TNAG-0381-FCO40-427-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1973 — Page 144

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14.

(d) The Automatic Corrective Mechanism

Not that there is any need for the Government

to intervene to regulate the economy.

Provided the rate

of growth of public expenditure is kept more or less in

step with the rate of growth of overall demand, the economy

will automatically adjust so as to maintain both internal

and external equilibrium. This is a consequence of the

economy's heavy reliance on trade with the rest of the world,

the absence of tariffs and other restrictions on the free

movement of goods and services into and out of Hong Kong

and the existence of a competitive labour market.

15.

If aggregate demand were to grow so rapidly as

to result in an excess demand for labour in the short

term which drove up internal costs and prices, then this

would tend to increase the rate of growth of imports and

lower the rate of growth of exports (partly because of the

rise in prices and partly because the rise in money wages

would lead to some diversion of real resources away from

the export oriented industries to industries catering for

domestic consumption, small though they are in relation to

the export sector). As a result the economy would

automatically tend to deflate, thereby slowing down the rise

in internal costs and prices and the rate of

growth of imports and stimulating the production of goods

for export at more competitive prices.

16.

In addition, this process would be reinforced

by an automatic monetary effect. Neither the Government

(except to a very limited extent), nor the banks can

influence the money supply.

This is because there is

/no.....