李浩 ● 孫永泉
(Reprinted from HKCER Letters, Vol. 51, July 1998)
Is Hong Kong Finished?
Li Hao and Wing Suen
for the first time since 1985, Hong Kong registered a first-quarter negative
Despite government officials' repeated assurances of "sound fundamentals" the outlook for the
economy's long-term future has become gloomy. Rent in Hong Kong is too high. Mediocre managers
and administrators earn amazing salaries considering the amount or the importance of their work.
Speculative fervor draws energy away from enterprise. Government mismanagement, real or
imagined, nips at Hong Kong's free-market foundation.
problems new or just newly discovered? Hong Kong's economic success has
short of a miracle. One theory has it that we are just lucky. At every critical junction, events took the
best possible course for Hong Kong.
was born when the communists took over China. The refugee workers and entrepreneurs
that came here as a result helped turn Hong Kong into a successful manufacturer of textiles, toys, and
electronics. When labor costs began to erode Hong Kong's competitive edge, China opened its doors
to foreign investment. Hong Kong's investors and managers jumped at this opportunity and swarmed
into South China. And just when Hong Kong managers became too expensive relative to the local
supply of talent, the demand for financial services arising from mainland business needs exploded.
Hong Kong quickly transformed itself into a world-class financial center.
But our luck
is running out. Since Shanghai woke up a few years ago Hong Kong's status
financier for Chinese economic development has been under threat. Steven Cheung of the University
of Hong Kong often comments on the fact that Shanghai's college students study so much harder than
do their counterparts in Hong Kong. They learn English; they understand stocks and derivatives; they
can prove the Modigliani-Miller theorem. And they are willing to work for a fraction of the pay that
Hong Kong graduates are getting. It is not hard to imagine that some day mainland and foreign
investors will find it both cheaper and easier to engage in transactions in Shanghai than in Hong Kong.
What will become of Hong Kong without the financial industry?
may gain ascendancy is a valid concern, but one should not lose sight of
comparative advantages of the Hong Kong economy. In Hong Kong there is an efficient legal
framework, a working administrative system, a close connection to international financial markets, and
a state-of-the-art infrastructure. Hong Kong has all the hardware, but how can it best exploit it? The
answer is simple: by getting the best software.
It is well
recognized that entrepreneurs from Shanghai played a crucial role in bringing
industrialization of Hong Kong that took place in the 1950s. The supply of talent in Hong Kong at that
time was rather limited. One would like to believe that as the city became more prosperous the
situation changed. True, fifty years of economic development has improved the human capital stock of
Hong Kong tremendously. Hong Kong may even claim to train better people than Shanghai does now
(Steven Cheung would disagree). It is all too easy to turn complacent, however. As migration control
in China relaxes, Shanghai has been drawing talent from all over the country. Hard as Hong Kong may
try, it is tough to beat the numbers: the best and the brightest from a pool of 6 million people will face
an uphill battle against the best and the brightest from a pool of 1.2 billion.
of small numbers is compounded by the problem of thin markets. Workers
in Hong Kong
who have highly specialized skills do not enjoy all the protection offered by competition. For an
air-traffic controller or a differential topologist who is not internationally mobile, alternative employment
opportunities are few and far between. Employment risks in a thin market discourages investment in
specific human capital. In response, Hong Kong workers choose breadth over depth. No wonder why
they are more renowned for their flexibility than for their expertise.
If Hong Kong
wishes to boost its human resources it cannot afford to rely exclusively
on local talent.
No investment is large enough to overcome the disadvantage inherent in small numbers and thin
markets. That is why Hong Kong has been importing skilled labor from all corners of the world.
Except from the mainland. True, many highly educated mainlanders are now working in Hong Kong,
but most of them came by way of North America or Europe. It is a shame that America, not Hong
Kong, gets some of the best brains in China. If Hong Kong opens up to skilled mainland labor, the
combination of a high living standard and locational advantages will be irresistible to many mainlanders.
way of attracting talent is to allow mainland (and overseas) students at
local universities to
stay in Hong Kong and find work after graduation. If the mainland government allows students to go to
the United States, it will not object if they come to Hong Kong instead. So it is unlikely that tapping
Chinese human resources will invite the mainland government's interference with local affairs. At
present the University Grants Committee allocates only two percent of the undergraduate intake to
nonlocal sources. Moreover, many mainland students with degrees from Hong Kong find it easier to go
to the United States than to stay here. These students should be given the opportunity to become
permanent residents in Hong Kong. The government could permit them to stay as long as they are able
to keep jobs in the Hong Kong, which is effectively what the United States does to keep many of its
former students there.
Hong Kong universities will then become appealing enough to attract the
talent, and the intake quota should be raised. Because of the sheer size of its population, mainland
China produces more innate talent than does Hong Kong. Yet education resources in Hong Kong are
far superior to those in China. Bringing mainland talent into contact with the superior education
resources will benefit the mainland students themselves, their teachers, and their fellow students in
Hong Kong. When they leave the education system they will become part of the software that is key
to Hong Kong's development.
should also import skilled labor directly from China. Talented mainlanders
with them not only skills but also the specific knowledge crucial for the success of China-related
businesses. This specific knowledge complements Hong Kong's hardware advantages, but Hong
Kong's education system is unlikely to impart it to local students. Mainland talent should be treated in
the same way as is the talent of other countries. In particular, skilled and professional workers from
the mainland should not be confined to working in mainland financed enterprises. They should be
allowed to move freely between mainland China and Hong Kong. Mobility is crucial to making Hong
Kong an attractive destination for talented mainlanders, because some of them perceive the mainland
as having more opportunities than Hong Kong does right now. If mainlanders can move freely, then
the labor market will sort out the right kind of workers for both Hong Kong and for the mainland.
A new labor-importation
scheme may sound like heresy now that unemployment is at a fifteen-year
high, but it is during times like this that we should be especially vigilant about the rise of protectionism.
The current labor-importation schemes, which focuses on importing less skilled workers, are indeed
perverse. Real wages for unskilled labor have remained relatively flat for several years, whereas
wages for managerial and professional workers soared. Hong Kong's future lies in high value-added
industries-sectors that will serve the business needs of China. It is brains, not brawn, that Hong Kong
is short of. Bad economics will try to say that the importation of skilled labor will eliminate jobs for
local Hong Kong people. But different types of human capital tend to complement one another, and
they tend to complement raw labor power as well. An increase in the supply of skilled labor with
specific human capital will raise, instead of reduce, the demand for other skilled labor and for unskilled
labor as well.
come and go. Concerns about present economic troubles should not delay
the long-term future of the economy. By the time the proposed policy is in place and mainland students
have started looking for jobs upon graduation, Hong Kong's labor market may well be tight again. No
government can fine-tune its policies to the employment situation three years down the road.
Governments can only hope to adopt policies that are likely to contribute to long-term productivity
So many people
in Hong Kong worry about losing out to Shanghai, but few have asked just
should build another financial center when Hong Kong can provide most of the services the country
requires. After all, even the United States, which is a bigger economy than China is, has only one
financial center - New York. Some say a separate financial development in Shanghai is justified
because the renminbi is not convertible. But this should be the window of opportunity for Hong Kong,
instead of an excuse for no action. If Hong Kong does not act, in ten years' time China's service
providers will be in Shanghai, and those for the rest of Asia will either move east to Tokyo or west to
Singapore. That would finish Hong Kong once and for all.
Li Hao and
Wing Suen are lecturer and senior lecturer respectivley at the School of
and Finance, the University of Hong Kong.
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