ENG-1986 — Page 25

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HONG KONG AS A PARTNER IN WORLD TRADE

operations done on them, but not sufficient to qualify them for Hong Kong origin. They are all re-exports. As we have seen, however, domestic exports also have an import content, some more than others, but considerable in most cases.

The Hong Kong economy is, thus, essentially a transformation economy, transforming imports in one way or another into saleable exports or re-exports. Each manufacturer is constantly seeking out the best materials for making his product in terms of price and quality. There is very little vertical integration within industry and manufactures in the later stages of production are just as likely to use imported materials, even if these are also made in Hong Kong. For instance, by now most garment makers use imported cloth even though there is also Hong Kong made cloth; and weavers may use imported yarn. In every case, local production has to compete on equal terms with imports. As an example, although Hong Kong is the world's largest exporter of clothing, it is also the world's largest importer of cotton and man-made fibre fabrics. Another example is that Hong Kong, although the world's largest exporter of watches by quantity and the third largest by value, is also the second largest importer by value, a significant quantity being sold to tourists.

Determinants of Growth

It is worth looking a little more closely at some of the main forces which have lain behind and contributed to the growth of Hong Kong's trade and of the economy so far described. Why was it that tiny Hong Kong, facing the unpromising circumstances of the early post-war years, became the first, the pioneer, of the so called newly industrialising countries (NICs) after Japan - before South Korea and Taiwan or elsewhere in Southeast Asia or, for that matter, anywhere else in the developing world? How was it that Hong Kong was the first developing territory to break into the rich markets of Europe and North America and sell manufactured goods? The relative importance of the factors involved can be subject to argument but the following, although not exhaustive, are among the more important. Each of them has played its part but, together, they have interlocked and reinforced each other in helping to drive forward the engine of the economy. They are:

(1) The existence of the free port and free trade.

(2) A convertible currency and the free movement of money.

(3) Government policies, including relatively low taxation and a prudent fiscal policy.

(4) The long accumulation of commercial and financial experience.

(5) Hong Kong's favourable location and good communications.

(6) The hard work and entrepreneurial instincts of the population. (7) The flexibility of the labour market.

In many ways the first of these, the free port, has been the most important, the bedrock of economic policy in Hong Kong since its inception. Contrary to popular misconception, the main beneficiary of free trade is the economy of the territory actually applying it, for it ensures that all parts of the economic system are subject to, and have to adapt to, the forces of the world market and that, consequently, its resources are used most efficiently and most productively. This, in turn, ensures a faster rate of economic growth and higher standards of living than would otherwise be the case. It is no accident that a recent study of developing countries has shown, on the basis of World Bank figures, that capital has been invested more efficiently in Hong Kong in terms of the resulting increase in production than anywhere else. For none of the other economies studied has been required to adjust so completely or so rapidly to changes in world market forces.

The second element, the free movement of money, is also essential if the free port is to operate effectively. The Hong Kong dollar is freely convertible into all other currencies and