Transcript EF3450 Principles of Econometrics

EF3461
The Economies of Mainland
China and Hong Kong
Tutorial 3
Hong Kong’s business environment
and productivity
City University of Hong Kong
Dr. Isabel Yan
1. Friendly Business Environment in HK
(Enright, 1997)
1.
Economic Cluster
“Economic clusters” means the clusters of related industries,
which provide relevant economic goods and services for the
efficient operation of businesses
e.g. Good banking and financial services, telecommunication
facilitate business transactions .
Economies of scope
The cluster of allied business services creates the benefit of
economy of scope.
Hong Kong’s clusters (groups of industries):
i. infrastructure and real estate development cluster
linking property development and construction groups with
engineers, architects, surveyors and interior designers.
ii. business and financial services cluster
this cluster includes legal services and accounting services as well
as financial services like private banking, corporate finance etc.
iii. transport and logistics cluster
it comprises air cargo, sea cargo, tourism and logistics-related
services etc.
iv. light manufacturing and trading cluster
it comprises the 4 largest manufacturing industries in HK by export
value – clothing, electronics, textiles and watches/clocks.
v. Tourism cluster
it includes the hotel industry and tourism-oriented services like
restaurants.
2. Strategic location for trade and excellent harbor
A hub for trade into and out of Southern China and East Asia.
Hong Kong’s seaport is the world’s busiest container port.
S.Korea
Japan
China
goods
India
Thailand
Malaysia
Supporting
services
Taiwan
Philippines
Indonesia
3. Capital and Finance
Hong Kong’s capital markets are advanced. For instance, HK’s
stock market is the second largest in Asia after Tokyo.
4. Rule of law
HK’s legal system has been based on the rule of law and an
independent judiciary. This provides HK a free and liberal
investment regime.
5. Free Trade & Free Market
6. Corruption-free & Stable Society
7. Low and Predictable Taxes
The total salaries tax charges will not exceed 15% of a person’s
assessable income.
8. Workforce and Education
Nine years of free education. Use of IT in the school curriculum.
HK’s economic challenges (Enright,1997)(1)
1. Cost pressure
HK’s residential and office rental costs are widely known to be
among the most expensive in the world. Unless the cost
increases are matched by increases in productivity, the cost
increases will hurt competitiveness.
HK’s economic challenges (Enright,1997)(2)
2. Challenges for the non-traded sector
The non-traded sector influences the competitiveness of an
economy in 2 ways:
(i) it provides key inputs and services to the traded sector and
hence contributes to its success or failures in the international
markets.
e.g. air/water transportation, storage, insurance etc.
(ii) the efficiency and productivity of this sector directly affects
the standard of living of an economy
e.g. restaurants; electricity, gas and water etc.
2. The Productivity of HK (Li(2002) Ch3)
Definition of Total Factor Productivity (TFP)
Total factor productivity measures the overall efficiency of production.
In a neo-classical production function, the aggregate output (Y)
depends on the quantity of capital (K), the quantity of labor (L) and
the total factor productivity/level of technology (A). “A” is a catchall
term that captures the total production efficiency. The production
function is specified as follows:
Y  F ( A, K , L)
e.g.Cobb  Douglas production function : Y  AL K 
Productivity Accounting – How to Measure Total Productivity Growth?
Differentiating the production function with respect to time and
dividing through by Y: 


Y
F K K
F L L
 g A  ( K )( )  ( L )( )
Y
Y
K
Y
L
Define
FK K
FL L
sK  (
), s L  (
)
Y
Y

g
A
productivity
growth/
technological
progress


Y

sK

Y

share of
growth
in output
,

K
 sL

K

share of
capital factor growth
in capital
payment in
input
total output
L
L

labor factor growth
payment in in labor
total output input
In other words, productivity growth is the “residual” growth after we subtract the
growth of capital and labor (each weighted by its share of factor payment) from
the output growth.
Usually a constant returns to scale is assumed, which means that sK  sL  1
.
Classification of industries:
Before looking at the data, we need to know how the industries
are classified into various sectors based on their tradability:
Goods sector
Tradable
goods sector
Manufacturing,
Nontradable
goods sector
Construction
Tradable
services sector
Hotel
Air/water Transportation
Electricity, gas and water
Mining and
quarrying
Services sector
Real estate
Storage
Financial services,
business services,
insurance and real estate
services
Nontradable
services sector
Wholesale and retail trade
Restaurants
Communication
Community, social and
personal services

An alternative classification of the services sector is made by
Richard Wong and Zhigang Tao(2000). They classify services
according to the production activities:
Services sector
Consumer services
Producer services
Government services
Services for final
consumption
Services output of the industries
that produce intermediate inputs.
Producer services add values to
the output of other economic units
Services provided by
the government
Restaurants
Hotels
Community & Personal
Services
Financial services, business
services, insurance and real estate
services
Government Services
Discussion Question 1
1. Based on the data in table 3.6, analyze the changes in
the productivity of HK in the various sectors.
1a. Which sector had the highest total productivity growth during
1995-2000? Does this industry belong to the tradable or
nontradable sector?
1b. What do you think are the factors that contribute to the rapid
total productivity growth of this industry?
1c. Which sector had the lowest total productivity growth during
1995-2000? Does this industry belong to the tradable or
nontradable sector?
Lowest TFP growth in
1996-2000.
Highest TFP growth
in 1996-2000.
1a. The financial services/insurance/real estate services/business services
industry had the highest TFP growth in 1996-2000. This industry
belongs to the tradable services sector, or the producer service sector
based on Richard and Zhigang’s classification.
1b.
Reasons for the high technological growth in the tradable sector/
producer service sector:
1. The tradable services sector is a competitive sector which faces keen
competitions from foreign suppliers. For this reason, higher
technological growth is necessary to keep up with parallel
competitors.
2. The economic integration with the Mainland China gives rise to
the demand for producer services in HK, because Mainland China
hinterland is actually home to 2/3 of HK’s relocated industries. The
higher demand provides incentives for the introduction of new
technology to lower cost and improve efficiency.
1c. The electricity, gas and water industry had the lowest TFP growth in 19962000. This industry belongs to the nontradable goods sector.
3. The Competitiveness of HK
Two Measures of Competitiveness:
1. Productivity -- Total factor productivity (TFP)
2. Unit Labor Cost
One measure of the production cost is the unit labor cost,
which is measured as the ratio of payroll per person and labor
productivity:
unit labor cost = payroll per person/ labor productivity
where payroll includes wages, overtime pay, shift allowance, bonuses etc.
Labor productivity is the ratio of real output and the number of
persons engaged in the production.
Based on the definition, we can see that the unit labor cost is
inversely related to the labor productivity.
Discussion Question 2
2. Based on the data in table 3.9, analyze the changes in
the unit labor cost of the various sectors in HK during
1995-2000.
1a. Which sector had the largest increase in unit labor cost during
1995-2000?
1b. Which sector had the largest decline in unit labor cost during
1995-2000?
Nontradable
Tradable
Based on the data in table 3.9, we observe the following
characteristics of HK’s competitiveness during 1995-2000:

The competitiveness of HK’s nontradable sector fell, as
indicated by the increase in the unit labor cost. This supports
the hypothesis that the high monopolistic power in the
nontradable sector shields them from international
competition, resulting in higher costs in this sector and
hence erodes its competitiveness

The tradable goods industries (mainly manufacturing)
showed the largest increase in competitiveness as
indicated by its large decline in the unit labor cost
Possible Project Topic on the Productivity and
Competitiveness of Hong Kong
 “One country, two levels of competitiveness?
-- Is Hong Kong losing its competitiveness to
the Southern Mainland China?”
In the project, you can compare the productivity of HK and
the Southern Mainland China (like Guangzhou, Shenzhen)
in various sectors. In what sectors are HK’s competitiveness
declining? Are the Southern Mainland China gaining
competitiveness in these sectors?
An example of the short proposal on this topic :
 Concerns about the ability of Hong Kong’s manufacturing and service
industries to keep pace with their competitors in the Southern Mainland
China, such as Guangzhou and Shenzhen, have been heightened in recent
years by rising labor and property costs. Many observers have argued that,
with Hong Kong entering a new era, a fresh look should be taken at the
government’s hands-off approach to industrial policy.
 To address some of these issues in an analytical framework, this study
constructs estimates of competitiveness for Hong Kong and the Southern
Mainland China’s manufacturing and services industries from highly
disaggregated production-based GDP data for 1990-2000. For Hong Kong,
it was argued that (Dodsworth and Mihaljek, 1997) labor and other
resources have moved in a clear, predictable pattern from manufacturing
and certain declining service industries to the rapidly growing sectors, such
as trade, transportation, financing, and business services. Also, there has
been a marked difference in the performance of tradable and nontradable
industries. Manufacturing and tradable services (import/export trade, most
transportation industries, financing) expanded on average twice as fast as
nontradable services (retail trade, restaurants and hotels, domestic
passenger transportation, real estate, and social and personal services).
 In this project, we will compare the unit labor cost and productivity
between HK and the Southern China in different industries. This sheds light
on the changes in the competitiveness of the two places.