ENG-2005 — Page 69

The Economy 43

labour cost per unit of output, the former being mitigated by improving business and the latter by the strong growth in labour productivity. The extent of imported inflation was also mild, especially in the second half of 2005 when the effects of an easing in oil prices and a stronger US dollar started to be felt.

As for the GDP deflator, the year-on-year decline, which began in the third quarter of 1998, was finally arrested in the third quarter of 2005, thanks to higher domestic prices and also the relative improvement in the terms of trade on account of a stronger US dollar. In the fourth quarter, the GDP deflator picked up slightly to a 0.7 per cent increase over a year earlier, though for 2005 as a whole there was still a marginal decline of 0.2 per cent.

Structure and Development of the Economy

With its strategic location at the doorway to the Mainland and in a time zone that bridges the gap between Asia and Europe, the Hong Kong Special Administrative Region (HKSAR) serves as a global centre for trade, finance, business and communications. Hong Kong is now the 11th largest trading entity in the world. It operates one of the busiest container ports in the world in terms of throughput, as well as one of the busiest airports in terms of number of passengers and volume of international cargo handled. In addition, it is the world's 15th largest banking centre in terms of external banking transactions, and the sixth largest foreign exchange market in terms of turnover. Its stock market is Asia's second largest in terms of market capitalisation.

Hong Kong is characterised by high degree of internationalisation, a business- friendly environment, the rule of law, free trade and the free flow of information, open and fair competition, a well-established and comprehensive financial network, a superb transport and communications infrastructure, sophisticated support services and a well-educated workforce complemented by a pool of efficient and enterprising entrepreneurs.

Added to these are the substantial amount of foreign exchange reserves, a fully convertible and stable currency, prudent fiscal reserves and a simple tax system with low tax rate. With these virtues, Hong Kong is widely regarded as amongst the freest and most competitive economies in the world. The US Heritage Foundation ranked Hong Kong as the world's freest economy for the 11th year in a row in its '2005 Index of Economic Freedom'. The Cato Institute of the United States, in conjunction with the Fraser Institute of Canada and other research bodies around the world, also consistently rank Hong Kong as the freest economy in the world.

Over the past two decades, the Hong Kong economy has nearly tripled in size, with GDP growing at an average annual rate of 5.3 per cent in real terms. This outpaces both the world economy's growth of 3.6 per cent and the 2.8 per cent growth of the Organisation for Economic Cooperation and Development (OECD) economies by a large margin. Over the same period, Hong Kong's per capita GDP has doubled, giving an average annual growth rate of 4 per cent in real terms. At US$25,600, Hong Kong's per capita GDP was amongst the highest in Asia in 2005 (Chart 1).