(This essay was published in South China Morning Post on 28 June 2017.)

 

Last Saturday Andrew Sheng, writing in the South China Morning Post about Asia’s future in the next market adjustment, correctly pointed out: ‘Ultimately, demographics and geography determine destiny’. Hong Kong has the most robust market institutions in Asia for weathering the looming uncertainties in the global economic environment. It also has the right geography. But unfortunately it has poor demographics.

 

The right geography is its location in the fastest growing area in the world. Between 1990 and 2010, 20 per cent of the world’s GDP shifted largely to Pacific Asia. Hong Kong is at the centre of this region. What better neighborhood is there?

 

Hong Kong’s poor demographics are evident in the declining size and quality of its labor force. Government projections show the labor force will shrink by 3.9 per cent in 2016-26 and 2.2 per cent in 2026-36 – and among 25-44 year olds, by 10.4 per cent and 7.3 per cent, respectively.

Hong Kong’s aggregate human capital stock as measured by the average years of schooling multiplied by the size of the labor force will also cease to grow from now onwards if education investment remains unchanged. For the younger worker force aged 25-44 years old it had stopped growing since the mid-1990s.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A declining and ageing labor force means investments and jobs will go elsewhere. To sustain investments in the highest value added jobs, the younger population has to be much better educated than it is today.

 

The questions of how much to expand education investment, at what pace, and in which areas must be addressed as a matter of considerable urgency by the government as they take time to bear fruit.

 

But in order to protect economic growth and grow quality jobs in the shorter term, there also needs to be a more proactive and sustained effort to attract skills and talents from outside Hong Kong. Relying on education alone will be insufficient.

 

Contrary to the fears of many, importing skills and talents need not lower the wages of local employees because investments will expand to create more and better paying jobs. In fact, a shortage of skilled and talented people deters investments that are crucial for economic growth and quality jobs.

 

Evidence of the benefits can be seen in Israel, which received a massive influx of Jewish immigrants after communism ended in Eastern Europe and the Soviet Union, and Hong Kong after the war and revolution in China.

 

Attracting skills and talents from overseas will not succeed, though, without addressing infrastructure issues to make Hong Kong attractive to them. The shortage of housing is the most important issue and one that locals are most unhappy about.

 

The government needs to fundamentally rethink its public housing policies. The view of the outgoing administration that this was a question of simply providing more land to build housing is not entirely correct.

 

Hong Kong’s housing market is enormously complex and heavily regulated. In 2016, 30.4 per cent of households lived in government subsidized rental housing, 15.9 per cent in government subsidized ownership housing, 13.0 per cent in private rental housing, and 36.2 per cent in private ownership housing.

 

There is a big difference between public and private sector housing units because the former cannot be rented out and are subject to severe restrictions on their transfer. Only housing units in the private housing sector are freely transferrable on the open market and can be used either for owner occupation or rented out.

 

The tight housing market has led to the sub-division of private sector flats to meet housing demand and a situation where units of comparable size are more cramped in the private rather than public rental housing sector. The effects are exacerbated because a relatively small private rental sector concentrated in popular locations has to absorb the shocks emanating from a larger public rental sector.

 

Unfortunately, this situation only acts as an incentive for more people to join the application list for public housing. The public rental sector will keep growing and increasingly crowd out the private housing sector.

 

A housing sector dominated by public rental housing units is not conducive to attracting skills and talents from outside Hong Kong for both economic and political reasons.

 

Homeownership is the most important means for the general public to benefit from a growing economy because as the economy prospers, housing prices will rise. In a city of homeowners, nearly everyone can share in the prosperity.

 

But a city increasingly dominated by public rental tenants encourages a redistributive mindset and breeds envy and jealousy leading to political divisiveness that is detrimental to economic growth and nurtures a shared poverty ethos.

 

When most citizens are public housing tenants, they will resist the arrival of skills and talents fearing they have come to take away what is rightfully theirs. When most citizens are owners of private property, they will welcome the arrivals as the bearers of shared prosperity, not shared poverty.

 

 

 

 

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