Economic Development of Hong Kong
Economic Development of Hong Kong
Economic Development of Hong Kong
Introduction and Literature Review
Hong Kong enjoys a free market that relies on international trade. The value of goods and services traded in the city has continuously grown with a higher value of services than goods. A greater contributor to the high GDP of the city is the larger re-export of goods and services. Hong Kong also employs zero tariffs on imported goods, which is responsible for the robust GDP of the city. The city’s tax authority only levies duties on alcohol and tobacco with no quotas or dumping laws. The tax system exemplifies the city as a self-fulling authority, a contribution that has greatly raised its currency among the competing currencies like the US dollar, euro, and sterling pound.
The economic development of Hong Kong city can be best explained by the phenomenon of wealth distribution between nations. The phenomenon looks into wealth disparities between nations, which determine the flow of goods and services between their markets. The model also determines time, speed, and direction of economic development. According to Mookherjee, and Ray (2001), the Robert Solow hypothesis explains the dominant paradigm in inter-nation convergence. The Robert Solow theory explains that the law of diminishing return to inputs requires poor nations to exhibit high rate of capital return. Further, considering constant savings and fertility rates across the nation, the per capita income in the developing nations should grow faster till it matches the living standards of the developed nation. Continuous disparity in wealth and development between the nations would only be best explained by other indirect economic factors such as population and socio-cultural inequity. The explanation confirms the difference between the societies, particularly Hong Kong and its neighbors. However, the proximity of the city to highly developed nations like China and Singapore stimulates its economic development following the Robert Solow’s model. The difference between their development accounts for what the author’s terms as the variance of economic development. The other difference can also be explained by ethical breeds and attitude towards transformative economic policies. The policies are explained by factors of savings, investment, population growth, labor, and socio-political amenities. The political factors like security and infrastructural development determines the direction and speed of a nation’s economic development.
Robbins (1968) makes great contribution with the mercantilism theory of economic development. The theory applies to the development of Hong Kong as a trade city based on Adam Smiths’ thought of wealth creation and accumulation. The theory’s relevance to the study focuses on the segment of economic and trade policies formulated to steer development of a city. Through a favorable balance of trade, the city was able to objectively grow over time. As desired by Adam Smith, polices allowed nations to accumulate more precious metals within available time by trading what they possessed. The wealth accumulated acted as reserve to future economic turbulences. The system, therefore, allowed creation of credit facility to traders, which expanded the economy through employment creation. The Smith hypothesis, though difficult in modern day practical objectivity, proposed that economic growth can be achieved through increased production due to sufficient wealth that can secure future contingencies. With time, it led to specialization, which increased efficiency and productivity of nations. As witnessed in Hong Kong, the economy grew into a satisfactory service economy due to its efficient service provision than its competitors. Therefore, the city has accumulated more wealth to sponsor its growth and safeguard it against modern economic turbulences.
Robbins (1968) also explores the Neo-Classical theory. According to the author, the theory purports that an increase in capital or labor to some level causes diminishing returns. As such, the author assumes that increase in capital will only have limited impact on economic growth up to the point of saturation, after which further increase will reduce income earned. The saturation stage of economic development is often signaled by stagnant growth, unemployment, and rise in inflation. Moreover, to attain an economic growth, the model proposes increase in GDP invested. Hong Kong has experimented steady increase in GDP reinvested, leading to economic growth witnessed in the last decades. In addition, the city has heavily invested in technology, which has increased labor productivity. However, the theory is criticized for its argument that poor nations that increase their investment have a chance of matching their economic development with the developed nations. However, the model does not explain the cause of investment disparities between nations as percentage of their GDP. Also, it fails to exemplify the fact that some nations are underdeveloped due to poor structural and systemic investment. As such, the author concludes that the model must be applied diligently without overlooking its shortcomings on measurability of economic development.
Copestake (1999) uses his seminal paper to discuss economic development under various circumstances, including free trade. Under consideration of closed economies, the author disregards his previously discussed theories due to clack of free trade economy. He argues that external market effects are crucial in industrialization of an economy with least cap of the internal authority. He quotes Ricardo’s theory of Comparative advantage as most explicit theory of free trade. According to Copestake (1999), allowing free goods and service specialization is the most amicable way of enhancing income growth between trading partners. For instance, good specialization between a developing and a developed nation can foster profitable business and economic growth between the countries regardless of the difference in production efficiency and technology. For example, for the case of Hong Kong, the service industry specialization guarantees the city’s formidable trade with Singapore and Chinese partners; thus enhancing its economic growth.
Minardi and Loiselle (2013) exploit the post-revolutionary Hong Kong to present day economic development. According to them, Hong Kong’s economic development was realized in its transition from a commodity production giant to a self-sufficient service industry. Hong Kong’s production shift was caused by mainland China’s foreign investment policy change in 1978 led by Deng Xiaoping, which no longer favored Hong Kong. The high price of land and labor made many investors shift production from Hong Kong to mainland China. Therefore, Hong Kong remained a service industry characterized by unique features that propel its economic development.
Minardi and Loiselle (2013) acknowledge the free-market institution as the greatest propeller for Hong Kong’s economic development. Hong Kong’s sovereign entitlement in economic return to China is based on the continuity of their trade. The decision gives Hong Kong all the reasons to ensure retention of its free-market economy with the least uncertainty in their economic relationship, which can only be achieved through responsive maintenance of the city’s free-market model. In addition, the Sino-British joint declaration and other political agreements such as with China have ensured political stability of the city, a considerable factor for its economic development. The Sino-British Joint Declaration ceased Hong Kong from being a British colony on July 1, 1997. The “One Country, two systems” principle is also impactful in the stability of the city. The system grants the city autonomy by allowing continuity of the capitalistic system until the year 2047 (Minardi, & Loiselle, 2013). As such, there is undeniable sectoral development realized in Hong Kong City.
Factors of Economic Development
Hong Kong’s economic development is based on certain economic considerations that can be termed as the pillars of its growth. These are factors of production, management, consumption, and growth retention, which can promote the city’s economic development. They include a free market economy, export-led growth, special economic zones, labor supply, and political stability.
Hong Kong has one of the world’s most transparent and responsive free-market economy. With no government intervention and levies, the City’s economic system is fully reliant on the market forces of supply and demand, which has been in practice since 1978, giving a mature system that relies on what it produces against what it consumes to gauge prices, supply, and re-exportation. In addition, the market system gives foreign investors the surety of investing in the city, hence creating an influx of foreign investment. It has also strengthened its currency against global giant currencies like the US dollar, euro, and sterling pound. The free-market economy model has therefore managed to retain Hong Kong on the global market, thereby being the most effective driver of economic development.
Service Industry and Export-led Growth
Hong Kong’s economy is based on service production as opposed to commodity production. The conversation of the economy from the commodity industry to the service industry was due to the increased cause of land and labor in Hong Kong. With increased investment in the 1970s, the city moved most of its commodity industry to mainland China that offered lower prices for land and labor. Therefore, the moves left the city service based, which proved cheaper to produce under least space. Today, Hong Kong makes a great investment through its service industry with the least cost of production and efficiency in service delivery. In addition, Hong Kong pursues an export-led development model. It aims to export more than it imports to boost its local manufacturers and strengthen its economy in the global space. The most explorative example of the service industry and export-based production in Hong Kong is the tourism industry, which contributes 40% of the service earning received (Wong, 2017).
Economic Zones and Location
The listing of Hong Kong among the Special Economic Zones and 14 Open Cities gives it the opportunity to enjoy unlimited economic freedom. These include, among others, relaxed policies and no government interference, which makes the city attract to more investors. The zoning offers the city investment incentives that are shared to investors through non-tariffs and low taxes for corporation and individuals. For example, negotiated 16.5% corporate tax, 15% personal tax, and zero after sale tax gives enough reason to invest in the city (Wong, 2002). In addition, the geographical location of Hong Kong puts it closer to a large market in China, Japan, Taiwan, and other Asian countries. As such, proximity to China offers it the largest market for Hong Kong goods and services (Wong, 2002).
Labor Supply and Political Stability
Hong Kong has a steady supply of skilled labor that steers its manufacturing industry. A constant supply of skilled labor is obtained from expertise learning institutions like Hong Kong University. More labor is obtained from China and its highly industrialized market. In addition, the city’s mile labor laws attract many skilled laborers to the city, which also enjoys stable politics due to none politicization of its business operations. Its political leadership embraces the free market model without infringing on the market operations.
The market model adopted by Hong Kong gives it a unique approach that must be considered in the formulation of its strategic plan. The plan must, therefore, come at the cost of an alternative model that drives its business-oriented approach against the social-benefit approach adopted by other cities in the region. Unlike other Asian cities, Hong Kong’s model is entirely business oriented. That can best be explained by its budget that only allocates 19% to socio-political expenditure while retaining the larger remainder for investment budget (Wong, 2002). The result of such a model has caused social complaints due to the hard life experienced by the middle and low-class members of society who are increasingly becoming unable to afford basic amenities, particularly housing and food whose prices are exaggerated due to uncontrolled investment.
Formulation of a strategic plan must, therefore, consider the most appropriate model for the socio-economic benefit of the city. This study proposes a reconsideration of the social apathy of the city in its strategic plan.
The Key Options spell opportunities for improvements that for Hong Kong city. The recommendations suggest ways to patch some of the socio-economic challenges facings the city. They are as listed below.
ü There is a need for increased social investment to cater for the needs of the middle and low-income earners. An example is investing in equitable social amenities like hospitals and schools to cut down on the expenditure disparities of these facilities between the social classes. The result would increase savings of the middle and low class income earners hence more purchasing power.
ü There is a need to plan for a price cap to avoid exaggeration of market prices, particularly in the housing market.
ü The government must also implement policies that would ensure sustainable land use and planning around the city. There should be a proper urban segment that distinguishes industrial, commercial and residential quarters to cup unplanned expansion. The planning would ensure balanced urban growth under interest of all stakeholders.
ü The city must also reconsider commodity production since nearly every industry participating in good production offers services for its products. The option would also reduce high good importation from China that costs its citizens’ job opportunity.
ü There should also be increased investment in infrastructure, particularly transportation. The congestion of the city requires intense planning of the city’s transport system that would ease congestion and efficient transportation of goods and services.
Push Back and Response
With the continuous growth of the Hong Kong economy, the push backs may exist in infrastructural development, social and community interest, sustainable land use and political stability. According to Wong (2017), the city is already faced with challenge of socio-economic inequality which stands to jeopardize its growth. To solve this problem, the government must reinvest in social amenities to strike a balance between the low and high income earners. The increased cases of congestion and jam should also be tackled by seeking for various alternative modes of transport and restricted development to secure enough roads, rails, and air transport for everyone. The government should also put in place proper planning for the scares land available, and this includes discouraging commercial construction in residential areas and vice versa.
The city’s growth may also be pushed back by increasing political quest to have the city autonomous to Chinese leadership. Wong (2017) believes that increasing cases of riots to have an autonomous governance may tamper with its economic pace. The city’s authority should respond by gesturing goodwill to destruct people from future riots that ruin its economy. A designated body can then be formed to investigate into the issue without taking any inappropriate decision that may jeopardize the success of the city.
Elements of Strategic plan
Hong Kong’s economic development plan may prove challenging if no good strategic plan is contemplated. The plan must consider most import segments of the economic development; otherwise, it may ruin its economic structure. A good plan offers a good opportunity to learn about the city’s model. Therefore, this study recommends five key elements that must be present in a responsive strategic plan for the city (Poister, & Streib, 2005).
- The Plan Must Determine the City’s Location or Zone
There is a great concern for crafting a strategic plan that displays the city, that is, how foreign investors would like to see it, not domestic investors. The element would ensure that investors and customers’ expectations are met. Fortunately, this idea has been in the interest of the city. However, the city seems to have overlooked the needs of the local market, particularly from the middle and low-income earners.
- Acknowledgment of What is Important
The strategic plan must then consider where it desires to see the city in future. Strategic plans are primary tools for economic development and must hence have a goal achievable within a specified time. The goal would set the direction for the city by clearly defining its mission in terms of production, consumption, and sustainability. However, it may be in the interest of the city to prioritize its goals with regard to task involved, cost, and completion time. For example, the objectives can be divided into short and long term goals, hence making it efficiently implementable.
- Define what to be achieved
A good strategic plan must clearly define the objectives of the course. These must include micro and macro objectives in favor of priority and other economic considerations.
The strategic plan must clearly outline who is accountable for each task. The element gives the purpose of direction as there is a sense of task ownership. If need be, it should be expanded to indicate resource and time allocation to avoid a collision of interest.
- Review of the Strategic Plan
A responsive strategic plan must be reviewed comprehensively. The purpose of the review is to implement the plan as desired and make adjustment where need calls. The study recommends a professional review of the plan at least every quarter of the year.
Copestake, J. (1999). Theories of Economic Development. Department of Economics and International Development, University of Bath, UK. Article for the UNESCO Encyclopedia of Life Sciences, 20(5). https://utd.edu/~mjleaf/Copestakeunesco.html
Minardi, J. F., & Loiselle, M. J. (2013). Hong Kong: The Ongoing Economic Miracle. Montreal Economic Institute. Retrieved from http://mobi.iedm.org/files/note1113_en.pdf
Mookherjee, D., & Ray, D. (Eds.). (2001). Readings in the theory of economic development. Oxford: Blackwell Publishers. https://www.econ.nyu.edu/user/debraj/Papers/DevReaderIntro.pdf
Poister, T. H., & Streib, G. (2005). Elements of strategic planning and management in municipal government: Status after two decades. Public administration review, 65(1), 45-56. Retrieved from http://www.msu.ac.zw/elearning/material/1284547370strgt%20planning%20students.pdf
Robbins, L. (1968). Theory of Economic Development in the History of Economic Thought. Springer. https://mises.org/sites/default/files/The%20Theory%20of%20Economic%20Development_2.pdf
Wong, Y. C. R. (2002). The Role of Hong Kong in China’s Economic Development. The University of Hong Kong Working Paper Series, 2002, 26. Retrieved from http://www.agi.or.jp/7publication/workingpp/wp2002/2002-26.pdf
Wong, Y. C. R. (2017). Fixing Inequality in Hong Kong. Hong Kong University Press. Retrieved from https://www.hkupress.hku.hk/pro/con/1618.pdf [Accessed on March 8, 2019]