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authorities needed to spend money on the airport construction project, this
meant that other public investment projects would need to be cut. Finally, he
said that further relaxation of labour import restrictions would help.
9.
Evans (Australia) supported the staff appraisal. He commented that on
the whole the staff always tend to end up supporting member countries exchange rate arrangement, and that this probably reflected the fact that any arrangement can work if other policies adapt to it. In the HK context this
meant that fiscal policy needed to adjust, and he agreed with the staff
analysis. He agreed with Abbott that if fiscal policy did not adjust, then
inflation might become entrenched, which would be incompatible with the
exchange rate link to the dollar. His main criticism of the fiscal expansion
scenario in the paper was that it did not bring out this constraint. Without
it, the key message of the staff paper was lost, because in his view the HK
authorities were probably not too concerned with slightly higher inflation, if
growth rates remained high. What they were concerned about was maintaining the
fixed exchange rate. Fuleihan (Saudi) said that he agreed with Evans and
Abbott. Citrin agreed that the scenarios did not capture the exchange rate
constraint.
10. In reply to Directors' comments, I pointed out that Hong Kong had
achieved success through the sorts of policies that the Board regularly
prescribes to other members. Success had come in spite of uncertainties ahead
of the transfer of sovereignty. I attributed this to dynamism in the economy
fostered by years of competition and open markets, rapid growth in Southern
China (which had also benefitted substantially from developments in HK), the
fixed exchange rate link as an anchor, and the good sense of the UK and
Chinese authorities despite any short-term differences, in sticking to their
joint commitment to keeping HK's basic economic system in place after 1997.
11. I said that I agreed with Abbott that the exchange rate regime
effectively acted as a cap on inflation, if not an anchor. On fiscal policy, I
said that the authorities believed that the staff overstated the impact on
inflation of the projected deficit, because they expected a bigger supply side
response, with, if needed, more imported labour and a bigger shift of activity
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