(This essay was published in South China Morning Post on 11 May 2016.)
Service industries have grown rapidly in Hong Kong. From 1980 to 2015, the real GDP share of the service sector grew from 75.0% to 92.3% (see Figure 1). Meanwhile, the manufacturing of goods declined from 13.8% to 1.5%.
Most of this growth has been in producer services. During the same period, the value-added share of producer services increased from 31.2% to 47.5%, while consumption services’ value-added share increased from 34.8% to 38.2%. Government services declined from 8.9% to 6.6%.
The producer services sector in Hong Kong is a highly heterogeneous industry. Bankers, accountants, engineers, scientists, marketing, communications and transportation professionals provide a large proportion of high value-added producer services. Education and medical services are also inputs into the creation and maintenance of society’s stock of human capital. Without this expenditure, the productivity of any population would quickly decline.
Producer services are also the vehicle by which new technology is introduced into the goods and services production process. New technology can lead to lower production costs, the development of improved and new products, and new and more efficient methods for distributing goods and delivering services. These inputs account for the enormous growth of labor productivity in the production of goods and services.
The rapid expansion of this sector reflects a dynamic market process at work, where workers are reallocated from low-productivity manufacturing jobs to high-productivity service jobs. Fears of low productivity following deindustrialization were unfounded because the rise of our producer services sector supported the growth of the manufacturing base across the border in the Chinese mainland.
This was the situation in Hong Kong, at least until 2005. But since then the share of producer services has stagnated at between 47% and 48%. The slowing growth of producer services is the primary reason why real GDP growth has also slowed. The Asian Financial crisis probably postponed the search for new industries by a decade because the uncertain economic environment deterred risk taking. Although the economy picked up subsequently, it has remained lackluster. There is much talk that the economic base is too narrow.
Tertiary education only started to expand at a very late stage but grew rapidly. University entrance places funded by the University Grants Committee increased from 2,000 places per annum in 1983 to over 14,000 per annum in 1994, but have since flattened out.
The growing number of tertiary graduates in Hong Kong could provide the human capital stock necessary for nurturing a broader economic base. The number of tertiary graduates in the population aged 30-39 increased from 61,000 in 1981 to 297,000 in 2001 and 464,000 in 2011, and is projected to rise to 678,000 in 2021 (see Figure 2).
Given their large numbers, these graduates are currently depressing their own salaries in the labor market and this will be an incentive for them to go entrepreneurial. By the law of probability some will start successful businesses. I will not be surprised to see the next wave of producer services emerge from this generation who will soon be entering their thirties.
The slow economic growth and depressed wages that new tertiary graduates have faced over the past decade is a consequence of the very late and rapid increase of tertiary places during a short period from 1983 to 1994 and the timing of the onset of the Asian Financial Crisis.