Seminar organizer
Richard Charles Lee Canada – Hong Kong Library
University of Toronto
February 11, 2013
ECONOMICS FREEDOM OF HONG KONG:
LESSONS AND CHALLENGES
KUI-WAI LI
CITY UNIVERSITY OF HONG KONG
1
GRATITUDE CONVEYS TO
Organizer: Richard Charles Lee Canada – Hong
Kong Library.
 Sponsors:
- Hong Kong Economic & Trade Office, Toronto
- Hong Kong Canada Business Association (HKCBA)
- Asian Institute, Munk School of Global Affairs,
University of Toronto
- In Depth Conference: student organization.

2
WHY ON HK’S ECONOMIC FREEDOM?
Externally:
 Absolute picture of the freest economy.
 As a reference to emerging/Asian economies.
 Is there a Hong Kong model?
 World opportunities given to HK.
 Internally:
 Falling skill to analyze economic issues in HK.
 Reiterate the appropriate use of economics as a
solution.
 HK people’s ingenuity, enterprising, dynamism.

3
INDEX OF ECONOMIC FREEDOM
Ten indicators grouped under 3 pillars:
 System: trade, financial, investment, and
adherence to property right.
 Policy: fiscal, monetary, and size of
government.
 Ethics: business, freedom from corruption, and
labor.

4
THE HONG KONG MODEL
Laissez faire: supply-driven strategy, pro-growth
policies.
 Govt: provides “needed positive assistance”,
taking a “back seat”, supportive approach.
 Promote civic freedom between ruler and ruled.
Colonial govt acted as a referee in politics.
 Economic relativity: economic activities
produce relative outcomes, absolute outcome
activities become personal choices.

5
Per
cen
20
tag
e
Economic
Recovery
15
US$ Depreciation /
Visit Free Travel Scheme
Stock Market Crash
Beijing
Olympic /
US Financial
Crisis
Iraq-US War
10
China 's Entry
to WTO
Deng's Southern
Tour
Water Supply
Restriction
China's Reform
Riots in
1967
5
Transfer of
Sovereignty
Nixon's China
Visit
SARS /
Iraq-US War /
CEPA
Political Turmoil
in China
0
1962
1964
1966
1968
1970
1972
1974
1976
1973 Stock Crisis
1978
1980 1982
Oil Crisis
-5
1984
1986
1988
1990
Sino-British
Negotiations
1992
1994
1996
1998
2000
-10
Development as a Financial Centre
Revitalization of Re-Exports
2004
2006
2008
911 Attack
Afghanistan-US War
Property Boom
Asian Financial Crisis
Industrialization
2002
Growth in Services
Mainland
Economic
Integration
Figure 2.2 Hong Kong’s GDP
Growth Rates: 1962-2009
Year
6
OVERALL GDP PERFORMANCE
GDP volatility is asymmetric: volatility is low when
GDP rises.
 Investment drives growth.
 Govt. spending not growth promoting.
 Volatility is high in housing and stocks.
 Financial market more in line with Tokyo and
Singapore.
 Trade and consumption more in line with Taiwan.

7
TOTAL FACTOR PRODUCTIVITY
Measureable inputs: capital, labor, land.
 TFP indicates the sum of non-measureable
input contributions: human capital, technology,
efficiency, economies of scale, etc.
 Most convenient is to use the accounting
approach. Can be calculated on both the
aggregate and disaggregate basis.
 Economic freedom: allow openness and
opportunities, should facilitate TFP growth.

8
Table 4.3 Hong Kong’s Productivity Accounting: 1981-2005
(Compound Annual Growth Rates)
Growth Rates
Share of Payment
Contribution to Output by
Output Capital Labor Capital Labor
TFP
Capital
Labor
1981-1985 5.4
8.1
3.5
0.46
0.54
-0.2
3.7
1.9
1986-1990 8.3
7.3
1.3
0.47
0.53
4.1
3.5
0.7
1991-1995 5.4
8.1
0.1
0.48
0.52
1.4
3.9
0.0
1996-2000 3.5
5.5
3.3
0.45
0.55
-0.8
2.5
1.8
2001-2005 4.7
3.8
0.8
0.42
0.58
2.6
1.6
0.5
1981-1990 6.8
7.7
2.4
0.46
0.54
2.0
3.6
1.3
1991-2000 4.5
6.8
1.7
0.47
0.53
0.4
3.2
0.9
1981-2005 5.4
6.6
1.8
0.46
0.54
1.5
3.0
1.0
Note: The sum of the last three columns should equal to the first column. Any difference
is the result of rounding off.
9
TFP (%GDP) OF INDUSTRIES:
1983-2005
Agri, fishing, mining, quarrying: 5.2
 Electricity, water & gas: -1.4
 Construction: 1.6
 Manufacturing: 5.1
 Whole/retail, im/ex, rest/hotel: 2.5
 Fin, insur, real est, bus services: 1.0
 Transport, storage & com.: 0.9
 Comm,social & personal service: 0.5

(0.2)
(2.34)
(4.96)
(13.24)
(25.75)
(19.84)
(9.52)
(15.56)
10
Economi
c Sectors
Industries
Table 4.9 Labor Productivity and Unit Labor Cost: Average Percentage Growth Rates
1981-2005
Labor Productivity Unit Labor Cost
Mining and quarrying*
12.74
2.67
Manufacturing*
8.40
-0.52
Communications
8.39
-0.05
Electricity, gas and water*
7.36
-3.61
Agriculture and fishing
7.20
2.62
Finance
6.45
2.44
Air transport
6.12
-0.50
Other transport
5.15
0.19
Storage**
5.00
0.69
Import and export trades*
4.82
-0.05
Water transport
4.46
-0.57
Wholesale*
4.33
0.32
Construction
3.94
0.36
Hotels
3.61
1.65
Insurance
3.27
3.62
Business services
3.16
1.59
Retail*
2.89
0.89
Community, social and personal services
1.15
0.50
Land transport
0.43
-0.06
Restaurants***
0.34
0.08
Real estates
-4.32
8.34
Non-tradable goods
5.16
-1.40
Tradable services***
3.80
0.46
Tradable goods
2.77
-0.71
Non-Tradable services*
1.83
0.87
Notes: *, **, *** refer to the sample periods of 1982-2005, 1983-2005 and 1984-2005,
respectively.
11
TFP OF SMES (1983-2005)
Industry: TFP%
 Manufacturing:
 Retail:
 Import/export:
 Business services:
 All transport:

Total/SMEs/Non-SMEs
5.1/4.6/5.3.
1.5/0.7/1.4
2.4/2.4/1.9
2.5/2.4/2.6
0.4/0.6/-0.4
12
18
16
14
Years
12
10
8
6
4
2
0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Aggregate
Manufacturing
Agriculture and mining and quarrying
Construction
Electricity, gas and water
Transport, storage and communications
Community, social and personal services
Finance, insurance, real estates, business services
Wholesale, retail, import and export trades, restaurants, hotels
Figure 6.1 The Mean Years of Schooling in Hong Kong: 1981-2006
13
Table 6.11 Comparison of Education Attainments by Age Groups: 2007
Attained Upper Secondary Education
Attained Tertiary Education
25-64
25-34
35-44
45-54
55-64
25-64
25-34
35-44
45-54
55-65
Australia
Brazil
Canada
Denmark
Finland
France
Germany
Italy
Japan*
S. Korea
Mexico
Netherland
Poland
Sweden
Switzerland
Turkey
UK
USA
Hong Kong†
68
37
87
75
81
69
84
52
84
78
33
73
86
85
86
29
68
88
55
81
47
91
85
90
83
85
68
94
97
39
83
92
91
90
38
75
87
75
70
37
90
80
87
74
86
56
94
92
37
77
90
90
87
26
69
88
64
64
31
86
71
81
63
85
48
82
65
29
71
86
83
85
22
66
89
41
54
22
78
66
65
53
81
34
65
39
18
61
74
74
81
16
61
87
29
34
10
48
32
36
27
24
14
41
35
16
31
19
31
31
11
32
40
22
41
10
56
40
39
41
23
19
54
56
19
37
30
40
35
14
37
40
37
34
10
53
34
43
29
26
14
46
40
16
31
18
31
34
10
32
42
25
32
10
45
30
36
20
25
11
41
21
15
30
13
29
30
9
31
40
14
27
8
39
24
28
17
23
9
24
11
9
26
12
26
26
8
25
30
10
OECD Average
70
79
74
67
56
27
34
29
24
20
Notes: * = The year of reference for the Attained Upper Secondary Education is 2003. † = 2006 data.
Sources: Education at a Glance 2009, OECD, Paris; Census and Statistics Department, Hong Kong.
14
Table 6.14 Incorporating Human Capital in Hong Kong’s Productivity: 1981-2005
(Compound Annual Growth Rates)
Growth Rates
Share of Payment Contribution to Output by
Outpu Capita Raw Huma Capita Raw Huma TF Capita Raw Huma
t
l
Labo
n
l
Labo
n
P
l
Labo
n
r
Capital
r
Capital
r
Capital
5.4
8.1
3.5
2.0
0.46 0.48 0.06 -0.1 3.7
1.7
0.1
19811985
19868.3
7.3
1.3
-2.2
0.47 0.29 0.23 4.9
3.5
0.4
-0.5
1990
19915.4
8.1
0.1
4.7
0.48 0.17 0.35 -0.2 3.9
0.0
1.7
1995
19963.5
5.5
3.3
1.9
0.45 0.14 0.41 -0.2 2.5
0.5
0.8
2000
20014.7
3.8
0.8
0.8
0.42 0.16 0.41 2.6
1.6
0.1
0.3
2005
19816.8
7.7
2.4
-0.1
0.46 0.39 0.15 2.3
3.6
0.9
0.0
1990
19914.5
6.8
1.7
3.3
0.47 0.15 0.38 -0.2 3.2
0.3
1.3
2000
19815.4
6.6
1.8
1.4
0.46 0.25 0.29 1.6
3.0
0.4
0.4
2005
Note: The sum of the last three columns should equal to the first column. Any difference
is the result of rounding off.
15
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Mean
Table 7.5 Decomposition of TFP Growth (1984-2005)
Tt
Scale
TE
TFP
(3)
(4)
(5)
(3)+(4)+(5)
0.0383
-0.0101
0.0235
0.0517
0.0425
-0.0909
0.0223
-0.0261
0.0424
-0.0207
0.0211
0.0428
0.0175
0.0637
0.0200
0.1013
0.0335
0.0005
0.0190
0.0529
0.0385
-0.0249
0.0180
0.0315
0.0316
-0.0369
0.0170
0.0116
0.0049
0.5856
0.0161
0.6066
0.0207
-0.5920
0.0152
-0.5561
0.0072
0.1097
0.0144
0.1314
0.0498
-0.2901
0.0136
-0.2267
0.0482
-0.0328
0.0128
0.0282
0.0510
-0.0772
0.0121
-0.0142
0.0057
-0.0056
0.0114
0.0116
0.0000
-0.0318
0.0108
-0.0211
0.0354
-0.0909
0.0102
-0.0453
0.0257
-0.0073
0.0096
0.0281
-0.0059
-0.0081
0.0090
-0.0049
-0.0231
-0.0180
0.0085
-0.0326
-0.0043
-0.0137
0.0080
-0.0100
0.0230
-0.0349
0.0076
-0.0042
0.0164
-0.0174
0.0071
0.0062
0.0227
-0.0293
0.0140
0.0074
16
Table 10 Summary of the SWOT Analysis of the Hong Kong Stock Market
Strength:
Weakness:
1. World standard supervision and
1. Over reliance on the support of
accounting policy.
Mainland enterprises. Need diversity.
2. Sound regulatory framework.
2. High overhead cost.
3. Information disclosure.
4. Full of experienced talents.
5. Free follow of capital.
6. Simple tax system.
Opportunities:
Threats:
1. As a platform for Mainland enterprises 1. Facing competition from Mainland and
to raise capital.
overseas stock markets as they improve.
2. Channel global fund to the Mainland
2. Number of China enterprises raising
market.
capital in Hong Kong increased at a
3. Provider of financial services and
declining rate.
investment products to Mainland.
17
TVGDP = TOTAL VALUE OF SHARES TO GDP RATIO.
MCGDP = MARKET CAPITALIZATION TO GDP RATIO.
TV_MC = STOCK MARKET TURNOVER TO MARKET CAPITALIZATION RATIO.
SAMPLE PERIOD: 1998-2004
Table 7 The Ordinary Least Square Estimates
Dependent Variables
Coefficient Estimates
R
Square
GDP Components
TVGDP
MCGDP
TV_MC
(annual % growth rates)
(β1)
(β2)
(β3)
GDP
0.222 (2.573*) -0.096 (-2.392*) -0.531 (-2.543*) 0.367
GDP per capita
0.259 (3.190*) -0.113 (-2.983*) -0.607 (-3.095*) 0.467
Consumption
0.192 (-1.566) -0.093 (-1.639) -0.452 (-1.524)
0.177
Gross capital formation 0.668 (2.198*) -0.316 (-2.242*) -1.447 (-1.971)
0.318
Export
0.467 (3.084*) -0.219 (-3.120*) -1.201 (-3.289*) 0.477
Import
-0.004 (-0.024) 0.009 (-0.104) -0.230 (-0.525)
0.411
Saving deposit
0.024 (0.551) -0.022 (-1.074) -0.042 (-0.402)
0.481
Unemployment
-0.004 (-0.108) 0.017 (-0.921) 0.005 (-0.047)
0.676
Notes: The t-statistics are shown in parentheses, and * indicates a significance level of 5
percent.
18
High
Growth Rate
Stars:
Equities, Warrants
Dogs:
Bond
Cash Cows:
?
Low
Question Marks:
ETF, Stock future/options
Stock index futures/options
Small
Share in Global Market
Large
Figure 6 The Boston Matrix for Hong Kong
19
SMALL GOVERNMENT, LARGE MARKET
Total public expenditure/GDP: highest in 2002
with 21.8%.
 Notably, social welfare has gone up from 5.4%
in 1986 to 13.2% in 2009.
 More often with fiscal surplus than deficit,
worst in 2001-2004 fiscal years.

20
21
22
Exit
Enter
Poverty Pool
Recovery
Recession
Education
School Leavers
Training
Elderly
Restructure
Immigration
Figure 2 Stock and Flow in the Poverty Pool
23
Table 12.1 Land Use in Hong Kong
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total Area (square kilometers)
1,095
1,096
1,097
1,098
1,099
1,100
1,103
1,108
1,107
1,108
1,108
1,108
1,108
1,108
Developed land (% of total area)
15.99
16.05
16.32
16.75
20.93
21.36
21.66
21.95
23.68
23.84
23.29
23.38
23.56
23.74
Residential
5.30
5.29
5.38
5.46
6.10
6.18
6.17
6.05
6.96
7.04
6.77
6.77
6.77
6.86
Commercial
0.18
0.18
0.18
0.18
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.36
0.36
Industrial
1.00
1.00
1.00
1.00
1.73
1.73
1.72
1.90
2.26
2.26
2.17
2.17
2.26
2.26
Government, institution, community
1.64
1.73
1.82
1.91
1.82
1.82
1.90
1.90
2.08
2.08
2.17
2.17
2.17
2.17
Transportation
2.47
2.65
2.83
3.01
4.46
4.45
4.53
4.69
4.79
4.87
4.96
5.14
5.14
5.23
Open space
1.46
1.46
1.55
1.55
1.82
1.82
1.81
1.81
1.90
1.99
1.99
2.08
2.17
2.17
Vacant land
3.93
3.74
3.65
2.46
2.46
2.82
2.99
2.80
2.62
2.35
1.81
1.71
1.53
1.44
1.18
2.27
2.27
2.27
2.53
2.80
2.98
3.16
3.07
3.16
3.25
Other urban & built up areas
Non-developed land (% of total area)
84.02
83.94
83.69
83.24
79.07
78.54
78.33
78.07
76.32
76.17
76.71
76.62
76.44
76.26
7.03
7.03
6.84
6.65
6.37
6.18
6.07
6.41
6.59
6.59
6.14
6.05
6.14
6.14
67.49
67.43
67.37
67.30
67.42
67.18
67.00
66.88
66.03
65.70
66.70
66.70
66.52
66.34
Wetland
0.00
0.00
0.00
0.00
0.55
0.55
0.54
0.90
0.45
0.45
0.45
0.45
0.45
0.45
Barren land
4.02
4,01
4.01
4.01
2.18
2.18
2.18
1.35
0.81
0.81
0.81
0.81
0.72
0.72
Water area
2.37
2.37
2.37
2.37
2.55
2.55
2.54
2.53
2.44
2.62
2.62
2.62
2.62
2.62
Temporary structures & other uses*
3.11
3.10
3.10
2.91
Agriculture land
Woodland/shrub land/grassland
Notes:* = These classifications are unavailable after 2000. The figure for the total area in 2004 (1,107) is slightly larger than the figure of 1,104 reported in
Hong Kong 2005, Informational Services Department, Hong Kong, due probably to definitional difference in different categories.
Source: Planning Statistics, Planning Department, Hong Kong.
24
Table 3 Property-related Bank Loans (HK$ Million)
Year
(1)
(2)
(3)
(1+2+3)
Total
PRL/Total
HOS/PPS
ORP
BCD
PRL
Loans
Loans (%)
1990
13,664
133,688
108,112
255,464
690,228
37.0
1991
19,077
180,113
125,704
324,894
817,077
39.8
1992
21,628
202,630
144,533
368,791
909,912
40.5
1993
34,886
233,145
180,439
448,470 1,075,777
41.7
1994
39,939
258,557
249,112
547,608 1,258,589
43.5
1995
47,494
301,715
262,199
611,408 1,398,193
43.7
1996
50,620
371,270
333,032
754,922 1,637,191
46.1
1997
60,399
480,401
440,296
981,096 2,037,278
48.2
1998
74,227
515,431
416,226 1,005,884 1,960,371
51.3
1999
76,189
532,370
384,127
992,686 1,819,792
54.5
2000
90,524
535,761
398,365 1,024,650 1,861,465
55.0
2001
107,187
539,723
388,921 1,035,831 1,790,063
57.9
2002
99,214
542,431
378,879 1,020,524 1,743,009
58.5
2003
86,849
529,389
360,412
976,650 1,708,521
57.2
2004
76,548
534,188
386,488
997,224 1,792,395
55.6
2005
67,603
539,192
450,569 1,057,364 1,930,316
54.8
2006
59,763
535,022
491,783 1,086,568 1,974,022
55.0
2007
58,410
564,127
578,244 1,200,781 2,274,284
52.8
2008
57,174
592,980
686,793 1,336,947 2,524,085
53.0
Notes: HOS = home ownership scheme; PPS = private participation scheme; ORP = other
residential properties, BCD = building, construction, property development and
investment; and PRL = property-related loans.
Source: Annual Digest of Statistics, Census and Statistics Department, Hong Kong SAR
Government.
25
F
P
D1
D
P3
P2 D1
P1
D
Figure 12.11
Q1 The Upward-Sloping
Q2
Q3Property Price Spiral
Q
26
ECONOMIC INTEGRATION WITH MAINLAND
China/HK: absolute vs comparative advantage.
 HK: a reference to China’s economic reform.
 HK: major investor, in early stage of reform.
 Visa-free, CEPA, Pan-PRD, 5-Year Plan.
 Marginalization? Catching up / overtaking?
 HK:market-led(expost);China:state-led(exante)
 Few discussed on implication to HK economy.

27
20
15
10
5
0
-5
-10
China's Real Growth Rate
Hong Kong's Real Growth Rate
Note: Base year = 2005.
Source: Statistical Yearbook of China; Hong Kong Statistics; and CEIC.
Figure 14.2 Performance of Real GDP Growth Rates: Mainland China and Hong Kong
28
IS
+
Competitive Curve
B
IND
A
Complement Curve
Figure 14.1 The Complement – Competitive Model
29
PRE-1997 FEATURES
Short-term investment behavior.
 Wealth promoting, rise in income.
 Inflation, negative interest rate, wage increase
 De-industrialization, fall in real economy.
 Speculations in stocks and real property.
 1998 financial crisis: real economy could not
sustain the collapse of the nominal economy.

30
POST-1997 FEATURES
Young government: leadership challenged.
 Periodic crises: Asian financial crisis, health
hazards, terrorist attacks and war, oil crisis,
natural disasters, 2008 crisis, etc.
 Economic recession (1998-2005): prolonged
economic weakness, fiscal deficit, collapse of
property market.
 Stability and prosperity: challenged?

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CHALLENGES TO HK’S ECONOMIC FREEDOM
Internal:
 Demand-driven vs supply-led strategy?
 Short-term, ad hoc solutions vs long-term
insights?
 Property dominates: cart in front of the horse?
 Fiscal policy: welfare vs growth?
 Intervention vs assistance (private cost vs
social cost)?
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MORE CHALLENGES
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External:
External-led vs domestic-led economy? Or a dependent
economy?
Integration with mainland: win-win vs marginalization?
Count the cost?
Political Economy:
System-driven vs personality-driven?
Result-led vs public opinion-led?
Formalization vs informal economy?
Conflicts in “two systems”: 2047 comes earlier?
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ECONOMIC OPPORTUNITIES, BUT……
Economic diversification & expansion: reindustrialization through CEPA (over 1,700
export items to mainland tariff free).
 Encourage physical investments, target CEPA.
 High cost: not a problem when consider the
huge mainland market.
 Challenge: property price getting out of context,
speculation=wealth increase, the most
distorted sector. Stability in question!

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FREEDOM IS AN EVERGREEN
HK’s economic freedom is a built-in, is an
infrastructure.
 Creation of economic opportunities has to be
sustainable.
 Relative outcomes preferable to absolute
outcomes.
 Aim for comparative advantage, avoid absolute
disadvantage.

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SUMMARIZE IN LAST SENTENCE IN THE BOOK
Together with a reliable
civic and economic system,
the path of economic freedom
in Hong Kong
is the ability to generate
new economic opportunities
to help others to prosper.
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KUNG HEI FAT CHOI!
Wishing You All a
Healthy and Prosperous
Year of the Snake 2013
Thank you!
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