(Reprinted from HKCER Letters, Vol. 43, March, 1997)
At Your Service
Alan K.F. Siu
The rapid rise of service industries in Hong Kong and the concomitant fall in manufacturing is a well-known story. In 1994, services accounted for 83 percent of GDP, compared with 68 percent in 1980. In 1995, services employed 72 percent of workers. Between 1986 and 1995, total employment grew 10.7 percent (from 2.6 million to 2.9 million workers), while employment in service industries grew nearly 46 percent. At the same time, manufacturing employment dropped by 384,600.
The shift from manufacturing to services is not unique to Hong Kong, but is a characteristic of economic development. What is remarkable about Hong Kong is the speed of the transformation. It took the U.S. 31 years to increase the share of services in output by 15 percentage points (from 57.2 percent in 1960 to 63.2 percent in 1990), but only 15 years in Hong Kong. The reason for such rapid change is the opening up of China. Most of our manufacturing operations were relocated to South China. Services grew to support the much larger scale of activities.
Concerned by the shrinkage of the manufacturing sector, the government is under pressure to implement active policies to stimulate the growth of high-tech industries. The presumption is that a service economy can neither generate a large number of good jobs nor sustain high rates of output growth. The slogan that "we cannot grow rich by doing each other's laundry" is true but trite. An economy consisting mostly of maids and hamburger-flippers is a sorry sight, but is there any evidence that Hong Kong will degenerate into such an economy?
Table 1 shows that in the decade between 1985 and 1994, the number of jobs in Hong Kong increased by 11 percent. Employment grew rapidly in occupations with the highest earnings. The number of professional, administrative and managerial positions went up by 53 percent, and the median monthly earnings shot up by 135 percent. Low-skilled service jobs only expanded by 29 percent. Employment in blue collar occupations shrank by 22 percent, but median earnings were up by 185 percent. The rate of increase of earnings for production workers was faster than the rates for other occupations. Though fewer in numbers, production workers are earning relatively more.
The transition into a service economy was accompanied by a higher education attainment of our workers. Compared with the 1980s, our work force is now better educated. In 1981, 10 percent of our workers had no formal schooling and only 6 percent had tertiary education. In 1995, the corresponding numbers were 3 percent and 10 percent respectively. The types of jobs created in this period were able to take advantage of the improvement in the quality of our workers. Relatively more workers are now employed in high-skilled and well-paid positions. This record should help dispel the concern that, as a service economy, most of our original workers will be confined to be the functional equivalent of flipping hamburgers or taking in each other's laundry. A service economy can generate good jobs for its workers.
Measuring productivity in service industries is difficult. Service outputs tend to be elusive. What is the output of the banking sector? Is output the number of transactions, the value of outstanding loans, or something else? And what is the output of education? In many service sectors--banking, financial services, education and health care-outputs must be determined indirectly on the basis of inputs. Hence, by definition, calculated productivity growth in these industries is zero and official estimates almost certainly understate real output growth.
Because sector-specific output deflators are not available in Hong Kong, it is impossible to compute the productivity of services. We have to rely on the experiences of other countries. As a group, the service sector in the U.S. has a poor record in productivity growth. The annual growth rate of services between 1977 to 1993 is only 0.3 percent, compared to an average rate of 2.2 percent in the manufacturing sector.
The overall productivity growth rate of the service sector hides the diversity of performances within the sector. There are two discernible sub-groups: one with high productivity growth rates and the other with low rates. The high fliers include the communication, wholesale and transportation industries. They have all invested heavily in information technology. Deregulation has also played an important role in making the communication and transportation industries more competitive. The low productivity growth service industries -- legal, health and personal services -- tend to be very labour intensive. The U.S. record shows that services tend to have low productivity growth, but this is not true for all service industries. Some service industries are capable of high productivity growth. Two factors are crucial for good performance: a competitive environment and the ability to exploit advances in information technology either by integrating these advances into existing operations or by using them to develop new services.
As a service economy, Hong Kong can maintain its growth by further developing its high productivity growth service sectors. Developing high-tech industries as an engine of growth is risky as well as unproven. We are already a significant business center as well as a regional financial center. Building on our existing strengths is the obvious strategy. There is no hard evidence that we cannot maintain our prosperity and grow richer by concentrating on what we do best, which is to provide efficient quality services.
Table 1 Employment and Median Monthly Earnings by Occupation Employment Earnings 1994 %Change 1994 % Change ('000) (1985-94) ($/month) (1985-94) Total 2837.7 11 7500 179 Professional, Administrative, and managerial workers 408.5 53 15000 135 Clerical and related workers 628.2 53 7000 153 Sales workers 391.6 38 8000 170 Service workers 550.4 29 6000 143 Production and related workers, transport equipment operators, and labourers 879.7 -22 7000 185 Source: Quarterly Report on General Household Survey, 3rd quarter figures.