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ANALYSIS

By Vaudine England, BBC News, Hong Kong

Two things have made global financial meltdown obvious in

Hong Kong: daily protests by people who bought what they thought were

safe bonds but turned out to be worthless when Lehman Brothers

collapsed, and the seemingly permanent sales in the malls.

The larger-than-usual number of ships moored in waters south of Hong

Kong, or travelling light in and out of southern China's factory zones, has

been another clue, as has the growing numbers of homeless and

unemployed, some of them returning from jobs on the mainland.

But for the majority still in jobs, and without negative equity given the

continued buoyancy of Hong Kong's property market, there has not been

an obvious recessionary feeling.

A recent survey suggested Hong Kongers were spending - and saving - as

much as usual. Hong Kong has always had an optimistic feeling about it.

Economic Recession, Government Policy and Workers' Welfare

S. H. Tang
Introduction

Business cycle is a basic characteristic of capitalism. The Hong Kong economy is of no

exception. The present economic recession, unfortunately, is the worst one in Hong Kong

since the 1960s. With negative GDP growth in the first half of 1998 and unemployment rate

reaching 4.8% for the May-July period, it may take a long time for the economy to ride out

the tough of the cycle.

With massive lay-off and pay-cut, and without a mandatory unemployment compensation

fund, Hong Kong workers are hardest hit in this recession. Triggered by the Asian currency

turmoil in last October, the economic recession in Hong Kong has been dampened by short-

sighted economic policies since the 1980s. The labor unions have long been arguing that

labour welfare has been ignored under the prevailing economic policies even without this

recession. They also express grave concern that workers?welfare would further deteriorate

after the economic recovery.

Conflict of interest between workers and capitalists is an inherent nature of capitalism. The

collective strength of labor unions is an effective and powerful weapon to safeguard the

workers?welfare. But the divergent and competitive political affiliations of labor unions in

Hong Kong deter them from forming a common front to deal with employers. The Hong
Kong government is supposed to look after the welfare of all sectors, including workers. But

in reality it gives more weight to the wealthier. There are no laws on collective bargaining and

on minimum wages in Hong Kong. Having less political and market powers, the workers are

in a disadvantaged position in protecting their welfare and entitlements.

Prevailing Economic Policies: Positive Non-interventionism and Workers' Welfare

The Hong Kong government is noted for its economic philosophy of positive non-

interventionism. The main thrust of this philosophy, simply put, is to rely heavily on the

market mechanism to allocate and distribute resources and outputs. The government's role is

to safeguard the rule of law, to protect property rights, and to provide infrastructure. The

government would intervene in the market only after careful examination of the costs and

benefits of its actions. In most cases, the government would not intervene, even if the short-

term results of intervention are desirable. The government also relies on low tax rates and a

simple tax system to attract foreign investments. Financial stability is more important than

economic stability. Thus the guiding principle of fiscal policy is to pursue "living within our

means". Keynesian countercyclical policy is considered by the government to be

inappropriate for Hong Kong. The very objective of economic policy is to generate rather

than to redistribute wealth. The government avoids addressing income disparity, arguing that

the fruit of economic growth is trickled down to workers through creating more jobs and
paying higher wages, means which are more desirable than political struggle. Unfortunately,

the worsening income disparity since the 1980s has proved that the "trickle-down theory" has

not really worked in Hong Kong.

Without a mandatory unemployment compensation fund, workers face an even harsher

situation during the economic recession. Workers could only hope that the government could

stimulate the economy so as to create more jobs. However, this approach would imply having

budget deficits potentially, which the government wants to avoid. A classic example is the

government's position on a motion debate in the Legislative Council in 1995 when the

economy could not reach the estimated 5% growth target. The motion requested the

government to adopt appropriate policies so as to ensure the 5% target be reached. The

government refused to endorse the motion, arguing that the estimated 5% GDP growth rate

was arrived at after taking into account the overseas and local economic conditions, including

the government's budget drafted under the guiding principle of "living with our means". Thus

it should be seen as a result of market operations, rather than a government target. The

Councillors were even warned that it would be unwise and dangerous to push the government

to stimulate the economy because this would disturb the proper functioning of the market, and

would move Hong Kong into a planned economy.

This ultra fiscal conservatism does not only rule out the role of short-term fine-tuning
functional finance, but also ignores the adverse impact on the long-term growth potential of

the economy. The Hong Kong government spends less than 6% of its total expenditure on

economic affairs, including industrial programmes. With total public spending accounting for

less than 20% of GDP, the amount spent on industrial programmes is too small for any

meaningful long-term development. In fact, there was no subsidy given to encourage R&D of

manufacturing industries in the 1980s. The Applied Research Fund, set up in 1992, attaches

many conditions which discourage rather than promote applications. Tax incentives are

virtually nonexistent for industrial development and promotion. Under this passive industrial

policy, the contribution from the manufacturing sector to the economy has declined from

23.7% in 1980 to just 7.2% in 1996. Manufacturing employment has dropped from close to

one million in 1980 to just 309,000 in 1997. The growth potential of the economy has reduced

to 5% in the 1990s due to inadequate spending on domestic fixed capital formation.

Alarmed by the declining share of the manufacturing sector, a prominent business group

commissioned a consultancy study in 1989 on economic strategy for Hong Kong's future.

Two of its recommendations relate to industrial R&D and training: (1) total public and private

spending on R&D and on industrial training should target at 1% of GDP respectively; (2) the

above cost should be shared equally by the government and the private sector. The other three

newly industrialized economies (NIEs) in Asia have already passed this 1% critical mark.

These recommendations, if accepted, would exert significant impact on economic


restructuring and job creation for the 1990s. They would also enhance the capacity of the

economy to absorb external shocks.

Unfortunately these recommendations were not endorsed by the government which argued

that increased spending commitment would violate the guideline that expenditure growth

should not exceed the trend assumption as to the growth in GDP. When the other NIEs such

as South Korea, Taiwan and Singapore have already injected over 1% of their respective GDP

to R&D, it is no wonder why Hongkong's manufacturing industries have lost their

competitive edge to these NIEs in high-technology content products, and to Mainland China

in labor-intensive low-technology content products. The decline in manufacturing share in

GDP translates into a loss of over half a million manufacturing jobs. The Employee

Retraining Programme, set up in 1992, only provides retraining opportunities to those

displaced manufacturing unskilled workers to seek low-paid employment in the services

sector, not to retrain them to move to high-tech industries. Promoting services industries as

the main source of economic growth in Hong Kong is the theme of the 1996-97 Budget. But

the initial injection to the Services Support Fund is only HK$50 million, and there has been

no significant change in the share of government spending on economic affairs. Simply put,

the Hong Kong government has not provided enough resources for economic restructuring

and labor retraining.


Human resource development policy is an integral part of economic restructuring. In Hong

Kong, the largest share of government expenditure goes to education. Paradoxically, the

education policy and programmes could not accommodate economic development and

restructuring in Hong Kong. Three major problems have become prominent in the 1990s: (1)

the education and training programmes could not produce graduates with knowledge and

skills specific to high-tech industries; (2) the standards of language (i.e. English, Putonghua)

proficiency of our graduates are declining; (3) the teaching and quality of information

technology are lagging behind other NIEs substantially. The lack of coordination between

economic and education policy bureaus on developmental strategy is the root cause of this

poor performance.

Hong Kong may be the only place where the government does not publish any white paper

on short-term and long-term economic development strategy and plan. The is because the

research culture is underdeveloped within the government. The Economic and Financial

Services Bureaus are the only governmental agencies that have a research unit equipped with

a few professional economists. Economic policies are seldom discussed publicly. Co-

ordination between economic policy and other policies is viewed mainly as a technical issue

of secondary importance. This explains why the above mentioned deficiencies has prolonged

and deteriorated throughout the 1990s. Improving these deficiencies must involve substantial
resources. But money is not forthcoming. Because of the small size of the public sector,

spending on education accounts for less than 4% of GDP in Hong Kong. This ratio is even

smaller than many developing economies. Inadequate resources on formal and informal

education and training could not produce and maintain a high quality and competitive labor

force which is so crucial for sustaining economic growth and job creation. Ironically, neither

the Secretary for Education and Manpower nor the Financial Secretary has aimed at a higher

target for education spending.

An imbalanced economic structure, a less competitive labor force, and the guiding principle

of fiscal conservatism are long-term factors that have reinforced the recessionary forces

generated by the recent Asian currency turmoil. It is expected that the economic situation in

the second half of this year will be even worse, due to the new airport crisis in the July-

August period.

A New Paradigm Shift?

Contrary to the outright rejection of the Legislative Council's recommendations to

stimulate the economy during the 1995 mild recession period, the Hong Kong government

introduced a Mini-Budget in June 1998, which converts the original $10.7 billion 1998-99

budget surplus into a $21.4 billion deficit. The Mini-Budget contains new initiatives such as
increasing spending, offering tax/fee reductions, and freezing land sales, etc. Although this is

the largest deficit budget in the public finance history in Hong Kong, its expansionary effect

is uncertain because the projected deficit arises mainly from revenue loss from freezing land

sales, rather than from massive tax reductions and rebates or spending increase. Thus it does

not reflect a genuine shift of the fiscal paradigm of the government.

Having no unemployment compensation fund, the Hong Kong fiscal system does not

possess any built-in stabilizer to automatically fine-tune aggregate demand. Although the

Comprehensive Social Security Assistance (CSSA) Scheme does allow unemployed workers

to apply for assistance but its severe eligibility conditions limit the number of successful

applicants, rendering it as only a partial and somewhat ineffective tool of built-in stabilizer.

When CSSA spending rose suddenly above the budgeted level due to the unexpected

worsening economic situation in the first half of 1998, the Director of Social Welfare

expressed concern that the CSSA may have been abused by unemployed workers, and pointed

out that a review of the CSSA would be held in due course to close the loopholes. In fact,

none of the 9 measures of the 1998-99 Mini-Budget has relaxed the stringent eligibility

conditions for applying CSSA, nor raised the CSSA level. The Financial Secretary did

propose to set up a special $2 billion fund to assist small and medium size enterprises to

obtain bank credit, but there was no corresponding proposal to help unemployed workers

financially.
It could be argued that the short-term fiscal measures of the 1998-99 Mini-Budget should

not be interpreted from a long-term perspective. One has to wait for more evidence and

concrete examples before tentative conclusions could be drawn. One possible outcome is that

the forthcoming 1999-2000 Budget would introduce new concepts and measures to deal with

long-term economic issues. For example, the First Report of the Innovation and Technology

Commission, to be released soon, may recommend massive subsidy to the extent of 1% or

more of GDP to support manufacturing R&D and training. The government's response to such

recommendations would indicate whether and to what extent it would shoulder an

institutional responsibility to finance proactively economic restructuring in general and

industrial development in particular.

The Hong Kong government is noted for its success and expertise in crisis management. It

has been quite successful in handling banking and currency crises before the sovereignty

transfer. One of the conditions for such success is the support from the private sector. It is

ironic that the opportunity cost of reform is relatively smaller during the crisis period.

Resistance from the private sector on policy reform would be nominal. However, this is not

the case for the 1998 recession. The government and the private sector have divergent views

on the root cause of the recession, and hence do not seem to see eye to eye on remedial

actions. Massive tax rebates and a proactive industrial policy advocated by some businessmen
and industrialists are rejected by the government. On the contrary, the government depends

very much on the downward adjusting forces in the asset and labor markets to reduce the

rental and production costs so as to regain competitiveness for the economy. The government

argues that providing unduly public funding assistance would distort the proper function of

the market and would delay the recovery of the economy. It seems unlikely, therefore, that the

Hong Kong government is contemplating any major paradigm shift because added spending

commitment may lead to deficit budgets which would exert a destabilizing effect on the

linked exchange rate, and may even be in breach of the budgetary principles of the Basic Law

(i.e. Article 107).

Concluding Remarks

For political and historical reasons, workers have the least bargaining power in Hongkong's

capitalist economic system. In the previous studies on economic development strategy

completed by various business groups, labor unions were not consulted. As a matter of fact,

workers?welfare had never been a focal point in such studies. It is no wonder that the labor

unions have to resort to political forces in the Legislature Council to fight for their fair share

of economic output and wealth through engineering more favourable labor laws. But these

laws could neither create jobs nor guarantee job security. The recent drive by some labor

unions and political activists to push for passing a minimum wage ordinance reflects their
complete loss of confidence in the existing distributional policy and institutions.

Obviously the chance of passing a minimum wage law in Hong Kong in the near future is

slim. The real purpose of this political move may be just to voice out grievances that the

workers?welfare is being sacrificed and exploited in the current recession. It could be argued

that one positive outcome of this recession is to demonstrate that the prevailing economic

policies of the government have achieved neither economic prosperity nor social stability.

Such long-term goals could not be achieved through piece-meal policies and temporary

measures. With the exchange rate crisis and economic recession still unfolding, it would be

more productive if workers could join hands with employers, especially of the small and

medium size enterprises, to push the government to conduct a critical and comprehensive

review of the prevailing policies, and to pursue policy reforms. Only through genuine review

and discussion, and with a holistic, balanced and long-term perspective, could proper lessons

be learnt from the recession.

Prof. Shu-hung Tang is a Professor in the Department of Economics, School of Business,

Hong Kong Baptist University.


Although the data for mainland China is not available there is

data for Hong Kong and the shocking revelation is that the Hong

Kong economy seems to be in a long term recession unrelated to

the current international economy. The Hong Kong economy in

recent quarters went through a boom but this was followed by a

sharp downturn that probably was due to the current global

recession.
Presentation

Hong-Kong
Capital: Hong Kong

Local time:

It is 01:13 AM in Hong Kong

Exchange rate on 03/01/2010:

1 HKD = 0.1284 USD, 1 USD = 7.7879 HKD

1 HKD = 0.0892 EUR, 1 EUR = 11.2068 HKD

GDP growth rate: 0.5% in 2010

FDI stock: 1 184 471 million USD in 2007

Country risk: See the country risk analysis from Hong Kong provided by

Ducroire.

Economic freedom:

Score: 90/100

Position: free
World Rank: 1 out of 179

Regional Rank: 1 out of 42

Distribution of Economic freedom in the world

Source: 2008 Index of Economic freedom, Heritage Foundation

Economic trends

GDP growth reached an average level of 5% during the period of 1989 to 2006. In

2008, the country was extremely affected by the financial crisis owing to its strong

dependence on foreign capital and the strong financialization of its economy. After

four years of maintained growth, the global financial crisis led the Hong Kong

economy into recession during the third quarter of 2008. The deterioration of the

foreign environment, which led to the decrease in Hong Kong's commercial trade,

caused a significant drop in domestic demand. From 2008, private consumption

dropped, a trend which should continue during the next three years. The price

indicator is expected to follow this downward trend. Economic growth had enabled

the noticeable improvement of the employment market. This market deteriorated


considerably, especially financial services, and recovery is not expected before 2011.

Due to the strong decrease in global and domestic demand, the inflationary pressure

(4.3% in 2008) let up in 2009.

Main branches of industry

Since the agricultural sector is almost non-existent, Hong Kong has to import 80% of

its food supplies. Hong Kong does not have any natural resources and depends

entirely on imports of raw materials and power. Agriculture contributes practically

nothing to the economy.

The manufacturing Industry's contribution to the GDP is very low. The country's main

industrial sectors are textiles, clothing and electronic components.

The tertiary sector, particularly financial services, is the heart of economic activity and

contributes around 90% of the GDP. Hong Kong is a services center for Asian

companies, especially those that trade with China. Additionally, the tourism industry

is booming mainly, due to an exponential increase in the number of visitors from

mainland China.
International trade

Hong Kong is amongst the world's first fifteen commercial services exporters and the

world's fifteen primary trade economies. Hong Kong's economy is considered as a

model of capitalism because of its dedication to free trade. Foreign trade was

pursued intensively during these past years. Maintained by the strength of trade with

China and the weakness of the dollar, export and import of goods grew by 10%.

However, a decrease in trade was noted in 2009 and Hong Kong's trade deficit

worsened. This trend should continue in 2010.

The island's main trade partners are China, Southeast Asia and Japan.

Labour market

The active population in figures | Working conditions | Cost of labor | Social partners
The active population in figures

Main indicators

Labor force

Labor force (annual growth, %)

Rate of activity (%)

Unemployment rate (%)

Source: Statistics Department


Working conditions

Legal weekly duration

Between 40 and 48 hours

Retirement age

There is no legal age for retirement, but the average age is around 62 years.

Working contracts

The labor contract is mainly drawn-up by the law. It is completed by collective

negotiations and agreements.

The formalism of the labour contract, hiring conditions and lay-off constraints

are relatively flexible. CDI and the CDD are the two existing types of

contracts.

Cost of labor

Minimum wage

There is no legal minimum wage.

Average wage
Average monthly gross earnings in Hong Kong is HKD 11.000 (USD 1.400)

Social contributions

Social security contributions paid by employers: 0 %.

Social security contributions paid by employees: 0%

Social partners

Social dialogue and involvement of social partners

Hong Kong Confederation of Trade Unions - (HKCTU) gathers several trade

unions. Their power remains very weak.

Unions

HKCTU

Hong Kong Federation of Trade Unions (HKFTU)

Labor regulation bodies

Labour Department

General Information
Political outline | Living conditions | Useful resources | Communications

Political outline

Executive Power

The territory is governed by a Chief Executive, elected for 5 years by a

college of 800 large voters including parliamentarians, eminent personalities

and representatives of the professional sectors. Mr.Donald Tsang was re-

elected as Chief Executive on 25 March 2007 with 81% votes of large

electors and a strong popular support (nearly 70% favorable opinions). For

the first time, this election was challenged by a candidate of the democtratic

camp Mr. Alan Leong, member of the Civil Party, a favorable sign of the effect

of democratic debate.

The government is responsible only to the Chief Executive and is composed

of 12 ministers (Secretaries) who are assisted by 17 senior functionaries who

hold the title of "Permanent Secretaries". In hierarchical order, the three main

government posts are the Chief Secretary- number 2 in the government, the

Financial Secretary, and the Secretary for Justice. If the Chief Executive is
unable to conduct his functions temporarily, they will be conducted in this

order of precedence by the title holders of the main posts.

In addition, the Chief Executive is assisted by an Executive Council or Exco

which includes the government ministers and 15 non-official members who

are parliamentarians nominated by the Chief Executive; personalities from the

business world or from civil companies. The Exco serves as the Council of

Ministers by being the venue for formulation of government's policies. This

council is consulted for all important political decisions. It meets once a week,

under the chairmanship of the Chief Executive who should specially justify his

decisions in case of disagrement with the majority of its members.

Legislative Power

The Monocameral legislative power is conferred to a legislative council of 60

members whose appointment is confirmed through a complex poll procedure

which has three distinct colleges :

- 30 members are elected by univeral voting (proportional voting by

geographical district);

- 30 members are elected as part of the districts called "functional", which are
professional colleges (teachers, banks, real-estate sector...) of very unequal

importance (from several thousands to a few tens).

The council votes for and amends laws and can also introduce any new

proposal. It examines and approves the budget, taxes and public expenditure,

appoints the judges for the Court of Final Appeal and the President of the

High Court. It can even question the responsibility of the Chief Executive and

raise questions to the government about the conduct of its policy, the absence

of political responsibility of the ministers can make the legislative council limit

the control exercised by this assembly on the executive power.

Their mandate is for four years. The government is directly or indirectly

dependent on parliament's support, which is often given through a vote of

confidence. The Chief Executive does not have the power to dissolve the

Parliament. He cannot refuse to sign a bill which has been voted in by 2/3

majority in the parliament. The politicial rights of Hong Kong citizens are very

limited and very elementary.

Main political parties


Since there is no legislation on political parties in Hong Kong, there is no legal

definition of what is a political party. Most of the political parties or groups are

registered either companies or as Business Corporations. Hong Kong has a

multiparty system. There are several parties and one single party generally

does not have any chance to win power by controlling the Legislative Council.

The main political parties of the country are :

- The ADPL (Association for Democracy and People's livelihood), popular pro-

democracy party

- The Citizens Party, it supports matters regarding minorities and

environmental protection;

- DAB (Democratic Alliance for Betterment and Progress of Hong Kong),

conservative and pro-Beijing party;

- The Democratic Party, pro-democracy and liberal party ;

- The Frontier Party, radical, pro-democracy, demands that Hong Kong should

have the right to draw-up its own constitution.

Current political leaders

Head of State : President of China - HU Jintao (since March 2003) - Chinese

Communist Party

Chief Executive : Donald TSANG (since June 2005) non-supporter

Next election dates


Legislative Council : in 2012

Why you should choose to invest Hong Kong

Strong points

Hong Kong is an international leader in terms of export and as a services

center. The country is also the bridgehead to one of the largest production

bases in the world, China. Hong Kong has a sound economy and an efficient

financial and banking system.

Favorable tax measures, the transparency of local institutions, political

stability, freedom of information, availability of qualified human resources as

well as its advantageous geographical location in Asia, all constitute to make

Hong-Kong a preferred place for company establishment, as witnessed by the

millions of companies registered on the territory.

Weak points

Hong Kong has few, yet consequential, negative points against setting up:

- High cost of real estate and work space (offices, shops,etc.);

- High cost of salaries, compared to other Asian countries such as Mainland


China and India;

- The question of Hong Kong's future, especially when the town will be

completely integrated with the People's Republic of China;

- The excessive importance of the financial sector.

Furthermore, on the whole of the 2008-2009 year, the Hong Kong stock

market was highly disturbed. The stock market's main indicator fell by 45%,

the lowest in 34 years.

Government measures to motivate or restrict FDI

Hong Kong is a free territory for investments, which are in fact encouraged by

the government with a favorable taxation policy and light legislation. Foreign

companies can be set up freely, register their brands and the Director of the

company doesn't have to be a citizen nor resident of Hong Kong.

Bilateral investment conventions signed by Hong Kong

Hong Kong has signed bilateral agreements for investments with 15

countries.

To see the list of countries, click here.

To see the agreements, click here.

culture
The territory's population reached more than 7 million in 2007. Hong Kong

has a fertility rate of 0.95 children per woman, one of the lowest in the

world and far below the 2.1 children per woman required to sustain the

current population. However, the population in Hong Kong continues to

grow due to the influx of immigrants from mainland China, approximating

45,000 per year – there exists a daily quota of 150 people from Mainland

China with family ties in Hong Kong are granted a 'one way permit'.

According to a United Nation report, Life expectancy in Hong Kong is 81.8

years as of 2006, the second highest in the world.

Hong Kong is frequently described as a place where East meets west,

reflecting the culture's mix of the territory's Chinese roots with the culture

brought to it during its time as a British colony/territory. Although over a

decade has passed since the handover, Western cultural practices remain,

and coexist with the traditional philosophy and practices of Chinese

culture.
According to Emporis, there are 7,650 skyscrapers in Hong Kong, putting

the city at the top of world rankings. The high density and tall skyline of

Hong Kong's urban area is due to a lack of available sprawl space, with the

average distance from the harbour front to the steep hills of Hong Kong

Island at 1.3 km (0.8 mi), much of it reclaimed land. This lack of space

causing demand for dense, high-rise offices and housing has resulted in 36

of the world's 100 tallest residential buildings being in Hong Kong, and

more people living or working above the 14th floor than anywhere else on

Earth, making it the world's most vertical city.