CODE 18-77
RESTRICTED
3 -
Reference......................................
14.
i. The small increases in import price despite the declining currency. This is largely caused by the stability of import prices from PRC (the currency of which has declined against the HK$.)
ii. The availability of cheap labour for outward processing in PRC means that the labour market in Hong Kong is less tight than at first sight.
Another factor should be mentioned, namely the productivity of the domestic labour market. Measured in terms of output/worker this has been rising rapidly: about 17% for industrial production in the year to June 1987. This may be the consequence of several positive factors, in particular: more overtime, less underemployment and movement to more capital intensive production itself facilitated by transfering labour intensive processes to PRC. At the same time earnings, taking into account overtime worked, have been increasing much less fast, in both real and nominal terms (7% and 13% respectively). This simple arithmetic suggests that although the labour market is tight, and there is a clear incentive to seek more workers rather than pay overtime, the impact so far on price level has in fact been negative. The normal cost of labour/unit of production has fallen.
Comment
15. Prior to the stock market crash the principal question was when constraints on growth would begin to bite: when would the competitive advantages of the low currency by eroded by inflation; when would supply constraints mean that production could no longer grow fast, at least within the confines of existing technology? The economy has coped this far, by a mixture of good fortune, working harder, and technological change. The key to sustained success continues to be the speed of the last named effect, which is why evidence of significant capital substitution would be of considerable significance.
16. The stock exchange crash raises additional questions including:
The direct effects of the traumatic event in Hong Kong: both the loss of both wealth and confidence.
i.
ii. The overall effect on world trade of international wealth effects: is especially due to the importance of the US market to Hong Kong.
iii.
The renewed decline of the dollar: while for other countries not linked to the $ the effect is to switch any recession from the US to them, this is not the case for Hong Kong where the competitive position will be strengthened again, at least in the short run. This amplifies the already existing questions concerning inflationary pressures and structure adjustment.
M. тур
M Wright
Economic Advisers
4 January 1987
1988