Friday, November 25, 2005

Hong Kong: from toy-makers to traders

I got a question from Blur re my previous post: hi. i'm not an economist but isn't hong kong (like singapore) not necessarily overflowing with natural resources? hence, the reason for not wanting to focus on producing or manufacturing but rather to act as "middlemen" for the region (or the world)?

Hong Kong, Singapore, Japan, are all resource-poor countries. However all went through a stage of rapid industrialization. Definitely not the type of macho, large-scale, steel-based industries the nationalists favor. The classic pattern is to start with labor-intensive industries (often consumer goods manufacturing, such as apparel and footwear), to take advantage of labor abundance. Yes, that's right, start with low wage cheap labor. The glass is half full after all - the "sweatshop" is but a the first room in the corridor towards the computerized office, or even the corporate boardroom.

Consider Hong Kong: Dodsworth and Mihaljek quote Smith (1997):
When I arrived in the territory in 1970, Hong Kong’s reputation was as a low-cost manufacturer of cheap clothing, wigs, plastic goods and toys. Although the Hongkong and Shanghai Bank, Standard Chartered, and Citibank were present in Hong Kong with a group of relatively weak local banks, Hong Kong was in no sense a financial centre, let alone an international financial centre. If a trading company were to have asked its bankers for a price for U.S. dollars two weeks hence, it would most likely be told: "If you want dollars in two weeks’ time, come back then—I’m sure we will have some" (pp. 1–2).

Well, now it is:
the world’s seventh largest trading entity and seventh largest stock market; the world’s fifth largest banking center in terms of external financial transactions and fifth largest foreign exchange market in terms of average daily turnover; the world’s fourth leading source of foreign direct investment the world’s busiest container port, and one of the world’s most prosperous economies, with per capita GDP of US$24,500 comparable to all but the wealthiest industrial countries.

All that earlier Hong Kong manufacturing was domestic. Tao and Wong (PDF file) show that domestic exports in the 1970s accounted for over 80% of total exports; in recent years however re-exports (a large part of which goes to the mainland) now stands at about 70%. Within thirty years the low wage, labor -intensive manufacturing economy became a trade and financial hub.

One does not need exotic theory to explain this. One need only apply the most elementary economics. When labor is abundant relative to capital, the efficient use of resources, and one which the free market would promote, would be to specialize in labor-intensive industries. However with consistent savings, capital accumulates; labor slowly becomes scarce relative to capital, and wages start going up. Labor-intensive manufacturing disappears (the owners would go abroad for other countries in which labor remains abundant. In the Hong Kong case it was the mainland.) Either manufacturing diversifies towards capital-intensive, high technology activities, or disappears altogether, to be supplanted by services with high value-added. The former happened to Japan, and is happening in South Korea; the latter happened to Hong Kong and Singapore.

Most of the East Asian economies pursued industrial policies and export promotion; Hong Kong is unique, as it did none of this. Rather export promotion was "pursued" by engaging in free trade. Note that economy can only export (earn money from the rest of the world) by buying goods from the rest of the world (import), unless it is willing to lend indefinitely to the rest of the world. Hah, and my grandma is a TV set.

Why did Hong Kong pursue free trade? Historical reasons, apparently, according to this old Economic Times article Hong Kong used to be a duty-free port under the British. That historical heritage got embedded deep in the government psyche.

Unfortunately in other countries the psyche among policymakers and the general public (at least those with some idea about trade issues) is knee-jerk protection. Drat. At least I have the right to daydream. The Subic duty free zone, getting bigger and bigger, swallowing up Zambales, Pampanga, Tarlac, Metro Manila, Luzon, Visayas, Mindanao...

1 comment:

jemy said...

hi. still not convinced although a truly conclusive answer would indeed be welcome.

however, the same is not possible for now i guess. as far as hong kong is concerned, a confluence of events most probably led to its present status. location, political history, social developments, developments abroad, and yes economic policies. i think its a bit premature to immediately pin it down singularly on free trade. it's possible that they were able to take advantage of an open economy because they were ready. as in, they opened up at just the right time.

i guess the same would go for south korea. and for china. in any event, someone told me that brunei is an example of an open economy that's essentially still struggling.