ENG-1986 — Page 77

THE ECONOMY

55

year, the prices of locally produced goods and services tended to increase more rapidly. Nevertheless, soft world commodity prices generally and the fall in the import prices of goods from China in particular continued to provide some dampening effect on consumer price inflation.

Among the various components of goods and services in the CPI(A), miscellaneous goods and clothing and footwear recorded the most rapid increases in prices in 1986, at an average of 11 per cent and eight per cent respectively. These two components together accounted for 28 per cent of the overall increase in the Index, with another 21 per cent accounted for by the increase in prices of foodstuffs, given the large weighting of this component in the CPI(A).

Government's Involvement in the Economy

Economic Policy

Economic policy in Hong Kong is to a large 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 will normally be most efficient if market forces are relied on and government intervention in the private sector is kept to a minimum.

This basically free-enterprise, market-disciplined system has contributed to Hong Kong's economic success. The narrowly based tax structure with relatively low tax rates provides incentives for workers to work and for entrepreneurs to invest. Both workers and entre- preneurs 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 and a stable legal and administrative framework conducive to economic growth and prosperity.

Monetary Policy

The government has consistently worked towards providing a favourable environment in the financial sector, with sufficient regulation to ensure, as far as possible, sound business standards and confidence in the institutional framework, but without unnecessary impedi- ments of a bureaucratic or fiscal nature.

Unlike most major economies, Hong Kong has no central bank. Most of the functions which might typically be performed by one - such as prudential supervision of financial institutions, managing official foreign exchange reserves, certain types of open market operations, issuing banknotes, and providing banking services to the government – are carried out by different government offices under the Monetary Affairs Branch of the Government Secretariat or by selected commercial banks.

The Hong Kong Government Exchange Fund was established by the Currency Ordin- ance of 1935 (later renamed the Exchange Fund Ordinance). Since its inception, the Exchange Fund has held the backing to the note issue. Hong Kong dollar notes are issued by the two note-issuing banks - the Hongkong and Shanghai Banking Corporation and the Standard Chartered Bank - against their holdings of certificates of indebtedness. These are non-interest-bearing liabilities of the Exchange Fund, and are issued or redeemed as the amount of notes in circulation rises or falls. In 1976, the role of the Exchange Fund was expanded, with the assets of the Coinage Security Fund (which held the backing for coins

URBAN COUNCIL PUBLIC LIBRARIES

Reference Library, City nail