From diversification of trade and the domestic economy to managing housing, policy choices in Singapore and Hong Kong have been markedly different, explaining their different outcomes today.
Singapore and Hong Kong, two cities that were part of the initial group of high-growth Asian tiger economies, have had much in common and are frequently compared with each other. Both Singapore and Hong Kong have attracted substantial amounts of foreign direct investment (FDI) by providing a high-quality business environment, low tax rates and world-class infrastructure. Both have long histories as transport hubs, with ports and airports that are among the busiest and best in the world.
Singapore and Hong Kong are highly externally oriented, with gross domestic product shares of exports and foreign direct investment that are among the highest in the world. GDP growth in both economies is highly sensitive to variation in the strength of the global economy. Indeed, GDP growth in both Singapore and Hong Kong for the second quarter was negative (minus 0.8 per cent and minus 0.4 per cent respectively) partly due to global headwinds, and the outlook is also sluggish. The official GDP growth forecast for this year is just 0 per cent to 1 per cent for both economies.
But despite these similarities, Singapore and Hong Kong are increasingly different in their economic structure and dynamics. This is partly due to their different political and geographic contexts, but importantly has been reinforced by different policy choices. There are a few areas in which the impact of these policy choices can be seen.
First, the respective economic structures of Singapore and Hong Kong are diverging. This dynamic is evident in the manufacturing share of GDP. Manufacturing in both Singapore and Hong Kong accounted for about 20 per cent of their GDP in the mid-1980s. In Hong Kong, manufacturing is now reduced to less than 1 per cent as production activity has moved across the border to mainland China and elsewhere. Indeed, Hong Kong’s statistical agency discontinued the “domestic export” series that captures locally produced exports of goods in 2017 because domestic exports accounted for less than 1 per cent of the city’s exports of goods.
In Singapore, however, manufacturing has remained at around 20 per cent of GDP. The ability of high-cost and resource-constrained Singapore to retain a high share of manufacturing activity is due to deliberate policy choices: from FDI attraction, to investments in research, innovation and skills, as well as the broader business environment. Singapore’s non-oil domestic exports (NODX) account for 35 per cent of GDP. Singapore has deliberately created a diversified economic structure.
In contrast, Hong Kong has become a heavily services-based economy organised around real estate, financial and professional services, logistics and tourism. Hong Kong has become a hub for cross-border capital and trade flows, in a manner similar to London or New York. This makes Hong Kong deeply exposed to variation in the strength of these flows, and in its competitive position with respect to other hubs like Shanghai or Shenzhen. This has also reduced Hong Kong’s distinctiveness; it is increasingly like other Chinese cities.
At one level, this is a straightforward story of comparative advantage. As Hong Kong has become an increasingly capital-intensive economy, with a rising wage and cost profile, it has focused on financial and business services as well as transport and logistics. But passively following comparative advantage can lead to the hollowing out of other small economy capabilities. And for a city state, this creates deep exposures – from income inequality to the weakening of productivity potential.
Second, and relatedly, Hong Kong has become deeply integrated into the mainland Chinese economy. Of course, part of this is due to Hong Kong’s economic geography as well as its political status as a special administrative region of China. But these realities have been reinforced by deliberate government policy in Hong Kong.
Government policy statements and budgets over the past several years have consistently emphasised deeper integration into China, including through huge infrastructure projects (the bridge to Macau, high-speed rail to the mainland) and participation in Belt and Road projects. Fifty-five per cent of Hong Kong’s exports are sent to the mainland, and Hong Kong’s stock exchange is dominated by Chinese companies.
Singapore has also developed its economic relationship with China, through the efforts of both private enterprise and multiple government initiatives. But only 24 per cent of Singapore’s NODX exports are sent to China and Hong Kong, and it has a broader set of economic relationships. Asean is a bigger export market for Singapore, the United States and Europe are both large markets, and the China export share has been reducing over the past two years.
While Singapore is deeply integrated into various sectors in the global economy, Hong Kong has become highly specialised and deeply integrated into China. Although Hong Kong’s policy model has supported its growth, it also means it has fewer options.
A final example of the stark policy differences between Singapore and Hong Kong is in terms of housing. Hong Kong has become one of the most expensive housing markets in the world. House prices have risen by 65 per cent since the first quarter of 2011, in real terms, compared with a reduction of 5 per cent in Singapore.
Research firm Demographia estimates that the ratio of median house price to median household income is over 20 in Hong Kong, while it is under 5 in Singapore.
Hong Kong’s housing affordability situation is among the reasons for the ongoing protests in the city.
There are some external drivers of these changes. For example, Hong Kong’s exchange rate arrangements mean that it has imported loose monetary policy from the US, and there have been substantial inflows into the housing market from mainland China. But different domestic policy choices are central to these different outcomes. Hong Kong has adopted a relatively hands-off approach to housing policy, with few restrictions on the demand side while constraints on the supply of housing remain.
In contrast, Singapore has deliberately leant against house price pressures over the past several years. The Government has imposed a series of demand-side measures (stamp duty, borrowing restrictions) as well as increasing the supply of public housing units and land for private development.
In sum, many of Hong Kong’s current economic and social challenges reflect sustained policy choices. Hong Kong has doubled down on becoming a gateway to China, deeply integrating into the mainland economy, and focusing on services without developing other strengths. But at the same time, it has not updated policies to address rising income and wealth inequality.
These policy choices have deepened Hong Kong’s exposures and made it less resilient. An index I construct of economic strength of small advanced economies (using data from 13 selected small advanced economies) places Singapore well ahead of Hong Kong.
Singapore’s strategic choice to develop a portfolio of domestic strengths and external markets has generated a measure of economic resilience. Singapore, of course, remains deeply exposed to the global environment. But its willingness to push back against economic gravity has provided it with valuable strategic options.
However, in a more challenging, competitive world, this is unfinished business – and more will need to be done to develop strengths in the Singapore economy to sustain its dynamism and resilience.
The lesson to take from the experiences of Singapore and Hong Kong, and the broader international small economy experience, is that small economies do not have to be passive recipients of external developments.
Rather, small economies can act to shape their future – and indeed, need to do so.
https://www.straitstimes.com/opinion/spore-and-hk-how-two-small-cities-diverged-in-policy-choices
