/.
development, rather sparingly so as to keep the price relatively high. This arrangement not only produces substantial revenues but also ensures that scarce land is intensively utilised by highly profitable industries.
15. By 1971, Hong Kong's fiscal reserves had risen to HKX
(USB
million (excluding the surplus on the Exchange Fund. whuch holds the assets backing the banks' note issue and which maintains the exchange value of the Hong Kong dollar). This was
equivalent to as much as HKX
) per head of the popu-
lation. Most of these reserves were held in the form of sterling (Hong Kong then being part of the Sterling Area) and this applied also to the foreign exchange holdings of the commercial banks. By 1971, net amounts due to Hong Kong's banks from banks abroad (excluding amounts in respect of Asia-dollar lending) were approach- ing HK$5,500 million (equivalent to some 35% of total deposit liabilities).
The Years of Change
(a) Government Spending
16. Thus, by 1971, Hong Kong had behind it more than a decade in which it had been able, consistently and simultaneously, not only
to maintain full-employment and more-or-less avoid internally
generated inflation, but also to achieve high rates of growth
Jurging with varying household incomes (this compensating, no doubt, for the likelihood that there was little, if any, improvement in the
distribution of incomes, and compensating also for the relative lack of amenities which a city-state can provide). At the same
time, there had been no balance of payments constraint and the currency had remained strong. Furthermore, taxation had been low, the public debt had been almost non-existent and the official
reserves had been mounting. It is this remarkable background of
success for which Hong Kong is now so very well-known, and all
the more so in that it was acquired in the absence of formal
domand management techniquos.it/was against this background also that the government drew up' ambitious plans in 1971 for the rupid acooloration of exponditure on housing, education and the
social services. But Hong Kong's economic outlook was already . changing and it was to change even more dramatically by 1975. It is important that the principal events bringing about this change should be identified, since they not only highlight the vulnerability of the economy to external events over which Hong
Abit
/Kong
CONFIDENTTAL
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