(This essay was published in South China Morning Post on 18 June 2014)


Singapore and Hong Kong are well known for their growth miracles. They have taken different approaches – in Singapore interventionist, in Hong Kong non-interventionist. They have also adopted different policies on human capital investment, with repercussions for their future. In Hong Kong’s case, the situation is worrying.


First, let’s look at per capita real GDP growth rates since 1960. As it turns out, Singapore’s growth rates have been higher than Hong Kong’s fifty years. From 1960 to 2011, Hong Kong’s rate grew at 4.70%, an average 0.56% slower than Singapore’s 5.26%.


About half the difference can be 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, unlike the subsidized housing units of Singapore’s Housing Development Board. So as we build more subsidized housing our economic growth rate becomes slower because valuable land resources are taken out of the market and turned into non-tradable assets.


But there is another important difference: human capital.


Hong Kong’s population growth has declined over time, while Singapore’s has grown. From 1960 to 2011 it was 1.63% per year on average, compared to Singapore’s 2.28%.. From 1960 to 1970, Hong Kong’s employment grew an amazing 9.16%. But in the absence of a pro-active immigration policy, and with an ageing population, employment growth has been progressively falling off. By 2000-11, the growth rate was down to 0.83% per year.


But it is not just on numbers that they differ. The quality of their human capital has also shifted. The average years of schooling for those above 15 years old actually declined slightly in 1990-2000.


Singapore has adopted an immigration policy to recruit highly skilled workers from abroad so as to help sustain employment growth. It has also expanded post-secondary education far more aggressively than Hong Kong. There is clear evidence that in the 1980s and 1990s its human capital index (defined as average years of schooling of the adult population multiply by the rate of return to schooling) rose much faster than Hong Kong’s as a result of these policies.


In the 1980s, Hong Kong also lost some talent due to uncertainties about 1997. Higher education opportunities were then expanded, partly in response to the outflow.


But replenishing a lost talent pool takes many years. The expansion of post-secondary education did not gain traction until after the year 2000, by which time there was a dilution effect from the inflow of less skilled immigrants from the Mainland.


Another way of comparing Hong Kong and Singapore is total factor productivity (TFP), which measures the productivity of all 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. In 1960-70 the difference was 37.1%; by 2000-11 it had dropped to only 3.3%.


The obvious explanation for this is Hong Kong’s slow growth in employment and human capital relative to that of Singapore. When combined with the growth rate declines in population, employment and average years of schooling, it is evident that the critical mass of human capital talent necessary for sustaining productivity growth in Hong Kong has been lowered. Singapore, in contrast, has experienced very robust growth in both numbers and quality due to its immigration policy and sustained investments in education.


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 invest in human capital. Hong Kong has no time to lose.


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