(This essay was published in Hong Kong Economic Journal on 20 November 2013)
My essay last week showed that Hong Kong’s economy will be in demise as our labor force descends into continuous secular decline for the rest of this century. This stems in part from our rapidly ageing population and low labor force participation rate. But declining numbers alone are only part of the story of demise. The greater challenge facing Hong Kong is the faltering quality of its population. The gradual decline of Hong Kong as a world class metropolitan center appears to be imminent and unavoidable if this trend is not quickly reversed.
About two decades ago, in 1991, Hong Kong’s population (above 25 years old) had more average years of schooling than Singapore’s (see Table 1). The figure was 7.5 years for Hong Kong residents and 6.6 years for Singapore’s. But that advantage has gradually been eroded. By 2001 we were neck and neck and by 2011, it had become 9.7 years in Hong Kong and 10.1 years in Singapore. The same catch-up pattern is also observed when we examine years of schooling of men and women separately. In education, Singapore has successfully overtaken Hong Kong.
Table 1: Average Years of Schooling and Penn Human Capital Index in Hong Kong and Singapore (aged 25 years and over)
Note: The above figures of Years of schooling in Singapore are the estimates in 1980, 1990, 2000 and 2010.
Source: HK Population Census and By-Census sample datasets and Singapore Statistics, Population 2013
Human Capital in Decline
This situation has economic implications for individuals and for Hong Kong. The economic value of more years of schooling depends on how scarce it is. In Hong Kong, where higher educated persons are relatively scarce compared to Singapore, one would expect the rate of return on human capital investment to be higher. This has indeed been the case, as we can see from the Penn World Tables (Version 8.0) which enable us to construct a human capital index for an economy, by multiplying the average years of schooling by the estimated rate of return to schooling.
The estimated Penn Human Capital Index (Penn HCI) for Hong Kong and Singapore are presented in the last two columns of Table 1. The first thing one notices is that the value of Penn HCI in Hong Kong is higher than Singapore in all years. Since the figure for average years of schooling in Hong Kong was lower in the recent decade, by implication the rate of return to schooling must have been higher in Hong Kong due to its relative scarcity.
The Penn HCI also enables comparisons of the economic contribution of years of schooling in an economy to gross domestic product (GDP). Figure 1 plots the annual growth rates of the Penn HCI from 1961 to 2011 in Hong Kong and Singapore. In the 1970s, the annual growth rate of Hong Kong’s PHCI was higher than Singapore’s by almost 1.5%. This pattern began to be reversed in the 1980s and Singapore’s growth rate became on average 0.5% higher per annum. In the 1990s, Singapore’s lead in the growth rate widened to 1.5% higher than Hong Kong. The stock of human capital per capita in Singapore has overtaken Hong Kong’s initial lead.
Figure 1: Annual Growth Rates in the Penn Human Capital Index for Hong Kong and Singapore 1961-2011
Modern theories of economic growth assign a central role to human capital investment to account for why growth rates can be sustained into the indefinite future and need not decline over time (see my article in HKEJ, 20 April 2011). A person can exert effort and pay some cost to augment his human capital. Human capital can be acquired without limit and generates increasing returns to scale in economic production. This feature allows economies to continue growing even as they become richer.
Human capital not only raises the productivity of an individual and increases his earnings. The average level of human capital in the economy is also increased and causes everybody’s productivity to rise further. In other words, human capital skills generate positive spillover effects that increase the productivity of an economy. This productivity-enhancing effect is not fully reflected in increases to personal earnings and is therefore a “positive externality”.
According to the modern theory of economic growth, Singapore has generated positive productivity-enhancing externality effects to sustain its economic growth because it has increased its population, labor force, and per capita human capital stock. The Penn World Tables estimate the total factor productivity in Hong Kong and Singapore (see Figure 2). Hong Kong had a substantial lead over Singapore until the end of the 20th century, but not afterwards.
Figure 2: Total Factor Productivity in Hong Kong and Singapore 1960-2011
Source : Penn World Table, version 8.0
In the period 1970-1989, total factor productivity in Hong Kong was higher than Singapore by about 13%. This widened to 24% in the 1990s, when productivity in Hong Kong rose rapidly as manufacturing industries expanded and moved across the border and the domestic economy transformed into a financial and producer services center. Singapore did not benefit as much from China’s opening, but made a concerted effort to attract highly skilled Chinese immigrants beginning from the 1980s. This allowed Singapore to avoid a decline in its productivity after the mid-1990s as Hong Kong had experienced. As a consequence, Singapore was able to narrow the total factor productivity gap with Hong Kong to 5%. This was the narrowest measured gap between the two economies in the postwar period. It appears in the table above that Singapore has overtaken Hong Kong, not just narrowed the gap.
Migration and Human Capital Decline
There are several reasons why the stock of human capital per capita in Singapore has been catching up. First, Hong Kong suffered from a loss of skilled manpower during the period 1980-1998 (see Figure 3). In the 1980s the numbers of residents leaving Hong Kong averaged over 20,000 per year. The peak period was in the decade preceding the restoration of sovereignty in 1997 when the figure fluctuated around 50,000 per year. Since then it has averaged about 10,000 per year.
Figure 3: Number of Emigrants Leaving Hong Kong 1980-2012
In total, an estimated 842,000 individuals from Hong Kong have emigrated abroad since 1980. About 500,000 of them left during the period 1980-1998 and it is reasonable to conjecture that they did so as a result of the uncertainty over the change of sovereignty. This amounted to approximately 27,000 individuals per year, who were mostly skilled individuals. The departure of this group was largely anticipated. The expansion of post-secondary education opportunities in the 1980s and 1990s was in part a response to this exodus, but their numbers could not be quickly replaced.
Second, China’s opening also precipitated large numbers of immigrants to once again enter Hong Kong. The first batch of 300,000 entered Hong Kong over an 18-month period in 1978-80. This triggered the introduction of a one-way permit scheme, currently set at 150 per day. Most entered Hong Kong under the scheme for family reunion purposes. Since 1978 the total numbers that have entered Hong Kong are estimated to be almost 1.6 million or approximately 45,000 per year on average. Until recently, most of the immigrants that came were relatively less educated and less skilled. The Talents Admission Scheme first introduced in June 2006 has only admitted 2553 persons to date.
Third, Hong Kong’s investment in both secondary and post-secondary education has been slowing down. What happened to the post-secondary education provision in Hong Kong from 1981 to 2011? Table 2 shows the net annual average percentage increases in population (aged 15 and over) by schooling attainment. There was rapid growth in the number of people with tertiary education at both the non-degree and degree levels between 1981 and 1996. Degree holders increased at a net annual rate of 5.4%, 6.3% and 12.5% in the periods 1981-86, 1986-91, and 1991-96. This reflected in part the conversion of the two polytechnics, the colleges of education, and other post-secondary colleges into degree institutions. This effect is mirrored in the decline of tertiary non-degree holders in 1991-96.
Table 2: Net Annual Percentage Increase in Population Aged 15 and Over by Educational Attainment (1961-2011)
After 1996, the net annual rates of increase of degree holders were much lower than the previous 15 years, as the figures in the table show. They were 4.1%, 4.1% and 3.1% in the periods 1996-2001, 2001-06, and 2006-11, respectively. At the same time, the net annual rates of increase of tertiary non-degree holders in the periods 1996-2001, 2001-06, and 2006-11 were -4.9%, 15.2% and 4.3%, respectively. The cumulative effect of the increase in tertiary non-degree holders was the same as in 1981-1996 and would have been much worse had self-funded Associate Degrees not been introduced.
The Challenge of Deteriorating Quantity and Quality
Taken together, these figures reflect a slowdown in the scale of investment in tertiary education in 1996-2011 compared with 1981-96. The slowdown might be justified in the wake of the slower economic growth during the Asian Financial Crisis, but it is hard to defend post-2003. The numbers of degree and non-degree holders are now growing at the lowest net rate in 30 years.
It is arguable that the conversion of the polytechnics, colleges of education and other post-secondary colleges into universities under heavily subsidized terms by the University Grants Committee was misguided. The result of conversion on such expensive terms set a costly precedent that led government to become unwilling to expand degree education at highly subsidized levels. As a consequence, the slow investment in degree education worsened the shortage of skilled workers to keep up with technological progress, increased the rates of return to schooling, contributed to rising income inequality, and negatively impacted the productivity of the economy.
It is fair to say that the public and the government were not unaware of the worsening demographic condition in Hong Kong. Unfortunately the challenges of slow growth in the quantity and quality of the population was often understood as only an ageing problem rather than in its many dimensions which are leading to worsening economic prospects, rising poverty, growing political divisiveness, and ultimately a threat to the free society most people in Hong Kong cherish.
Hong Kong’s unusual demographic condition today is a direct result of the massive immigration wave that occurred in 1945-51. The situation was worsened by inadequate investment in education at all levels. These long lasting effects will continue to impact Hong Kong’s future this century unless we implement an immigration policy and set significant target numbers to attract educated and skilled persons to be our permanent residents. Alternative measures suggested in the government’s recent consultation document on population policy entitled “Thoughts for Hong Kong” released by the Steering Committee on Population Policy on October 24 will not be adequate. This will be the subject of my next essay in this series on Rekindling Hong Kong’s Magic, but first this series will pause temporarily from next week to accommodate some timely topics.
YCR Wong, “Cities, Human Capital and Economic Development”, Hong Kong Economic Journal, 20 April 2011.
Third essay in the series on Rekindling Hong Kong’s Magic