ENG-1987 — Page 23

HONG KONG

BUILDING FOR THE FUTURE

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All this investment must ultimately come from savings made from the collective income, but the physical and human investment, in turn, increases the productive potential of the economy and thus the ability to save and invest more in the future. This is the process which has been going on in Hong Kong over the last three to four decades. The start, from a position of poverty and low incomes, had necessarily to be modest. But, as time has gone by, the achievements have become increasingly impressive.

Of course, there have been ups and downs in the investment cycle. But looked at over a run of years, there has been a remarkable stability also. The most serious downturn was in the late sixties, when capital investment fell away sharply compared with the earlier

years of that decade. Thereafter, apart from a hiccup during the world recession in 1974-5, fixed investment increased steadily until the boom years of 1977–82, when it expanded rapidly.

In the latter part of that cycle construction costs, as well as land costs, began to increase sharply and capacity constraints appeared. Inflation in the whole economy was also high at that time. Since then, and until recently, an easing in the demand for construction has served to stabilise costs and contract prices or even, in some cases, to bring about reductions. This has helped to cushion the fall in the volume of work being undertaken. Over the past year or more, however, there have been signs of a renewed rise in the demand for construction and, if this continues, it could again lead to serious capacity constraints and price rises.

Looking at capital investment in real terms in relation to the GDP over the 20-year period from 1966 to 1985, however, it is remarkable how stable the percentage has been when viewed in five-year cycles, as the following figures show:

Gross domestic fixed capital formation in relation to the gross domestic product at constant 1980 prices

1966-70

27.85

1971-75

27.75

Five-year average percentages

1976-80

1981-85

30.0

29.0

Over the whole 20 years, the lowest percentage was 23.8 in 1969 and the highest was 33.2 in 1980. Although it is not possible to draw firm conclusions from this evidence alone, it does suggest that, when capital investment rises above the equivalent of 30 per cent of the GDP, capacity constraints begin to occur and inflationary pressures to increase, but that, if the figure falls much below 25 per cent, investment may not be sufficient to maintain a satisfactory growth rate in the economy over the long run.

Planning for the Future

Looking back again at developments over the past 30 years, it becomes apparent that, as the economy expands, it comes up against a series of physical and infrastructural thresholds which have to be surmounted for growth to continue smoothly. Examples were the decision to embark on the New Towns programme to meet the housing needs of an expanding population, or the decision to construct a Mass Transit Railway. The private sector, also, is reaching similar thresholds which have to be jumped over for business to continue expanding. Jumping over the thresholds involves more investment, sometimes very sub- stantial. It is the task of planning to anticipate where the constrictions will occur and to organise the necessary investments to overcome them.