Thu, Jul 29, 2004 - Page 8 News List

China investment should be curbed

By Kenneth Lin林向愷

It has been seven years since Hong Kong was returned to China. International focus as of late has been on the issue of direct elections of the former colony's chief executive. Less attention has been paid to prospects for Hong Kong's economic development.

Hong Kong, Taiwan, Singapore and South Korea -- the so-called Asian tiger economies -- are second only to Japan, and lead China in economic growth. But given China's rapid growth during the 1990s, many wonder whether China has surpassed the Asian tigers in this respect.

Some economists argue that GDP is an appropriate measure of a nation's wealth. Thus, we can measure the GDP of the Asian tiger economies relative to that of China to explain the changes in the wealth of these nations.

In 1990, Taiwan's GDP was 7.3 times greater than China's GDP. In 1995, that difference had shrunk to 5.8 times, and by 2002, it had shrunk further to 4.5 times.

During the same years, Hong Kong's per capita GDP was 12, 8.6 and 6 times greater. China has not been catching up with Taiwan's GDP as fast as it has with Hong Kong's, but is catching up with Taiwan's faster than it is with Singapore's.

In South Korea's case, its economy was 5.7, 4.6 and 3.7 times greater than China's over the same time period, making it the Asian economic tiger whose wealth gap with China shrank the most.

Since China still finds itself in the early stages of economic development, its growth rate will be faster, so the shrinking wealth disparity between China and the four Asian tigers is a normal part of the process of development.

By the second half of the 1980s, the competitive advantage of the Asian tiger economies was no longer based only on labor-intensive products for export, and the four gradually developed capital and technology-intensive industries.

Compared to the developed world, the bulk of foreign investment from the four Tigers went to less developed countries. This reflects the fact that many firms in Taiwan, Hong Kong, Singapore or North Korea prefer a cost-reduction strategy.

The main reason for the closing wealth gap between China and the tiger economies was that, during this period, there were differing levels of foreign investment in the Chinese economy.

Hong Kong invested the most, followed by Singapore, Taiwan and South Korea. A simple analysis reveals that countries with close economic ties with China may gain advantages in the short run, but such ties will prove disadvantageous in the long run. Hong Kong and Singapore are two good examples.

During the 1980s, Hong Kong businesses adopted cost-reduction strategies in production and moved their factories to China, where land and labor were cheap.

What's more, the Hong Kong government did not restrict this development, which led to large flows of capital and technology to China.

Because they lacked the ability to "use knowledge to create value," this migration of production led to a very slow upgrading of Hong Kong's industries, which in its turn caused the value of Hong Kong's manufacturing proportion of its overall GDP to fall from 23.6 percent in 1980 to 6 percent last year.

The speed of deindustrialization was much faster than in any developed country, and caused unemployment in the territory to rise significantly.

At the time, government and industry groups in Hong Kong took the attitude that production service industries would create new job opportunities. As the competitiveness of production service industries in Guangdong Province improved significantly, Hong Kong manufacturers setting up operations there found it more convenient to begin using the production services provided by local companies instead of those from Hong Kong. This led to a rapidly deteriorating employment situation in Hong Kong.

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