(Reprinted from HKCER Letters, Vol. 55, March-May 1999)
Since the Court of Final Appeal made its ruling on issues concerning right of abode, immigration has risen to the top of the public agenda in Hong Kong. Discussion has focused on one big issue - how can Hong Kong deal with 1.68 million potential new immigrants? This issue has apparently been resolved by removing the right to come to Hong Kong of most of these people through an interpretation of the Basic Law by the Standing Committee of the National People's Congress. Discussion of the economic implications for Hong Kong of the arrival of a large number of immigrants has been dominated by the fear factor created by the figure given for the number of newly eligible immigrants. The following articles seek to give some perspective to the discussions by analysing the basis of the figure on which the whole debate was centred, and also by looking at the broader economic impact of immigration for Hong Kong. Since it is the possible economic impact which creates the greatest fear of immigration, it is crucial that discussion be based on carefully considered analysis. The issue of immigration is one which will continue to be central to Hong Kong's economic development, and it is vital that it is discussed fully. There is a strong economic case for continued immigration from the Mainland to Hong Kong. It is important that the focus shift to debate on exactly what kind of immigration policy Hong Kong wishes to have in order to maintain its economic vitality.
The following article is based on views offered in discussions with Professor Y. C. Richard Wong, Dr. Alan Siu, Dr. Y. F. Luk and Dr. Wing Suen of the University of Hong Kong, and Professor Liu Pak Wai of the Chinese University of Hong Kong.
Immigration - a Flood or Flow?
Y.C. Richard Wong
Immigration can be one of the most divisive issues to face any society. Conflict between immigrants and natives is not difficult to find in many countries around the world and rejection of newcomers often seems to be an almost instinctive reaction. Of course, there are many reasons for this, but the one that frequently weighs heaviest is the economic threat that immigrants are believed to embody, encapsulated by the fear that they will take our jobs and use our services without paying for them. In essence, it seems that this is the fear which captured the minds of policy makers and public opinion in Hong Kong after the announcement that 1.68 million new immigrants were eligible to come to Hong Kong as a result of the Court of Final Appeal ruling on questions concerning the right of abode.
Much of the fear is based on an underlying zero-sum view of the economy. There is only a fixed amount of output and jobs to go around, and any new arrival must necessarily reduce the share of those who are already in the game. That this view should now apparently prevail not only in Hong Kong. public opinion but also as a basis of government policy is perhaps surprising. Surely a society of immigrants with a record of economic success such as Hong Kong should understand better than others that the economy is not a zero-sum game. If it were the case then the 6.5 million people in Hong Kong today would still be trying to survive on the same output as, for instance, the 600,000 people here in 1945. Hong Kong has traditionally welcomed immigrants. Have we not been told many times by government and business leaders that Hong Kong's only resource, apart from its harbour, has been its people? This recognises an important economic fact - people are assets.
It is worth recalling the extent to which Hong Kong is an immigrant society. In 1996 approximately one third of Hong Kong's residents were born in mainland China, while another 7.1% were born outside either Hong Kong or China. Of the rest, most have parents or grandparents who were born in other parts of China. "Immigrant" and "native" in Hong Kong are relative rather than absolute terms.
For over a hundred years immigration has been a key source of population growth for Hong Kong, and large influxes of immigrants in short periods are nothing new. Since the Second World War, on three occasions large waves of immigrants from China have caused sudden surges in population growth. The first was in the period from 1949 to 1950 when the collapse of the Nationalist government brought several hundred thousand refuges from the Mainland, increasing the population of Hong Kong from 1.8 million in mid-1949 to 2.3 million in mid-1950. The second surge of immigration took place as a result of the failure of the Great Leap Forward in China in the late 1950s, bringing a large influx of illegal immigrants to Hong Kong. The third major surge occurred in the period from 1978 to 1980 when the Mainland first began opening to the outside world, when a flood of mainly illegal immigration increased the population of Hong Kong by 7%.
These episodes tell us that Hong Kong has been able to successfully absorb large surges in immigration even when they are unplanned and many resources were far more limited than they are today. Rather than a threat, immigration from China in the past has given a significant impetus to the expansion of the Hong Kong economy, providing both the labour and skills on which growth has been built. There is no necessity that further immigration will hurt the Hong Kong economy. In fact there are strong arguments in favour of a continued flow of immigrants from China. Hong Kong currently has one of the lowest fertility rates in the world, approximately 1.2 children per woman (or couple). In recent years immigration from China has become the main source of population growth in Hong Kong.
Efforts to restrict immigration may be as damaging as uncontrolled immigration. It was only after strict immigration controls were imposed with the abolition of the "touch base" policy in 1980 that severe labour shortages developed in Hong Kong, requiring the importation of labour and contributing to the high inflation rates of the late 1980s and 1990s. The effect of over restriction should be borne in mind at a time when "competitiveness" has become a watchword for business and government policy.
Just how is it that immigration, rather than a threat, can be a benefit to Hong Kong? The most direct threat perceived by many Hong Kong natives is that either new arrivals will take their jobs, or that they will compete with them and reduce their earnings. The evidence, however, tends to show that immigrants have little impact on the employment and wage rates of natives. The belief that immigrants take jobs away from locals depends not only on the assumption that there are a fixed number of jobs, but also that immigrants are able to substitute directly for incumbents. The reality is that the ability of immigrants to steal the rice bowls of incumbents will depend on a number of factors, the most important of which is the skills of the immigrants. It is unlikely that most immigrants from China will have the education and skills to compete for any job in Hong Kong. Their impact is most likely to be felt at the lower end of the job market, but even here there is little evidence of long-term damage to the interests of incumbent unskilled workers.
No Room for Newcomers?
One of the main reasons given for rejecting a new influx of immigrants is that they will require large amounts of new housing, including public housing. Past experience shows that immigrants to Hong Kong do not immediately create huge demand for new housing. From 1945 to 1948 the population of Hong Kong increased from 600,000 to 1.8 million, but by 1948 there were only 30,000 squatters in Hong Kong. Almost all the arrivals had been absorbed by private sector housing within the existing housing stock, there of course being no public housing at that time and also very little building of any new private accommodation. By 1953, when the population had increased to 2.3 million, there were 300,000 squatters. Again, most of the arrivals had been accommodated within existing housing stock. At this time, there were severe impediments to legal private development or redevelopment of housing, and the squatter settlements were primarily an extra-legal response of the market to the housing needs of the population. There is no reason why the market cannot respond to any increase in immigration today, especially given that most new arrivals will be absorbed into the existing housing stock since they have relatives in Hong Kong with whom they are likely to live on arrival.
Research in the United States has shown that the impact of immigrants on native wages and employment is marginal, with greater effects being felt by immigrants who had arrived earlier. Studies of cities in the United States have typically shown the estimated elasticity of immigrants on earning of natives to be in the order of -0.02. That is to say, a 10% increase in immigration will reduce the earnings of natives by 0.2%. The effect on employment is estimated to be of a similar order, with one study showing an elasticity of -0.01, i.e. a 10% increase in immigration will increase unemployment of natives by 0.1%. In 1980 about 125,000 Cubans were permitted to leave Cuba within the space of a few months. Most of these went to Miami, where the labour force was suddenly increased by 7%. Nevertheless, there was little impact on wages and employment in the city in the following few years.
The most recent influx of immigrants to Hong Kong in the 1978-80 period introduced a large number of new workers, mostly unskilled, into the labour market. It is true that in the following period real earnings in certain sectors of the economy were depressed, although it should be remembered that this was also a period of slow growth in the economy. Nevertheless, by the second half of the 1980s, labour shortages resulted in rapid rises in real earnings in the same sectors which far exceeded the previous declines.
The key question is how long the market mechanism will take to absorb the new labour on the market. This depends on a large number of unknowns, including the future path of the Hong Kong economy, but given market flexibility, experience has shown that Hong Kong has the ability to absorb influxes of labour without damaging in the long-term interests of existing employees or resulting in high levels of unemployment.
In its projection of the potential impact of the arrival of the newly eligible immigrants the Government appeared to believe that it would be impossible for any of them to find work, and that therefore there will be a large rise in unemployment, creating a huge burden on the community. But, even if we assume the government estimates of the potential arrivals in the first generation are correct, given normal patterns of labour force participation it is unlikely that all the arrivals will enter the labour market, and those that do arrive, given moderate rates of economic growth, are likely to be absorbed quite quickly. Even today, when Hong Kong's economy is in recession there are certain sectors where businesses claim there are labour shortages and call for labour imports.
As the case of Russian emigration to Israel in the early 1990s shows (see box), the unemployment rate of immigrants will probably fall rapidly.
Russian Immigration Benefits Israel
The economic impact of previous waves of immigration from mainland China to Hong Kong has not been studied in detail, but immigration of Jews from the former Soviet Union to Israel in the 1990s may have some lessons for Hong Kong. Under the Law of Return all Jews have the right to settle in Israel. From August 1989 the soon to be former Soviet Union for the first time permitted free immigration to its Jewish citizens to Israel. Between 1990 and 1995 about 700,000 people from the former Soviet Union arrived in Israel, increasing the original population of 4.5 million in 1989 by 16%.
What effect did this have on Israel's economy? In 1989, immediately prior to the influx, the unemployment rate in Israel was 8.9%. This rose to 9.6% in 1990, peaked at 11.2% in 1992 before falling to 6.3% in 1995, significantly lower than at the beginning of the influx. In 1989, on the eve of the influx, GDP grew by only 1.1%. In the following six years, however, the annual growth rate fell below 6% only once, in 1993 when it was 3.4%. Return on business capital, which was 5% in 1989, rose to 12.4% in 1992, before falling back somewhat to 7.4% in 1995. House prices in 1995 were 50% higher in real terms than they had been in 1989 despite a significant growth in the housing stock
The big picture shows that the Israeli economy was not damaged by this wave of immigration. Nevertheless, it is true, as we have noted, that there was a temporary rise in the unemployment rate. Did this hurt incumbent workers? In fact both the labour participation rate and the unemployment rate for incumbents remained virtually unchanged throughout the period, and actually fell towards the end. The increase in overall unemployment was almost entirely the result of unemployment among immigrants. How bad was this? The unemployment rate for the 1990 cohort (the immigrants arriving in 1990) was initially over 50%. This fell rapidly so that by 1994 the unemployment rate for the 1990 arrivals was only slightly higher than that for native incumbents. The initial unemployment rate for each succeeding cohort fell so that by 1994 it was about 40%, and the unemployment rates of each cohort declined as labour was rapidly absorbed by the economy. Real wages for incumbents remained more or less unchanged throughout the period while those for immigrants, initially well below those for natives, tended to rise over time.
One key difference between Russian immigration to Israel and Mainland immigration to Hong Kong is the educational background of the arrivals. A large proportion of the immigrants to Israel were well educated and brought skills with them. Whether immigrants from the Mainland will bring the same level of human capital is doubtful. Nevertheless, the basic lesson remains, that a sudden surge of immigration can bring great benefit.
The assumption that none of the new arrivals will find a job, and will hence become a burden on the community, should be set aside, and a basic economic fact remembered - that people are assets and not a burden. The new arrivals will not slow economic growth in Hong Kong, and will more likely help accelerate growth. Labour supply is a critical factor in the cost of doing business in Hong Kong. As we have seen, an increase in labour supply will likely temporarily lower wages in certain sectors, stimulating growth in those industries to the benefit of all residents of Hong Kong. Immigrants will also bring with them an increase in consumption spending, adding to demand in the domestic economy, and will pay taxes on the income they earn, in the same way as everyone else in Hong Kong.
The extent to which people are economic assets depends largely on their education and their skills. This is where the greatest difficulties for new arrivals from the Mainland, whether or not they arrive as a result of the Court of Final Appeal ruling, are likely to arise since their education and skills may not match those required in Hong Kong. Interestingly, the Government survey figures, in as far as they go, do not indicate a huge mismatch. According to the survey, 63% of those eligible in the first generation under the Court of Final Appealing ruling have education to secondary level or above compared with 60% in the Hong Kong population, and 10% of the newly eligible are described as professional or technical, compared with 14% in Hong Kong. Despite this, it is likely that there will be some mismatch between the skills acquired in the Mainland and those required in Hong Kong. It is this question of skills which will remain a central issue in Hong Kong's immigration policy.
The evidence shows that Hong Kong not only can, but must, have immigrants. The real question for Hong Kong is not whether it will have immigration, but how much it will have and how it will be controlled. Will it be an uncontrolled flood or a controlled flow? The Government has taken steps to solve the "crisis" created by the Court of Final Appeal ruling. If Hong Kong is not to have the flood which the Government claimed was about to inundate us, then there must continue to be a steady flow of immigrants. Under current policy, family reunion is the main purpose of immigration from the Mainland as embodied in the current quota system. This is proper given the serious humanitarian and social problems of divided families. But at the same time wider consideration must be given to the type of immigration policy that Hong Kong wants to have. Under existing policy, although immigration is controlled, it is not fully under the control of Hong Kong in that the Special Administrative Region government has no power to decide who is included in the quota. Unlike other countries, Hong Kong cannot decide to accept immigrants on the basis of their skills or other attributes, even though it is their skills that will decide how much immigrants will contribute to Hong Kong. Thus, aside from family reunion, Hong Kong must have an immigration policy that takes into account other policy aims.
In its efforts to solve a crisis by the quickest possible route, the Government has abandoned the chance for proper consideration of the future of immigration to Hong Kong. Hong Kong will continue to need immigrants, but it must have a coherent immigration policy that benefits its long-term interests. Even if Hong Kong chooses to exclude many of those eligible for right of abode under the Court of Final Appeal ruling, it still needs to give serious consideration to immigration policy in order to ensure a continuing supply of labour to sustain economic growth.