Is Hong Kong Finished?
with Wing Suen
For the first time since 1984, Hong Kong registered a first-quarter negative growth rate this year. Despite repeated assurances of "sound fundamentals'' from government officials, the long term future of the economy has come to adopt a more gloomy outlook. The rent is too high. Mediocre managers and administrators earn amazing salaries for the amount or importance of the work they do. Speculative fevers draw talents away from enterprise. Government mismanagement, real or imagined, nips at Hong Kong's free market foundation. Are these problems of the economy newly developed or newly discovered?
The economic success of Hong Kong has been nothing short of a miracle. One theory has it that Hong Kong is plain lucky. At every critical junction, events went in the way that could not have been better for Hong Kong. The miracle was born when the communists took over China. Refugee workers and entrepreneurs 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 door to foreign investment. Hong Kong's investors and managers jumped at this opportunity and swarmed South China. And just when Hong Kong managers became too expensive relative to the local supply of talents, the demand for financial services from mainland business needs exploded. Hong Kong quickly transformed itself into a world class financial center.
But Hong Kong's luck is running out. Since Shanghai woke up a few years ago, Hong Kong's status as the financier for Chinese economic development has been under threat. Steven Cheung of the University of Hong Kong is always fond of talking about Shanghai's college students. They study so much harder than 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 someday mainland and foreign investors will find it both cheaper and easier to do transactions in Shanghai than in Hong Kong.
What will become of Hong Kong without the financial industry? The worry of Shanghai gaining ascendancy is well placed, but one should not lose sight of the comparative advantages of the Hong Kong economy. There is an efficient legal framework, a working administrative system, a good connection to international financial markets, and state-of-art infrastructure. Hong Kong has all the hardware, but how can Hong Kong best exploit its advantages? The answer is simple: by getting the best software.
It is well recognized that entrepreneurs from Shanghai had played a crucial role in bringing about the industrialization of Hong Kong. The supply of talents in Hong Kong then was rather limited. As Hong Kong became more prosperous, one would like to believe that the situation has changed. True, fifty years of economic development have 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 eases, Shanghai is drawing talents from all over the country. Hard as Hong Kong may try, it is tough to beat the numbers: the best and 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.
The problem 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.
To boost its human resources, Hong Kong cannot afford to rely exclusively on local talent. No investment is large enough to overcome the inherent disadvantage from 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 really 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 high living standard and locational advantages will be irresistible.
A practical way of attracting talents is to allow mainland (and overseas) students at local universities to stay and find work in Hong Kong after graduation. If the mainland government is allowing students to go to the United States, it will not be bothered if they come to Hong Kong instead. So it is unlikely that tapping Chinese human resources will invite mainland government's interference with local affairs. At present, the University Grants Committee allocates only two percent of the undergraduate intake to non-local 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 can permit them to stay as long as they can find jobs in Hong Kong, which is what the United States does to keep foreign talents there. Then, studying at Hong Kong universities will become attractive enough for the best of mainland talents, and the intake quota can be raised. For the sheer size of its population, mainland China produces more innate talents than does Hong Kong. Yet education resources in Hong Kong are far superior to those in China. Bringing mainland talents 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 prove to be part of the key software for the development of Hong Kong.
The government should also directly import skilled labor from China. Mainland talents will bring with them not only skills but also the specific knowledge crucial for success of mainland-related businesses. This specific knowledge complements the hardware advantages of Hong Kong, but is unlikely to be obtained from Hong Kong's education system. Mainland talents should be treated in the same way as talents from other countries. In particular, they should be allowed to move freely between mainland China and Hong Kong as they wish. Mobility is crucial in making Hong Kong an attractive destination for mainland talents, because some perceive the mainland to have greater opportunities than Hong Kong right now. If mainland talents can move freely, the labor market will sort out the right kind of workers for both Hong Kong and the mainland.
A new labor importation scheme may sound like heresy at a time when unemployment is at a fifteen year high, but it is times like this that we should be especially vigilant for the rise of protectionism. Bad economics will try to say that 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 supply of skilled labor with specific human capital will raise instead of reduce the demand for both other skilled labor and unskilled labor. The current labor importation schemes are ineffective at best. Real wages for unskilled labor have remained relatively flat for several years, while wages for managerial and professional workers soared. The future of Hong Kong lies in high value-added industries ---sectors that will serve the business needs of China. It is brains, not brawn, that are short in Hong Kong.
Business cycles come and go. Concerns about present economic troubles should not delay plans for the long term future of the economy. By the time the proposed policy is put in place and mainland students under this policy start looking for jobs, Hong Kong may well be experiencing a tight labor market again. No government can fine tune its policies to the employment situation three years from now. Governments can only hope to adopt policies that are likely to contribute to long term productivity growth.
So many people in Hong Kong worry about losing out to Shanghai, but few have asked just why China should build another financial center when Hong Kong can provide most of the services. After all, even for a bigger economy like the United States, there is only one financial center, and that is 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, service providers for China will be in Shanghai, and those for the rest of Asia will either move east to Tokyo or west to Singapore. Then Hong Kong will be finished for sure.