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  • Mathieu Provencher

Did Hong-Kong’s economy suffer from its reunification with China?


(Picture from Wix’s library)

Hello everyone! As Hong-Kong is going through a turbulent time with protests and a constant high-stake political game between activists and the government of (mainland) China, we can expect the economy to be affected.

Although this would be a really interesting article to write, I’m afraid I’ll have to wait around five or ten years to be able to tell you guys about the likely effect of such instability. These events can lead to important short-run effects that can slowly go away as time passes… or generate long-term positive or negative consequences that last for decades or forever.

SO! Instead of boring you guys with theoretical impacts that may or may not occur, I have another idea: well… the title says it all doesn’t it… Could we attribute at least some of those protests to economic hardship coming from their reunification with mainland China?

Let’s see together how the economy of Hong-Kong changed after the reunification of 1997. I’ll go over the data with you guys and focus on the average values of few economic indicators to see if there was indeed a significant impact. We’ll see data from 1960 or so (depending on the variable) all the way to 2018 (which are still estimates at the time I wrote that article).

I decided to show averages from 1960 to 1996, 1998 to 2007, and finally from 1998 to 2018. I decided not to include the reunification date itself because it may have been a year of great uncertainty and instability, which could skew the data. Also, I added from 1998 to 2007 to show the years after reunification, but before the great recession (which affected most developed countries) because it seems a bit unfair to compare pre-1997 and post-1997 including the great recession, which affected negatively Hong-Kong’s economy, regardless of reunification or not.

All right! Let’s get to the fun part: the data!!!!!!! Ah yes, just a little disclaimer before we start: this is a simple analysis to show the trends of important economic indicators. In order to do a proper research and get solid conclusions, I would have to look much deeper into these economic indicators.

(1) For our first look, let’s see if Hong-Kong’s GDP and GDP per capita suffered from reunification.

Source: World Bank

Source: World Bank

Did you guys notice how the two graphs seem to follow almost exactly the same pattern? That’s because population growth in Hong-Kong is very stable, except for a few notable years. So, can we conclude that Hong-Kong’s economy dropped because of the reunification with China?

As you guys should know by now, my answer to almost everything Economics is ‘it depends’! There is a clear deceleration of economic activity when we compare pre-1997 and post-1997. However, it would be unfair to include the great recession of 2008-2009 and its aftermath in our analysis of this variable. Even when looking at 1998-2007, we can see a clear negative impact on the growth rate of GDP and GDP per capita after the reunification.

However, and that’s where ‘it depends’ comes in, an average growth rate of 3.91% is very good for such a developed country (province). It had already started to slow down around 1989 and although there is a clear drop of economic activity right after the reunification, GDP and GDP per capita pick up well the following year.

In any case, a growth rate between 3% and 4% in a developed economy doesn’t seem like a good reason to ask for the government to resign.

(2) For our second look, let’s see the unemployment rates in the country.

Source: World Bank

As you can see on the graph, the unemployment rate in Hong-Kong increased significantly after the reunification with (mainland) China. The average rate increased by more than twice, which seems extreme but remember that the unemployment rate was very low before. There is a comfortable reduction in unemployment starting in 2003, with the exception of the aftermath of the great recession.

Although the unemployment rate increased substantially right after 1997, the rate had decreased to acceptable levels by 2011. It seems unlikely that the protests of 2019 are linked to unemployment since they occurred more than ten years after rates had already started to decline. The unemployment rate is still higher than in the 80s but I doubt that protesters would compare today’s situation to the one they saw 30 years back.

(3) Finally, let’s see if Hong-Kong’s trade with the outside changed from reunification.

Source: World Bank

This graph points out to a substantial increase in both exports and imports after 1997. This may be due to a greater integration of Hong-Kong’s economy in the Chinese one (if it is indeed considered as a ‘foreign’ country in the database of the World Bank). Hong-Kong stayed a net exporter for most of these timelines while increasing substantially its trade with the outside world. As mentioned, the composition of Hong-Kong’s trade partners might have changed (proportionally less with western countries and more with mainland China for example) but this doesn’t seem to be likely to lead to the protests we have seen so far.

In conclusion, it would seem that the economic performance of Hong-Kong is not a good indicator of its current political instability. Although GDP and GDP per capita have both decreased on average after 1997, a quick look at a somewhat similar country, Singapore, shows a similar pattern. As you may imagine, Singapore was not integrated into China in 1997, which means that some other regional event might have caused most of that decline in Hong-Kong.

I would say that Hong-Kong’s protests are primarily based on concerns other than the economy. Political and cultural changes are most probably the main reasons for those social frictions.

Well, I hope you guys were able to enjoy most of this preliminary analysis. Although I found nothing of interest to explain the protests, I wanted to show you guys the type of indicators Economists look for when trying to evaluate the health of an economy when there is political change.

I also looked at savings and investment rates in the country but I could not see any pattern that would be informative for this topic. It would have added a whole lot to read for you guys and I don’t know if you would have found it interesting.

Anyhow, thanks for reading and don’t forget to have fun!!!!!

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Just in case some of you are curious regarding the savings and investment rates, here’s my take on it:

Source: World Bank

Source: World Bank

As you can see on the graph, the average saving rate in Hong-Kong is slightly higher right after 1997 when compared to the period of 1960 to 1996. There are however strong variations in the saving rate from 1960 to 1972 and it seems that the rate between 1998 and 2007 is similar to the one of the previous 15 years. The rate drops substantially after the great recession, which may or may not be linked to the reunification.

Saving rates in a given country depend on a number of factors. One such factor is the savings culture, which tends to lead to higher savings in South-East Asian countries. As we can assume that culture has probably not changed with the reunification of Hong-Kong, something else has lead to this decrease of the later period.

Economists would normally expect that an increase in savings rate (which is not the same as an increase in savings overall) is likely to be linked to an increase in uncertainty in the economy. As people get scared about the future (for reasons other than hyperinflation), they tend to save more and spend less. This data shows us the exact opposite, which may indicate that people in Hong-Kong felt safer after the global economic crisis of 2008-2009. This seems a bit counter-intuitive, which means that we would need more data to be able to understand what actually happened.

The graph of investment in the country shows a decrease in rate after the reunification, on average. It is particularly evident in the period of 1998 to 2007. This decrease in investment might be the result of less foreign direct investment (FDI) coming from western countries (especially from Great Britain, if it is the case at all). New investment from mainland China (if any occurred) were not enough to compensate for the reduction in local and foreign investment.

Although a reduction in investment may lead to less dynamism in the country, the reduction is unlikely to be significant enough to lead to fears about the economy. To know more, we could see if this decrease in investment rate was linked to sectors of the economy that had special coverage in the media or were of special importance to the public.

#Macroeconomics #HongKong #Protest #GDP #GDPpercapita #Trade #Unemployment

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