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7 Economic Competition and Structural Change The industrial composition of Hong Kong’s economy has undergone a very rapid structural change over the past three decades. Between 1980/81 and 2010/11, the share of service sector employment in Hong Kong grew from 47.1% to 87.5%, while the share of manufacturing employment fell from 41.3% to 4.0% (see Table 7.1). In terms of their shares in real GDP, the service sector grew from 74.2% to 92.6%, while the manufacturing sector fell from 17.1% to 1.8% (see Table 7.1). When measured in nominal GDP terms, the change is Table 7.1 Employment and industry percentage shares in nominal and real productionbased GDP Employment Percentages Nominal GDP Percentages Real GDP Percentages 1986 2001 2010 1980 2010 1980 1985 2000 2010 Goods-Producing Industries 44.8 17.3 11.6 31.7 7.1 24.5 22.9 13.2 7.4 Manufacturing 34.7 7.1 3.4 22.8 1.8 13.5 11.7 3.9 1.8 Service-Producing Industries 55.2 82.7 88.4 68.3 92.9 75.5 77.1 90.0 92.6 Distributive services 25.6 37.2 36.6 22.5 35.3 24.9 27.3 27.8 34.9 Producer services 6.0 14.1 18.8 21.7 26.4 23.9 16.5 22.1 25.9 Consumer services 17.0 25.6 28.6 11.5 13.5 12.8 16.3 17.7 13.6 Government services 6.6 5.8 4.5 4.2 6.6 4.6 6.2 8.8 6.8 Ownership of premises 8.4 11.1 9.3 10.8 13.6 11.4 Overall Economy 100 100 100 100 100 100 100 100 100 78 Starting Points even steeper—the service sector grew from 68.3% to 92.9%, and the manufacturing sector fell from 22.8% to 1.8%. These are extremely rapid rates of change. But the economy adjusted well to the demand shifts due to the flexibility of its labor market. Unemployment rates were low throughout the entire period, except for the recession years during the Asian financial crisis. A major cause of this rapid structural change was the migration of manufacturing industries across the border during the 1980s and 1990s. The relocation of the production base to the Pearl River Delta allowed firms in Hong Kong to quickly enlarge their export-oriented manufacturing operations in an era of expanding international trade and rising globalization . At its peak, Hong Kong employed over 10 million workers in Guangdong province alone. The structural transformation of the economy was also accompanied by accelerated price inflation from the late 1980s to the mid-1990s. The enormous expansion of manufacturing production across the border created a huge demand for supporting services in Hong Kong, including import and export services, business services, professional services, financial services, and so on. The higher income from cross-border operations also increased the demand for goods and services in Hong Kong. While most goods could be imported from abroad, it was much more difficult to import many services. The non-tradable nature of many services meant that their prices rose relative to the price of tradable manufactured goods. Under the linked exchange rate system, the HK dollar is fixed to the US dollar; therefore, the price of tradable manufactured goods has to adjust to world inflation rates. Structural inflation appeared in Hong Kong as the prices of non-tradable services soared ahead of those for tradable manufactured goods. The Growing Service Economy Monetary expansion was accommodated by running a surplus in the balance of payments. From the late 1980s to the mid-1990s, world interest rates were relatively low and Hong Kong experienced a long period of negative real interest rates. This fuelled property price increases, especially for domestic premises, whose final use—as residence—also happened to be a highly nontradable service. Unfortunately for Hong Kong, the supply of land did not increase adequately during most of this period. Furthermore, planning, land, and building restrictions were tightened in response to a greater concern for Economic Competition and Structural Change 79 development control, making it even more difficult to increase the supply of property. As a result, the rise in property prices failed to abate. In the mid-1990s, the loss of the manufacturing industry and the rise of the service industry were perceived by many...


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