ENG-1985 — Page 61

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THE ECONOMY

Diversification of the Services Sectors

Not only has the financial and business services sector grown in importance, other services sectors such as insurance, transport and tourism have also expanded. Most of the insurance and transport services are related to merchandise trade transactions. Hong Kong shipown- ers have long been engaged in operating ships for charter and in providing international liner services.

The steady growth of Hong Kong's external trade has led to the expansion of a number of services related to shipping, notably cargo handling and storage facilities in the container port. Hong Kong's air cargo handling facility ranks as one of the largest in the world. According to the 1983 Survey of Transport Establishments, the direct contribution of ocean and air transport and related services to the GDP was about three per cent in value-added terms. The tourist industry has also expanded rapidly. The number of incoming tourists has increased from 1.3 million in 1975 to 3.4 million in 1985, with total spending reaching an estimated $14,700 million.

Inflation

Inflation has been a much more significant phenomenon in Hong Kong in the 1970s and early 1980s than in the 1960s. Given the externally oriented nature of the economy, even under a floating exchange rate system, the inflation rate in Hong Kong could not be insulated completely from what was happening in the rest of the world.

In the late 1970s, the inflation rate stayed at double-digit levels. Three factors were relevant during this period. First, the double-digit real growth rates of the economy for each year since 1976 resulted in a persistent imbalance, with the aggregate demand for domestic resources being in excess of their supply. Second, the rate of world inflation accelerated sharply in 1979, resulting in a rapid rate of increase in import and export prices. Third, the growth rate of the money supply was faster than the growth rate of GDP in money terms. In 1983, the rate of inflation, in terms of the Consumer Price Index (A), was 10.0 per cent, mainly due to the depreciation of the Hong Kong dollar. With the moderate increase in world commodity prices and the return of stability in the Hong Kong dollar under the linked exchange rate system, the rate of inflation slowed down from 12.4 per cent in January 1984 (on a year-on-year basis) to 4.6 per cent at the end of the year. It remained at a relatively low level throughout 1985, at about 3.2 per cent on average.

Economic Policy

Economic policy in Hong Kong is to a certain extent dictated, and constrained, by the special circumstances of the Hong Kong economy. Owing to its small and open nature, the economy is vulnerable to external factors and government action to offset unfavourable external factors is often of limited effectiveness. The government is of the view that, except where social considerations are regarded as over-riding, the allocation of resources in the economy is normally most efficient if left to market forces, and government intervention is kept to the minimum.

This basically free-enterprise market-disciplined system has contributed to Hong Kong's economic success. The narrowly based tax structure with low tax rates provides incentives for workers to work and for entrepreneurs to invest. Both workers and entrepreneurs are highly motivated, given that all individuals have equal opportunity to pursue the goal of individual betterment and accumulation of wealth. The primary role of the government is to provide the necessary infrastructure, together with a stable legal and administrative framework, conducive to economic growth and prosperity.