Daddy,
Can I ask you for a favour? I have a horrible essay to write on how attracting cultural activities with a potentially global audience is a good strategy for solving local problems. Don't ask how I got this essay.
Jess

Dear Jess,
Your heart is in the right place, daughter. How like academics to phrase a highly dubious proposition as a certainty. How like them also to leave the key question undefined.

Most of all, how apropos of Hong Kong, which is why, having composed my thoughts on the matter, I decided it would make a good Monitor column.

Now don't get put out. You are not studying in Hong Kong and your professors only read politically correct journals anyway.

The key question to my mind is a simple one. What local problems?

I can certainly think of some problems that cultural activities might solve. Try the old Roman Empire, for instance, which adopted bread and circuses for the constant problem of how to keep its people content with an oppressive political system. Feed them and, above all, entertain them and they will stay quiet.

We may shudder at Rome's way of doing it through spectacles of organised murder in the Coliseum but the underlying principle is not all that different from how the likes of North Korea stages "cultural activities" in spectacles of banner waving as a palliative for social unrest.

It is in fact a common modern way of solving this "local problem", cultural activity as a disguised way of stoking nationalist sentiment, which is perhaps the most dangerous of all emotions but one that certainly draws attention away from personal hardship. Beware of people who wrap themselves in flags.

Of course, this is not what your professors mean by cultural activities. It is only what such activities so easily and frequently become when officially sponsored. Try Hitler's 1936 Olympic Games for size.

What your professors have in mind is probably that organising big shows will attract foreign tourists, who will spend money and thus help boost economic performance without the need to bring in polluting industries.

If so, I am glad that they at least look at the "local problem" in a better way. Don't hide unhappiness about living standards. Address it directly. Governments do best when they promote greater prosperity for all.

But it is still a fallacy on many counts, most notably that governments tend to fool themselves about their ability to achieve their purpose. What they most frequently forget is cost. It is easy to do when a cultural spectacle is visible to all, but the widespread burden on society of staging it is not. The misery Greece now suffers from its wastrel staging of the 2004 Olympics is a rare example of it becoming visible.

Tourists do not really bring in that much money anyway. Most of what they spend goes right out again to pay foreign-owned airlines, foreign-run hotels, the imported knick-knacks they buy in shops, and the imported foodstuffs they eat.

The foreign-sourced component of tourist spending is much greater than that of domestic spending.

Even then the greatest beneficiaries of their spending is that narrow segment of society represented by the corporate owners of those airlines, hotels, restaurants and retail chains, while the employment it creates is mostly menial. Tourism does as much to freeze economic development as encourage it.

But the price to the country seeking to boost tourism can be enormous - vast public works for cultural venues, always on the best public land, and hideously expensive infrastructure projects justified on illusions of tourist benefit. You can cite the obvious Hong Kong examples as well as I can. Try Greece again if your professors cannot find Hong Kong on the map - they probably cannot.

And then you get the follow-on question. Could we have had a better return on our public money by spending it on something else? Tourism boosters tend to evade the question by speaking of social benefits that they say cannot be quantified.

There is one useful retort to this. If what we get is so many nebulous units of warm social feeling, let us pay in the same coin. But if tourism boosters want money from us then let them talk money, too. It is their choice.

They are wrong, however, in their surmise that the social benefits cannot be quantified. You do it yourself every day when you decide what you will buy and what you will not.

Will you spend the money on tickets to a dance performance or on a new bike? Make that decision and you have just quantified the social benefit of a cultural activity in precise money terms.

Which is why I always propose the ultimate in democracy for these sorts of questions. Why not let people decide themselves how they will spend their money? It is almost always the best strategy for solving a problem that is essentially economic in nature.

But that would be a world in which there are fewer silly essay questions for professors to assign. My consolations.
Daddy

"Beijing must head off risk of deflation, think tank warns"

SCMP headline
September 29

Years ago, a friend of mine showed me an illustrative chart. On one line, it plotted the number of economists employed by the central bank of Canada. On the other, it plotted Canada's economic growth. The first line went straight up and the second went straight down, producing an almost perfect "X".

It brings to mind the response of an old colonial financial secretary, John Cowperthwaite, to the suggestion that Hong Kong collect and publish more economic statistics.

"Oh we can't do that," he is reputed to have said. "If we did, people would only try to use those statistics and where would we be then?"

Given the use I make of economic statistics, I cannot say that I entirely agree with Sir John's sentiments, but I understand what could have prompted them.

Beijing collects and publishes enough statistics on inflation to put the US to shame. You can get them for consumer, retail, producer, purchaser, corporate goods and fixed asset price indices. They are further broken down by product, industry, city, province and rural or urban location.

They are also not entirely reliable, particularly for prices that are controlled by state edict, and can sometimes be misleading. Here is an account of one way in which they may have misled.

Back in 2003, Beijing authorities finally took note of a disconcerting trend. Production of rice had fallen by 20 per cent over the previous six years and wheat by 30 per cent while the sown area of all grain crops was down by more than 10 per cent.

Time to do something about this, they said, and the obvious remedy came to mind - pay the farmers more for their grain crops.

The red line on the first chart shows you that they did. The grain price component of the consumer price index suddenly spiked up to a year over year inflation rate of more than 30 per cent and stayed at these high levels for more than a year.

This introduced another difficulty, however. It pushed the rate of inflation for all foodstuffs to more than 14 per cent and this in turn caused inflation on the overall CPI (the blue line) to rise to more than 5 per cent.

Beijing has had sad experience in the past with permitting rampant inflation and has not since been minded to permit it. Once more, the obvious remedy came to mind. The countryside has had its turn and that turn is over. Prices of grain were frozen again and, since earlier this year, have actually declined.

The desired effect was also achieved. The overall rate of inflation has come down to just over 1 per cent.

But now let us say that all this really had little to do with underlying inflationary forces. What would that inflation index have shown if the food element were taken out of it?

This requires a little guesswork because, for all those myriad inflation indices, nowhere can I find a statement of different weightings for inflation components. In general, however, the poorer the country the bigger the weighting that food has in the basket. Thus for Singapore, the food weighting is 24 per cent and for the Philippines 49 per cent. We shall call it 40 per cent for the mainland.

Throw this figure into the calculations and the second chart gives you an indication of what the inflation rate in the mainland would have been over the past three years after knocking out the monkeying with grain prices.

It was low, negative for most of that period in fact and it is still low now, but it does not tell you that deflation is the immediate risk that Beijing faces. The trend at the moment is up, not down.

I am not saying there is no risk of deflation should the big fixed-asset investment boom of recent years turn sour. The point is only that a surfeit of statistics can sometimes give you confusion rather than clarity. I think the central bank of Canada would know what I mean.

"These [mainland] workers earn one-fifth to one-tenth of what Hong Kong workers get. Our legislators can now see clearly what the remaining manufacturers in Hong Kong face. There is no way that a Hong Kong company can compete."

Alex Woo, chairman,
Central Textiles (HK)
Letters to the editor, September 29

Mr Woo is right. What the remaining manufacturers in Hong Kong face with the way things are going is extinction. There is no way they can compete.

They have mostly recognised it, too, as the first chart shows. Twenty years ago manufacturing accounted for 23 per cent of our gross domestic product. That figure is now about 3 per cent and headed down further with the demise of the international garment quota system. Going, going, gone indeed.

The implication here, however, is that we do not have a real economy unless we have a good dollop of manufacturing in it. Hence Mr Woo's suggestion that we should allow Hong Kong manufacturers to bring in one mainland labourer for every Hong Kong labourer they employ and impose no restrictions on that mainland labourer's wages.

You can understand the thinking. Perhaps there is reason to pay Hong Kong workers a little more than their mainland counterparts but the scale of difference between the two is so large that soon Hong Kong will have nothing left that the mainland cannot do at much lower cost and where will we be then? Let's address this problem while we still have time.

I don't buy it. The idea ignores fundamental differences between the Hong Kong and mainland economies while implicitly assuming that the overall productivity of each is the same. The second chart should put this in perspective.

The red line shows you the multiple by which the average wage in Hong Kong exceeds the average wage in the mainland, 8.3 times at the end of last year, according to the official figures after expressing both in US dollar terms.

This multiple has come down over the past 10 years. Wages in the mainland have risen faster than in Hong Kong over that period, particularly as our wage growth was held down for much of that time by a six-year bout of deflation.

It is still a wide enough disparity, however, to make you wonder why anyone would choose to set up shop in Hong Kong for any endeavour that could be carried out as well in the mainland.

But now look at the blue line. It shows you by how much Hong Kong's GDP per employed person exceeds the equivalent for the mainland, a multiple of 23 times as of the latest figures, far more than the multiple for wages.

I am not entirely happy with the mainland's official figures. They imply a total wage bill of more than 80 per cent of GDP which is impossible. More believable figures would bring the two lines closer together but you would have to adjust either mainland wages or the GDP figure by a factor of almost three times to bring those two lines right together and this is simply not in the cards. Even if you could do it you would only have proof that Hong Kong's higher wages are justified by higher output.

Monkeying with exchange rates will not do the trick. The yuan may be undervalued but assigning it a stronger value would only make both lines come down. The gap would remain the same.

There is no getting away from it. Workers in Hong Kong are paid more because they deserve to be. Their productivity is much greater yet.

And therein lies the fallacy in Mr Woo's line of thinking. The reason we are more productive is that we have a market economy with a sound financial system and rule of law to govern both. It has allowed us to make the next step up from manufacturing to a far more lucrative services economy.

This economy is under no competitive threat from the mainland and will never be until the mainland also has all the attributes of a modern market system, which is still a long time away.

We simply cannot bring manufacturing back to Hong Kong. We have outgrown it and any attempt to bring it back would only mean crawling into our past. Wasting our money by trying it would only make us grow poorer and more at risk, not wealthier and more secure.

One of the things I cannot understand in all the hullabaloo about getting new issues from the mainland listed on our stock market is the way so many people think it brings great benefit to Hong Kong.

It does get us a high profile in the financial press, I shall grant you. The financial press has a way of thinking about these things as investment bankers do and there is no doubt that investment banks benefit hugely from bringing new issues to the market. Thus when they rate markets by how much new money has been raised on each over the past year, we tend to think it a rating that has merit for the rest of us too.

I shall also grant you that it can be interesting to see Singapore bidding furiously for new issues on its market only to draw consistently far less money than Hong Kong. A little Singapore bashing is always good for a tickle. The chart shows you the relative standings over the past 10 years.

But what does it really bring us?

Well, I suppose our stock exchange collects more fees this way. Our stock exchange is now itself a listed company and this undoubtedly benefits its shareholders. Hip, hip, hurrah for the stock exchange shareholders.

And, yes, there are those investment banks, almost all of them local branches of big foreign banks, HSBC now included. If those new issues were not listed here, they would employ fewer people here.

We created 190,000 jobs in the Hong Kong economy over the past two years. How many fewer would we have had? Yes, fetch a microscope.

Then we get the investment analysts. If the stocks are listed here, then surely the investment analysts who cover them must also be based here.

I am not so sure. Mainland stocks are best covered in the mainland, wherever they happen to be listed, and if they are not covered in the mainland, then they may as well be covered in New York or Singapore as covered in Hong Kong.

The same goes for the associated legal and accountancy fees. Our economy undoubtedly derives some services income from these but not all that much by the time you take out the element of the work actually done outside Hong Kong.

And certainly the stockbrokers who trade these stocks need not be based here. Markets are made over the telephone these days. We may have a registry here but this does not bind the brokers here nor the big fund managers who are their principal clients.

The simple fact of the matter is that in modern financial arrangements the physical location of a registered place of listing is only a place for modern telecommunications to touch down occasionally. The money does not necessarily follow.

This is not to say that having a stock exchange brings us no benefit. A listing allows a company to raise new money more efficiently and easily than through most other channels it may have open. It also brings a better standing with bank lenders and investors generally and it gives the original owners a way of trading in their shares and diversifying their wealth.

But the point is that we benefit most when this is something the Hong Kong stock exchange does for Hong Kong companies that are active in the Hong Kong economy. We benefit much less when our stock exchange does it for companies that are not active here.

And when we pitch heavily for Hong Kong listings by companies that do not carry out their businesses here, we run a distinct danger of undermining the market for those that do.

When a corporate boss in the mainland decides to go for a listing outside the mainland, he does not much care where he lists so long as he gets a good price and a reasonable prospect of active trading in his stock. Ours is not the only exchange that fits the bill and he is likely to base his choice heavily on which one gives him the least trouble and the lowest cost.

Our exchange is thus always under pressure to lower its standards for such listings which it is induced to do anyway because the relevant authorities conceive it their duty to Beijing to make mainland listings easier. They may hotly deny that they lower their standards but they cannot really avoid doing so.

Take note here also that our regulatory authorities are always hamstrung in oversight of mainland listings as they cannot really probe in the mainland as they can at home.

Trust is a fragile precious thing and the viability of stock markets is heavily based on trust. What little we gain from mainland listings we always risk losing in the value of our stock market to its home listings.