Economy of Hong Kong - Research Paper Example

HIS385 Chin Lim Ting-Chun Chou Number: 992831183 Research Paper Hong Kong: Its Economy and Modernization Introduction Hong Kong has been very successful in terms of its economy and modernization. In fact, it is one of the leading countries in Asia1. In many aspects, Hong Kong succeeded in developing its economy - tourism, financial market, and trade. Also, because of its traditional free market policy, Chan stated that "Hong Kong has developed into a modern, vibrant and cosmopolitan services economy, underpinning the role of the city as a global business platform". According to the CIA World Factbook, Hong Kong has become more interactive with mainland China more than before. China has been the largest trading partner of the country which makes up 49% of Hong Kong's exports value in 2008. Aside from that, the number of Chinese tourists in Hong Kong had increased by 12.4 million from 2001 to 2008. When it comes to the stock market of Hong Kong, China still plays a very vital role. Chinese firms still dominated the Hong Kong Stock Exchange accounting to 60% of the stock market's capitalization. The average GDP growth of the country is 5% from 1989 to 2007 ("Hong Kong") However, before Hong Kong was able to reach its success, several events have happened that contributed a lot in the country's development. It can be said that the British has played a significant role in Hong Kong's economic development and modernization. This paper will try to track down the events that led to the current economic status of Hong Kong and how the British contributed to this. It will also elaborate the transformation of Hong Kong's economy as well as the impacts of economic development to Hong Kong's modernization. Thesis Hong Kong has played a crucial role not only in Asia's economic system but also linked to the western. British successfully prospered Hong Kong's economy and several impacts has brought into through this development which could be said as a path to Hong Kong's Modernization. The role of Opium War in Hong Kong's economic development During the start of the 19th century, Hong Kong did not show any indication that it would later become a world trade center in Asia. The country was way beyond in terms of economic development. Unlike today, China was not interested into foreign trade so Hong Kong dwelled mostly on farming and fishing. This did not last until British ocean-going ships discovered Hong Kong as useful for "unloading and loading cargo to be barged up the Pearl River to Canton" (Liu). During that time, there was a trade imbalance between the western countries and china because china had more to offer than it needed in return. Because of the on-going trade imbalance, the British had to think of ways to prevent it. One of the solutions that they thought of is to illegally import opium to China. Opium was used for medicinal purposes in China toward the end of the 15th century (Tho'Mas). It was used to cure dysentery, cholera, and other diseases. However, it was in 1729 when the Chinese imperial government had found out of the detrimental effects of opium smoking. The opium sale had been banned since 1729 and its importation had been illegal until 1820 (Liu). The British saw this as an opportunity to offset the trade imbalance. According to Liu, the illegal opium trade thrived in Canton where they imported 40,000 chests of opium to China annually. The British and the US have made a good fortune in this illegal trade. "This illicit massive transfer of wealth from China, one of the world's richest and largest economies at the time, played a key role in financing the economic development of Europe and North America in the 1800s." (Liu) As the British continue the opium trade, the Qing dynasty ordered to stop the Opium trade by assigning troops in Canton and demanded that the British troops turn over their opium contraband. More than 20,000 chests of opium were surrendered by the British after six weeks (Liu). This happening encouraged British traders to occupy since it was undefended by that time. They made the place as their navy base. Since China was defenseless against the British weapons, the First Opium War was ended with the Treaty of Nanking in August 1842 where China granted the British with "extraterritorial privileges in five Chinese trading ports" including the acquisition of Hong Kong. The British colony of Hong Kong went through tough times at first with rising population and social unrest (Liu). With the help of Hong Kong's local elite, the British has managed to make the country prosper economically by serving the geopolitical interests of Britain and administering free market and democracy (Liu). The Entrepot trade as an intermediary The usual terms of trade is just between the producers and the final consumers of a good. However, there are certain countries that serve as intermediaries of trade for other countries. This is called the Entrepot trade and Hong Kong is one of the countries that adopted this kind of trade policy. As we go along this paper, we will find out how the Entrepot economy of Hong Kong has contributed to its economic success. The task of Entrepot economies such as Hong Kong and Singapore is to match the buyers and sellers of different markets. (Feenstra & Hanson). In other words, these countries serve as an intermediary for other countries' exports. Hong Kong has been re-exporting goods from China to the rest of the world. This is done through the importation of Hong Kong traders from China and distributes those goods to other parts of the world. Because of this, Chinese goods become more expensive when they leave Hong Kong compared to their original price. Usually, Hong Kong's mark-up on these traded products is 24% which made a significant impact on the country's economy. "In 1996, re-exports of Chinese goods equaled 52% of Hong Kong GDP."(Feenstra & Hanson). The entrepot trade in Hong Kong allowed more income flow which had a great impact in their economic development. Hong Kong's industrialization After the focus on entrepot trade, Hong Kong's economic development surged because of industrialization. According to Yee, the industrialization began when the inflow of refugees, entrepreneurs, and capital increased after the war. The major contributors to this industrialization development were the textile entrepreneurs from China (Yee). Aside from that, a portion of Hong Kong's revenue during the Post-war industrialization period came from its imports from China which helped a lot in its foreign exchange revenues. Since Hong Kong was already self-sufficient with food at that time, there was a surplus in the food supply which made food prices lower. This made the wages remain to be low during the period of labor-intensive industrialization. After the textile industry, Hong Kong was diversified into clothing, electronics, and plastics during the 1960s (Schenk). This spurred the continued economic success of the country. Hong Kong as a leading financial district Hong Kong is famous for its being one of the world's leading financial markets. This is because of its highly capitalist economy, corporate headquarters, high growth rates, stock exchange, and many other factors. After transforming from a trade-based industry into manufacturing, Hong Kong began to be the leading financial hubs in the Asia Pacific region. This transformation began when China adopted the "Open door policy" which enabled the bulk of manufacturing to be relocated from Hong Kong to Mainland. This is primarily because of the low labor and land costs in the mainland (HKSAR). Because of this, Hong Kong was able to serve the Pearl River Delta area and became the main part of Hong Kong's economy. This resulted to transforming Hong Kong into a financial center in the region. Sino-American Relations and the Hong Kong, Special Administrative Region Sino-American relations is a bilateral agreement between China and America that occurred during the period of 1945-1996. This allowed China to seek assistance from America. This agreement allowed Hong Kong to trade favorably with the US. With this relationship, US became the second largest trading partner of Hong Kong next to Mainland China. This agreement also enabled the US to introduce their products in Mainland china where the market is really large. Because of this agreement, Hong Kong decided to be a Special Administrative Region and somehow be autonomous of the Mainland. According to Fung, "The need to give our newly-established SAR Government some "running room" was the heart of the Trade Development Council's message at our annual Hong Kong Dinner in Washington in May this year. We emphasized how important it is for Hong Kong to work out by ourselves the full meaning of the high degree of autonomy which China has solemnly pledged to us. We explained that this means being left, by governments and friends alike, to find our own path through the challenges which lie ahead." The Special Administrative Region of Hong Kong emerged because they have proven that they can stand on their own and do not want to abide by the terms of China when it comes to its relationship with America. Contributions of Hong Kong to China and the rest of the world Even before the colonial time, Hong Kong has contributed a lot in China's economy. During the entrepot trade, Hong Kong served as an intermediary for Chinese goods to be distributed to the rest of the world. With the entrepot, Chinese products were able to be marketed to different consumers all over the world. When Hong Kong shifted to manufacturing, China still benefited because eventhough Hong Kong was self-sufficient with food that time, they still imported grains from China which created exchange rate flows to China. When Hong Kong shifted to the financial markets, the bulk of manufacturing was transferred to China because the cost of wages and land are lower. This provided more jobs for Chinese people. The free economic system of Hong Kong affected the world through globalization2. The country does not impose tariffs so other countries can export goods without paying a high price. There are also no protectionism or subsidies for local manufacturers (Chan). The effects of the absence of protectionism could be negative for the local producers of Hong Kong because they will be less competitive if the world price is less than the domestic price. However, many countries will benefit with Hong Kong's free trade policy because they will have a larger market for their goods. The producers will be encouraged to produce more and the consumers will not have a hard time buying imported good because they are not faced with higher prices because of the absence of tariffs. The inflow of tradable goods may lead to decrease in prices (both domestic and world price) which can be beneficial to all trading countries. Also, because of the free trade policy in Hong Kong, the trading countries can use their comparative advantage fully which will spur development. Lastly, free trade eliminates protectionism. And protectionism allows room for imperfect competition, meaning, monopolists can be present. This will in turn result to inefficiencies and consumers facing higher prices and lesser outputs. Hong Kong's modernization After the three transformations in Hong Kong's economy, there have been a lot of changes in its technology and modernization. It was mentioned earlier that during the pre-war period, most of the people in Hong Kong relied on fishing and farming as their source of living. But now, Hong Kong is one of the most modernized countries in Asia. It is even now becoming into a modern country close to those of the western ones. One reason that we can see here is the colonization of the British. Because they were colonized by the westerners for a very long time, they have adopted the kind of policies and technologies that the British used. After the Opium war, Hong Kong has found ways to improve its economic status through trade, manufacturing, and financial markets. Other reasons for Hong Kong's modernization are because of the continued growth in its different sectors and industries. The manufacturing sector of Hong Kong has "undergone substantial restructuring process during the 1980s and early 1990s". Its trans-boundary manufacturing base combines high value-added in technology intensive manufacturing processes with land and labor-intensive processes in the southern part of the Mainland ("Trade and Industry"). Hong Kong's optimal mix of technology and strategies add up to its continued modernization. In fact, the manufacturing sector accounting for 2.5% of the country's GDP in 2007. The services sector of Hong Kong has also been growing rapidly in the past two decades. Because of this, Hong Kong has been known as one of the most service-oriented economies in the world. In 2007, 86.7% of the total employment was included in the services sector. Below is a graph of the trend of GDP of the different sectors in Hong Kong. Aside from the growth in Hong Kong's different economic sectors, one factor that can be attributed to its modernization is the effort of the government to innovate and apply research and development for the country's improvement. Quoted below are the government's aims and visions on some specific technology areas in the country. "a. Biotechnology - to position Hong Kong as a hub for the region for biotechnology products and services. b. Traditional Chinese Medicine - to make Hong Kong a centre for the development of health food and pharmaceuticals based on Chinese medicine. c. Electronics Industry - to assist manufacturers to upgrade their technologies to produce high-end electronics products. d. Environmental Technology - to identify and stimulate development of environmentally friendly technologies and processes. e. Foundation Industries - to enhance the technology profile of the foundation industries by research and development activities. f. Information Technology - to make Hong Kong a leading city in the world for the development and application of information technology. g. Textiles and Clothing - to promote the use of technology to develop textile products, improve quality and enhance productivity." To accomplish this, the Hong Kong government has also provided an Innovation and technology Fund and Applied Research Fund which will be given to technology entrepreneurs, academics, and industrialists to help them develop their innovative ideas. The effects of pre-war population growth on today's economy of Hong Kong According to Liu, the population grew from 32, 983 to 878, 947 in the late 19th century. This created social unrest but resulted to the free market and democracy in the end. This population growth was said to have been resulted to increase in commercial activity which was dominated by shipping, banking, and merchant companies (Schenk). Eventually, the services sector and retail outlets were able to cater to the growing population. Because of the increase in population, many economic activities took place. The effects of this population growth can still be felt in today's Hong Kong. Because of the population growth then, the manufacturing sector flourished which spurred the industrialization in Hong Kong. That industrialization was the starting point of today's modern Hong Kong. The population growth created a large workforce which helped boosted the economy of Hong Kong. Post-war development of Kowloon Peninsula and New Territories After the second Opium War, Kowloon Peninsula was ceded by the British and began as part of Hong Kong's structure. Originally, the peninsula was used by the British for hunting only because it focused its development in Hong Kong ("Kowloon Overview"). Its development and growth after the war included manufacturing and trade. This was spurred by the population boom in the peninsula. Airports and railways were developed but after the World War II, refugees came to Kowloon and things became complicated. Now, it is one of the most popular shopping destinations. On the other hand, the New Territories was leased by the United Kingdom to China ("New Territories"). The place was developed into three segments, the center, western, and eastern. The rail up to China can be found in the center while the western consists of infrastructure projects that link to the new airport. On the east, public transports are a popular signs of development ("New Territories"). Conclusion Hong Kong's success can be attributed to many factors. However, it is unquestionable that the British has made a lot of impact on Hong Kong's economy and modernization. When Hong Kong was still not colonized by the British, the lifestyles of the people there are really different from the economic status of Hong Kong today. The British has done a lot of changes in its economy and modernization. It can be concluded that the opium war started the development of Hong Kong. Although it was not a good thing at first, it resulted to good outcomes and until now, those good outcomes are very obvious. Without the British colonizing Hong Kong, so little improvements can be done. Majority of Hong Kong's economic success can be attributed to its free trade policy. And without the British, Hong Kong would not have adopted this kind of policy and stick to the trade policies of China. Trade had contributed a lot to Hong Kong's economy. Proofs of this can be seen in the share of their imports and exports on GDP. Hong Kong's development into a leading financial market is caused by the many developments done during the British colonialism. The different transformations of the country have helped a lot on its modernization. We can say that sometimes, what does not seem so good can still be beneficial in the end. Works Cited Feenstra, Robert & Hanson, Gordon. Intermediaries in Entrepot Trade: Hong Kong Re-exports of Chinese Goods. December 2000. NBER. 25 March 2009 < http://www.econ.ucdavis.edu/faculty/fzfeens/pdf/markups7.pdf> Hong Kong's Third Economic Transformation and the Development of Innovation and Technology. March 2001. Planning Dept., HKSAR. 24 March 2009 Liu, Henry. From Colonialism to Confusion. 2003. Asia Times. 23 March 2009 Chan, Helen. Hong Kong Economy. 2008. The Government of Hong Kong Special Administrative Region. 25 March 2009 "Hong Kong". CIA World FActbook.19 March 2009. CIA.gov. 25 March 2009 < https://www.cia.gov/library/publications/the-world-factbook/geos/hk.html > Tho'Mas, Kristianna. Opium War: Britain Stole Hong Kong from China. July 10 1997. Workers World Service. 24 March 2009 Yee, Danny. A Modern History of Hong Kong. 2006. Danny Yee Book Reviews. 23 March 2009 Schenk, Catherine. Economic History of Hong Kong. March 16 2008. EH. Net Encyclopedia. 25 March 2009 Fung, Victor. The Impact of US-China Relations on the Hong Kong SAR. 23 March 2009 "Trade and Industry". Hong Kong: The Facts. November 2008. Information Services Department. 23 March 2009 "Kowloon Overview". Hot Travel. 1999. HotTravel.com. 25 March 2009 "New Territories". Marimari. 2004. Marimari.com. 25 March 2009 "New Territories." Wikipedia, The Free Encyclopedia. 10 Mar 2009. 30 Mar 2009 . Read More