilized the foreign exchange market. The linked exchange rate represented a depreciation of the Hong Kong dollar against the U.S. dollar and could be considered a competitive advantage for Hong Kong’s exports to the U.S.
(4)Based on the long-time, close connections between Hong Kong and Mainland China, Hong Kong’s role as an entrepot for Mainland China should become even greater, if Mainland China’s open-door policy is maintained. The financial sector, in that case, will be greatly expanded.
(5) U.S. direct investment in Hong Kong substantially increased during the 1960s and the U.S. has long become the largest foreign investor. Its influence is evident in such areas as net capital inflows and the introduction of technological innovations, management and training techniques, and marketing facilities. Japanese investments, which have some unique characteristics, were also very significant in various sectors in the 1970s. No evidence has been found showing a withdrawal or a persistent decline of foreign investment during the past two years. Serving as a steppingstone to Mainland China, and with the government’s policy of minimum intervention in the economy, Hong Kong should remain an attractive place for foreign firms.
(6) Through production economics diagnosis and aggregate production function analysis, the disadvantages and shortcomings of the manufacturing sector in Hong Kong may be identified. Several of its characteristics – viz., its small scale, low value-added products, and relatively poor labor productivity, just to mention a few – are becoming increasingly more pronounced. Unless the Hong Kong government transforms its passive attitude and adopts a more positive industrial policy (which is not expected), the qualitative features of the manufacturing sector, such as those just mentioned, as well as the current industrial structure seem destined to remain as they are for another decade. One exception is the electronics industry, which has demonstrated a tendency to become more capital- and technology-intensive. The strength of the Hong Kong manufacturing industries is revealed in the production economics figures. Its strength lies in its high flexibility and in its capacity to respond quickly to changing market conditions in order to exploit the maximum possible short-run profit for a particular commodity. Past successes have also been largely due to industry’s ability to meet demand through rapid turnarounds, product differentiation, and competitive pricing, while maintaining acceptable quality. It is expected that the manufacturing sector in Hong Kong will continue its self-sustained growth along these lines in the coming decade.
(7) In production economics, similarities between the service sector and the manufacturing sector have been observed. However, as far as the contribution to Hong Kong’s export activities is concerned, it is found that most of the traditional export-oriented service industries are to a measure dependent on tourism. Finally, as a regional and international financial center, the financial and business services sector deserves much more attention in this regard .
(8) Hong Kong’s export markets are narrowly confined to a few countries. Among these the United States is by far Hong Kong’s most important market. Mainland China grew very rapidly after 1980 and ranked second in 1984. According to forecasts derived from our trend analysis and our study of the marginal propensity to import in the major western markets, few changes are foreseen in terms of their relative importance.
(9) Obviously, trade problems exist due to the changing international economic environment. But it is found that Hong Kong manufacturers can always find a way out. The strategy is to be flexible and adaptable in coping with changes in market tastes within a specific commodity group. More technically, Hong Kong firms promote exports by differentiating product lines at the less aggregated SITC code levels. Our analysis of the Relative Export Performance of major 3-digit commodity groups along with the change pattern of 4-digit level sub-groups during the last few decades provide rather convincing evidence.
With an insignificant share in the world market, it would be reasonable to expect that Hong Kong could promote its exports with such strategies. The study has also made forecasts for 28 major 4-digit commodity sub-groups under the above assumption.
