Hong Kong's Economic Restructuring

Hong Kong's Economic Restructuring

Learning Objectives

• Trace the growth and decline of manufacturing in Hong Kong through its different phases:
  • I: Hong Kong as an entrepot (up to late 1940s).
  • II: Hong Kong as an industrial/manufacturing city (early 1950s - late 70s).
  • III: Hong Kong as a service-oriented city (early 80s - mid-90s).
• Understand Hong Kong as one of the Four Asian Tigers.

Hong Kong Profile

• Area: 1,054 sq km
• Population: 7.536 million (as of 2023)
• Ethnic Groups:
  • Chinese: ~92%
  • Indonesian: 1.9%
  • Filipino: 2.7%
  • South Asians: 1.4%
• Life Expectancy: ~84 years (as of 2022)
• GDP: USD 382 billion (as of 2023)
• GDP per Capita: USD 50,696.59
• GINI Coefficient: 0.47 (as of Jan 2024)
• Projected Deficit: HK$100B for fiscal year 2024-25

Hong Kong as a British Colony

• Became a British colony through the First and Second Opium Wars (1839-1842; 1856-1860).
• Treaties Expanding Territory:
  • Treaty of Nanking (1842): Qing Dynasty ceded Hong Kong Island to Britain after the First Opium War.
  • Treaty of Tianjin: Britain gained land on the Kowloon Peninsula after China's defeat in the Second Opium War.
• Mid-19th Century Role:
  • Entrepot for lawful trade in wool, clothing, metals, Indian raw cotton to China coast ports.
  • Export of Chinese products (tea, silk, porcelain, bamboo matting, sugar, pigments) overseas through Hong Kong.

Hong Kong Development - Phase I: Entrepot (轉口港)

• Lord Palmerston's Description: "A barren island with hardly a house upon it."
• Free Trade Port (1842): Established to compete with Portuguese Macao.
• Hong Kong Government Setup (1843): Investment in infrastructure and constructions.
• Attraction of Foreign Merchants:
  • Free-port status and proximity to Guangzhou attracted foreign merchants and capital.
  • 73 foreign firms established within 20 years of becoming a port.
  • By 1893, 98 foreign firms and six banks were headquartered in Hong Kong; trade volume exceeded 20 million pounds sterling.
• Dominance of British Firms:
  • Major British firms (hongs行): Butterfield & Swire 太古洋行, Dodwell & Co. 天祥洋行, A.S. Watson & Co., Jardine, Matheson & Co. 怡和洋行, and Lane and Crawford.
• Rapid Development of Shipping Industry and Entrepot Trade:
  • Shipping companies: Butterfield and Swire, Jardine's.
• Complementary Activities:
  • Shipbuilding and ship repair: Whampoa and Wheelock.
  • Rope manufacturing.
  • Expansion of British-owned and Chinese-owned trading houses, insurance companies, shipping companies, and banks (e.g., Hong Kong and Shanghai Bank, est. 1865).
• Hub of Southeast Asia's Transportation Network:
  • Thriving shipping industry placed Hong Kong at the hub of Southeast Asia’s transportation network in the late 19th century.

International Trade

• Definition: Exchange of goods & services between countries; export and import of goods and services.
• Needs:
  • Price
  • Quality
  • Availability
  • Demand
• Types:
  • Export Trade: Selling goods & services out of the country.
  • Import Trade: Goods & services flowing into the country.
  • Entrepot Trade: Importing goods from one country & exporting it to another after adding some value to it.
• Advantages:
  • Comparative Advantage
  • Economies of Scale
  • Competition
  • Transfer of Technology
  • More job creation
• Disadvantages:
  • Over-dependence
  • Unfair to new companies
  • A threat to National Security
  • Pressure on natural resources
• Comparative Advantage Factors:
  • If foreign companies can produce goods & services more cheaply, then it may be beneficial.
  • If the companies abroad can offer good and services of superior quality.
  • If it's impossible to produce a product domestically.
  • If demand for product/services is more in country than what it can domestically produce, then it goes for import.

Entrepot Trade

• Location: Situated in the outer estuary of the Pearl River, close to Guangdong.
• Process: Importing goods and re-exporting them to other countries without repackaging or additional processing.
• Role of Trader: Acts as both the exporter and importer simultaneously.

Chinese Business Elite Emergence

• Growth in Trading Hongs and Chinese Traders:
  • Trading hongs: 215 in 1876 to 395 in 1881 (83.72% increase).
  • Chinese traders: 287 in 1876 to 2377 in 1881 (728.22% increase).
  • Chinese brokers: 142 in 1876 to 455 in 1881 (220.42% increase).
• Taxpayer Statistics:
  • In 1876, 8 out of the top 20 taxpayers were Chinese individuals or firms.
  • In 1881, 17 of the 20 were Chinese.

Hongkong and Shanghai Banking Corporation

• Established as a 'local bank' for Hong Kong and treaty ports of China, Japan, and Chinese overseas networks.

Demise (敗落) of Entrepot Trade

• 1st Shock: The Japanese Occupation (late 1930s to 1945).
  • Postwar recovery of entrepot trade.
• 2nd Shock:
  • Setting up of People’s Republic of China (1949).
  • The outbreak of the Korean War (1950).
  • UN’s trade embargo (禁運) on China (Resolution 500 in 1951).
• Trade Statistics:
  • In 1938, more than 40% of Hong Kong’s trade was with China.
  • In 1953, it dropped to a mere 20%.
• Consequence:
  • Forced Hong Kong to develop industries to support itself.

Hong Kong Development - Phase II: Industrial/Manufacturing City

• Limited Development Options:
  • Lack of new cultivable land.
  • Hilly relief.
  • Obsolete (過時的) system of land tenure and property rights in the New Territories (regulated by The New Territories Ordinance (Cap 97) enacted in 1910).
  • Negligible mineral resources.
• Extension of agriculture Investment in agricultural infrastructure.

Export-Oriented Industrialization (EOI) 出口導向型經濟

• The Only Option: Export-oriented industrialization (EOI) 出口導向型經濟.
• Definition: Industrialization led by exports of goods in which the country has a comparative advantage (i.e., an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners).
• Characteristics:
  • Production of manufactures for export.
  • Labor-intensive.
  • Small firms.
  • Dominated by export-oriented industries (textiles, clothing, and electronics).
• Key Features:
  • Manufacturing of standardized consumer goods.
  • Export of goods to high-income countries in the West.
  • Raw materials imported from other Asian countries.
  • Reliance on the West for capital goods (machinery, equipment, vehicles, and tools).

Four Stages of Development of the Industrial Economy (Sit 1998)

• Figure 1.
  • The Four Stages of Post WW II Industrialization
    • Import Substitute Phase I
    • Export-oriented Phase I
    • Import Substitute Phase II
    • Export-oriented Phase II

Stage 1

• Import-substitute (进口替代) Phase I:
  • Political and social stability attained.
  • Early industrialization driven by:
    • Domestic market.
    • Absorption of foreign capital.
    • Imported matured technology and management skills.
  • Typical industries at this stage: Food, textiles, and garments.
  • Strong government support: Tariff, stringent controls over foreign currency exchange, incentives to infant and pioneer industries.

Stage 2

• Export-oriented Phase I:
  • Local market reaches saturation.
  • New industries ready to compete in international market.
  • Government promotes export for growth and expansion.
    • No more trade protectionism measures such as tariff.
    • Presence of a new regime of laissez-faire (自由放任).
    • Definition: The less the government is involved in the economy, the better off business will be, and by extension, society as a whole.
    • Note: Laissez-faire economics is a key part of free-market capitalism.
  • Growth of export-oriented industries.

Stage 3

• Import-substitute Phase II:
  • Complicated industrial structure.
  • New challenges facing low skill and labor-intensive industries:
    • Market protections in major importing countries.
    • Increasing competition from lower-cost producers.
  • Need to increase technological depth and a diversification path.
  • New industries to develop to complement established export-oriented light industries.
    • Heavy, capital- and technology-intensive (e.g., iron and steeling making; machinery).
  • Light industries will try to maintain growth by improving quality and introducing partial automation.
  • Government supports are required (e.g., tariff, subsidies).

Stage 4

• Export-oriented Phase II:
  • New industries in stage 3 mature in quality and price competitiveness.
  • R & D activities and new sector developed.
  • Less government interference.
  • More policies on high-level human resource training and enhancement of R & D.

Country Stage Examples

• Taiwan: Stage 1 in 1956-66 and Stage 2 from 1966-71.
• South Korea: Long import- substitute phase (1955-70) before entering the Export-Oriented Phase I in the early 1970s.
• Malaysia and Thailand: Still in Stage 1 at the beginning of the 1970s.

Hong Kong's Unique Position

• Hong Kong is unique among Asian newly industrialized economies (NIEs).
  • NIE= developing economies that have advanced toward industrialization and might become developed, at some point, in the near future.
• It has never been in Stage 1, having started off in Stage 2 as a consequence of the transferred industrialization.

Transferred Industrialization

• Hong Kong as Stage 2 (export-oriented phase I) of industrialization.
• Reason: A result of new political realities of China and Hong Kong’s geographical and ethnic proximity.
• Benefited from Substantial Transfer:
  • With Japan's industrial plant in ruins at the end of WWII, the only core of industrial strength in the whole of Asia was that of Shanghai.
  • Hong Kong benefited from the substantial transfer of capital and human resources from this center.
  • This gave the colony an edge in the post-WWII industrialization competition among Asian economies, and it had almost no serious or capable rivals at the time.
• Contributing Factors:
  • Hong Kong's political system, laissez-faire tradition, excellent infrastructure (result of being an international port and financial center), and the large amount of export quotas.
  • Flexible system of production and entrepreneurship, have enabled it to remain competitive in Stage 2 industries for a much longer period than other economies.

Positive Non-Interventionism

• Sir John James Cowperthwaite (郭伯偉)
  • Hong Kong Financial Secretary 1961-1972
  • Cambridge educated economist
  • Laissez Faire approach to economic development
  • Govt. provided public goods like infrastructure, education, housing
• Daniel Hanson Quote:
  • "Cowperthwaite made Hong Kong one of the most economically free economies in the world and pursued free trade, refusing to make its citizens buy expensive locally-produced goods if they could import cheaper products from elsewhere (Singleton, 2006)."
    Definition
  • "Positive non-interventionism: The policy that unleashed Hong Kong"
  • Recognized the power of free markets while realizing that proper infrastructure and light regulations were sometimes essential to facilitate market decisions.
  • Argued that the government needed a demonstrable competitive advantage to justify every intervention into the economy, and that very few of these demonstrable advantages existed
• Kept taxes low, refused to impose any tariffs, and focused his efforts on innocuous tasks, like building roads. Businesses fail, but noted that:
  • "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster."

Laissez-faire State Intervention

• The laissez-faire form of state intervention in the economy persisted during the 1950s and 1960s.
• Minimal interaction between state and society.
• Administrative Absorption of Local Chinese Elites:
  • A process by which the govt co-opts (推舉) the local elites into an administrative decision-making body.
  • The colonial government gained legitimacy by recruiting respected elites into the administrative system.
  • Lessened political threats to the government.
• Positive Non-Interventionism After 1967 Riots:
  • In response to challenges to the legitimacy of British colonialism in the aftermath of the 1967 riots and, as a result of rising social expectations and demands, the colonial government resorted to “positive non-interventionism”.
  • Defined by the rapid growth of social spending and public investment in infrastructure and human capital as well as by government regulation of the financial and banking sectors.

Trade-Led Arrangement

• Local Manufacturers as Original Equipment Manufacturing (代工生產) producers in the 1970s:
  • An Original Equipment Manufacturer (OEM) makes components of another company's products.
  • Small establishments (employing 50 or less) always played a role
    • 1961: 78.7%
    • 1971: 92.1%
  • Rely on local trading companies and overseas buyers as intermediaries.
  • Minimal access to working capital: working capital= the capital required by a business or venture to meet its day-to-day expenses.
  • Focus on production.
  • Responsive and adaptable to a changing business environment.
  • No marketing, minimal technological investment.
  • Survivors operating in narrow niches instead of taking the lead in innovation and structural transformation.
• Immigrant Cheap Labor:
  • Benefited from waves of immigrant cheap labor.
  • Lax control over illegal immigrations (“touch-base” 抵壘政策 concession 1974).
    • Touch-base policy allowed immigrants from mainland China who reached the urban areas (reaching south of Boundary Street) and met their relatives to register for a Hong Kong Identity Card.
    • It was replaced with a strict repatriation (遣返) policy in 1980.
  • Active role of government in urban developing and provision of public housing
    • Development of new towns on the urban fringe (1970s).

Employment Share of Dominant Industries in Hong Kong

• TABLE 3.1 Employment Share of Dominant Industries in Hong Kong, 1960-1990

GDP and Employment by Industry

• Table 2.1

Growth of HK’s GDP

• Growth of HK’s GDP in 60s and 70s attributed to √“horizontal” expansion of the labor force (i.e. the influx of large number of relatively unskilled workers
• × “vertical” upgrading of skills of resident employers and employees

OEM Producers in 1980s

• OEM producers in 1980s:
  • Wages dramatically increased during this period.
    • Daily wage in 1982 (HK$73) and by 1990 (HK$184).
  • Labor shortages.
    • Cancellation of “touch-base” policy in 1980.
  • A soaring property market.
    • Rent doubled between 1981 and 1990.

Deindustrialization (去工業化)

• Hong Kong chose deindustrialization去工業化 due to shifts in the industrial structure, emerging market demands, and the interconnected upgrading of production and human resources
• Deindustrialization The contraction and decline of the weight of manufacturing industry within an economy.
• Additionally, the development of closer cross-border ties and Hong Kong's evolution as a global city played a role in the decision
• The government's non-interventionist economic policy also influenced the promotion of high-tech industries
• Factors contributed to the decision
  • Economic
  • Political
  • Global

China’s Open-Door Policy (1978)

• Better business environment in the Delta; more incentives and opportunities to foreign direct investment
• Law on Joint Venture Involving Chinese and Foreign Investment.

FDI and TNC Branches

• Since its economic reform and opening-up in the late 1970s, China has been one of the most successful developing countries in attracting FDI and drawing transnational corporation (TNC) branches to boost economic development and urbanization model
• Nationally strategic mega-city regions, such as the Beijing–Tianjin–Hebei (BTH), Yangtze River Delta (YRD), and Pearl River Delta (PRD), have a disproportionately high concentration of economic activities related to FDI
• PRD in southern China stands out from BTH and YRD by its “one step ahead” in economic reform and the influx of low-end production and assembly economic activities from abroad
• FDI and TNC branches from Hong Kong, Taiwan, and other developed economies have flourished the PRD economically for over three decades, characterizing it as an internationally renowned satellite industrial platform and “exogenous urbanization” (exogenous: externally-induced 外源的)

FDI in Guangdong

• Table 6.1

GDP by Economic Activity

• Percentage contribution to GDP cost
• Table 2.7

Distribution of employment by sectors

• Table 2.6

Hong Kong Development Phase III: Service-Oriented City

• Manufacturing industries: restructured through massive relocation (“Made by Hong Kong” instead of “Made in Hong Kong”)
• To operate labor intensive assembly in China or ‘offshore’ (離岸) while keeping HK as controlling HQ
• Offshore: outside the country; running a portion of business operations in another country
• Hollowed-out (挖空) manufacturing in the late 1990s
• No growth of knowledge-based and higher-value added manufacturing

Reconnecting its hinterland

• Yunnan
• Sichuan
• Hunan
• Jiangxi
• Guizhou
• Fujian
• Guangxi
• Guangdong
• Hainan
• Macao SAR
• Hong Kong SAR

Expansion of HK’s Tertiary Sector

• To serve the expanded industrial system
• To offer producer services for supporting Hong Kong’s export-oriented processing industries
  • Front shop, back factory 前店後廠
    • Exogenous urbanization model under the regional division of labor between Hong Kong and the PRD
    • Front shop activities: tertiary in nature, higher value-added; concentrated in HK
    • Back factory: manufacturing processes in the Delta

Front Shop Back Factory Model

• Designing, Marketing, Financial Control (Hong Kong Management Headquarter Office)
• Production, Labour (Back Factory, the Delta)

Labour Intensive Manufacturing

• Hong Kong's labor-intensive manufacturing industry moved north to the Pearl River Delta on a large scale.
• “Three Import and Compensation Trade” (“sanlai yibu”三來一補): processing with supplied materials, processing with supplied samples, assembly with supplied parts, compensation trade.
• Front-shop-and-back-factory: Hong Kong is responsible for receiving orders, sales market network, and financial management, and the Pearl River Delta is responsible for processing and manufacturing with low-cost labor and land.
• "Bottom-up" regional cooperation initiated by Hong Kong entrepreneurs and ordinary citizens, and participated by local governments in the Pearl River Delta

“Flying Geese” Model of Asian Economies

• (雁行形態論)
• Coined by Kaname Akamatsu (赤松要), an Economist from Japan, in the 1930s
• A view of Japanese scholars regarding technological development in East and SE Asia which sees Japan as a leading power
• The model intends to explain the catching-up process of industrialization in latecomer economies
  • Lead goose: Japan
• The second-tier of nations + city-states: newly industrializing economies (South Korea, Singapore, Taiwan, and Hong Kong) and the Association of Southeast Asian Nations (ASEAN) (東南亞國家協會) countries
• The least developed major nations in the region: China, Vietnam, the Philippines

60 Years of Asian Industrialisation

• Japan as Lead goose: Japan
• China, Malaysia, South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Thailand, Vietnam, Cambodia & Laos, Myanmar

Four Asian Tigers/Dragons (亞洲四小龍/ 虎体经济)

• A term given to the economies of Hong Kong, Taiwan, Singapore, and South Korea
• Rapid growth through export trade and industrialization
• Transformation began in the 1960s when TNCs sought new areas with lower labor costs
• They represent the first generation of NIEs
• Their economic growth serves as a model for many developing nations, particularly Southeast Asia’s Tiger Cub Economies (Indonesia, the Philippines, Malaysia, Thailand, and Vietnam)
• Driving Forces:
  • Rapid industrialization and export policies, the Four Asian Tigers have steadily maintained high economic growth rates since the 1960s
• Rapid GDP grown: 1950 to 2018

Hong Kong

• Rapid industrialization after 1950s, induced from the UN embargo to China after the Korean war, and driven by strong demands
• Low, simple, and competitive tax system
• Free trade and a host of government policies
• Rapid GDP growth (over 180 times from 1960s to 2000)
• Entrepot back to business from the 1980s, with strong growth of tertiary production and services
• Property as a important “market product” and speculation

Singapore

• One of the 14 states of Malaysia from 1963 to 1965, independence gained since 1965
• Foreign trade and foreign direct investment
• Strong, efficient and least corrupt governance
• State-led policy and investment
• Export of machinery and refined petroleum products
• Fast growth of tertiary production (Tourism, resort, exhibition, gambling, etc.)

South Korea

• Strong yet not efficient governance
• Huge national conglomerates (Samsung, Hyundai, etc. they are in fact even more significant than Japan’s Zaibatsu 財閥)
• Industrial and export-oriented economic growth
• Heavy and light industries: cars to smartphones
• Growth of soft-powers

Taiwan

• Pro-1949 KMT Government and economic reform
  • National economic plans in 1970s
  • U.S. commercial ties with Taiwan have been maintained and have expanded since 1979
  • Industrialization and open doors to China
• From farming products to cultural industries and semiconductor
• The Taiwan Miracle (臺灣奇蹟 ) or Taiwan Economic Miracle refers to Taiwan's rapid economic development to a developed, high-income country during the latter half of the twentieth century

Similar Characteristics of Four Asian Tigers

• The Four Asian Tigers share common characteristics, including export-oriented industrialization, well-developed infrastructure, strong government intervention, emphasis on education and technology, and a focus on developing a skilled workforce

Tiger Cub Economies (亞洲四小虎)

• Refer to the economies of the developing countries of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, the five dominant countries in Southeast Asia.
• They follow the same export-driven model of technology and economic development already achieved by the Four Asian Tigers
• shift of manufacturing hubs from East Asia to the emerging markets of Southeast Asia has created an unprecedented demand for supply chain professionals in the region

Evolution of Hong Kong’s Economy

• Entrepot phase (up to Late 1940s)
• Industrial/manufacturing phase (early 1950s - late 70s): Transitioned to an industrial hub, focusing on export-oriented industrialization (EOI)
• Service-oriented phase (Early 80s - Mid-90s)
• Historical influence: British colonial legacy shaped economic policies, leading to a laissez-faire approach that promoted free trade and minimal government intervention
• The Four Asian Tigers