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United Kingdom-Hong Kong: Selected Issues

Author(s):
International Monetary Fund
Published Date:
July 1997
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COMPETITIVENESS IN HONG KONG’S SERVICES INDUSTRIES47

I. Introduction And Summary

153. Throughout its history, Hong Kong has been a highly competitive and open economy. In domestic markets as well as international commerce and finance, the government has followed noninterventionist policies, leaving legitimate business to operate without much interference. Given the level playing field at home and the small size and openness of the economy, Hong Kong entrepreneurs have been forced to compete against each other and those abroad in order to sustain and improve their business. In this environment, Hong Kong has established a record of robust growth, resiliency to shocks, and flexibility in factor markets.

154. Recently, however, rising costs of labor and property, and the emergence of strong competition from regional centers such as Singapore, Shanghai, Taipei, and Kuala Lumpur have raised concerns about Hong Kong’s long-run competitiveness. These concerns have been heightened by uncertainties associated with the transfer of sovereignty. There have been calls for the government to consider policy measures to maintain Hong Kong’s competitiveness. In August 1995, the Hong Kong Monetary Authority (HKMA) issued a strategy paper on steps to maintain and enhance the status of Hong Kong as an international financial center (HKMA (1995), Yam (1995)). In March 1996, the Financial Secretary further raised the profile of this issue by releasing, along with the annual budget, a special addendum on the services sector support and promotion (Government Secretariat (1996)). A key question in these papers is how the Government can offer the policies and programs necessary to support Hong Kong’s continued success as a major international services center, while ensuring that these policies and programs are “business friendly” and do not hinder enterprise.

155. Given the government’s noninterventionist approach in industrial policy matters, the proposals for policy actions to maintain competitiveness have been highly controversial. Part of the problem has been that it was difficult to assess whether the services sector had a competitiveness problem in the first place. Data on value added by sector in constant prices are not available, and there were no systematic attempts to construct such data from various indicators of real activity or price deflators.

156. To further discussion of these issues, this paper constructs estimates of competitiveness in Hong Kong’s services industries for the period 1982–94. The estimates are derived from highly disaggregated production-based GDP data in current prices using a variety of price deflators constructed from the data on exports and imports of services, components of the consumer price index, or other relevant price data (property rentals, real estate developers’ margins, prices of retained imports, etc.). The use of such deflators provides the first comprehensive estimates of real growth in Hong Kong’s services sectors. The estimates should be regarded as tentative and policy implications need to be interpreted with caution. However, while the approach used here remains approximate, the characterization of longer-term developments that it provides conforms well with the stylized facts on recent developments in Hong Kong’s services industries.

157. As discussed in more detail below, the following conclusions emerge from the analysis of competitiveness in the services sectors:

  • Real output expanded rapidly in most services sectors since the early 1980s. Wholesale trade, import/export trade, transportation and Communications, and financing, insurance and business services expanded, on average, at double-digit annual rates.
  • Growth of labor productivity was strong not only in manufacturing, but also in several services industries (wholesale and retail trade, transportation, financing, real estate services).
  • In the early 1990s, many services industries temporarily absorbed higher costs by restraining price increases. These actions led to continued growth in business but falling profit margins. Since 1994, however, several industries began to bring increases in unit labor costs under control by stepping up investment in labor-saving Capital equipment and reducing employment.
  • Resources moved from manufacturing and certain declining services industries to the rapidly growing industries such as trade, transportation, financing, and business services in response to relative price changes and relative wage differentials among sectors. Industries whose prices increased most rapidly relative to manufacturing were generally the ones that recorded the highest growth rates of real output. Labor also moved away from manufacturing in a clear, predictable pattern, i.e., to industries where wages have been increasing rapidly.
  • Given that markets have done their basic job in allocating resources, the government’s policy of not intervening has been appropriate. Looking ahead, it will be important to maintain this noninterventionist approach and avoid the measures which might reduce the flexibility of factor markets or impede the resource movements.

Chapter II reviews changes in the structure of employment and output in overall economy over 1982–94. Chapter III discusses measurement of real growth and competitiveness in manufacturing. Subsequent chapters turn to detailed discussion of competitiveness issues in the services sectors, including: trade and tourism (Chapter IV); transportation, storage, and Communications (Chapter V); financing, insurance, real estate, and business services (Chapter VI); and community, social, and personal services (Chapter VII). Chapter VIII concludes with an interpretation of the results and a discussion of their policy implications.

II. Output And Employment in The Hong Kong Economy

158. Hong Kong’s economic performance over the period 1982–94 is summarized in Table 1.48 Real GDP expanded at an average annual rate of 6 percent from 1982 to 1994; the average annual rate of inflation was slightly above 8 percent based on the consumer price index, and 8¼ percent based on the GDP deflator; and the unemployment rate was on average 2½ percent. Productivity growth in overall economy averaged over 4½ percent per year between 1982 and 1994. Although nominal wages increased by an average of 9½ percent per year over this period, long-run profitability of Hong Kong’s industries grew at a healthy pace, as unit labor costs rose at a relatively moderate rate of 4¾ percent per year.

Table 1.Hong Kong: Basic Indicators, 1982–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1982–94
Real GDP5.710.00.410.713.08.02.63.45.16.36.15.46.1
GDP deflator4.59.75.43.98.99.512.37.59.29.78.57.58.2
Inflation (CPI (A))9.98.33.12.95.57.510.19.711.69.38.58.18.1
Employment0.83.21.53.22.41.90.3-1.31.1-0.12.83.51.5
Unemployment rate (percent)4.53.93.22.81.11.41.11.31.82.02.01.92.3
Nominal wages7.68.56.56.09.110.013.012.711.19.810.89.79.6
Real wages-2.90.42.53.93.82.02.92.5-1.10.22.81.31.5
Labor productivity4.86.5-1.17 210.35.92.34.83.96.43.21.84.5
Unit labor costs2.71.87.7-1.2-1.03.910.57.56.93.27.37.74.7
Nominal effective exchange rate−13.9−2.25.2−12.0−8.2−2.32.7−1.503−0.83.8−1.4−2.3
Real effective exchange rate−8.62.84.8−11.0−5.80.46.63.36.95.18.72.41.6
Per capita nominal GDP, in U.S. dollars5,4776,0786,3917,2508,83510,35811,81113,11114,94917,32419,60021,702
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual Digest of Statistics (various editions); IMF, Information Notice System; and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual Digest of Statistics (various editions); IMF, Information Notice System; and staff estimates.

159. Changes in the sectoral composition of output since the early 1980s have been remarkable: the share of manufacturing in GDP declined by over 60 percent to 9¼ percent of GDP between 1982 and 1994 (Table 2). Meanwhile, the share of the services sectors in GDP increased by a quarter to 83 percent of GDP in 1994. Within the services, the share of trade and tourism increased by 5½ percent of GDP, while the shares of financing, community and personal services, and property ownership increased by about 3 percent of GDP each.

Table 2.Hong Kong: Gross Domestic Product by Sector at Current Prices, 1962–1994 1/(In percent of GDP)
1982198319841985198619871988198919901991199219931994Average 1982–94
Manufacturing20.822.924.322.122.622.020.519.317.615.413.611.29.218.6
Utilities1.82.42.42.62.82.62.32.22.32.12.12.12.32.3
Construction7.36.45.45.04.84.64.75.25.45.55.15.24.95.3
Trade and tourism20.020.423.122.822.324.325.125.025.225.926.127.026.224.1
Transportation7.78.27.88.18.28.69.18.99.59.69.79.59.78.8
Financing, real estate, and business services22.517.615.616.017.017.918.919.520.222.724.425.826.720.4
Community, social, and personal services14.715.314.816.015.213.713.313.413.814.114.214.815.014.5
Ownership of premises10.211.210.210.510.19.89.910.310.610.911.110.812.210.6
Memorandum items: Primary Sector 2/
Primary Sector 2/0.80.80.60.60.60.40.40.30.30.30.20.20.20.4
Secondary Sector 3/29.831.732.129.830.229.327.626.625.223.020.918.516.426.2
Tertiary Sector 4/69.367.567.369.669.270.372.073.174.576.778.981.383.473.3
Source: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995.

Measured relative to production-based GDP at factor cost.

Agriculture, fisheries, mining, and quarrying.

Electricity, gas, water, manufacturing, and construction.

Services sectors and ownership of premises.

Source: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995.

Measured relative to production-based GDP at factor cost.

Agriculture, fisheries, mining, and quarrying.

Electricity, gas, water, manufacturing, and construction.

Services sectors and ownership of premises.

160. The turning point in the process of structural transformation occurred in 1987, when relocation of manufacturing operations into southern China began on a massive scale. Until 1987, the output share of manufacturing declined by less than ¼ percent of GDP per year (see tabulation below). Construction and financial services actually lost a greater share of GDP than manufacturing over 1980–87. However, these losses were largely cyclical in nature, prompted by the property market collapse of 1982–84 and the banking and stock market crises of 1982 and 1986–87.

1980–941980–871987–94
(In percent of GDP)
Change in the share of output in:
Manufacturing−14.4−1.7−12.7
Utilities1.11.4−0.3
Construction−1.4−2.00.6
Trade and tourism 1/5.62.92.7
Transportation2.41.31.1
Financing, real estate, and business services3.1−5.18.2
Community, social, and personal services3.22.11.1
Property ownership2.70.81.9

Includes Wholesale, retail, import/export trades, restaurants and hotels

Includes Wholesale, retail, import/export trades, restaurants and hotels

161. After 1987, the output share of manufacturing began to decline by 1¾ percent of GDP per year. Meanwhile, financial services began to expand rapidly, increasing their output share by over 8 percent of GDP by 1994. Large gains in the output share were also realized in trade and tourism (2¾ percent of GDP) and property ownership (2 percent of GDP). By 1994, the share of manufacturing in GDP was smaller than that any of the services sectors.

162. The decline in the output share of manufacturing and the rising importance of the services sectors are part of the secular trend of the maturing of the Hong Kong economy. An important factor behind structural transformation has been the external environment. Thus, in the 1950s, the Hong Kong economy was forced to transform from an entrepôt to an export-oriented manufacturing center because of the Chinese Revolution and the Korean War. By that time China opened up in 1979, manufacturing accounted for one quarter of GDP and Hong Kong had developed skills in the production of labor-intensive consumer goods to the point where it could market them abroad. Hong Kong firms soon began to move into Southern China, where inexpensive land and labor complemented well the technology and managerial skills those firms possessed. The front and back ends of factory operations that stayed in Hong Kong gradually transformed themselves into dynamic, export oriented services industries.

163. Developments in employment by sector mirrored the changing composition of output. At the beginning of the 1980s, manufacturing employed more than 40 percent of total workforce. By the mid-1990s, the share of manufacturing employment had fallen below 15 percent of the total (Table 3). At the same time, employment expanded strongly in trade and tourism (to 35 percent of the workforce in 1994), financing, and other services.

Table 3.Hong Kong: Structure of Employment, 1982–94 1/(In percent of total employment)
1982198319841985198619871988198919901991199219931994Average 1982–94
Manufacturing36.335.835.933.833.032.631.029.427.324.321.318.215.128.8
Utilities 2/0.50.40.40.40.40.40.40.40.40.40.40.40.40.4
Construction 2/3.42.92.72.62.72.72.82.52.52.22.22.02.22.6
Trade and tourism20.921.622.123.123.223.925.527.229.731.732.833.335.226.9
Transportation3.63.73.73.73.73.84.14.54.84.85.25.45.54.3
Financing, real estate, and business services6.86.76.77.07.27.78.39.110.010.411.211.712.38.8
Community, social, and personal services7.58.08.17.97.97.98.18.49.19.59.79.79.98.6
Civil Service 3/6.87.06.96.96.86.86.86.87.06.86.76.46.26.8
Other 4/14.213.813.514.515.014.213.111.79.19.810.612.913.212.7
Memorandum items:
Labor force growth (Annual percentage rate)0.31.72.60.82.81.31.6−0.0−1.11.8−0.22.93.51.8
Labor force participation rate (Percent)65.564.865.164.964.763.763.263.462.362.562.554.0
Sources: Census and Statistics Department, Monthly Digest of Statistics (various issues), and Annual Digest of Statistics (various issues).

Average of end-quarter employment figures, unless noted otherwise.

As of the last full working day of the year.

As of the first of January of the following year.

Includes sectors not covered (agriculture and fishing, nonmanual construction workers, and others) and statistical discrepancy.

Sources: Census and Statistics Department, Monthly Digest of Statistics (various issues), and Annual Digest of Statistics (various issues).

Average of end-quarter employment figures, unless noted otherwise.

As of the last full working day of the year.

As of the first of January of the following year.

Includes sectors not covered (agriculture and fishing, nonmanual construction workers, and others) and statistical discrepancy.

164. The structural shift that took place in 1987 can be clearly discerned from the composition of employment. Between 1981 and 1987, only about 40,000 manufacturing jobs were lost; between 1988 and 1994, however, more than 414,000 manufacturing jobs were lost. Construction and the civil service were the only other sectors where employment had declined significantly since the early 1980s. However, job creation in the services sectors had offset these job losses by a huge margin: a total of one million services jobs were created between 1980 and 1994, mostly in the six years since 1988.

165. Given the openness and external linkages of Hong Kong’s economy, the future pace of structural transformation will depend to a large extent on developments in China and the global economic environment. However, it is safe to predict that the process as a whole will continue given the underlying changes in the demographic structure and the human Capital of Hong Kong’s population.

III. Manufacturing

166. The conventional view on recent developments in Hong Kong’s manufacturing is that, during the 1980s, Hong Kong’s competitiveness in low-technology, light manufacturing industries began to erode as a result of rising wages and the emergence of lower-cost regional competitors. Following the liberalization of foreign investment regulations and the onset of market oriented reforms in China, Hong Kong firms started to relocate their labor intensive operations to southern China, where labor costs were initially up to 15 times lower and land costs up to half lower than in Hong Kong. The decline in employment since the mid-1980s and the upgrading of skills in industries that remained in Hong Kong (to supervisory and technical functions, such as product design and marketing), led to strong productivity growth.

167. It is not trivial to verify this conventional view on the basis of existing data. As with other production-based estimates of GDP, data on manufacturing output in constant prices are not available. The Census and Statistics Department (CSD) compiles, however, a quarterly index of industrial production (IIP), which measures the changes in the volume of local manufacturing gross output after discounting the effect of price changes. Recently, the CSD started Publishing estimates of value added in manufacturing at constant prices.49 Finally, as most of the manufacturing output is exported, the deflator for domestic exports can be used as a proxy for changes in manufacturing prices. The use of these three indices yields slightly different estimates of growth of real output and labor productivity.

168. Using the IIP, real output in manufacturing rose on average by 5¼ percent per year between 1983 and 1994 (Table 4). Growth in manufacturing mostly took place before 1988; in the period since, real output in manufacturing basically stayed flat. Manufacturing prices derived on the basis of the IIP increased by about 2¼ percent per year over the same period, much slower than consumer price inflation (9 percent per year). Based on the HP, labor productivity grew by 11¼ percent per year, while unit labor costs declined by 1¾ percent per year since 1982.

Table 4.Hong Kong: Basic Indicators for Manufacturing, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Real output 1/13.016.7−4.414.916.06.00.8−0.80.81.6−0.80.05.3
Implicit price deflator 1/7.58.10.83.54.15.26.03.1−1.91.0−6.5−4.42.2
Employment−0.63.5−4.40.71.2−3.0−4.9−8.3−10.2−12.5−12.2−13.9−5.4
Nominal wages7.58.76.45.79.08.711.512.211.09.510.68.89.1
Real wages−2.90.42.53.93.82.02.92.5−1.10.22.81.31.5
Labor productivity13.712.7−0.014.114.69.36.08.112.316.112.916.211.3
Unit labor costs−5.4−3.56.4−7.4−4.9−0.65.13.8−1.2−5.7−2.0−6.3−1.8
Memorandum items:
Index of manufacturing value added at constant prices14.717.5−3.016.315.87.23.70.1−4.70.4−8.3−7.84.3
Implicit price deflator 2/5.97.4−0.72.34.34.13.02.13.72.21.23.73.3
Deflator for domestic exports9.912.7−0.42.03.12.22.81.31.81.1−0.21.93.2
Implied growth rate of real output in manufacturing 3/10.511.9−3.316.617.19.13.91.0−2.91.5−7.0−6.24.4
Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics (various issues), and Estimates of Gross Domestic Product, 1961 to 1995; and staff estimates.

Derived from the index of industrial production.

Derived from the index of manufacturing value added at constant prices.

Nominal value added in manufacturing deflated by the price index for domestic exports.

Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics (various issues), and Estimates of Gross Domestic Product, 1961 to 1995; and staff estimates.

Derived from the index of industrial production.

Derived from the index of manufacturing value added at constant prices.

Nominal value added in manufacturing deflated by the price index for domestic exports.

169. Using the index of manufacturing value added at constant prices, real output in manufacturing grew by 4¼ percent per year, and manufacturing prices rose by 3¾ percent per year over 1982–94 (Table 4). Productivity growth measured by the index of manufacturing value added averaged 10 percent over 1982–94, and unit labor costs declined on average by 3/4 percent per year. The use of the deflator for domestic exports led to very similar estimates. The differences between the estimates of real growth and productivity based on the IIP and the other two indices for the most part represent scale effects—the broad trends obtained from the IIP are basically the same.

170. Although a high rate of productivity growth was maintained throughout the period considered, the gains in productivity since 1988 came from different sources. Between 1983 and 1988, real output growth was still strong and large-scale employment reductions had not yet taken place, as wage increases remained tolerable (Table 4). After 1988, nominal wages started to grow at double-digit rates and layoffs accelerated. However, real output declined by much less than employment, suggesting that there has been a significant increase in the use of labor saving technology. This evidence is consistent with the conventional view on developments in manufacturing.

171. As discussed below, the main reason why resources moved away from manufacturing is that relative prices and wages in the services sector grew more rapidly. Markets have thus done their basic job in allocating resources and the policy of not intervening was basically correct.

IV. Trade And Tourism

A. Background

172. Trade and tourism, which comprises Wholesale, retail, and import/export trades, restaurants and hotels, has traditionally been the largest sector in Hong Kong’s economy. In 1994, it contributed 26 percent of GDP and employed 35 percent of total workforce (Tables 2 and 3). Trade and tourism overtook manufacturing as the largest sector in terms of the contribution to GDP in 1985, and in terms of employment in 1990.

173. On average, almost 60 percent of value added in trade and tourism historically came from import/export trade, followed by retail (16 percent), restaurants (13 percent), Wholesale (6 percent) and hotels (5 percent) (Appendix Table 1). The share of foreign trade in total value added of the sector expanded since 1982 as that of other distributive trades and restaurants declined, while the share of hotels remained fairly constant.

174. Employment in trade and tourism grew on average by 6¼ percent per year over 1983–94, slightly faster than the average for all services sectors (5¾ percent per year). Growth in employment was distributed unevenly: while employment in import/export trade grew on average by over 12 percent per year, employment in retail, Wholesale, and restaurants grew on average by 2–3 percent per year (Appendix Table 2). As a result, the employment share of import/export trade doubled to 49 percent in 1994, while the share of retail trade and restaurants shrank considerably. Thus, contrary to the widespread belief, import/export trade rather than retail and restaurants absorbed the largest number of workers released from manufacturing.

175. Wages in trade and tourism grew on average by 9 percent per year over 1983–94, about the same as in manufacturing (Appendix Table 2). Workers in import/export trade enjoyed the highest wage increases (12½ percent per year). Wages in retail trade, hotels, and Wholesale also grew at double-digit rates, but wages of restaurant workers lagged behind consumer price inflation by about 1 percent per year.

B. Estimates of Real Output

Nominal value added and deflators

176. As the major activity of Wholesale, retail, and import/export trades is the distribution of goods, for statistical purposes gross output of is measured by the gross margin realized on trading (i.e., the sales value less the cost of goods sold). To a lesser extent, trading establishments also provide agency services to their clients, so the income from commissions, fees, Service charges, and rentals is also included in gross output. The intermediate consumption comprises rentals, operating expenses on materials and supplies, and the cost of services such as advertising, insurance, and transportation. Assuming that the trading margin represents the bulk of the gross output, and that cost-plus pricing represents a reasonable model of firm behavior in this sector, value added in constant prices can be derived from the deflators of the sales value or the deflators of the cost of goods sold. Hence, the following deflators of nominal value added were used:50

  • For Wholesale trade, the implicit price deflator for retained imports was used. Wholesalers mostly distribute imported goods in the domestic market, including foodstuffs, consumer goods, machinery and equipment, and production inputs (fuels, raw materials and semi-manufactures). Over the long run, Wholesale prices should broadly reflect movements in prices of retained imports, which form the basis for cost calculations in this industry.
  • For retail trade, the implicit price deflator for retail sales was used. Given the comprehensive coverage of the indices of value and volume of retail sales, this deflator provides a good indicator of the price changes in the retail sector.
  • For import/export trade, a weighted average of the deflators for domestic exports, retained imports, net re-exports, and exports and imports of trade-related services was used. The rationale for the use of the deflators for domestic exports and retained imports is obvious. Net re-exports (re-exports less nonretained imports) represent value added realized in re-export trade, which in recent years accounted for 15–18 percent of GDP. Finally, the deflators for trade related services represent the price movements relevant for Companies engaged in off-shore trading.

177. The output of restaurants is measured by the value of sales receipts less food cost and intermediate consumption. The output of hotels is measured by receipts from room sales less intermediate consumption. Hence, assuming cost-plus pricing, real value added in tourism can be derived from the deflators of food prices and travel services:

  • For restaurants, a subindex of the composite CPI which measures prices of “meals bought away from home” was used.
  • For hotels, the deflator for exports of travel services (which cover both personal and business travel) was used.

Real growth estimates

178. Estimates of value added at constant prices based on the above deflators indicate that all trade and tourism industries recorded high real growth rates over 1983–94. Import/export trade grew by 15½ percent per annum, Wholesale trade by 9½ percent per annum, and other industries by up to 8 percent per annum (Table 5). Real value added in the sector as a whole expanded at an average annual rate of 11¾ percent.

Table 5.Hong Kong: Real Output and Deflators in Trade and Tourism, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Real output
Total1.221.65.79.328.216.79.04.710.112.713.59.311.8
Wholesale−7.714.011.61.527.55.514.021.72.76.018.0−1.39.5
Retail−12.419.25.90.922.315.24.7−4.912.39.71.410.77.1
Import/export trade9.329.33.612.434.420.89.79.814.513.617.811.515.5
Restaurants0.68.28.110.219.98.311.0−8.3−5.113.93.03.06.1
Hotels0.915.411.114.014.115.64.3−5.60.216.610.32.38.3
Deflators
Total11.310.8−1.24.35.55.44.27.75.43.63.71.65.2
Wholesale12.89.8−5.26.95.04.50.17.33.52.22.30.74.2
Retail9.46.20.63.56.27.56.16.56.35.15.45.85.9
Import/export trade11.911.3−2.54.24.23.31.66.74.13.43.2−0.14.3
Restaurants8.67.13.12.95.29.715.514.812.52.55.74.87.7
Hotels13.412.74.56.610.410.17.06.55.77.36.98.98.3
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).

179. There has been considerable fluctuation in real output growth over the years. In 1984 and 1986–88, a marked acceleration in growth took place across the sector, occasioned by the steep exchange rate depreciation and the consequent surge in exports (Tables 1 and 5). In 1990–91, and again in 1994, growth decelerated sharply in retail, restaurants, and hotels, reflecting, in the former period, the loss of consumer confidence following the political unrest in China in mid-1989, and, in the latter period, a sharp downturn in asset markets. By contrast, the steady expansion of output in import/export and Wholesale trade reflected the relatively stable external demand conditions.

Productivity and unit labor costs

180. Labor productivity in trade and tourism grew on average by 5½ per-cent per year between 1983 and 1994, faster than in overall economy (4½ percent per year), but slower than in manufacturing (11¼ percent per year) (Table 6). As noted above, the rapid pace of productivity growth in manufacturing has been mainly due to the use of labor-saving technology. The same forces apparently operated in the most productive industry in this sector, i.e., the Wholesale trade, where real output grew by close to 10 percent per year while employment grew at a moderate rate 2¾ percent per year. Retail trade also maintained productivity growth at a higher rate than in overall economy, while productivity in import/export trade, restaurants, and hotels grew more slowly because of the higher growth rate of employment.

Table 6.Hong Kong: Productivity and Unit Labor Costs in Trade and Tourism, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Labor productivity
Total−3.015.3−0.75.321.67.52.0−3.02.09.38.6−0.15.4
Wholesale−12.412.612.13.824.8−0.39.113.4−4.83.619.3−1.76.6
Retail−14.519.32.62.220.79.11.5−9.77.99.32.27.34.8
Import/export trade4.413.2−12.70.819.94.5−1.4−1.12.58.25.4−5.63.2
Restaurants−5.32.28.08.517.56.07.7−14.0−10.411.34.71.13.1
Hotels−1.613.06.35.27.36.3−9.1−7.7−4.310.48.23.43.1
Unit labor costs
Total11.6−2.59.05.0−5.38.210.819.68.82.62.65.26.3
Wholesale28.2−3.1−3.74.5−9.712.8−1.10.614.410.4−5.99.24.7
Retail24.9−5.96.89.1−0.410.913.529.23.63.87.5−9.17.8
Import/export trade7.25.024.210.9−4.310.113.219.57.64.15.511.99.6
Restaurants10.23.6−3.8−2.3−7.14.85.626.723.6−3.72.84.95.4
Hotels9.8−0.42.05.11.26.825.825.217.00.65.36.48.7
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

181. Because of the relatively faster growth of wages, unit labor costs in trade and tourism increased by 6¼ percent per year between 1983 and 1994, about 1½ percent per year faster than in overall economy (Table 6). There was considerable Variation in the dynamics of unit labor costs across industries and over time. Rapid increases in unit labor costs were recorded in import/export trade (on average, by 9½ percent per year), hotels, and retail trade. In 1987, average unit labor costs declined by 5¼ percent; in 1990, however, they spiraled by almost 20 percent as severe labor shortage developed. Since 1992, unit labor costs were rising at a relatively moderate pace in all industries except in import/export trade.

V. Transportation, Storage, And Communications

A. Background

182. Transportation, storage, and Communications contributed on average about 9 percent of GDP and employed about 4¼ percent of total workforce over 1983–93. Despite its relatively small size, this sector overtook manufacturing in terms of the GDP share in 1994 (Table 2). Land transportation contributed on average about 28 percent of value added in the sector, water transportation and Communications about 20 percent each, and air transportation about 16 percent (Appendix Table 3). The output share of transportation held fairly constant at about 77 percent, while the output share of Communications expanded at the expense of storage.

183. Total employment in transportation, storage and Communications grew on average by 5¼ percent per year (Appendix Table 4). Except for air transportation and storage, growth in employment was fairly stable. About 65,000 jobs were created in the sector between 1982 and 1993, over 80 percent in transportation services and water and air transportation. Wages in transportation, storage, and Communications grew by 11½ percent per year between 1983 and 1994, about 2 percent per year faster than in overall economy. Wage indices for individual transportation and Communications industries are not available.

B. Estimates of Real Output

Nominal value added and deflators

184. For statistical purposes, gross output in transportation is measured by the Service charges received (passenger and freight revenue, warehousing rental, and receipts from sales of postal, Courier, telephone and other communication services). The intermediate consumption comprises expenses on fuel, materials and supplies, repair and maintenance costs, rentals, and the cost of various services (advertising, legal, insurance). The following deflators were used to derive value added in constant prices:

  • For land and government transportation, a transportation subindex of the composite CPI was used. Land and government transportation are for the most part nontradable services, so their prices generally move in line with underlying costs, which should be adequately captured by the transportation component of the CPI.
  • For water and air transportation and transportation services (travel agents and airline ticket agents, air and sea cargo forwarding agents, packaging and crating services, inspection and measuring services), a weighted average of the deflators for exports and imports of transportation services was used. Water and air transportation and related services are tradable, so their prices are expected to move in line with export and import prices.
  • Operators of storage facilities derive their revenue from warehousing rentals. As the rental index for warehousing premises is not compiled, the rental index for private manufacturing premises was used as a proxy.
  • For Communications industry, the deflator for exports of business services was used. As exports of business services cover a much broader range of services, this deflator also reflects price changes in other industries. It is unlikely, however, that movements in this broader index would systematically misrepresent the price changes in Communications industry.

Real growth estimates

185. Average real growth rates derived from the above deflators varied from 2¾ percent per year in storage, to 19½ percent per year in air transportation; the average for the sector was 9½ percent per year over 1983–93 (Table 7). Like in other services sectors, there was considerable fluctuation in activity levels over time: in 1986–88, growth in transportation took off explosively, reflecting marked acceleration in external trade and, most likely, expansion of capacity (especially in air transportation); while in 1989, real output growth was for the most part negative. In recent years, most of the expansion in real output came from water transportation, transportation services, and Communications.

Table 7.Hong Kong: Real Output and Deflators in Transportation, Storage, and Communications, 1983–93(Annual percentage changes)
19831984198519861987198819891990199119921993Average 1983–93
Real output
Total8.03.86.213.723.517.6−1.310.14.311.36.59.4
Transportation9.03.63.613.428.219.6−2.510.82.211.01.29.6
Land0.9−0.44.67.713.48.80.49.3−2.311.74.85.4
Water13.614.40.96.823.716.1−2.911.911.59.215.411.0
Air34.90.9−5.640.693.442.0−8.46.11.98.4−0.719.4
Transportation services25.55.216.625.511.320.4−0.724.7−3.123.413.914.8
Government transportation−11.1−8.79.65.512.28.911.09.80.40.4−0.93.4
Storage32.42.2−15.023.07.9−12.34.3−1.74.91.6−16.02.8
Communications0.54.820.213.110.914.82.99.112.413.26.19.8
Deflators
Total8.88.94.03 26.17.313.07.69.85.64.27.1
Transportation9.68.13.12.66.95.911.78.49.04.63.36.6
Land and government transportation12.010.35.63.97.25.412.113.712.47 27.88.9
Water and air transportation and transportation services5.45.51.11.16.15.911.75.27.13.00.74.8
Storage−17.60.04.86.817.040.029.95.03.87.310.39.7
Communications9.88.61.12.41.56.215.312.19.68.09.48.2
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

Productivity and unit labor costs

186. Productivity in transportation, storage, and Communications grew on average by 4 percent per year between 1983 and 1993, slightly slower than in overall economy but faster than the average for the services sectors. The fastest growth of labor productivity was recorded in Communications industries; the slowest in land transportation (Table 8).

Table 8.Hong Kong: Productivity and Unit Labor Costs in Transportation, Storage, and Communications, 1983–93(Annual percentage changes)
19631984198519861987198819891990199119921993Average 1983–93
Labor productivity
Total5.2−0.24.210.616.88.4−10.34.42.43.4−0.44.0
Transportation12.2−1.30.89.219.47.9−11.44.9−1.04.2−0.54.0
Land−14.1−5.60.84.811.58.50.54.8−3.35.1−0.51.1
Water6.16.2−1.93.819.21.5−14.36.113.1−0.93.43.8
Air15.2−8.5−8.021.259.514.9−18.6−3.4−12.4−6.5−9.84.0
Services10.8−6.918.210.6−2.23.2−6.914.2−5.812.12.94.6
Storage41.24.2−15.222.77.7−12.54.0−1.94.6−7.7−21.12.4
Communications−2.02.117.114.96.38.4−8.11.515.60.40.55.2
Unit labor costs
Total5.711.05.6−1.8−7.01.028.69.711.88.412.17.7
Transportation−0.912.29.2−0.6−9.11.430.19.215.67.512.37.9
Land29.417.39.23.5−2.70.914.79218.46.612.310.8
Water4.84.312.24.6−8.97.834.68.01.213.18.08.1
Air−3.521.019.7−10.5−32.0−4.741.618.530.619.923.811.3
Services0.318.9−6.9−1.811.06.023.80.321.50.08.67.4
Services−21.26.229.8−11.50.825.110.916.79.421.541.511.7
Communications13.58.5−6.0−5.52.11.025.512.8−1.011.611.16.7
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.

187. Because of the rapid wage growth, average unit labor costs in transportation, storage, and Communications grew by 7 percent per year over 1983–93, about 2 percent per year faster than in overall economy. Average unit labor costs in storage and air transportation grew by as much as 11 percent per year. These result have to be interpreted with caution, however, because the breakdown of the wage index by industry is not available.

VI. Financing, Insurance, Real Estate, And Business Services

A. Background

188. Financing, insurance, real estate, and business services is along with trade and tourism the largest sector in the Hong Kong economy. It contributed on average 26 percent of GDP and employed 18 percent of total workforce in 1982–94. Real estate services generated on average 44 percent of value added in the sector, financing about 35 percent (80 percent of which came from banks), and business services about 17 percent. The output shares of financing, business services, and insurance increased steadily, while that of real estate services declined. Within financing, the output share of nonbanks almost tripled since the early 1980s.

189. Total employment in financing, insurance, real estate, and business services grew at an average annual rate of 6¾ percent between 1983 and 1994 (Appendix Table 6). Employment in business services and real estate services expanded by 8–9 percent per annum. Financing (in particular banks) reduced its share in total employment. Wages in the sector grew on average by 11½ percent per year over 1983–94. The Variation in wage growth across industries was minimal, indicating a well-functioning labor market and a relatively high degree of job substitutability among industries.

B. Estimates of Real Output

Nominal value added and deflators

190. For statistical purposes, gross output of the financial intermediation services (“banks”) is measured by net interest receipts (i.e., total interest received from loans less total interest paid out to depositors and creditors) and other Service charges. For nonbank financial institutions (investment and holding Companies, stockbrokers, brokers and dealers in foreign exchange, gold bullion, commodity futures) the value of output is measured by the amount of management fees, service charges, and commissions and brokerages. The intermediate consumption of the financial services comprises the same cost items as in other industries, except that interest payments are not included (they are netted out from gross output).

191. The value of gross output of the real estate developers comprises the margin on property development, service charges, and rentals received. Real estate developers’ margins are estimated as the value of the work in progress less all project outlays incurred during the year. The value of business services is measured by the fees, commissions, and other service charges received by accounting and auditing, legal services, architectural design, engineering and similar firms. The value of the services provided by life insurers is being estimated as the sum of operating expenses and compensation of employees, and the value of services provided by general insurance Companies by net retained premiums less net Claims paid, plus income from investment of financial assets.

192. The following deflators were used to derive real value added:

  • For banks and nonbanks, the deflator for exports of financial services was used. This deflator reflects price changes for tradable financial services including banking, financial assets dealing, and brokerage services. Given the high mobility of financial Capital and absence of restrictions on capital flows, it seems appropriate to treat all financial services as tradable.
  • For real estate services, the implicit price deflator for real estate developers’ margin was used. This deflator is almost custom designed, as the survey on investment from which it is obtained also is used to derive the GDP estimates for construction and real estate services.
  • For business services, the deflator for exports of “other business services” was used. While many business services are nontradable, the high level of competition among domestic services providers and the absence of restrictions of foreign providers ensure that these services are priced competitively.
  • For insurance industry, a weighted average of the deflators for exports and imports of insurance services was used. Absence of restrictions on imports of insurance services warrants that this activity be treated as a tradable.

Real growth estimates

193. Growth performance of financing, insurance, real estate, and business services since the early 1980s was strong. Real growth rate for the sector as a whole averaged 11½ percent per year (Table 9). Nonbanks outperformed other industries by a huge margin, with average annual growth rate of 22 percent; however, real (as well as nominal) output of nonbanks was extremely volatile, varying from the highs of 102 percent in 1986 and 91 percent in 1991, to the lows of -44 percent in 1990 and -27 percent in 1988. These large amplitudes reflect the underlying volatility of Hong Kong’s stock market, which is under much stronger influence of uncertainties and changing expectations than other financial services industries.

Table 9.Hong Kong: Real Output and Deflators in Financing, Insurance, Real Estate, and Business Services, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Real output
Total−5.42.75.916.822.420.07.92.118.221.018.18.911.6
Financing−7.80.7−0.125.817.42.1−2.91.140.116.19.6−1.58.4
Banks−5.5−7.9−0.99.223.111.9−5.112.433.78.05.52.17.2
Nonbanks−25.081.93.7101.63.5−26.67.1−43.991.161.824.8−12.922.2
Business services8.66.219.219.721.924.6−5.3−0.78.06.72.611.010.2
Real estate services−9.23.65.17.028.737.923.34.48.730.828.113.815.2
Insurance7.7−0.218.47.322.719.211.3−3.010.313.828.123.813.3
Deflators
Total−8.72.62.75.76.75.08.913.87.13.21.68.64.8
Financing10.07.40.92.210.27.417.714.911.710.79.26.79.1
Business services9.88.61.12.47.56.215.312.19.68.09.46.38.0
Real estate services−23.9−4.44.613.12.5−0.1−0.114.22.4−4.0−5.413.71.0
Insurance5.17.03.83.53.55.77.89.97.87.28.64,26.2
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

194. Real output growth in banking averaged over 7¼ percent per year. During the banking crisis of 1983–85, real output in banking declined, while political uncertainties led to another fall in real output in 1989. In the second half of the 1980s and early 1990s, however, banks expanded strongly.

195. Real estate services grew on average by 15¼ percent per year over 1982. Real output changes in this industry track well the underlying trends in the property market, indicating, most recently, the property boom of 1992–93 and the subsequent consolidation in 1994.

196. Real output of business services grew by 10¼ percent per year. Activity in this industry was extremely buoyant in 1985–88, and after a brief decline in 1989–90 picked up again. A growth pattern reflecting the strong linkages to external trade is also displayed by insurance, where real output growth averaged 13¼ percent per year since 1982.

Productivity and unit labor costs

197. In contrast to the strong record of real growth, labor productivity in financing, insurance, real estate, and business services grew at a moderate pace. Reflecting the relatively high growth of employment, the average annual growth rate of productivity was 4½ percent over 1983–94, about 1¼ percent per year lower than in trade and tourism, and more than two times lower than in manufacturing (Table 10). Productivity growth in financing and real estate services averaged 4–5 percent per year, but was just 1 percent per year in business services. Only nonbank financial institutions recorded a double-digit growth of productivity; however, the performance of nonbanks is not comparable to other industries because of the underlying volatility of the stock market.

Table 10.Hong Kong: Productivity and Unit Labor Costs in Financing, Insurance, Real Estate, and Business Services, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Labor productivity
Total−4.9−0.0−0.09.012.99.2−2.1−5.811.712.610.50.14.4
Financing−4.6−0.0−2.220.59.2−5.2−10.8−3.534.812.43.6−7.93.8
Banks−4.8−11.2−4.55.218.67.8−8.68.328.27.82.1−3.43.8
Nonbanks−18.292.65.390.4−11.1−36.8−9.3−47.279.049.912.0−16.415.8
Business services3.21.15.69.910.014.4−12.5−13.04.6−3.0−4.2−2.31.1
Real estate services−14.00.63.1−0.724.020.011.9−4.2−7.720.416.14.36.1
Insurance10.9−4.29.2−8.59.90.5−3.8−14.57.78.328.920.95.4
Unit labor costs
Total13.38.58.3−0.1−3.45.422.123.70.7−1.41.58.67.3
Financing13.39.710.0−7.8−0.725.829.921.0−17.8−3.07.614.98.6
Banks13.523.512.65.5−8.610.626.87.8−13.61.19.29.68.2
Nonbanks32.1−43.12.1−41.721.988.827.9121.2−38.1−27.3−0.426.714.2
Business services−1.13.70.6−2.1−1.1−5.049.137.85.814.620.216.211.6
Real estate services25.47.85.09.6−12.0−4.06.721.621.9−7.7−4.63.36.1
Insurance−0.115.74.118.7−1.513.527.630.63.84.3−13.6−12.17.6
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

198. Unit labor costs in financing, insurance, real estate, and business services increased on average by 7¼ percent per year between 1982 and 1994, faster than in most other sectors. In business services and nonbanks, unit labor costs spiraled at double-digit rates, while in insurance and banks unit labor costs increased on average by 7–8 percent per year since 1982. These rapid cost increases were on average only marginally lower than the average rate of inflation in this period. Given that Hong Kong had generally a higher rate of inflation than its regional competitors, these results suggest that financing, insurance, real estate, and business services may indeed have a competitiveness problem externally, although domestically their rapid expansion was consistent with the underlying movements in relative prices and wages (see Chapter VIII).

VII. Community, Personal, And Social Services

A. Background

199. Community, personal, and social services is the third largest sector in the Hong Kong economy. It contributed on average 14 percent of GDP and employed 8½ percent of total workforce over 1982–94 (Tables 2 and 3). Organizations in this sector provide a wide range of services to individuals and households, including: education; medical and health services; sanitary, repair, and hairdressing services; public administration, public order, and safety services; and other services provided by nontrading bodies of the government. A breakdown of value added by these activities is not available. From an economic perspective, most community, personal, and social services are public goods; they are also largely nontradable.

200. Employment in community, personal, and social services grew at an average annual rate of 4 percent between 1983 and 1994 (Table 11). Except for the first half of the 1980s, employment growth was relatively stable. Wages in the sector increased on average by 11 percent per year. Until 1987, wage increases were relatively moderate; wage increases at double-digit rates have became common since. Thus, in 1989, wages increased by 24 percent in response to severe labor shortage and increased demand for community and social services following the 1989 events in China.

Table 11.Hong Kong: Community, Social, and Personal Services, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Real output2.62.96.64.04.95.03.12.84.45.98.43.24.5
Deflator12.511.87.77.26.69.611.512.811.110.88.710.710.1
Employment8.03.60.12.72.44.74.16.16.41.43.45.94.1
Wages7.35.46.84.310.415.723.814.29.211.59.713.211.0
Productivity−5.0−0.76.51.32.50.2−0.9−3.1−1.94.44.9−2.50.5
Unit labor costs12.96.10.32.97.715.424.917.911.36.84.616.210.6
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

Real output, productivity, and unit labor costs

201. Government services and services provided by private nonprofit bodies are usually provided to the public free, or at prices below their costs of production. Gross output of these services is estimated as the sum of operating expenses (including imputed rentals for government owned or subsidized premises) and compensation of employees. The operating expenses are treated as intermediate consumption, and compensation of employees as value added for such services. Estimates for commercial establishments are obtained from surveys and tax records; gross output of these establishments comprises mainly receipts from fees, commissions, and other service charges, margins on resale of goods, and rentals received.

202. The deflator used to derive estimates of value added at constant prices was consumer price index for miscellaneous services. Although this index covers some services that are provided by other sectors, the weight of these services in the overall index is relatively small (about 17 percent).

203. Based on the CPI subindex for miscellaneous services, real output in community, personal, and social services grew on average by 4½ percent per year over 1983–94, half the growth rate in other services sectors and about 1 percent per year more slowly than in manufacturing. Growth was fairly stable and, unlike in most other sectors, positive in the entire period considered. As employment expanded at roughly the same rate as real output, productivity growth averaged just 1/2 percent per year. Reflecting stagnant productivity and rapid growth in wages, unit labor costs rose by 10½ percent per year over the period, higher than in any other sector in the economy. Judging by these indicators, community, personal, and social services was the least competitive services sector. This result must be interpreted with caution, however. Because of the public goods aspects of the output provided by this sector, compensation of employees constitutes a much larger share of value added than in other services sectors.

VIII. Interpretation And Policy Implications

A. Limitations of Methodology and Analysis

204. In interpreting the above results it is important to keep in mind some assumptions used in analysis, and the limitations of the measures of competitiveness used in this paper. First, it was assumed that cost-plus pricing represented a reasonable model of behavior of firms in services industries. Under this assumption, deflating nominal output by an index of output price or input costs provides a good estimate of output changes in constant prices. Second, in comparing unit labor costs across industries, it was implicitly assumed that the costs of Capital and land did not change or contribute significantly to output prices. Rising unit labor costs thus suggested falling profitability and vice versa. Third, labor mobility between sectors was implicitly assumed to be high, leading to considerable wage equalization for similar labor among sectors. Fourth, the concept of competitiveness used in this paper focused on the degree to which, given current domestic factor prices and current international prices of goods and services, domestic goods and services produced by different sectors could be profitably marketed.

205. Given this analytical framework, the key issues that were addressed in this paper were growth performance, labor productivity, profitability of industries, and efficiency of resource allocation. The preceding chapters dealt with the first three issues. This chapter looks further into profitability and discusses the overall trends in resource allocation. The last section discusses some policy implications of the results.

B. Trends in Profitability and Intersectoral Resource Allocation

Profitability in services industries

206. The estimates of value added in constant prices indicate that real output expanded rapidly in services industries such as Wholesale and retail trade, transportation, financing, and real estate services. While unit labor costs grew rapidly in most services industries, in recent years these increases have moderated as capital has been increasingly substituted for labor.

207. Trends in gross operating surplus in constant prices suggest that the movements in unit labor costs were generally representative of overall trends in profitability. Thus, when unit labor costs declined across the economy in 1987, gross operating surplus rose sharply (Table 12). The reverse happened in 1989. Since then, profitability recovered in most sectors, although it dipped again in 1993, the last year for which the data were available.

Table 12.Hong Kong: Gross Operating Surplus and Unit Labor Costs by Sector, 1983–93(Annual percentage changes)
19831984198519861987198819891990199119921993Average 1983–93
Gross operating surplus 1/
Manufacturing24.319.6−17.231.325.49.00.80.24.26.1−4.19.1
Trade and tourism−1.033.3−3.29.538.615.23.3−0.47.615.412.311.9
Transportation14.711.32.47.914.910.17.12.816.43.22.58.5
Financing, real estate, and business services−16.6−1.51.121.625.520.05.80.523.325.820.711.5
Community, social, and personal services7.3−1.68.8−4.40.88.8−4.7−3.1−2.0−3.97.11.2
Unit labor costs Manufacturing
Manufacturing−5.4−3.56.4−7.4−4.9−0.65.13.8−1.2−5.7−2.0−1.4
Trade and tourism11.6−2.59.05.0−5.38.210.819.68.82.62.66.4
Transportation5.711.05.6−1.8−7.01.028.69.711.88.412.17.7
Financing, real estate, and business services13.38.58.3−0.1−3.45.422.123.70.7−1.4157.1
Community, social, and personal services12.96.10.32.97.715.424.917.911.36.84.610.1
Sources Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).

In constant prices of the sector.

Sources Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).

In constant prices of the sector.

208. These results would tend to support the conventional view on recent developments in Hong Kong’s services sectors. According to this view, the advantages enjoyed in the late 1980s and early 1990s by the firms providing services related to trade and investment in China were gradually eroded by the cumulative effects of high wage and property price inflation and stronger regional competition. As relocation options have been more limited in this sector, the services firms initially responded to eroding competitiveness by trying to restrain price increases and temporarily absorb higher costs. To maintain profit margins, since 1993, many services firms have reduced employment and stepped up investment in labor-saving capital equipment.

Intersectoral resource allocation

209. The above discussion indicated how the resources moved among industries over time (from manufacturing and certain declining services industries to the rapidly growing trade, financing, and business services), and partly why the resources had moved in such a pattern (linkages to external trade and investment, profitability, and cost considerations). The data used to derive these results can also be used to answer a more basic question: To what extent have the observed movements in resources responded to relative price changes and relative wage differences among sectors?

210. Trends in industry prices relative to manufacturing output prices suggest that, by and large, the intersectoral allocation of resources was efficient. Industries whose prices increased most rapidly relative to manufacturing (air transportation, transportation services, Communications, financing) were generally the ones that recorded the highest growth rates of real output (Table 13). In particular, as the relative prices rose rapidly across the services industries since 1990, the services sector expanded strongly while manufacturing stagnated.

Table 13.Hong Kong: Output Prices by Sector Relative to Manufacturing Prices, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Wholesale5.01.6−5.93.30.9−0.7−5.54.05.51.29.45.32.0
Retail1.80.0−0.10.02.02.20.13.38.44.112.710.63.8
Import/export trade4.22.9−3.30.70.1−1.8−4.13.56.22.410.34.42.1
Restaurants1.1−1.02.4−0.61.04.39.011.314.71.513.09.55.5
Hotels5.54.33.73.06.14.61.03.37.86214.213.96.1
Transportation1.4−4.22.89.623.113.7−8.07.44.29.914.66.8
Land−6.1−7.83.84.08.93.4−5.26.0−0.410.612.02.7
Water5.85.80.13.218.810.4−8.48.613.88.123.48.1
Air25.6−6.7−6.335.985.835.0−13.62.93.97.36.216.0
Transportation services16.8−2.715.721.36.914.5−6.320.9−1.222.221.811.8
Government transportation−17.2−15.58.82.07.83.64.86.52.4−0.55.90.8
Storage23.3−5.4−15.718.83.7−16.6−1.6−4.66.90.6−10.2−0.1
Communications−6.5−3.019.39.36.59.1−2.85.814.612.113.57.1
Financing (banks and nonbanks)2.3−0.70.1−1.35.92.011.111.513.99.616.711.56.9
Business services2.20.40.3−1.03.21.08.88.711.87.017.011.25.9
Real estate services−29.2−11.53.89.3−1.6−5.1−5.710.74.4−4.91.118.8−0.8
Insurance−2.2−1.13.00.0−0.60.41.76.69.96.216.19.04.1
Community, social, and personal services4.73.46.93.62.44.25.29.413.39.816.215.77.9
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

211. Similarly, in all industries except restaurants, wages have on average increased relative to manufacturing since the early 1980s (Table 14). Relative wages grew especially rapidly in import/export trade, the industry which also experienced one of the highest growth rates of employment Labor has thus moved away from manufacturing in a clear, predictable pattern.

Table 14.Hong Kong: Wages by Sector Relative to Manufacturing Wages, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Wholesale4.50.41.52.63.43.5−3.21.6−1.84.51.4−1.41.4
Retail−0.63.23.05.510.211.43.43.90.73.6−0.7−10.42.8
Import/export trade4.29.32.05.85.35.80.15.3−0.62.90.6−3.03.1
Restaurants−2.9−2.6−2.40.30.12.22.1−3.0−0.2−2.1−2.7−2.5−1.2
Hotels0.53.52.04.7−0.44.42.63.00.91.42.91.02.2
Transportation, storage, and Communications3.41.93.52.7−0.50.73.52.03.12.40.91.72.1
Financing (banks and nonbanks)0.50.91.15.1−0.69.74.04.0−0.2−0.50.8−2.81.8
Business services−5.1−3.6−0.11.8−0.20.017.06.8−0.31.44.14.32.2
Real estate services0.3−0.21.73.00.06.07.23.91.51.40.1−1.02.0
Insurance3.02.06.82.8−0.75.010.2−0.60.73.10.6−2.42.5
Community, social, and personal services−0.2−3.00.4−1.31.26.411.01.7−1.61.8−0.94.11.6
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.

C. Policy Implications

212. The above results indicate that most services industries have expanded strongly since the early 1980s and adjusted flexibly in periods of falling profitability and rising costs, as resources have moved rapidly to their more efficient uses in response to relative price changes. The main policy implication of this analysis is that, left to its own devices, the private sector can successfully undergo a major structural transformation in a relatively stable macroeconomic environment and under the overall conditions of economic growth. The importance of stability in providing a level playing field cannot be underestimated. In the period considered, Hong Kong had a stable exchange rate (the linked exchange rate system was adopted in October 1983). There have been only marginal changes in the tax system, which has been neutral in providing incentives to different activities. Major new public expenditure initiatives focussed on improving physical infrastructure and human capital of the population, that is, programs with spillover benefits accruing more or less uniformly to all industries. To the extent that inflation had asymmetric effects on certain industries (e.g., property, and personal and social services which use relatively more nontradable inputs), the prevailing demand conditions were such that these industries were generally able to pass on the rising costs to consumers.

213. Looking ahead, these results imply that, in order to maintain competitiveness in services industries, measures which might reduce the observed flexibility of factor prices or distort the price signals to which factor movements respond should be avoided. While structural transformation hurts certain segments of the workforce more than others (e.g., workers with low skills or older workers), the best way to address such problems is by focussing on specific programs at the microeconomic level, without changing the noninterventionist framework of economic policy.

APPENDIX: DATA SOURCES AND DESCRIPTION

Data sources

  • Publications of the Census and Statistics Department: Estimates of Gross Domestic Product, 1961 to 1995 (March 1996) (EGDP). Annual Digest of Statistics (various editions) (ADS). Monthly Digest of Statistics (various editions) (MDS).
  • Data on retained imports in current and constant prices were provided by the CSD directly to the staff.

Description of the data

Nominal value added

  • Annual production-based GDP at current prices by economic activity (EGDP, 11)
  • Breakdown of value added in Wholesale, retail, import/export trades, restaurants and hotels, and in financing, insurance, real estate, and business services was published for the first time in 1996 (EGDP, 13)
  • For the purpose of this study, value added in financing was split between banks and nonbank financial institutions. The share of banks was assumed to correspond to imputed bank services Charge (“financial intermediation services indirectly measured”), which is used to calculate production based estimates of gross domestic product (EGDP, 11). The share of nonbank financial institutions was obtained by subtracting the imputed bank services charge from value added of financing.
  • Breakdown of value added in transportation, storage, and Communications is obtained from principal statistics for all transport and related services by major industry group and value added (ADS 5.8). The coverage in the ADS is not comprehensive: the production-based estimates of GDP for this sector are on average 5 percent higher than the total obtained from the ADS.

Exports and imports of services

  • Exports and imports of services by component at current and constant (1990) market prices (EGDP, 8).
  • Breakdown includes exports and imports of the following services: Transportation (sea, air, and land transportation); Travel (business and personal travel); Insurance (direct insurance and reinsurance); Financial (banking, financial assets dealing, brokerage services); Trade-related (off-shore trading, purchasing services, other trade related services); Other business services (communication, legal, advertising, marketing research, management consultancy, accounting, industrial, construction, real estate, architectural, Computer, information, news transmission, production and distribution of films, hotel management, and other business services).

Employment

Average of end-quarter estimates of the number of persons engaged by major industry group (MDS 2.4).

Wages

Average of semi-annual (March and September) wage indices by industry sector (MDS 2.7).

Deflators

  • Manufacturing: Derived from nominal value added and index of industrial production (MDS, 4.1).
  • Wholesale trade. Implicit price deflator for retained imports (derived from the data supplied by the CSD).
  • Retail trade: Derived from indices of value and volume of retail sales (ADS, 5.15).
  • Import/export trade: Weighted average of the deflators for domestic exports (EGDP, 3), retained imports and net re-exports (i.e., re-exports less nonretained imports) (derived from the data supplied by the CSD), and exports and imports of trade-related services (derived from EGDP, 8). The weights used were the nominal shares of these five components in their sum.
  • Restaurants: “Meals bought away from home” subindex of the composite CPI (ADS, 9.1).
  • Hotels: Implicit price deflator for exports of travel services (derived from EGDP, 8).
  • Land and government transportation: Transportation subindex of the composite CPI which covers: fares for ferries, trains, taxis, and public transportation; motor fuel; purchases of and repairs to motor vehicles; and motor licenses, insurance, parking fees, and tunnel tolls.
  • Water and air transportation and transportation services: Weighted average of the deflators for exports and imports of transportation services (derived from EGDP, 8). The weights used were nominal shares of exports and imports of transportation services in total trade in such services.
  • Storage: Rental index for private flatted factories (MDS, 5.12).
  • Communications: Implicit price deflator for exports of other business services (derived from EGDP, 8).
  • Banks and nonbank financial institutions: Implicit price deflator for exports of financial services (derived from EGDP, 8).
  • Real estate services: Real estate developers’ margin, percentage change in constant prices (EGDP, 7).51
  • Business services: Implicit price deflator for exports of other business services (derived from EGDP, 8).
  • Insurance: Weighted average of the deflators for exports and imports of insurance services (derived from EGDP, 8). The weights used were nominal shares of exports and imports of insurance services in total trade in such services.
  • Community, personal, and social services: “Miscellaneous services” subindex of the composite CPI which covers: school fees and educational charges, medical services, entertainment expenses, household services, hairdressing, repairs to personal and household goods, subscriptions, and postal and telephone services.

Labor productivity

Measured as the (change in) value added in constant prices per worker. Data on person hours are not available.

Unit labor costs

Measured as the (change in) the nominal wage bill (wL) per value added in constant prices (pQ) (equivalent to dividing the nominal wage index by the labor productivity index).

Gross operating surplus

Defined as value added less compensation of employees (EGDP, 12).

Relative prices

Defined as the (change in) the output price deflator for industry i divided by the price deflator for manufacturing output.

Relative wages

Defined as the (change in) the nominal wage index for industry is divided by the nominal wage index for manufacturing.

Appendix Table 1.Hong Kong: Output and Employment Snares in Wholesale, Retail, Import/Export Trade, Restaurants and Hotels, 1992–94(In percent of total)
1982198319841985198619871988198919901991199219931994Average 1983–94
Share in output of the sector
Wholesale7.97.36.86.86.56.55.85.86.76.25.75.95.26.4
Retail22.118.818.018.416.916.216.315.914.314.714.513.213.916.4
Import/export trade49.353.657.255.356.958.959.858.660.862.562.864.965.158.9
Restaurants15.815.313.214.114.013.112.614.213.312.212.211.311.013.2
Hotels4.95.04.95.45.75.45.55.44.94.44.74.74.85.1
Share in employment of the sector
Wholesale11.111.210.810.19.59.29.08.88.78.78.68.27.59.3
Retail31.931.329.728.827.426.325.624.724.123.222.621.520.225.9
Import/export trade26.126.128.331.533.936.038.439.941.142.543.346.249.937.2
Restaurants26.627.027.125.525.024.222.822.021.721.321.119.918.523.3
Hotels4.44.34.24.14.34.34.34.64.44.24.34.23.84.3
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Monthly Digest of Statistics (various editions).
Appendix Table 2.Hong Kong: Employment and Wages in Wholesale, Retail, Import/Export Trade, Restaurants and Hotels, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Employment
Total trade and tourism4.35.56.43.85.58.56.97.98.03.14.59.46.2
Wholesale5.41.2−0.4−2.22.25.94.47.37.82.4−1.00.42.8
Retail2.4−0.03.2−1.31.35.63.25.34.00.4−0.83.22.2
Import/export trade4.714.218.611.512.115.611.211.011.75.011.718.112.1
Restaurants6.25.80.11.52.12.23.16.76.02.3−1.71.93.0
Hotels2.52.14.58.36.38.814.72.24.65.61.9−1.15.1
Wages
Total trade and tourism6.36.95.14.79.612.514.311.19.99.69.210.09.1
Wholesale12.39.18.08.412.812.57.914.08.914.412.27.310.6
Retail6.812.29.611.520.221.115.216.711.813.59.9−2.512.2
Import/export trade12.018.88.511.814.815.011.618.210.312.611.35.612.5
Restaurants4.35.83.86.09.111.113.88.910.77.27.76.17.9
Hotels8.112.68.410.68.613.514.415.612.011.113.99.911.6
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Appendix Table 3.Hong Kong: Output and Employment Snares in Transportation, Storage, and Communications, 1982–93(In percent of total)
198219831984198519861987198819891990199119921993Average 1983–93
Share in output of the sector
Transportation76.577.977.976.176.078.479.077.377.375.774.974.376.8
Land32.931.731.131.530.227.725.225.526.425.526.026.328.3
Water21.221.623.321.720.119.919.518.918.619.518.719.520.2
Air9.811.911.39.912.118.722.320.519.018.317.415.615.6
Transportation services7.28.18.08.79.58.45.58.59.38.59.29.48.6
Government transportation5.44.64.14.44.13.73.43.84.03.93.63.54.1
Storage3.02.82.62.12.42.22.22.72.32.22.01.72.3
Communications20.519.319.621.821.619.418.820.120.422.123.124.020.9
Share in employment of the sector
Total transportation73.072.973.573.474.475.075.875.975.776.775.775.974.8
Land20.523.123.223.723.722.720.919.219.018.918.418.021.0
Water18.117.817.618.018.017.318.119.119.018.018.218.618.2
Air7.57.37.57.98.28.39.19.610.011.412.212.59.3
Transportation services26.824.725.323.724.626.727.728.027.628.327.026.826.4
Storage6.05.55.25.14.94.74.33.93.73.73.83.84.5
Communications21.621.621.321.520.620.319.820.220.619.620.520.320.7
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Appendix Table 4.Hong Kong: Employment and Wages in Transportation, Storage, and Communications, 1983–94(Annual percent age changes)
1983198419851986198719881989199019911992199319941983-94 Average
Employment
Total2.64.01.92.85.88.510.15.51.97.66.86.35.2
Transportation2.54.81.94.26.69.710.25.33.26.27.16.35.6
Land15.64.24.62.41.40.11.24.31.54.54.58.94.0
Water0.62.74.62.71.813.216.45.1−3.48.69.12.85.6
Air0.06.87.96.27.018.416.110.516.314.510.14.210.4
Transportation services−5.56.4−4.36.514.912.911.14.24.42.56.37.95.4
Storage−6.2−1.90.20.20.20.20.20.20.210.16.44.90.9
Communications2.62.72.6−154.35.912.07.4−2.812.85.69.34.7
Wages11.210.710.08.68.59.515.314.514.412.111.710.711.5
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Appendix Table 5.Hong Kong: Output and Employment Shares in Financing, Insurance, Real Estate, and Business Services, 1982–94(In percent of total)
1982198319841985198619871988198919901991199219931994Average 1983–94
Share in output of the sector
Financing31.436.837.935.136.536231.530.630.637.838.938.834.535.1
Banks27.733.331.328.826.027.025.724.527 232.030.729.427.128.5
Nonbanks3.73.56.56.310.5925.76.13.45.8829.47.46.6
Business services11.315.617.118.918.818.819.818.417.616.415.214.214.216.6
Real estate services54.143.340.741.140.340.744.546.647.842.042 242.746.744.0
Insurance3.34.34.44.94.44.34.34.44.03.83.74.34.742
Share in employment of the sector
Financing47.746.445.543.942.742.441.641.039.638.937.437.136.441.6
Banks31.331231.630.930.028.727.125.524.424.122.421.721.126.9
Nonbanks16.415.113.912.912.813.714.515.515.214.915.015.415.314.7
Business services30.432232.935.135.636.436.135.537.336.537.337.439.135.5
Real estate services15.616.616.616.016.115.416.116.116.218.018.218.818.816.8
Insurance5.04.95.05.15.65.8626.56.86.66.56.05.75.8
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Appendix Table 6.Hong Kong: Employment and Wages in Financing, Insurance, Real Estate, and Business Services, 1983–94(Annual percentage changes)
198319841985198619871988198919901991199219931994Average 1983–94
Employment
Total−0.52.75.97.28.49.910.38.45.87.56.98.86.8
Financing−3.30.72.14.47.57.88.84.83.93.45.86.94.4
Banks−0.73.83.83.83.83.83.43.84.20.13.45.73.2
Nonbanks−8.3−5.5−1.65.916.316.118.16.46.87.911.44.26.5
Business services5.35.112.98.910.98.98.314.13.310.17.113.79.0
Real estate services5.63.01.97.83.814.910.29.017.78.710.49.18.5
Insurance−2.94.28.517.211.618.615.613.62.55.1−0.62.48.0
Wages
Total7.88.58.28.99.115.119.516.612.611.012.18.711.5
Financing (banks and nonbank8.19.67.611.08.419.215.916.710.89.011.55.811.1
Business services2.04.86.37.68.88.730.419.810.611.115.213.511.6
Real estate services7.88.58.28.99.115.119.516.612.611.010.87.711.3
Insurance10.810.913.68.68.314.122.811.611.812.911.36.211.9
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
Sources: Census and Statistics Department, Estimates of Gross Domestic Product, 1961 to 1995, and Annual and Monthly Digests of Statistics (various editions); and staff estimates.
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47

This paper was prepared by Dubravko Mihaljek.

48

The 1982–94 period covered in this paper was chosen because a comprehensive survey of wages by sector commenced in 1982, while the latest production-based estimates of GDP available were for 1994.

49

See feature article in December 1996 issue of the Hong Kong Monthly Digest of Statistics.

50

Data used to calculate the deflators are described in Appendix 1.

51

For buildings which are completely built within a year and sold in the same year, the real estate developers’ margin is equal to the selling price of the building less total costs incurred by the developer (excluding interest payments). Otherwise, the margin is equivalent to value of the work in progress less all project outlays incurred during the year.

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