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statistical and intelligence methods. Statistics show that the industrial labour force which topped 600,000 for the first time in 1971 and by December 1973 had reached over 627,000 has now dropped by some 16,000 from the latter figure. It is reckoned that real wages have been rising on an average of 4-5% per annum over the last ten years. But the wage index, calculated to measure the purchasing power of money earned, fell from 159 points in March 1973 to 146 in September 1973, and in March 1974 stood at 141.
6.
There is however little or no sign of unrest or agitation. A number of factors may be at work. First, that the recession in producing under-employment rather than unemployment (except possibly any recent immigrants). Secondly, the Chinese ethos, with its capacity for disciplined belt-tightening, finding casual ways of earning money when the market for labour is slack, and the in-built security system of the family. And thirdly, in a situation of weak and divided industrial organisation where only the Communist trade unions have much ability to exert pressure, the political reluctance of the Chinese Government to rock the Hong Kong boat. And food prices are showing signs of levelling off. In short, a situation to be watched but not yet alarming.
7. Against all this background, it is not easy to question the Hong Kong thesis that the right course is to inflate out of the present recession by selling more exports. It is from this that the antipathy e.g. to drawing on reserves for subsidy purposes or to intervention in the industrial wages field stems, since such measures are seen as calculated to increase the internal inflation. At the present juncture at least, there is validity in the Governor's judgment that if a statutory minimum wage were introduced high enough to affect current wage levels, it would inevitably lead to dismissals, and hence impair export recovery. The Government is not however being merely passive. Steps are being taken to improve the statistical and other indicators necessary to enable a continuing assessment to be made of the social effects of inflation. Civil Service pay is being increased this month: this will be reflected in the public utilities and bring some pressure to bear in the private sector also. The public assistance scales have recently been tipped. Executive Council has just approved legislative provision for redundancy payments in industry. And in the longer term the Governor is determined that, while the present financial and economic situation may call for some rephasing and adjustment, the momentum should be maintained in the health, housing, education and social welfare programmes, which already represent a social subvention amounting to 33% of the total budget, planned to rise to 45% in 1977-78.
8. Ministers will wish to explore all this ground in the talks with the Governor next week. I would not wish to prejudge these discussions, but my own preliminary thought would be to leave Hong Kong to tackle the current recession in its own way and according to its own judgment. If things recover and the upward curve is resumed, then pressure can be resumed on the wages, hours of work, paid holidays and social security issues to which Mr Foggon has drawn attention. If however things were to deteriorate, Hong Kong will face a new and very difficult situation; and the Governor might be asked to do some serious, contingency thinking about what might need to be done to meet social pressures in that
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