Hong Kong has the advantage, but for how long?
By Sin-ming Shaw
JAKE VAN DER KAMP, in his Monitor column on Wednesday, produced a graph showing GDP per capita and nominal wage per capita relative to the mainland. It claimed to prove Hong Kong is 20 to 50 times more productive than China. Jake is missing the point. Hong Kong is, of course, more productive, but certainly not by such a large amount.
Second, what counts, as he should know, is the change "at the margin". The speed at which productivity is increasing in China relative to Hong Kong is the relevant factor. That narrowing gap is relevant to Hong Kong's deflation. Indeed, to the world's deflation.
Third, one should not use nominal figures that incorporate the distortion of inflation. Fourth, using overall economic figures comparing Hong Kong and China - which has a huge rural and inefficient state sector - is comparing the proverbial apples and oranges.
The process of "arbitraging" between Hong Kong and the mainland does not mean prices in Hong Kong will hit mainland levels. It simply means the relevant prices will eventually meet somewhere in between.
If Goldman Sachs can find a graduate from Peking University who can do as good a job, if not better, at a lower wage than a graduate from Hong Kong University, the Peking University graduate will get the job. Over time, wages of newly graduated workers in the two cities will converge. One will go down, the other up - in real terms.
The argument is, in fact, broader. As China becomes more integrated into the world economy, the arbitraging process is between China and the rest of the world. It also means Hong Kong cannot live happily in the erroneous view that its real estate is non-traded, hence ignoring world price levels.
That argument, albeit in a different guise, was advanced to me by an SAR minister, who defended the off-the-chart public servant salaries in Hong Kong. "Why should we compare ourselves with what an American or a German minister gets?" he asked. We should, because public sector salary levels work into the entire price structure of the economy. Of course, the minister's wage bill is also contributing to the potential fiscal insolvency of the government.
Why is real per capita income in Hong Kong higher than Taiwan, which in turn is so much higher than that of mainland China? Are the Chinese on the mainland born inherently less intelligent, less productive than the Chinese in Hong Kong or in Taiwan? Last time I checked, they all shared similar cultural and racial DNA. The income disparity is due almost completely to different economic systems producing disparate incentives, or the lack of them.
The descendants of Adam Smith that took laissez-faire as the bible, so to speak, ran Hong Kong for the past 150 years. Taiwan is run historically by confucian bureaucrats who thought they could "proactively enable markets". China is still trying to shed its central planning apparatus that sought to replace market forces with a handful of planners making investment and consumption decisions on behalf of 1.3 billion individuals. If all three societies had exactly the same economic system, all the residents would enjoy roughly the same per capita income.
It follows that as China sheds more of its institutional shackles, the economy will expand. We have had convincing evidence of that.
Due to decades of economic mismanagement, the overall productivity of the mainland economy is understandably below that of Taiwan and Hong Kong.
But one should be comparing Hong Kong with similar urban cities such as Shanghai or Guangzhou, using real gross domestic product figures.
Jake's statistics fly in the face of common sense, not to mention reality. He should ask Johnson Electric management whether its mainland engineers or factory workers are 20 times less productive.
Of course, Hong Kong remains more productive in certain activities. That is not the point. If it were not, the SAR's per capita real income would already be the same as that in Taiwan and the mainland.
Let us try a different question that should help educate the pro-peg fundamentalists. Hong Kong's per capita income at the current exchange rate is roughly the same as America's. If productivity drives income, one could legitimately ask whether Hong Kong society is as productive as the US. Is Hong Kong's intellectual community as creative as its counterparts in the US or elsewhere?
It should, in fact, be greater, as academic wages in Hong Kong are much higher than those of scientists at institutions that have helped shape the world as we know it. What has Hong Kong done to reshape the world?
Is Hong Kong's business community as innovative as America's? What are Hong Kong's best companies and how do they stack up against US ones?
Hutchison, Johnson Electric and Cathay Pacific are excellent companies. But even there, the intellectual content of what these companies do is far below what we would consider cutting edge. These companies are still run on hand-me-down knowledge imported from elsewhere.
Even in the SAR's much-vaunted financial sector, which are the best companies? All are imported, together with the imbedded know-how. So, the question remains. Should Hong Kong enjoy the same per capita income at the current exchange rate?
The forces of arbitrage, sometimes known as "factor price equalisation", are, in fact, already providing the answer. Wages and other prices in Hong Kong are too high and they are being forced to converge, not merely relative to mainland China, but also the rest of the world in comparable sectors. One moves up, the other moves down - meeting in between. That is the logic of markets. Globalisation is speeding up that process. It seems too many in Hong Kong are still in self-denial. There are no free lunches.
Sin-ming Shaw teaches at the American University of Paris
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