Term Paper on "Integration of Hong Kong and China's Economies"

Term Paper 10 pages (2889 words) Sources: 1+

[EXCERPT] . . . .

Integration of Hong Kong and China's Economies

In 1997, control of the British colony of Hong Kong was officially transferred to the People's Republic of China, politically and otherwise officially integrating two entities which had, for years, been enmeshed with one another in many ways. In accordance with the Sino-British Joint Declaration on the Question of Hong Kong, administrative and certain other controls shifted to mainland China, and many of the vestiges of colonial British rule were removed.

Small and symbolic changes included the removal of British flags, currency, and national holidays; however, significant changes regarding the economic and political structure of Hong Kong were hotly debated and examined in integrating the province with the mainland of China.

This paper will examine the shift in Hong Kong's economy from one of manufacturing good to one of providing services, and how this economy can integrate itself with the economy of mainland China. The first section will explore not only Hong Kong's rapid evolution from a primarily goods-based economy to one heavily tilted towards services, but also the effects of this shifts as documented in other economies as well as the duplication of these changes in Hong Kong. Next, the factors that encourage greater integration with mainland China as a result of this shift will be explained; finally, a summary will be presented as well as the conclusion that while this shift is an overall positive change for Hong Kong's economy, care needs to be taken in undergoing this alteration to ensure the best possible result and smoothest integration with the mainland.

The strict facts regarding Hong Kong's economy are irrefutable proof that the area has shifted from manufacturing-driven economy to one focused on providing services: from 1980 until 1997, the percentage of Hong Kong workers in service industries rose from 42% to 79%;

during that same time period, the percentage of employees in the manufacturing industry declined from 46% to 10%.

Such radical change in employment is only the first indicator of the shift, however; in 1980, the gross domestic product stemming from services in Hong Kong was 90.7 billion Hong Kong dollars. By 1997, that number had multiplied by ten times, to 1050.4 billion.

Hong Kong's economy did begin as a primarily goods-based one; like so many developing nations, the proliferation of cheap labor initially encouraged significant levels of production and manufacturing jobs.

However, with the development of higher living standards and increased income, the profitability of manufacturing investment in Hong Kong began to decline and was eventually rendered noncompetitive with the third-world nations where manufacturing is more inexpensive. This development in the economy and cost of living, while an overall positive factor for the Hong Kong economy, was a detriment to the development manufacturing sphere.

The "massive deindustrialization" that took place in Hong Kong over the 1990s and that continues to the current day has not been considered by all academics a wholly positive development. Many scholars note the lack of jobs for unskilled or non-service workers, a lack of benefits such as unemployment aid for workers who are left without jobs due to the closing of manufacturing plants, and increased competition for Hong Kong workers from foreign workers, whose presence was approved by the government under the General Labour Importation Scheme.

Critics of this decline in manufacturing and its workers assert that simply because one industry (service) is increasing in both profitability and production rapidly, to ignore other industries (manufacturing) is poor economic policy:

the fact that deindustrialization is an unavoidable long-term trend of modern societies does not mean that a nation can ignore manufacturing completely and depend totally on services...the growth of the service sector is unlikely to increase rapidly enough to offset productivity decline in manufacturing, and overall growth also depends on continued productivity increases in manufacturing.

The potential (and to a certain extent, real) decline in the quality of living for former manufacturing employees who cannot make the transition to service-industry jobs is a significant factor in the nation's overall quality of living; in this case, the "rising sea lifts all boats" economic theory will not be sufficient, say these experts, to provide for the unemployed manufacturing employees. These critics note that this separation among service-oriented workers (such as those in the financial, insurance, real estate, and business industries) and the manufacturing-industry workers creates a significant stratification of wages and of living standards.

However, the transition of the majority of Hong Kong workers (as cited in Tau above) into service industries is impossible to ignore; the FIRE and business model of finance, insurance, real estate and other business sectors has become responsible for the majority of Hong

Kong jobs, more than doubling since 1985.

This rate of growth has made Hong Kong second only to Japan in Asia as an exporter of services, making it not only impossible but impractical to ignore this development.

The causes for this shift are varied; Hong Kong's rapid development over the previous few decades had made it o ne of the fastest-growing (and changing) economies in the world. These factors include globalization as a phenomenon in itself, the growth and integration of the Asia/Pacific region, and the integration and opening of China.

The concepts of both globalization and of the integration of the Asia region as a whole may be seen in the Japanese utilization of Hong Kong as a "world/global city" where service firms are based and do most of their business.

Along with Singapore and Los Angeles, Hong Kong has become an important center of foreign investment for service supply in the Pacific region; this foreign investment has come primarily from Japan but is also from all over the globe, including Europe, the United States, and most significantly, China.

Integration of the Asia/Pacific region has been significantly encouraged by the increased integration of China. It is worth noting that the exponential growth of Hong Kong has come almost completely in the years since 1979, which marked more open-market reforms and revisions in the People's Republic. The potential for economic integration with the mainland was quickly realized and capitalized upon, with the large and inexpensive labor market in southern China becoming the main destination for manufacturing-related jobs needed in Hong Kong-based firms, leaving a large gap of positions to be filled by the island. These open positions became more lucrative and less labor-intensive jobs related to services provided, such as financial, real estate, and insurance positions.

Other scholars put the reasons for this shift in Hong Kong's economy at even more specific levels. One study of the "hollowing out" of Hong Kong's manufacturing industry -- the phenomenon in which the manufacturing jobs leave the area, making a "hollow" for other industries (namely service) to fill-has established at least six factors in the Hong Kong shift to a service-oriented economy.

Three of the six factors are related to a more open and integrated Asian economy.

These first three factors -- an open China, growth in Asia, and the Japanese capital available-have had a profound influence on the Hong Kong shift away from manufacturing toward service. The influx of Japanese money as well as capital and investment from the other growing Asian economies has created an increased demand for financial, insurance, and real estate services as well as increased transportation and tourism services necessary for the city to function as the international hub that growth in Asia has demanded. In addition, the opening of China has created not only a market for services but also has resulted in most manufacturing jobs, which are typically more inexpensive and labor-intensive, shifting to the developing countryside where work of any type is difficult to come across and is therefore more inexpensive and in demand.

These international factors were not the sole impetus behind Hong Kong's shift toward a more service-based economy. Hong Kong's own market-friendly environment, described as one of the most liberal in the world, had a definite impact on the encouragement and growth of more expensive and skilled services such as the financial and real estate industries.

The Hong Kong emphasis on information technology and telecommunication industries and the expertise available in Hong Kong in these areas made it an in demand hotbed of knowledge and know-how in the IT and telecom sectors, some of the fastest-growing industries in the world.

Finally, another international trend, that of economic globalization as a whole (not just in terms of China or Asia, as listed in the previous paragraph) heavily influenced international demand for services provided in Hong Kong.

Many of these factors also influenced one another as they influenced the Hong Kong economy; the influence of globalization on the opening of China and the deregulation in Japan is almost intuitive. A more specific example of these inter-factor influences are the demand created by the greater property investments of Japanese investors; this demand for financial and real estate services created the supply of financial, real estate, and insurance service experts in Hong Kong. Once established, these services became more internationally exportable and marketable due… READ MORE

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