(This essay was published in Hong Kong Economic Journal on 13 November 2013)

 

I shall explore in my next few essays the most important challenge Hong Kong is facing. It is not the political elections in 2017. It is not the saturation of our landfills. It is not Hong Kong Television losing its bid for a license. It is the serious population challenge that Hong Kong will have to live with for the rest of this century if best policies are not adopted soon and for a sustained period. Otherwise, inaction will mean Hong Kong’s gradual demise as a world class metropolitan center.

 

The people of Hong Kong have not fully recognized how serious this challenge is already. The best analogy is the classic scenario of “slowly boiling a frog in warm water.” The frog does not feel uncomfortable in the warm water and ignores its deadly predicament, only realizing what is happening when it is too late to reverse its fate.

 

In this first essay I shall concentrate on the quantity aspects of the population challenge. My essay next week shall consider the quality aspects. I shall then deal with the usefulness of various measures in addressing this challenge.

To gain some real appreciation of the severity of our predicament, I shall compare Hong Kong with Singapore.

 

These two city economies have commensurate population numbers and geographic areas and are at similar levels of economic development. In 2012, the populations in Hong Kong and Singapore were, respectively, 7.1546 and 5.3124 million; the GDP per capita in US dollar terms were US$36,798 and US$52,051; and the geographic sizes of the two cities were 1,104 and 716.1 square kilometers.

 

The population growth rates in these two cities have followed rather different trajectories in the past 60 years. From the 1950s to the 1970s, Hong Kong’s population grew at 3.18% a year and Singapore’s at 2.91% a year (see Figure 1). But from the 1980s until the present, Hong Kong’s population has been growing at a much lower 1.12% a year compared to Singapore’s 2.51%.

 

Figure 1: Population in Hong Kong and Singapore 1960-2012 (million persons)

Source: Penn World Tables Version 8.

 

 

These different trajectories impact on the number of employed persons in each economy. From the 1960s to the 1970s, the growth rate of employed persons in Hong Kong was higher than Singapore’s, rising, respectively, 6.55% and 3.88% a year. But from the 1980s to the 1990s, Singapore began to edge ahead, experiencing 3.19% annual growth in employed persons against Hong Kong’s 1.92% (see Figure 2). The difference has become even greater since the beginning of the 21st century, with Singapore’s labor force growing at a very fast rate of 4.01% a year compared to 0.83% in Hong Kong.

 

Figure 2: Persons Employed in Hong Kong and Singapore 1960-2010 (millions)

Source: Penn World Tables Version 8.

 

Many developed economies today are facing a declining workforce due to the ageing of their postwar baby boom generation. Singapore has been the most aggressive developed nation in using immigration policy to sustain its population growth and alleviate pressure on labor markets. Hong Kong by contrast has primarily admitted immigrants passively through family reunion from cross-border marriages. By 2012, Singapore had a labor force of 3.4 million in a population of 5.3 million. In the same year, Hong Kong only had a labor force of 3.8 million in a population of 7.2 million.

 

Figure 3 gives population projections estimated by the United Nations. The projections start in the year 2010 and continue until the year 2100. Hong Kong’s population is projected to peak at around 8 million beginning in the 2030s, which is less than 20 years from now. Singapore’s population will peak at over 7 million beginning in the 2050s, which is 40 years from now. Hong Kong’s population will stagnate almost 20 years before Singapore’s.

 

Figure 3:     Actual and Projected Population in Hong Kong and Singapore 1950-2100 (millions)

Source: UN Population Projection

 

 

Ageing Problem Long Lasting

 

It is worth noting that until the 1990s, Singapore’s population was around 50% of that in Hong Kong, but is now about 75%. This percentage is projected to continue to rise until it peaks around 90% in the 2050s. Singapore is successively using immigration policy to catch up with Hong Kong.

 

Hong Kong’s future population will obviously include a higher proportion of elderly persons than Singapore’s (see Figure 4). The projected ratio of elderly (defined as aged 65 or above) to working age population (defined as those aged 20-64 years) will rise rapidly from the 2010s onward in both cities. But in Hong Kong, the projected ratio of elderly to workers will peak at around 80% after the 2050s, while in Singapore it will be a much lower 50%.

 

Figure 4:     Actual and Projected Percentage of Elderly to Working Age Population in Hong Kong and Singapore 1950-2100

Source: UN Population Projection

 

There are two reasons why Hong Kong’s ageing population situation is far more serious than Singapore’s. First is Singapore’s aggressive immigration policy, which has targeted especially immigrants from the Chinese mainland. Hong Kong, although a natural destination for mainlanders, has refrained from formulating a similar policy. Instead, it has chosen to accept immigrants through family reunion combined with a very minimalist scheme to attract talented persons.

 

Second, the changing structure of Hong Kong’s population will place a greater burden on a smaller number of people to support their elders. It helps to understand the roots of that population.

 

Hong Kong has experienced population influxes over the years that have led to the current problem, first in 1945-51 when numbers swelled from 600,000 to 2.1 million, and second in 1978-80 when 300,000 persons entered the territory over a span of 18 months. Both waves had long-lasting impacts on the age structure of our population. This is best illustrated using figures. Table 1 shows the percentage change in population numbers by age groups over every ten-year period from 1950 to 2099.

 

Table 1: Ten-Year Percentage Change of Population by Age Group

Source: UN Population Projection

 

 

Birth Rates in Decline

 

The first immigration wave is by far the most important. This group was not only large but also had high fertility rates. The combined effects created a huge postwar baby boom generation that became the main driver of Hong Kong’s industrialization and economic development in the 1960s and 1970s.

 

From Table 1 we find that the number of persons aged 0-9 years increased by 106.6% between 1950 and 1959. This population effect cascades down diagonally towards the right-hand side in the table, as seen in the first diagonal shaded in yellow. We can see  the number of persons aged 10 to 19 years increased by 85.2% in the 1960s, and those aged 20-29 years increased by 105.7% in the 1970s. Members of this second generation of baby boomers swelled the labor force during Hong Kong’s era of export-led industrialization.

 

Continuing on the diagonal, the number of 30-39 year olds increased by 88.3% in the 1980s, and 40-49 year olds increased by 94.7% in the 1990s. During this period, they had a major role in jumpstarting the industrialization of the Pearl River Delta and transforming Hong Kong into an international financial and producer services center.

 

These postwar baby boomers will start to enter their retirement years in the period 2010-19, and continue to swell the ranks of the elderly for another three decades. But their descendants – the third generation – will be much fewer in number because of low fertility rates. This third generation begins to appear in Table 1 as 0-9 year olds in the period 1970-79. The ten-year growth rate for this group is negative at -13.4%.

 

The third generation entered the labor force when the economy was booming from China’s opening. Wages in Hong Kong advanced rapidly because of the enormous labor shortage during boom times. But their careers came to a halt in the Asian Financial Crisis and the subsequent economic recession. Some of the less fortunate ones were saddled with huge mortgage debts and negative equity. This dulled their confidence and willingness to take on risk.

 

The fourth generation made its appearance in the period 2000-09. Their numbers are even smaller as fertility rates have continued to decline. A growing number of this generation will grow up in divorced families and many will be from low-income households.

 

What is particularly revealing in the projections in Table 1 is their long lasting effect on population numbers across generations every 20 to 30 years.

 

The effect of the first generation on the second is reflected in the first yellow shaded diagonal. The subsequent effect on the third generation is reflected in the first light green shaded diagonal in Table 1. Their projected numbers can be traced up to 2100 and show that the population influx of 1945-51 will have had an amazingly long lasting effect of almost two centuries.

 

The 1978-80 population influx has had a much smaller and short acting effect. Its positive effect on population growth can be identified in the other two downward sloping diagonals with yellow shaded cells. The second generation’s effect can be seen by jumping to 2010-19 and the third generation’s by jumping to 2040-49 – but by then the impact is almost undetectable.

 

Table 1 shows clearly that Hong Kong’s population will decline in almost every age group over the next century, except for the elderly. Population ageing raises many questions relating to the provision of health and medical care, income and support services for old age retirement, household downsizing and housing demand, employment, and the sustainability of economic growth. All these issues have interrelated and sometimes conflicting economic and social dimensions. They also have political dimensions and consequences for how our political system could evolve. These issues will be considered separately in future essays. In the present essay, I focus only on employment.

 

Competitive Advantage Falls With Declining Workforce

 

In Table 2 labor force participation rates in Hong Kong and Singapore are compared by age and by sex. With few exceptions the participation rates are higher in Singapore for every age and sex group. The exceptions are men and women aged between 15 and 24. It is likely that this is because more Singaporean men and women are at school and therefore not in the labor force. Among men aged 25 to 54 the rate is 95.7% in Singapore versus 91.0% in Hong Kong. For women the corresponding figures are 75.9% and 69.6%.

 

Table 2:      Labor Force Participation Rates in Hong Kong and Singapore 2011 (percentages)

Note: Hong Kong-excluding foreign domestic helpers; Singapore-resident population.

Source: HK Population Census 2011, Singapore Population 2013

 

The overall labor force participation rates in Singapore and Hong Kong are 66.1% and 57.9%, which is a difference of 8.8%. Why this is so is an interesting question that has not been investigated. There can only be two possible reasons. One is a demand side explanation. Hong Kong has fewer job opportunities than Singapore so Hongkongers prefer to stay at home. Another is a supply side explanation. Hong Kong has more generous welfare support so more people are encouraged to stay out of the labor force rather than choose to work for low wages.

 

The demand side explanation is not credible on its own because Hong Kong has a free labor market, therefore, wages would adjust and markets would clear.

 

I surmise the real reason for Hong Kong’s low labor force participation rate has to be generous welfare benefits affecting the supply of labor. My colleague at the University of Hong Kong told me he recently counted 221 government programs in Hong Kong providing different benefits to people who are presumably in need of assistance. My article in the HKEJ 13 March 2013 explored the effects of such benefits on labor force participation behavior.

 

The UN population projections can be used to produce forecasts of the working age population and the labor force on the assumption that future labor force participation rates will be the same as those in 2011 (see Figure 5). Hong Kong’s labor force has already peaked, but Singapore’s is still growing. By 2030, Singapore’s labor force will have overtaken that in Hong Kong. The labor force in Hong Kong will continue to decline until the end of the century when it is projected to reach the level that existed in the 1980s. By then Hong Kong will have become just another city and tens if not hundreds of other cities in the world would have eclipsed its once bright lights. Perhaps it would still be an interesting place for tourists to visit but only as a museum like Venice.

 

Figure 5:    Actual and Projected Working Age Population and Labor Force in Hong Kong and Singapore 1950-2100 (millions)

Source: UN Population Projection & author’s estimates

 

The government’s recent consultation document on population policy, entitled “Thoughts for Hong Kong” and released by the Steering Committee on Population Policy on October 24, addresses this important issue. But I fear it has presented our dire situation in such a moderate light that the frog still feels too comfortable sitting in a pot of warm water to have stirred.

 

 

References:

Wong, Yue Chim, “The Value of Not Working and Its Policy Implications”, Hong Kong Economic Journal, 16 January 2013.

Wong, Yue Chim, “Income, Expenditure, Savings and the Poverty Line”, Hong Kong Economic Journal, 13 March 2013.

 

Second essay in the series on Rekindling Hong Kong’s Magic

 

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