Bulletin Number One 1983

the free market and private enterprise. At present, both Taiwan and South Korea have yet to overcome many basic problems, and their policy direction appears a little wavering in view of the pressing economic recession. But I have no doubt that their long-term policy would be towards further increasing the role of the free market and private enterprise. Whatever efforts are made by Taiwan and South Korea, however, it would be quite difficult for them to make their enterprise system - i.e., the whole complex of manufacturing, marketing and financing - comparable to Hong Kong's in the foreseeable future. And neither Taiwan nor South Korea has done any better than Hong Kong in the provision of the infrastructure needed for further development. On the basis of this observation, I have good reason to place strong confidence in the future of the Hong Kong economy. If Hong Kong Government should be persuaded to change its non-intervention policy merely to tide over the temporary difficulties faced by the export industries, I cannot help being worried about the possible impairment of the now healthy enterprise system. From the long-term point of view, this would be very unfortunate. In my personal view, if the future of the Hong Kong economy has anything to be worried about, that would be the comparatively slow technological progress of Hong Kong's industries. The basic reason for this appears rather ironical, and this is the overabundance of cheap labour! As we all know, the latter has been the most important motivating power of Hong Kong's economic development. Its adequate supply in the 1950s and 1960s was responsible for the comparative advantage of Hong Kong's labour- intensive industries in overseas markets. However, the extended growth of the labour-intensive industries over too long a period has also seriously hampered technological progress. Imagine if the supply of cheap labour had been gradually exhausted in Hong Kong in the late 1950s, followed by rapid rises in wages, Hong Kong's labour-intensive industries would most likely have lost their comparative advantage in the competitive overseas markets in the 1960s when Taiwan and South Korea began to develop their labour-intensive export industries. Under such circumstances, the then favourable world economic climate and the highly adaptative ability of Hong Kong's enterpreneurs should have combined to make the local industries increasingly moving from labour- intensiveness towards technology intensiveness, thus enabling Hong Kong to maintain its technological lead over Taiwan and South Korea in the following years. Unfortunately, in spite of the strenuous effort made by Hong Kong Government, illegal refugees have continued to pour into this island and have resulted in an unabated supply of cheap, low-quality labour. It is this fact which is directly responsible for the lingering-on of the labour-intensive industries and the relative sluggishness of technological progress. Now that Hong Kong's labour-intensive industries have clearly lost their comparative advantage, the question of ‘1997, has inopportunely cast a shadow of doubt in the minds of the industrialists at a time when long-term investment is badly needed to speed up technological advance.Furthermore, the confidence crisis arising from the uncertainty of the future status of Hong Kong during the last three months has inevitably brought severe damage to the Hong Kong economy. This development is most regrettable, especially from the long-term point of view. On the basis of my optimism about the future of the Hong Kong economy, I wish to suggest the following, to help solve some of the basic problems within the scope of the existing positive nonintervention policy, meanwhile hoping that the general public stays cool and that Hong Kong Government can find a better solution to prevent the continuing influx of illegal immigrants so as to reduce the supply of cheap labour. 1. Hong Kong Government has already recognized the importance of helping the local industries to step up technological innovation, as testified by the provision of a generous allowance for depreciation on imported new factory equipment. This is a great stride forward and should bring about the desired beneficial effects. I now suggest that, to the extent practical, the royalty payable for patents acquired by local industrialists in an attempt to upgrade the existing technology be deducted from NEWS 7