TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 143

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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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