If anything, the coronavirus pandemic has served to hammer home a simple truism – no economy is an island. And this is especially the case for a small and open economy like Hong Kong, which does not have a domestic market comparable to its larger counterparts.
Over the past 18 months or so, the Hong Kong Government has introduced over HK$300 billion in relief measures to stem the economic fallout caused by the pandemic. On top of the HK$10,000 cash handouts provided to eligible residents last summer, electronic consumption vouchers worth HK$5,000 will be distributed starting in August, with the objective of boosting the local economy by encouraging people to spend.
In the hospitality sector, residents’ demand for staycations has provided some respite to hotels, retail and F&B outlets. Notably, hotel occupancy rates in Hong Kong are already well above last year’s levels despite inbound tourism remaining at a standstill (Figure 1). Some hotels are also providing quarantine services to inbound travellers.
This shift in focus to domestic demand, however, only serves as a band-aid solution. This is simply because the city’s population of 7.5 million alone cannot sustain sectors that are heavily dependent on the export of services. This is borne out by government estimates on visitor spending, which accounted for as much as 40% of overall retail sales during the ten-year period from 2010-2019.
Another example is in the area of hospitality. In 2019, before the pandemic struck, Hong Kong hosted 24 million overnight visitors, who spent an average 3.3 nights in the SAR. This means that residents would have to spend the equivalent of an average of 11 nights per year in a hotel to compensate for the shortfall in inbound traffic.
Economies with a large and strong domestic market are arguably better able to withstand changes in the global business cycle and less susceptible to disruptions in world trade.
This is why the notion of a Greater Bay Area (GBA) is economically beneficial to Hong Kong – other than a supersized domestic market and efficiency gains from the economies of scale, such a regional common market also offers economic resilience in turbulent times. By becoming part of a single market, Hong Kong would be in a better position to withstand external economic headwinds.
However, for such a unified market to flourish, there is the need for regulations to be aligned and a mutual recognition of standards. Unlike other city clusters such as the Tokyo Bay Area and the San Francisco Bay Area, the GBA involves three customs zones, three legal systems and two hard borders – between Guangdong Province and Hong Kong, and between Guangdong and Macao.
Indeed, policy and regulatory ambiguity is often identified as the most important challenge facing businesses. Companies would like to see greater regulatory clarity, and a reconciliation of the different tax, healthcare and visa regimes – among other things – to facilitate the greater movement of people, capital, goods and services in the GBA.
Despite the challenges faced by the GBA, the outlook looks promising if the European Union’s experience is anything to go by. Although the E.U. consists of 27 member states as opposed to cities, there are still key lessons to learn from the bloc.
For example, smaller members of the E.U. have enjoyed significant gains in living standards, measured in real GDP per capita, over the past two decades following their integration into the European Common Market (Figure 2), a phenomenon known as economic convergence.
As borders become more porous, workers are able to move from a member state (usually a less well-off one) to another (more developed and wealthier) in search of better prospects. In the case of the GBA, a similar development trajectory would likely take place with the mobilization of labour towards more prosperous cities in the region such as Hong Kong, Macao and Shenzhen as workers seek out better pay and job opportunities.
However, there is the need to be mindful of unintended consequences. One of the key objectives of the initiative is the freer movement of people among GBA cities to facilitate the recruitment of regional talent to address local labour bottlenecks, which is a chronic issue in Hong Kong. However, there is the risk of oversupply in the absence of policy oversight.
A policy on integration would therefore be useful to ensure that Hong Kong’s capacity is reviewed regularly to avoid a repeat of the tourism overload that the city experienced a few years ago. The resultant backlash against the influx of tourists has impeded the integration process.
To address this issue, the Government could, at the initial stage, consider setting quotas for residents from other GBA cities seeking jobs in Hong Kong by tying these to local labour market conditions.
At the same time, it is important to ensure that a move towards achieving a single market benefits all ordinary residents who live and work in the enlarged economic community. This is especially the case given the perceived failings of globalization, which has resulted in lopsided gains instead of a fairer distribution of wealth.
Economic integration in the GBA, like international trade, will create winners and losers. Although it is likely to improve living standards on an average and aggregate basis, the man on the street may have a different perception of whether he is better or worse off, which is pivotal to the success of such integration projects.
Over the coming decade or so, we may see low-end service industries move out of Hong Kong to other GBA cities with better comparative advantages, while Hong Kong moves up the value chain to provide high-end services, thereby creating better jobs in the city. This is a welcome development.
However, for the GBA to develop sustainably, businesses must transform and workers must be retooled to ensure that they do not get left behind as and when the domestic economy changes. This will require closer coordination among governments in the GBA.
Wilson Chong, firstname.lastname@example.org