Singapore & Hong Kong: A tale of two cities

David Skilling

Straits Times, 14 September 2019

Singapore and Hong Kong, two city-states that were part of the initial group of high growth Asian tiger economies, have had much in common and are frequently compared to each other.  Both Singapore and Hong Kong have attracted substantial amounts of foreign direct investment by providing a high-quality business environment, low tax rates, and world-class infrastructure. Both have long histories as transport hubs, with ports and airports that are among the busiest and best in the world. 

Singapore and Hong Kong are highly externally oriented, with GDP shares of exports and foreign direct investment that are among the highest in the world.  GDP growth in both economies is highly sensitive to variation in the strength of the global economy.  Indeed, GDP growth in both Singapore and Hong Kong for Q2 was negative (-0.8% and -0.4% respectively) partly due to global headwinds, and the outlook is also sluggish.  The official GDP growth forecast for 2019 is just 0-1% for both economies.

But despite these similarities, Singapore and Hong Kong are increasingly different in their economic structure and dynamics.  This is partly due to the different political and geographic contexts of Singapore and Hong Kong, but importantly has been reinforced by different policy choices.  There are a few areas in which the impact of these policy choices can be seen.

First, the respective economic structures of Singapore and Hong Kong are diverging.  This dynamic is clearly evident in the manufacturing share of GDP.  Manufacturing in both Singapore and Hong Kong accounted for about 20% of GDP in the mid-1980s.  In Hong Kong, manufacturing has now reduced to less than 1% as production activity has moved across the border to mainland China and elsewhere.  Indeed, Hong Kong’s statistical agency discontinued the ‘domestic export’ series that captures locally produced exports of goods in 2017 because domestic exports accounted for less than 1% of Hong Kong’s exports of goods. 

In Singapore, however, manufacturing has remained at around 20% of GDP.  The ability of high cost and resource constrained Singapore to retain a high share of manufacturing activity is due to deliberate policy choices: from FDI attraction, to investments in research, innovation and skills, as well as the broader business environment.  Singapore’s non-oil domestic exports (NODX) account for 35% of GDP.  Singapore has deliberately created a diversified economic structure.

In contrast, Hong Kong has become a heavily services-based economy organised around real estate, financial and professional services, logistics, and tourism.  Hong Kong has become a hub for cross-border capital and trade flows, in a manner similar to London or New York.  This makes Hong Kong deeply exposed to variation in the strength of these flows, and in its competitive position with respect to other hubs such as Shanghai or Shenzhen.  This has reduced Hong Kong’s distinctiveness; Hong Kong is increasingly like other Chinese cities. 

At one level, this is a straightforward story of comparative advantage.  As Hong Kong has become an increasingly capital-intensive economy, with a rising wage and cost profile, it has focused on financial and business services as well as transport and logistics.  But passively following comparative advantage can lead to the hollowing out of other small economy capabilities.  And for a city state, this creates deep exposures, from income inequality to the weakening of productivity potential.

Second, and relatedly, Hong Kong has become deeply integrated into the mainland Chinese economy.  Of course, part of this is due to Hong Kong’s economic geography as well as Hong Kong’s political status as a special administrative region of China.  But these realities have been reinforced by deliberate government policy in Hong Kong. 

Government policy statements and Budgets over the past several years have consistently emphasised deeper integration into China, including through massive infrastructure projects (the bridge to Macau, high speed rail to the mainland) and participation in Belt & Road projects.  55% of Hong Kong’s exports are sent to the mainland, and Hong Kong’s stock exchange is dominated by Chinese companies. 

Singapore has also developed its economic relationship with China, through the efforts of both private enterprise and multiple government initiatives.  But only 24% of Singapore’s NODX exports are sent to China and Hong Kong, and it has developed a broader set of economic relationships.  ASEAN is a bigger export market for Singapore, the US and Europe are both large markets, and the China export share has been reducing over the past two years. 

Whereas Singapore is deeply integrated into a range of sectors in the global economy, Hong Kong has become highly specialised and deeply integrated into China.  Although Hong Kong’s policy model has supported its growth, it also means that Hong Kong now has fewer options.  

A final example of the stark policy differences between Singapore and Hong Kong is in terms of housing.  Hong Kong has become one of the most expensive housing markets in the world.  House prices have increased by 65% since Q1 2011 in real terms, compared to a reduction of 5% in Singapore.  Research firm Demographia estimate that the ratio of median house price to median household income is over 20 in Hong Kong, compared to under 5 in Singapore.  Hong Kong’s housing affordability situation is one of the reasons for the political and social dissatisfaction in Hong Kong evident in weeks of protest. 

There are some external drivers of these changes.  For example, Hong Kong’s exchange rate arrangements mean that it has imported loose monetary policy from the US, and there have been substantial inflows into the housing market from mainland China.  But different domestic policy choices are central to these different outcomes.  Hong Kong has adopted a relatively hands-off approach to housing policy, with few restrictions on the demand side and ongoing constraints on the supply of housing.

In contrast, Singapore has deliberately leant against house price pressures over the past several years.  The government has imposed a series of demand-side measures (stamp duty, borrowing restrictions) as well as increasing the supply of HDB units as well as land for private development.

In sum, many of Hong Kong’s current economic and social challenges reflect sustained policy choices. Hong Kong has doubled down on becoming a gateway into China, deeply integrating into the mainland economy, and focusing on services without developing other strengths.  At the same time, it has not updated policies to address rising income and wealth inequality.  These policy choices have deepened Hong Kong’s exposures and made it less resilient.  An index I construct of the economic strength of small advanced economies (using data from 13 selected small advanced economies) places Singapore well ahead of Hong Kong. 

Singapore’s strategic choice to develop a portfolio of domestic strengths and external markets has generated a measure of economic resilience.  Singapore, of course, remains deeply exposed to the global environment.  But its willingness to push back against economic gravity has provided Singapore with valuable strategic options.  However, in a more challenging, competitive world this is unfinished business – and more will need to be done to develop strengths in the Singapore economy to sustain dynamism and resilience.

The lesson to take from the experiences of Singapore and Hong Kong, and the broader international small economy experience, is that small economies do not have to be passive recipients of external developments.  Rather, small economies can act to shape their future – and indeed, need to do so. 

Supporting charts available here.

Dr David Skilling

Director, Landfall Strategy Group

David Skilling