(This essay was published in Hong Kong Economic Journal on 6 January 2016.)


There is a perception that new business formation has been slowing for some time in Hong Kong. Are people becoming less entrepreneurial, and the economy less risk-taking, creative, and innovative? If so, why has this happened? And will it end?


The share of individuals in the workforce between the ages of 30 and 39 who are employers rather than employees is a good measure of the amount of new business formation in an economy. Setting up a new business successfully requires both creativity (usually found among those who are young) and business acumen (usually acquired through high level work experience). Individuals aged 30-39 are in their prime for combining both requirements.


The percentage share of employers among 30-39 year olds rose from 4.0% in 1976 to a peak of 7.1% in 1996, and subsequently declined to 3.6% in 2011, according to 5-year figures from the various census years. Using annual figures from the quarterly General Household Survey, we can also see that this share peaked at 7.9% in 1993, and then declined to 2.5% in 2014 (see Figure 1).

The data confirms that the decline of entrepreneurial activity in Hong Kong has apparently been underway for longer than two decades. What explains this decline?


One contributing factor is the Asian financial crisis of 1997. The subsequent economic recession lasted for 6 years and overlapped the bursting of the Internet stock market bubble; it only ended after the SARS epidemic in 2003. Hong Kong experienced a very severe economic shock and the intensity and duration of economic deflation was second only to the Great Depression.


Between 1997 and 2003 the cumulative consumer price fell by 11.6%, the cumulative GDP deflator fell by 17.5%, nominal GDP fell by 9.5% and unemployment reached a peak level of 8.8%. Real interest rates reached their highest levels since World War II: the real Best Lending Rate hit 12.9% and real HIBOR hit 9.8%.


By comparison, during the Great Depression of 1929-39 in the US, the cumulative consumer price fell by 18.7%, the cumulative GDP deflator fell by 19%, nominal GDP fell by 11% and unemployment reached a peak level of 24.9 %. Deflation and economic output decline were comparable with Hong Kong 70 years later, but the unemployment impact was softened here thanks largely to a more flexible labor market and the contraction of the youth population.


Severe and prolonged economic recessions have lasting effects. The Great Depression helped create the economic conditions for the rise of fascism in Germany, the emergence of the social welfare state in the US, and the start of another world war.


But economic recession alone cannot be the primary explanation for the decline of employer shares in Hong Kong. For example, the employer share among individuals with tertiary education between 30 to 39 years of age fell from 9.1% in 1986 to 3.9% by 2011, according to Census figures. The General Household Survey annual figures suggest the share peaked as early as 1985, at 10.7%, when the data series began. Entrepreneurial activity among the best educated in Hong Kong therefore started to decline a good decade before the onset of the Asian financial crisis.


So what can explain this decline? The single most important factor is the changing demographic structure of the working age population. On the one hand, the age composition of the work force has been getting older. On the other hand, the labor market is tight, especially for educated and skilled workers. The two effects together have magnified the consequences.


A recent study using a sample of 83 countries found that entrepreneurship and demographics are strongly related. A decrease in the median age of the working age population by 3.5 years results in a 2.5% increase in the entrepreneurship rate. This is a very large effect since the average entrepreneurship rate is only 6.1% in these countries.


In Hong Kong, the median age of the adult working population increased from 32.0 in 1981 to 40.6 in 2011 as the fertility rate of the baby boom generation dropped precipitously. The resulting older workforce dampened entrepreneurial activity beginning in the 1980s among the better-educated population, and in the population as a whole in the 1990s. The rise of the median age alone could account for the very large drop in employer percentage shares that we find in Hong Kong.


In the last 50 years, most of the developed world has experienced a dramatic demographic shift. Japan has a fertility rate of 1.3, which means each generation will shrink by 40%. European fertility rates are around 1.6 on average, which means each generation will shrink by 20%. The U.S. is the only major developed country with replacement-level fertility rates. China’s are below replacement rates (although China wisely revised its one-child policy last year). Hong Kong’s fertility rate of 1.2 is even lower than Japan’s.


Japan’s “lost decades” have been attributed to its “entrepreneurship vacuum” since the 1990s. The median decade for the founding of the 300 largest listed Japanese companies is the 1930s; for the U.S., it is the 1980s. Age structure is an important cause of this entrepreneurial vacuum. A worker in a country with a younger workforce will be more entrepreneurial than a worker in a country with an older workforce.


Entrepreneurial capability depends on two types of ability: creativity and business acumen. Creativity decline with age, but business skills increase with experience in high-level positions. The very young do not have the requisite human capital and the very old have lost their creativity.


Workers who are placed in roles that give them high-level decision-making authority in an organization acquire more experience that will be useful in starting an enterprise. The probability of being placed in top positions depends on the age composition of the workforce.


A young society provides more opportunity for the young and the most creative to acquire the skills necessary for entrepreneurship. Having too many older workers in society slows this down. Not only are older workers less innovative, but more significantly, when they occupy key positions they reduce the opportunity for younger workers to accumulate business skills.


Hong Kong’s demographic structure is unique. The arrival of vast numbers of new and younger immigrants in the post-war years coincided with the post-war baby boom to greatly expand Hong Kong’s young workforce in the 1960s. This was a major source of the rise of entrepreneurial activity in the 1970s. But the fertility rate of the baby boom generation then dropped precipitously and the median age of the adult working population increased over time, leading to the sag in entrepreneurial activity after the 1980s.


This can be seen in the shifting percentage shares of the population by age, divided into three groups: 20-34, 35-49, and 50-64 (see Figure 2). The share of young people rose in the 1960s and 1970s, but began to fall from the 1980s onwards. Projecting forward from 2016, the percentage shares of the three age groups and the median age of the working age population will all stabilize.

In the past decade, many young people in Hong Kong have felt that job and upward mobility opportunities are limited. Many others have been unwilling to take risks. Their pessimism and behavior is to a large extent a consequence of the evolution of Hong Kong’s post-war demographic age composition. But the future outlook is becoming less gloomy as the baby boom generation retires and the ageing of the workforce starts to end.


Another factor that has had a dampening effect on entrepreneurial activity is the extremely severe shortage of labor, especially of skilled and educated manpower, as the world and Asian economies expanded greatly from the 1980s. The number of male workers peaked around 1996 at slightly over 1.9 million and has remained essentially unchanged ever since. All the growth in the labor force has been due to women, whose numbers rose from 1.14 million in 1996 to 1.55 million in 2011 (not including imported domestic helpers). Many of the additional women that joined the work force were recent immigrants from China.


The effect on the supply of young workers in the labor market has been dramatic. The number of young men aged 20-29 dropped by 66,900 in 1981-1991 and 56,100 in 1991-2001, and is projected to drop by 14,400 in 2001-2011, 55,400 in 2011-2021, 36,800 in 2021-2031; although their numbers are projected to increase by 34,200 in 2031-41, but will fall again by 57,100 in 2041-2051 and 33,700 in 2051-61. For men aged 30-39, their numbers dropped by 14,900 in 1991-2001 and 108,900 in 2001-2011; and is projected to rise by 8,100 in 2011-2021, fall again by 59,600 in 2021-2031, 11,100 in 2031-2041, rise again by 15,200 in 2041-2051, and fall again by 62,200 in 2051-61. (See Table 1.) The population of younger women did not decline by as much because there were far more incoming women migrants.

In a bid to hire workers, many expanding businesses have paid ever-higher wages to recruit the skilled and the educated. This has driven down the earnings gap between employees and employers over time so that it has become more attractive for young people to work as employees rather than assume risks in starting their own businesses.


With the benefit of hindsight, the tightness and ageing of our workforce is the primary reason why the young in Hong Kong have become less entrepreneurial (like Japan), even amidst the rapid expansion of economic opportunities across Asia and the world in the past three decades. Perhaps, the often-touted “can-do spirit” of Hong Kong reflects the favorable demographic composition of a young workforce in the 1960s and 1970s. If so, it can be reversed through an active policy to attract skilled and educated migrants and workers.


Slower economic growth, the rapid expansion of the retired population, and the ravages of a long economic recession have fed the demand for a larger social welfare state, which informs the only broad consensus in the political agenda of the pan-democratic political groups. In a sense, the political demand for universal retirement protection is a demand for parental support relief by the growing numbers of lower middle-income working individuals and families.

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