Both Eyes Open
When it comes to understanding how economic analysis can help decision making in Hong Kong, there is more than meets the eye. Fiona Waters explains why.
Hong Kong has long aspired to be Asia’s world city, a place where East meets West. The government above all strives to ensure the SAR fosters business opportunities and economic growth. Over the past 50 years Hong Kong has witnessed unmitigated success in realising rapid economic and structural change. Our GDP per capita is now the eighth highest in the world, ten times what it was in 1960. The economy has developed from a manufacturing and trading base to one dominated by services. We are a regional and global financial hub, a favoured location for regional headquarters and the third most popular tourist destination in the Asia Pacific region.
Competitive Advantage
At the heart of economic growth is the concept of competitiveness. Hong Kong is rated by The Global Competitiveness Report as the world’s 11th most competitive economy and as the world’s freest economy by the Heritage Foundation. We have the world’s best skyline, according to the Emporis annual skyline ranking. Our prizewinning airport is backed up by a transport system that is envied the world over for its efficiency and accessibility. Infrastructure development has been at the heart of Hong Kong’s emergence as an economic powerhouse. The next decade will see tens of billions of public dollars injected into a wide range of projects. These projects, grouped loosely into transport, cross boundary and new urban development, will not only be responsible for a direct economic stimulus, they will also determine how our city is shaped over the next 20 years.
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In his 2007-2008 Policy Address, Chief Executive Donald Tsang outlined 10 major infrastructure projects, noting that “development can bring about huge economic benefits. Both employment opportunities and wages will increase during the construction stage, and upon completion, the infrastructure projects will boost economic activities and improve the living environment”. He added that a “rough estimate of the added value to our economy brought about by these projects, from commissioning to a mature stage, would be more than HK$100 bil annually, amounting to some seven percent of GDP in 2006. In addition, some 250,000 additional jobs would be created”. If he is correct, the magnitude of benefits is very high indeed.
Identifying the Problem
The motivation behind these infrastructure projects lies primarily in Hong Kong’s main economic and political dimension, enhancing our integration and connectivity with the mainland. Other transport infrastructure is being built to facilitate connectivity within Hong Kong, and develop new sites both in the core urban area and with the new development areas in the New Territories. Clearly there are efficiency, trade and other benefits from enhancing internal and external connectivity. The challenge for Hong Kong is to ensure that our chosen investments are the right ones and that their implementation brings about the intended benefits. As Hong Kong’s economy has grown and changed over the recent decades, so have the needs and aspirations of our people and of the global economy in which we must compete. There is a danger that the focus on infrastructure will leave us neglecting other aspects of competitiveness that also need to be addressed.
After all, the question that seems to be on everybody’s lips, is: “do we really need more infrastructure?” Hong Kong’s infrastructure is already amongst the best in the world. International rankings place our road, railroad, port and air transport infrastructure all within the top five in the world, and the overall quality of our infrastructure is ranked fifth globally. Contrast this with Hong Kong’s performance in terms of quality of life, where out of 215 world cities we come a lowly 70th (according to the Mercer Quality of Life Index) and 15th in the Asia Pacific region. This has a real economic effect. As one executive search firm noted in a 2009 report, “environmental discomfort is generally given as the main reason why executives leave Hong Kong.” As Tsang himself said: “Hong Kong can only sustain its long term growth as a knowledge based economy. To develop this we need talent. We need to nurture local talent [and] we have to attract talent from around the world.”
A Question of Value for Money
Clearly there are benefits to infrastructure provision. But given our relative strength is this area, the pertinent question is whether an extra dollar spent here will generate a greater return for the Hong Kong economy than an extra dollar spent on improving our quality of life. This is where the power of economics comes in useful. Economics is all about making the best use of finite resources. We only have so much money, so where should we be spending it?
Sadly in Hong Kong, too often economics is used to endorse rather than inform decision-making. Of the ten major infrastructure projects, only two economic impact assessments have been published. The information presented to LegCo always focuses on the quantifiable results of the cost benefit equation (expressed as a percentage economic return or a net present value). However, economic assessments are not just about whether the benefit to a chosen project outweighs the cost. Rather, this calculation is just one part of a wider process of investigation and elimination used to determine if a project is justified. This preliminary process has four necessary steps. The first is to define the problem/opportunity that needs to be addressed. The second is to establish the counterfactual, i.e. to consider what would have happened anyway to the defined problem/opportunity if nothing were done. Given this counterfactual, an economic assessment should next determine whether the identified problem/opportunity really necessitates intervention. If the answer is yes, then the last step is to determine the best means of intervention through analysis of alternatives. Only once the economic rationale is established, are the results of the cost benefit equation truly valid.
In Hong Kong, too often economic analyses are limited to considering the cost benefit equation without examination of the fundamental economic rationale. This limitation clearly needs to be addressed. Having a clear rationale and sound explanation of why the chosen solution is the best solution is sometimes all the public is asking for when projects come under attack. A full economic analysis would surely help answer these questions. In addition to these problems of limited scope, Economic Internal Rate of Return (EIRR) calculations can also be limited, since techniques used elsewhere in the world to value intangible impacts are rarely used in Hong Kong. In fact GHK’s study of the value of the Hong Kong Harbour undertaken on behalf of the Harbour Business Forum applied one of these techniques called contingent valuation, for the first time.
A New Approach
Hong Kong needs to take a step back and decide what its priorities are for the coming decades, paying attention to liveability and quality of life, given their increasing importance to location decisions and ultimately our competitiveness. Greater use of economics in the early stages of the project cycle should be a key part of this process, including greater appreciation of the concepts of value for money and improving the way we incorporate the value of intangibles into decision making. If Hong Kong is to build upon its remarkable history of development, it needs to aim to be a great city to live in, not just one to travel around.
Fiona Waters is a Director at economic and management consultants GHK.
