Let the worriers worry about our competitiveness
'Asked about the economic challenges ahead, the city's declining competitiveness was ranked first or second by a total of 45 per cent of the respondents.'
SCMP, February 18
Take note of how the question was put in this survey of what we should do with our enormous fiscal surplus and reserves. It was phrased as 'What is the biggest economic challenge facing Hong Kong?' and among the list of answers from which respondents could choose was 'Our declining competitiveness'.
Other answers included 'Possible recession in the US' and 'Possible recession on the mainland' but there was no 'possible' to the answer on declining competitiveness. It was presented as a given fact. Our competitiveness is declining.
Against whom is it declining, however? This has to be a relative measure. You can only rate your competitiveness against someone with whom you are competing. Absolute measures do not work. You may think you have become better in some particular endeavour but if others have also done so, and more quickly, then you have become less competitive in that endeavour.
And the crude measure, in fact the only measure, of advancing or declining competitiveness across the entire range of endeavours that we call an economy is the underlying growth of that economy relative to the growth of competing economies.
Our economic growth rate over the last four years has averaged 7 per cent annually. For the world economy overall, that figure is about 3 per cent. The crude measure thus says that our competitiveness is not declining. We have become more competitive, not less so.
But, of course, you will protest that we need not care whether we are becoming more competitive relative to Burkina Faso. Forget the comparison with the world in general.
What counts is how well we compete against our immediate neighbours and the mainland's economic growth rate is much higher than ours. The crude measure thus says that our economy is in danger of being hollowed out by competition from across the border.
Well, not quite. The mainland is indeed quickly becoming more competitive and it is doing so faster than Hong Kong but this does not say that people across the border will soon steal all our jobs and we will become poverty-stricken.
The key measure this time is how relatively competitive we are to begin with (and here I must add a few words because my old English teacher would otherwise smack me on the head for ending a sentence with a preposition).
Our gross domestic product per capita is 12 times as great as the mainland's in US dollar terms, which is an enormous margin. If we were truly on an equal footing with the mainland, if people across the border could truly do everything we do as well as we do it, then the Hong Kong economy would have been wiped out long ago.
But we are not on an equal footing. We are much better at doing what we do than they are at doing it. That is why we are so much wealthier. We are better at it because of valuable intangible advantages that people across the border do not value as much as they ought to (and now my English teacher will smack me for a dangling infinitive).
These advantages include rule of law, protection of civil liberties and free markets. The powers that be across the border don't really understand why these things make such an enormous difference to relative wealth but that's their misfortune. As long as they remain in ignorance we will remain much wealthier.
What it comes down to is that the basic competitiveness of any economy is largely a function of the coercive forces that operate on that economy. Force people to do what you think will make them more competitive and they will invariably become less competitive. It always works that way. Competitiveness does not respond well to command.
Within this framework you can still find any economy becoming more or less competitive relative to any other but it rarely continues for long before exchange rates or, in Hong Kong's case interest rates, equalise everything again.
For instance, the artificially established exchange rate of the yuan has long given the mainland an artificial competitive edge. It can no longer do so. The yuan is strengthening. It cannot be avoided. This erodes the artificial competitive edge and brings the mainland's competitiveness edge back into balance.
Let me summarise all this. It is pointless to trouble ourselves about whether we are becoming more or less competitive. Leave alone that we can only measure it in a crude indirect way, we are always as competitive as our rights and liberties allow us to be. No fiscal measure can make any difference to this at all.
And what little competitive edge we may additionally gain or lose relative to this basic level of competitiveness will soon be brought back into balance by exchange rates and other self-adjusting economic mechanisms.
In other words, questions about our competitiveness serve to give chronic worriers something to worry about. They serve this purpose extremely well because, in this case, there is nothing the worriers can do about these worries. They serve no other purpose that I can identify.