CONFIDENTIAL
Reference...KK1.241.6.16/4
Mr Thompson (HKGD)
CC: Mr Smith
LACT
208
RECENT CLAIMS MADE BY THE HONG KONG GOVERNMENT
1.
Following the wake of the Governor's visit here and in Brussels I have some comments on the figures and arguments being bandied around.
Figures
Rc8
HK telno 979 para 2. I do not know what Mr Jeaffreson's sources are for his claim that 69% († 2%) of GDP is domestic exports. My sources are 'Estimates of GDP', 'Social & Economic Trends' and the Monthly Digest of Statistics, and I stand by the figure of a 64% average share of domestic exports in GDP for the last 10 years or a 9-year average of 65% if Mr Jeaffreson insists on excluding any of the so-called "disturbance" years of the mid-sixties when this figure was typically in the 50's. Incidentally, since HK government has just presented us with a new higher estimate of GDP in 1976 that year's percentage falls to 68.4. I agree, this is nit-picking but I like you to have the figures at your disposal.
Arguments
3.
In Maitland's telegram no 5652 from Brussels para 2(1), the Governor said that the loss of £130m worth of textile and clothing production would lead to:-
(a) a fall of 2% in the employed labour force,
(b)
a fall of 1.5% in the growth of GDP.
My best estimate of the total output of clothing and textiles for 1976 is HK$ 24bn, (given that the 1973 census showed 72% of output was exported and assuming this ratio to be unchanged) or £2,927m. A reduction in output of £130m is 4.4% of total domestic output of textiles and clothing, or 6.1% of domestic exports. So employment in these sectors would fall by something like 4.5% (but not 6.1% because the 1973 census showed just how much is consumed locally). 4.5% of a labour force of 382.000 is 17,000 people unemployed in textiles and clothing approximately 1% of the total labour force of Hong Kong. The Governor's figure of 2% therefore seems wrong to me; given that there is virtually full employment (para 35 of the Financial Secretary's speech to the HK Management Association) there will not be any 'multiplying' effect downwards, and indeed many of the displaced workers should be able to provide employees for the booming construction industry where wages have risen so sharply in response to a sizeable excess demand for labourers.
4.
Mr Jeaffreson's telegram (telno 979) has a very interesting third paragraph. He argues that because there is a long run correlation between growth in domestic exports and growth in real GDP the former drives the latter. But this is a long run argument and in his last sentence he concludes that it holds for the medium and short runs as well which is wrong. In the short run the domestic sector can buoy up the economy while the foreign sector temporarily takes a dive, and this should be controlled and encouraged by the government since this is what is meant by the 'counter-cyclical role of government expenditure' to which the Financial Secretary pledged himself in this year's budget speech (para 98). In the medium-term either government expenditure can be maintained or, more likely, Hong Kong's famed flexibility will take over and the resources will be directed to another sector aiming to export competitively.
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CONFIDENTIAL
5. However,