Performance of Public Investment

Though Hong Kong has been an outward oriented economy, investment did make significant contribution to growth occasionally. On average, however, investment growth has been rather uneven, and sometimes quite volatile. During 1996-2005, Hong Kong's GDP grew by an average annual rate of 3.9%, to which contribution from gross domestic fixed capital formation was 0.4 percentage point. This means that total investment has contributed about 9.2% to overall growth. Nonetheless, this fails to reflect the volatility of investment.

In the past decade, Hong Kong experienced two "bubbles". The post-bubble economic growth rates in 1999 and 2002 were 4.0% and 1.8% respectively, but contributions from investment in these two years were negative. In contrast, during the booming years before the 1998 financial turmoil, more than half of Hong Kong's growth momentum originated from investment. Its contribution during 1996 and 1997 even reached 81.0% and 82.4% of overall growth. Such a growth pattern has not been seen so far. While Hong Kong's GDP grew by 3.2%, 8.6% and 7.3% respectively in 2003-2005, investment only contributed 6.3%, 9.3% and 13.7%. Though contributions from investment increased in the first two quarters in 2006, they only reached 22.5% and 19.2%, which were still much behind the booming years though 1998. As overall investment failed to flourish, public investment was understandably dull.

Recently, public investment only played a minor role in gross domestic fixed capital formation. Public sector investment in building and construction in 2005 reached HKD37.9 billion (in 2000 dollars), occupying a share of 32% in overall building and construction investment. Public sector investment in machinery, equipment and computer software was HKD8.2 billion, less than 4% of the total. Overall public sector investment just occupied a share of 12.5% in total investment.

The slim share of public investment was a result of its gradual contraction. In the past decade, public investment in building and construction only recorded growth in 1996, 1999 and 2003, despite the government's effort in public housing construction. The deficit position in public finance recorded since 1998/99 should further restrain public investment. This resulted in continued lower growth in public investment, in comparison with private investment. In the first two quarters of this year, the difference further widened to 20.5 and 8.0 percentage points. The slightly better performance in public machinery, equipment and computer software investment failed to change the overall picture, though, due to its relatively small size.

Has Investment been Sufficient?

The above review seems to deliver a message that investment has not been sufficient. Nevertheless, a horizontal comparison should be more relevant in making such an assessment.

Among the four major world economies, i.e. the U.S., Japan, Germany and China, China is far behind the three in terms of economic development. While consumption has been the major growth driver in the three advanced economies, growth in China has been mainly propelled by investment. In 2005, the shares of fixed investment in GDP (in current dollars) in the three advanced economies were 19.7%, 23.2% and 17.1% respectively. In contrast, the share of investment in China's GDP was as high as 42.6%.

Among the Asian dragons Singapore, Korea and Taiwan, the shares of investment in GDP were 21.8%, 30.1% and 20.5% respectively in 2005. As for Hong Kong, the ratio was 20.9%. In comparison with the advanced economies as well as its competitors, there is no evidence of insufficient investment in Hong Kong. China, being a typical developing economy, remains mainly an investment-driven economy, with high demand for infrastructural development and still lagging consumption.

Per-capita GDP levels can also reflect the situation - the higher the per-capita GDP, the lower the investment demand. According to IMF statistics, per-capita GDP amounted to USD42,000 in the U.S. in 2005, while it also exceeded USD30,000 in Japan and Germany. Among the Asia dragons, Hong Kong's per-capita GDP was similar to Singapore's, being USD25,493, while Taiwan's and Korea's were lower at USD15,203 and USD16,308 respectively. As for China, its per-capita GDP was only USD1,709 in the same year.

Korea's case should be worthy of attention. Its investment ratio at 30.1% was the highest among the Asian dragons, while its per-capita GDP was just similar to Taiwan's. However, having invested substantially in research and production, Korea has developed high competence in technology, heavy industries and electronics in the world, even surpassing Taiwan in quite a number of areas. But whether Hong Kong can follow Korea's path or Singapore's, with technology and manufacturing investment led by the government, is still subject to further study.

The above horizontal comparison does not show Hong Kong's investment has been particularly low. This, nevertheless, does not imply there is no room for improvement. The private sector has played a major role in Hong Kong's investment. With the advocacy of "Big Market, Small Government", the government has mainly defined its role in offering a favourable environment or market system for private investors. Actual investment performance would have to rest on the economic or technology cycle.

Actually, to foster Hong Kong's economic growth, expansion or at least resumption of former levels of public investment is worthy of consideration. Hong Kong's Rose Garden Project during 1992-1998 involved over HKD100 billion investment, contributing substantially to growth in fixed capital formation and hence GDP. During the period, growth in public investment in building and construction, machinery, equipment and computer software far exceeded that of private investment. Should a suitable project be identified at this stage, it is feasible to stimulate economic growth through public investment.

Considerations in Increasing Public Investment

The Rose Garden Project is an example of fostering economic growth, employment as well as enhancing competitiveness through public investment. Should we simply initiate a similar project now?

The answer should be negative. Obviously, the current fiscal stance differs much from the early 1990s. In 1997, Hong Kong's investment occupied a share of 33.6% in GDP, with public investment's share being 14.1%, both higher than the recent 20.9% and 12.5% respectively. A buoyant but over-optimistic property market which generated unexpectedly high land premium was then to support the relevant expenditure in the 90s. Fiscal reserves still amounted to HKD415.7 billion by Oct. 1998, a year after the return of sovereignty, and reached a peak of HKD444.2 billion by March 2000. Today, the situation is entirely different. Our fiscal reserves barely exceeded HKD300 billion, though having reversed the declining trend. With the current land sale mechanism and the just stabilised property market, it cannot be expected to generate land premium comparable with the past. The awkward fiscal situation since 98/99 has further reminded us of the importance of a strict fiscal discipline, bringing forth the commitment to restrain public expenditure to below 20% of GDP.

In the last fiscal year, public expenditure was equivalent to 18.2% of GDP, indicating some room for growth of expenditure. Based on the same ratio for 06/07 projection, there exists room for increase in public expenditure by HKD26.0 billion. In addition, the Budget has provided HKD29 billion for infrastructural development annually, though unspecified. As the government has refrained from direct participation in the property market, public expenditure would probably focus on large infrastructural projects, instead of building. As public construction expenditure recently remained sluggish amid the completion of projects like the Deep Bay Link, there exists room for large infrastructural projects.

Then, what type of infrastructural project should the government engage in? Obviously, those just for the sake of investing or for creation of employment are not the best choices. In fact, large infrastructural items in the Rose Garden Project like the New Airport or the Lantau Link are related to Hong Kong's trade, logistics and tourism sectors. This should be the basic consideration in choosing future public investment. Planned projects like the Hong Kong-Zhuhai-Macau Bridge, Kai Tak cruise terminal, West Kowloon, the Lantau Logistic Park and the tenth Container Terminal are also related to trade, logistics, tourism and cultural industries. Together with the expansion of the Airport and Disneyland, and the construction of the new government headquarters, overall investment of these planned projects would be comparable with the Rose Garden Project. This should contribute to Hong Kong's long-term economic development, integration with the Mainland as well as sharing the gains from Mainland's economic development. Despite the possibility of duplication with the Mainland, our early initiation in the infrastructures should lead us to an advantageous position. As public investment has remained sluggish and public finance has improved, being more proactive in large infrastructural projects should be reasonable.

Besides, the areas public investment should focus remain worthy of consideration. Hong Kong can currently spot our comparative advantages and pillars, but in the long run we face tough challenges. While maintaining our lead position, exploring new growth engines should also be a major consideration in our long-term development strategy. Public investment as an early commitment and encouragement for further development has been indispensable in many economies. The government need not assume the sole responsibility in identifying suitable projects, the business sector, academics, private think tank also have their roles to play. After certain areas or sectors have been identified, mass support has to be sought when injecting public funds. There remain many challenges.