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13. You might well ask: why not regulate the economy by intervening to control the level of aggregate demand? Because Hong Kong is so dependent on international trade, such action could have unfortunate repercussions both on internal costs and prices and on the balance of payments. For example, if public expenditure were to be increased at a time when the volume of exports was growing rather slowly, and perhaps pockets of unemployment appearing, this would almost certainly increase the volume of imports both directly and as a result of increased household consumption expenditure. The output of the export- oriented firms would be unaffected but, to the extent that the Government's measures put pressure on the labour market and raised wage rates elsewhere in the economy, export industries could find it all the more difficult to move into an expansionary phase when the rate of growth of world demand began to rise. But questions of demand management aside, it is also important for the Government to ensure that public sector expenditure grows at much the same rate as the economy as a whole for, in the Hong Kong case, growth can only be sustained over time if it is
export-led. Were Government expenditure to increase significantly and rapidly in relation to the gross domestic product then this could lead to a diversion of resources away from the private sector and seriously impair the longer term growth prospects of the economy.
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