8
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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