Hong Kong needs to invest in human capital urgently

In order to sustain its productivity growth, HK needs to put more resources in nurturing talent

PUBLISHED : Tuesday, 17 June, 2014, 11:51am
UPDATED : Wednesday, 18 June, 2014, 7:44am

Singapore and Hong Kong are well known for their growth miracles. They have taken different approaches - in Singapore, interventionist; in Hong Kong, non-interventionist.

As we build more subsidised housing, our economic growth rate becomes lower

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 us look at per capita real growth rates of gross domestic product since 1960. As it turns out, Singapore's growth rates have been higher than Hong Kong's. From 1960 to 2011, Hong Kong's GDP grew at 4.7 per cent, an average 0.56 percentage point slower than Singapore's.

About half the difference can be accounted for by the fact that the market values of government-subsidised housing units in Hong Kong are not adequately reflected in GDP figures because they cannot be traded on the open market, unlike those of Singapore's Housing & Development Board.

So as we build more subsidised housing, our economic growth rate becomes lower because valuable land resources are taken out of the market and turned into non-tradeable assets.

But there is another important difference: human capital.

Hong Kong's population growth has declined over time, while Singapore's has risen. From 1960 to 2011, Hong Kong's rate was 1.63 per cent per year on average, compared with Singapore's 2.28 per cent.

From 1960-70, employment in Hong Kong grew an amazing 9.16 per cent per year on average. But in the absence of a proactive immigration policy and with an ageing population, employment growth has been progressively falling off. By 2000-11, the annual growth rate had slumped to 0.83 per cent.

But it is not just on numbers that the two cities differ. The quality of their human capital has also shifted. The average years of schooling for Hongkongers above 15 years old 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, Singapore's human capital index (defined as average years of schooling of the adult population multiplied 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 lost some talent because of uncertainties about 1997. Opportunities for higher education 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 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, which measures the productivity of all inputs, including capital and labour, used in production.

Hong Kong's total factor productivity estimates are higher than Singapore's, but the differences have narrowed considerably over time. In 1970-80, the difference was 12.7 per cent; by 2000-11 it had dropped to only 4.4 per cent.

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 robust growth in numbers and quality, thanks to its immigration policy and sustained investments in education.

In the Gobi desert, there is no life. If you practised 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.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong