(This essay was published in Hong Kong Economic Journal on 2 October 2013)


Singapore and Hong Kong are city economies well known for their economic growth miracles. There have been many discussions about the differences between the two and sometimes these have flared into political and academic debates over the proper role of government in conducting economic policies. One long-standing issue has been whether Singapore’s government driven interventionist policy delivers better economic performance than Hong Kong’s non-interventionist market driven policy. This essay is not concerned with this old debate, although for historical interest I shall recount some of the main points at the end of this essay. Rather, my interest here is to examine the economic performance of these two cities in terms of the role played by human capital investments.


Growth Rate Gap Widens


First, let’s look at the two cities’ growth rates. To measure their economic performance, I rely primarily on data from the Penn World Tables (Version 8) covering 1960-2011, which are the best and most reliable source of quantitative data for making cross-country comparisons.


Changes in the standard of living between Singapore and Hong Kong over time can be compared using their per capita real GDP growth rates based on the expenditure approach. Table 1 gives two sets of estimates: the government figures and the Penn figures and they are more or less consistent with each other. Both sets show the Singapore growth rates are almost always higher than the Hong Kong growth rates.


Table 1: Growth Rates of Real GPD per capita in percentages



  Hong Kong growth rates  Singapore growth rates  Difference between Hong Kong and Singapore growth rates 
  Government figures Penn figures Government figures Penn figures Government figures Penn figures
1960-70 6.17 7.39 6.62 8.11 -0.45 -0.72
1970-80 6.37 6.86 7.3 7.8 -0.93 -0.94
1980-90 5.27 5.08 5.37 5.1 -0.09 -0.02
1990-00 2.33 3.15 4.38 6.39 -2.05 -3.24
2000-11 3.68 2.49 2.95 3.86 0.74 -1.37
1960-2011 4.7 4.86 5.26 6.19 -0.56 -1.33

Note: RGDPe is the expenditure-based estimates of real GDP per capita, which is more appropriate for comparing standards of living across countries and over time.


According to the Penn estimates, the average growth rate in Hong Kong was 4.86% from 1960 to 2011 and for Singapore it was 5.26%. That means Hong Kong was growing at a slower rate than Singapore by -1.33% each year. The government-sourced GDP estimate of the gap is smaller at only -0.56%. In any case, the standard of living in Singapore has risen faster than in Hong Kong over the past fifty years. The interesting question of course is why Singapore’s growth has outpaced Hong Kong’s.


I believe a big part of the difference can be easily accounted for by the fact that the market values of government subsidized housing units in Hong Kong are not adequately reflected in GDP figures because they cannot be traded on the open market. This contrasts with the Singapore subsidized housing units of the Housing Development Board, which are tradeable. Moreover I have always believed that commoditizing subsidized housing in Hong Kong would bring substantial benefits besides their effects on GDP alone. I have elaborated on these points in other essays and will not dwell on them here.


The figures highlight an interesting difference, though, that relates to human capital. According to the Penn estimates, Hong Kong fell even further behind Singapore in the period 1990-2011. The difference in real GDP per capita growth rates for 1990-2000 and 2000-2011 were -3.24% and -1.37%, respectively. The corresponding government estimates were less negative at -2.05% and 0.74%, respectively. Alternating periods of high inflation in the early 1990s as China opened up, and the subsequent deflation during the Asian Financial Crisis, probably distorted the prices of non-traded goods and services in Hong Kong. The Penn figures probably present a more accurate picture.


Human Capital Key to Growth


However, I believe investment in human capital also offers an explanation for why Hong Kong fell further behind Singapore from the 1990s. Table 2 shows population growth in Hong Kong has declined over time, from 2.56% per year in 1960-70 to 0.44% in 2000-11. Over the 50-year period it was 1.63%. In contrast, Singapore’s population growth rate has averaged 2.28% over the entire period 1960-2011, and has been rising slightly. What accounts for the difference in population growth rates and what is its significance for human capital?


Table 2: Comparative average annual growth rates of population, employment, hours of work and schooling years


  Hong Kong growth rates   Singapore growth rates   Difference between Hong Kong and Singapore growth rates  
  Population Employment Human capital index Population Employment Human capital index Population Employment Human capital index
1960-70 2.56 9.16 1.42 2.34 2.93 1.66 0.22 6.23 -0.24
1970-80 2.47 4 1.7 1.53 4.83 0.06 0.94 -0.84 1.64
1980-90 1.38 2.14 0.96 2.25 3.51 1.41 -0.87 -1.38 -0.45
1990-00 1.59 1.69 -0.07 2.65 2.88 1.44 -1.06 -1.18 -1.51
2000-11 0.44 0.83 0.71 2.58 4.01 0.66 -2.14 -3.18 0.05
1960-2011 1.63 3.53 0.92 2.28 3.64 1.04 -0.64 -0.11  


Overall employment growth rates in 1960-2011 were not very different between the two cities and averaged 3.53% in Hong Kong and 3.64% in Singapore. But their patterns over time are very different. Hong Kong received an incredible injection of population numbers and human capital talent during 1945-51 when immigrants came here from the Mainland. During 1960-70, Hong Kong’s employment grew an amazing 9.16% as the first generation of baby boomers entered the labor market and joined the export-oriented labor-intensive manufacturing workforce.


In the absence of a pro-active immigration policy, however, the effects of an ageing population have gradually come to be felt and employment growth has been progressively falling off. By 2000-11, the growth rate was down to 0.83% per year. Beginning from 1978 the inflow of new Mainland immigrants began to rise again. This helped to boost population growth somewhat,  however, population quality did not improve. For example, the Penn estimate of the human capital index based on average years of schooling for those above 15 years old actually declined slightly in 1990-2000.


Singapore, on the other hand, adopted an immigration policy to recruit highly skilled workers from abroad so as to help sustain employment growth. This resulted in an employment growth rate that rose significantly faster than the population growth rate. If you compare the capital during 1960-2011 for the two cities, they look quite similar (0.92% in Hong Kong and 1.04% in Singapore). However, there is clear evidence that in the 1980s and 1990s the human capital index rose much faster in Singapore than Hong Kong. This was the result of Singapore’s policies to attract highly skilled immigrants and expand post-secondary education – policies which were far more aggressive than Hong Kong.


In the 1980s, Hong Kong also lost some talent when uncertainties about the future of 1997 prompted some to emigrate overseas. The expansion of higher education opportunities at that time was in part a response to the outflow, but replenishing a lost talent pool takes many years to take effect. Hong Kong’s effort to expand post-secondary education began to gain some traction only after the year 2000, but by then the diluting effects from an inflow of less skilled immigrants after the Mainland’s opening had already affected the average human capital level of the population.


Productivity Gap Narrows


Table 3 gives the Penn estimates of total factor productivity (TFP), which is a measure of the productivity of all the inputs, including capital and labor used in production. Hong Kong’s TFP estimates are higher than Singapore’s, but the differences have narrowed considerably over time. From 1960 to 2011, Hong Kong’s TFP was on average 18.5% higher than Singapore’s. But in the period 2000-11, the difference was only 4.4%. This is a huge drop compared to 1960-70 when the difference was 47.7%, and still a considerable drop compared to 1990-2000 when it was 24.1%.


Table 3: Total Factor Productivity in Hong Kong and Singapore compared to the US Benchmark



Hong Kong TFP

Singapore TFP

Ratio of Hong Kong TFP to Singapore TFP

























Note: The TFP figures are derived from production-based estimates of real GDP per capita, which is more appropriate for comparing production capacity across countries and over time.


Hong Kong’s TFP appears to have peaked in the years 1990-2000 and fallen since. Why would this happen, especially in contrast to Singapore whose TFP has not changed since 1970?


The obvious explanation is the slow growth in employment and human capital relative to that of Singapore. This is evident from the figures in Table 2 showing the progressive decline in the growth rates of population, employment and average years of schooling in Hong Kong over time. The combined effect of this decline has been to lower the critical mass of human capital talent necessary for sustaining productivity growth.


Singapore’s population has experienced very robust growth in both numbers and quality. An immigration policy to bring in highly educated manpower mostly from China, as well as sustained investments in education, have paid off. The 1980-2000 figures from Table 2 show Singapore’s average employment growth rate was higher than Hong Kong’s by at least 1.2%. The average years of schooling of the population in Singapore over the same period was increasing at a rate faster than Hong Kong by nearly 1.0% per year.


Combining together these two figures, i.e., 1.2% and 1.0%, implies that over a 20-year period, the total accumulated human capital stock from schooling in Hong Kong relative to Singapore’s stock would have declined by over 50%. This point can be illustrated by assuming hypothetically that in 1980 Singapore’s human capital stock equaled 10 units and Hong Kong’s stock equaled 20 units. Twenty years later, Singapore’s stock would grow to 15 units while Hong Kong’s stock would remain unchanged at 20 units. The drop in Hong Kong’s TFP numbers after 2000 is largely attributable to the much more rapid growth of Singapore’s human capital stock relative to Hong Kong’s sluggish growth.


Economic Miracle Unfazed by Ideological Disdain


This is a good time to revisit the debates on East Asian growth miracles and TFP growth rates that occurred two decades ago. In 1992, Professor Alwyn Young published an article showing that the miracle growth economies of East Asia had experienced no or little growth in TFP. All their miraculous growth rates were the result of capital accumulation through high savings rates and hard work, and not the result of productivity increases. Comparing Hong Kong and Singapore, he found some evidence for TFP growth in Hong Kong, but none for Singapore. Interestingly, Young’s findings are confirmed by the recent Penn estimates in Table 3.


Young further hypothesized that this was due to Singapore’s misguided industrial policy of picking winners, resulting in low rates of return on capital and adverse impacts on productivity. His work gave indirect support for the positive non-interventionist policy adopted by Hong Kong in favor of free markets. Professor Paul Krugman, Nobel Laureate 2008, did not challenge Young’s findings and interpretation, but asserted shockingly that the growth model in East Asia was similar to the Soviet Union – the result of perspiration rather than inspiration – and he made the prediction that growth rates in the region would have to decline as a result of the effects of diminishing marginal returns to capital. Young’s findings and Krugman’s oratorical onslaught lit a fire under the Singapore government. Krugman’s prediction has not been borne out as the miracle economies have not stopped growing.


Professor Joseph Stiglitz, Nobel Laureate 2001, also surprisingly concluded that if Hong Kong’s higher TFP compared to Singapore’s is to be believed then, he argued, “Is it because of better economic policies? Or is it because Hong Kong was the entrepot for the mainland of China, and as the mainland’s economy grew, so did the demand for Hong Kong’s services? In this interpretation, Young’s explanation of Hong Kong’s higher TFP relative to Singapore is turned on its head: Hong Kong’s success actually was a result of the growth of perhaps the least free-market regime of the region.”


Stiglitz’s ideological disdain for Hong Kong’s free market policies led him to clutch at any interpretation that could discredit Hong Kong’s record, but he was wrong. Young’s figures covered the period 1966-90. Throughout that period China was essentially a closed economy until the early-1980s. Young’s estimates of TFP growth rates for Hong Kong did not reveal any obvious change in TFP values before and after China’s economic opening, a finding that is also confirmed by the recent Penn TFP estimates. Stiglitz cannot be more mistaken. It is a pity how he allowed ideological belief to cloud scientific judgment.


The debates over East Asian TFP values were largely much ado about nothing. One cannot really prove whether Hong Kong’s free market policies were the sources of higher TFP values anymore than Singapore’s industrial policies were the reasons for lower TFP values. At the end of the day TFP is at best an imprecise measure of productivity, but this cannot tell us where the sources of productivity come from.


Catch Up Now! No Time to Lose!


The crucial driver of differential growth rates between Hong Kong and Singapore – two of the freest market economies in the world – is differential growth rates in human capital. Free markets in labor, capital and land allow these resources to be allocated more efficiently, but you cannot achieve growth and productivity increases if you do not invest in capital. In a modern economy the most important form of capital is human capital. Human capital markets are imperfect so there is an important role for government and non-government charities and voluntary organizations to play in fostering and financing human capital investments.


In the Gobi Desert there is no life. If you practiced free market policies there for a century, there would still be nothing there. To build a modern economy you must first invest in human capital. When human capital is present, people will sooner or later discover freer markets work better, at least in the long run. China discovered the wisdom of education 2,500 years ago and the value of free markets in agricultural land 100 years later; in the past 30 years it has rediscovered the importance of both education and free markets again. Hong Kong must not lose any more time in getting its act together on human capital.




Robert C. Feenstra, Robert Inklaar and Marcel P. Timmer “The Next Generation of the Penn World Table,” 2013, www.ggdc.net/pwt


Paul Krugman, “The Myth of Asia’s Miracle.” Foreign Affairs, November/December, 1994, 62-78.


J. Stiglitz, “From Miracle to Crisis to Recovery: Lessons from Four Decades of East Asian Experience.” In Joseph E. Stiglitz and Shahid Yusuf (eds.): Rethinking the East Asian Miracle, 509-26, Oxford University Press, 2001.


Alwyn Young, “The Tyranny of the Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,” Quarterly Journal of Economics, 110, 1995, 641-80.

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