Front Matter

Front Matter

Dubravko Mihaljek, and John Dodsworth
Published Date:
September 1997
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    Hong Kong, China Growth, Structural Change, and Economic Stability During the Transition

    John Dodsworth and Dubravko Mihaljek


    Washington DC

    August 1997

    © 1997 International Monetary Fund

    Cataloging-in-Publication Data

    Hong Kong, China : growth, structural change, and economic stability during the transition / John Dodsworth and Dubravko Mihaljek.

    p. cm. — (Occasional paper ; 152)

    Includes bibliographical references (p.)

    ISBN 1-55775-672-4

    1. Hong Kong (China)—Economic conditions 2. Hong Kong (China)—Economic policy 3. Hong Kong (China)—Politics and government.

    I. Mihaljek, Dubravko. II. Title. III. Series: Occasional paper (International Monetary Fund); 152.

    HC470.3.D63 1997


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    The following symbols have been used throughout this paper:

    • … to indicate that data are not available;
    • 0.0 to indicate that the figure is zero or less than half the final digit shown;
    • n.a. to indicate that the item does not exist;
    • – between years or months (e.g., 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
    • / between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.

    The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.


    Hong Kong, China, returned to Chinese sovereignty in July 1997 as one of the world’s freest and most vibrant economies. Hong Kong’s economic success, documented and analyzed in this occasional paper, has been particularly notable against the background of its structural transformation, one of the world’s swiftest and most profound over the past half century, and its unique political transition from an overseas dependent territory of the United Kingdom to a special administrative region of the People’s Republic of China. Although the circumstances in which growth in Hong Kong has evolved are in many ways unique, the lessons are universal.

    The Hong Kong authorities have consistently encouraged free trade, free flow of capital, open competition, and market flexibility by following a transparent, rules-based policy framework. Key macroeconomic policies—a linked exchange rate, prudent fiscal policy, firm financial regulation, and a noninterventionist stance vis-à-vis the goods and factor markets—have facilitated quick adjustment to shifts in comparative advantage, which have become common in an era of world wide economic liberalization and rapid technological change. These policies have also encouraged Hong Kong entrepreneurs and workers to take advantage of—rather than resist—the forces of globalization. The movement of local industries to mainland China has not hurt Hong Kong’s economy—on the contrary, it has left room for new activities in the territory and allowed both Hong Kong and China to benefit from their respective comparative advantages. Hong Kong has thus demonstrated that, with appropriate policies, the forces of globalization and integration into the world economy can bring significant economic benefits to large segments of the population.

    Sound institutions and good governance have been another critical ingredient of Hong Kong’s economic success. By safeguarding the rule of law and impartiality of the judiciary, improving the efficiency and accountability of the public administration, tackling corruption, and ensuring a free flow of information, the authorities have created an environment which rewards hard work, initiative, and risk taking. As Hong Kong, China, embarks on its historic voyage under the “one country, two systems” approach, these institutions and values remain key to its future stability and prosperity. The Joint Declaration and the Basic Law, as well as the arrangements for the mutually independent monetary relationship between Hong Kong and China, provide assurance that this framework will continue.

    Confidence concerning Hong Kong’s economic future appears well justified given the ongoing commitment to sound macroeconomic policies and institutions. As argued in the paper, Hong Kong is well positioned to benefit from the outlook for solid and more stable growth in China as well as encouraging prospects for regional and global economic expansion. As China gradually liberalizes capital account transactions, Hong Kong will be able to play a vital role in the subsequent rise in financial flows into and out of China. More generally, Hong Kong’s position as a preeminent international financial center will enable it to intermediate the huge saving and investment flows within Asia, which are presently to a large extent intermediated outside the region. These opportunities are likely to increase the ability of Hong Kong firms and financial institutions to initiate and manage commercial activity across international borders.

    Hong Kong’s ambitions to develop further as an international financial center will require that the Hong Kong Special Administrative Region assume increased responsibilities before the international financial community. In addition to continuing its record of sound macroeconomic management and firm financial regulation, Hong Kong will need to strengthen economic cooperation with Asian and OECD countries. Growing cooperation among Asian central banks, membership in the Bank for International Settlements, and the Hong Kong Monetary Authority’s participation in the IMF’s New Arrangements to Borrow are examples of actions that demonstrate Hong Kong’s willingness to take on new responsibilities commensurate with its evolving status.

    Hubert Neiss


    Asia and Pacific Department


    As the first publication on Hong Kong in this series, this occasional paper builds on the work of numerous current and former staff of the Asia and Pacific Department of the IMF. The authors acknowledge the valuable comments and ideas provided by David Goldsbrough, and would like to thank Bijan Aghevli, Charles Adams, Hoe Ee Khor, Guy Meredith, and Wanda Tseng for providing guidance for research on Hong Kong over recent years. Parts of this paper are based on contributions originally prepared by our colleagues Aasim Husain (financial market infrastructure and institutional development, financial system and regulatory framework), Jan Kees Martijn (transportation infrastructure, social policies, competition policy), and Ichiro Oishi (competition policy). The authors would also like to acknowledge past contributions by Lynn Aylworth, Bankim Chadha, Kenneth Miranda, and Kenji Okamura.

    Aung Thurein Win and Youkyong Kwon provided excellent research assistance. The authors are also grateful to David Driscoll and Marina Primorac of the External Relations Department, who edited the paper for publication and coordinated production. Lastly, the authors are indebted to the Hong Kong authorities for their outstanding cooperation.

    The views expressed here, as well as any errors, are the sole responsibility of the authors, and do not necessarily reflect the opinions of the Hong Kong authorities, the Executive Directors of the IMF, or other members of the IMF staff.

    Glossary of Abbreviations


    Asia-Pacific Economic Cooperation Council


    Bank for International Settlements


    generalized method of moments


    Hong Kong Monetary Authority


    Hong Kong Special Administrative Region


    social security allowance


    total factor productivity


    World Trade Organization

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