Many people in Hong Kong extol the virtues of MacLehose¡¦s socio-political legacy in the territory. Unfortunately this antiquated British-style welfare state is ill-suited to help us meet the challenges of the next few decades. However, the welfare state is already an integral part of Hong Kong¡¦s social and political landscape and the charge of making it fit-for-purpose through reform must be considered a high priority policy initiative and a serious challenge. This is no easy task politically, but some sound progress at reforming certain parts of the welfare state has been made in the past decade. The challenge now is to sustain this effort. However, we have also made unfortunate decisions that have hampered the progress of necessary reforms and served to entrench the welfare state.
Remedying the conflicting legacies of Cowperthwaite and MacLehose for our times, area by area, and subject by subject, should be part of the intellectual task for reconstructing a coherent policy framework; one that will propel Hong Kong throughout the coming century. I do not believe the task demands new ideas or any revolutionary rethinking. What it requires is a redrawing of the policy boundaries where these two legacies converge. A stronger interface between them must be constructed and it must be politically feasible and intellectually coherent. That interface requires us to integrate public bureaucracy and market mechanisms. Implementing and completing this task will be a long-term challenge and the greatest danger it faces is that it may be compromised, derailed, held to ransom, and sacrificed again and again for short term political expediency. For this reason it needs an intellectual foundation that will guide policy choices and prevail over short term political considerations. This is central to any resolution of Hong Kong¡¦s deep structural contradictions.
One of the key conflicts between these two legacies in society manifests itself in population issues. How should we deal with the challenges of a slow growing population, when the quality of that population is lagging behind leading cities like New York, London and Beijing, and when its numbers are ageing rapidly? Our housing, education, health care, retirement protection, and population inflow and circulation policy should center on our population challenge. The government¡¦s response so far has been painfully slow and subject to political compromises. A series of ad hoc patch-up measures have failed to address the deep-seated conflict between our two policy legacies.
Changes in the demographic structure have a profound impact on the economy. The East Asian ¡§economic miracle¡¨ owes a debt to the rapid ¡§demographic transition¡¨ that occurred in the region between 1965 and 1990. The term ¡§demographic transition¡¨ refers to a shift in the population where both fertility and mortality rates plummet. At such a time, the demand for human capital investment rises rapidly, and as labor becomes more productive economic growth follows. Policies that improve health, education, and job opportunities further reduce fertility and mortality rates and create a virtuous circle of economic growth and human capital investment.
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The Demographic Dividend Has Ended
Economic growth, induced by the demographic transition, is called the demographic dividend. Hong Kong reaped a huge dividend from its demographic transition thanks to the massive inflow of people in the period 1945-1950 and the subsequent baby boom era. This demographic transition is now complete, our baby boom generation is ageing, and we are moving into a period of slower growth unless we can refit our institutions to create fresh incentives to stimulate future growth and relieve the burden of supporting an ageing population.
Table 1 below shows the number of actual and estimated persons in the population for every five-year period from 1961 to 2036 by three age groups: 0-19, 20-64, and over 65. Those aged 0-19 can be used to approximate the number of dependents in the population that are children. The age group over 65 can be used to approximate the number of elderly dependants in the population. Those in the age group 20-64 are deemed economically active; although a fraction of the female population could be out of the labor force for a substantial period during this lifecycle term. The dependency ratio for the young and the elderly is defined, respectively, as the number of persons aged 0-19 and aged over 65 divided by the number of economically active persons aged 20-64. The total dependency ratio is the sum of these two dependency ratios.
It is illuminating to consider how these two ratios alter from 1961 to 2036. The dependency ratio for the young falls from 0.921 in 1961 to 0.257 in 2011; and stays within a narrow range from 0.257 to 0.290 over the period 2016 -2036. The pattern is totally reversed for the elderly dependency ratio. It starts at 0.063 in 1961 and rises to 0.191 in 2011. It then trends up to 0.231 in 2016, 0.289 in 2021, 0.374 in 2026, 0.448 in 2031, and 0.480 in 2036. The total dependency ratio is expected to rise from 0.448 in 2011 to 0.758 in 2036, which means by 2036 every economically active person will be supporting three dependants. Metaphorically speaking a family with a working couple after the year 2026, or 15 years from now, shall have to support two dependent children and four dependent parents. This situation will be economically viable if, and only, if this representative working couples are both highly productive.
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Reconstituting Existing Rules
This is a fairly alarming statistic and it is not obvious how well-prepared our society is to cope. There are many things that we can do to prepare Hong Kong. First, we can enhance the productivity of the economically active population; this would entail investing in human capital. Second, we can lure more economically active people to Hong Kong, particularly those who are more productive; this would require a more pro-active policy aimed at attracting the right kind of workforce and making the necessary investments to improve our environment and provide support facilities. Third, in many metropolitan areas people commute to an adjacent city for work and leisure. Today many in Hong Kong already cross the border for leisure and some for work; some young children living in Shenzhen commute daily to Hong Kong for school. So how can we better utilize the advantages of a wider metropolitan area? Fourth, we can increase the efficiency of the resources used to support the dependents. For example, children must go to school so can we make our schools more productive so that the child¡¦s parents (our metaphorical working couple referred to above) can gain the same outcome for less. The elderly will get sick but can we increase the productivity of our health care services creating a greater bang for each dollar the couple spends on elderly health care? What changes in housing arrangements will facilitate this working couple to better support two children and four parents? If people value privacy and they wish to live in separate households, rather than under one roof, then it would be desirable to have very different mixes of residential units in close proximity for mutual support, shared services and, at the very least, to reduce transportation and commuting costs. Will social welfare checks command a higher purchasing power across the border if the recipients are allowed greater flexibility as to how and where they collect them and are less restricted to meet residency requirements in the territory?
I submit there is much we can do for this working couple if only we are willing to exercise our imagination, and be prepared to reconstitute the many institutional rules that will make our wishes come true. In reconstituting our institutional rules we will be forced to acknowledge that expanding the welfare state cannot solve our population challenge without abandoning totally our commitment to a limited government and eroding Cowperthwaite¡¦s legacy. And if we do this we will further damage our prospects of economic growth and enter a policy-induced vicious circle.
I claimed earlier that the MacLehose welfare state is ill-suited for the task at hand. The reason for this is simple. The MacLehose legacy has left us with a high dose of state-provided benefits in the areas of housing, health care, education, social welfare, retirement protection, and more. Large components of these services are consumed by the dependents the working couple is supporting. When a working couple is called upon to support six dependents then one should consider using the usually more efficient market mechanism a la Cowperthwaite¡¦s legacy. The task is simply too burdensome for a less efficient public sector to process well. The resource available to the working couple must achieve the highest yield possible if the people of Hong Kong are to weather the coming population storm along with the surge in the dependency ratio.
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Cross-Border Marriages and Births Rises
Fast growing cities in general experience speedier population growth. These cities attract migrants by offering better economic opportunities. In turn the migrants help fuel the city¡¦s growth; Shenzhen is perhaps the best example of this. The continuous inflow of population helps to keep a city young. Table 2 compares New York with Hong Kong and shows that only 6.5% of the population in Hong Kong in 2001 was foreign-born. New York¡¦s foreign-born population was 30.1%. Some 9% of New York¡¦s population originates from elsewhere in the US. In Hong Kong 34.2% of the population was born on the Mainland.
A large proportion of Hong Kong¡¦s Mainland residents arrived as a result of cross-border marriages. In the decade between 1986 and 1996 most of the cross border marriages occurred on the Mainland. Since 1996, an increasing number of these have taken place in Hong Kong. The marriage partners have evolved from a high concentration of Mainlanders, initially from the rural areas to a greater number from urban areas. The number has risen dramatically over time, beginning with 782 in 1986, 2,484 in 1996, 21,588 in 2006, and 22,339 in 2009 (see Table 3). In 2009, the number of marriages registered in Hong Kong totaled 51,175 of which 22,339 involved at least a bridegroom or bride from Mainland China. Only 28,836 were solely between residents from Hong Kong.
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The percentage of cross-border marriages, in all marriages involving Hong Kong residents, was 27.9% in 1986, 43.3% in 1996, 54.6% in 2006, and 39.1% in 2009. Using these estimates the cumulative number of registered marriages during the period 1986-2009 involving Hong Kong residents is 1,004,838 of which 431,854 or 43.0% were cross-border marriages. Given the growing interaction between Hong Kong and the Mainland these numbers are likely to be maintained. Another emerging phenomenon is the number of children in Hong Kong born to Mainland women whose husbands are not Hong Kong permanent residents. In 2000, they constituted 709 or 1.3% out of 54,134 of all births. It has since risen to 32,653 or 36.9% out of 88,495 of all births in 2010.
An economy¡¦s productivity relies on the human capital content of its working population. The stock of human capital rises with public and private investments in education. Because migrants carry with them their human capital, the nature of migrant flows also affects general productivity. Hong Kong¡¦s openness, cosmopolitan institutions, and a market system that rewards those who are competitive, attracts talent and helps to make the city more economically vibrant.
Table 4 shows that in the year 2000 among those born in Hong Kong only 13.3% held a university degree, but for those born in New York the figure was 29.5%. The most fascinating statistic relates to those who were born elsewhere in the US ¡V a staggering 47.4% of them had university degrees. In Hong Kong the comparable figure was 7.1% ¡V and those were Mainland-born migrants. Clearly Hong Kong must adopt better policies to attract Mainland talent.
Within the foreign-born population group in Hong Kong an estimated 26.2% in 2000 were university graduates. This compares quite favorably with the 23.1% in the New York. However, Hong Kong has a much smaller proportion of foreign- born residents than New York. The ability to attract foreign talent needs to be attended to at a policy level.
Hong Kong¡¦s population is being gradually reconstituted through cross border marriages and cross-border births. These new migrants will have different needs and will also offer a different dimension to Hong Kong¡¦s much-needed diversity. Much has been talked about better assimilation of this growing group into Hong Kong¡¦s population, but very little action has taken place on what policies should be incorporated and how to refit Hong Kong¡¦s institutions for the challenge. And even less has been accomplished on how we should improve our environment and our institutions to facilitate the integration of our Mainland circular flows with our global flow. Enhancing and integrating these two flows offers the best hope for successfully addressing our population challenges.
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Ageing and Attracting Talents
The implication of sparking a continuous circulation of people through Hong Kong is profound. The emerging metropolis, combining Hong Kong and its immediate neighbors, already interpenetrates beyond physical borders. This presents new challenges for Hong Kong. The issue is whether we will adopt policies to facilitate, or hinder, the many creative ways of cultivating the talent that we can potentially attract and overcome the very profound challenges we face with an ageing population and the shortfall of fresh talent in our city.
Many of the services that the elderly demand ¡V housing, health care, social welfare ¡V are currently provided through the public purse and public institutions. But the elderly can continue to contribute ¡V by offering child care for grandchildren for example ¡V if they live in close proximity of their families. Reforming these institution will be a huge political challenge and may well ruin the careers of many politicians and public servants. The institutions will resist reform and they have, from time to time, demonstrated great tenacity to survive reform initiatives.
Solving our population challenge compels us, our government and our politicians, to reconstitute large chunks of our existing institutional rules. Expanding the welfare state often implies greater redistribution of resources from the more productive members of working population to the more deprived ones in the elderly generation. The more generous and extensive our redistribution through the welfare state the greater will be the disincentive to work hard, with consequent negative effects on much-needed growth. Redistributive transfers will make us more protective of insider interests, more inward looking, and will breed hostility towards new comers and outsiders. The controversy over $6000 given to permanent residents and initially denied to new immigrants is a case in point. This kind of attitude will also prove detrimental to our long term interests.