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Hong Kong's unkind cut
By Henry C K Liu
The Hong Kong civil
service, notwithstanding unenlightened bureaucratic
leadership of the new special administrative region
(SAR) government in the initial years of Chinese
sovereignty, is a key asset of the administration. One
major reason for its record of clean efficiency is the
good pay and benefits enjoyed by its members. Article
100 of the Basic Law, Hong Kong's constitution,
stipulates that public servants may remain in employment
and retain their seniority with pay, allowances,
benefits and conditions of service no less favorable
than before 1997, when the British handed over its
former colony to China.
Last weekend, more than
30,000 civil servants demonstrated their opposition to
the government's pay-adjustment proposals in a peaceful
and orderly march. The government spokesman claimed the
civil service is not unprepared to accept pay cuts, but
that its members hold different views from those of the
government as to how to achieve it. Opinion polls
indicate that those for and against the pay-cut
legislation are evenly divided. Yet the government has
already made its decision and takes the position that it
is too late now to go back to other options. The
government acknowledges that it is unfortunate that Hong
Kong is faced with this particular problem at the
beginning of the administration's second term with a new
ministerial system of political accountability. Its
rationale for a civil-service pay cut is based on the
need to improve Hong Kong's competitiveness and to move
toward a balanced budget.
In his 2002-3 Budget
Speech at the Legislative Council, Financial Secretary
Antony Leung explained that he had assumed, for
financial planning purposes, in the Medium Range
Forecast that civil-service pay would be cut by 4.75
percent and concurrently subventions on
personnel-related expenses for publicly funded
organizations would be reduced by the same rate. Leung
also made it clear that the government would in
accordance with the existing mechanism on civil-service
pay adjustment consider all factors and make a final
decision once the outcome of this year's private-sector
pay-trend survey is known. Any decision on a
civil-service pay cut needs to go through the
legislative process before it can be implemented.
Assuming that the pay cut takes effect from October 1
this year and the level of reduction is 4.75 percent,
the government will achieve savings of about HK$3
billion (US$385 million) in 2002-3 and about HK$6
billion over a full year.
The government will,
before deciding on an annual civil-service pay
adjustment, take into consideration the results of the
private-sector pay-trend survey and other important
factors, including the state of the economy, its
budgetary position, the morale of the civil service, the
staff sides' proposals, changes in the cost of living
and the views of the public. The government is facing a
serious budget deficit this year and the situation is
likely to persist in the next few years.
Personnel-related expenses for the civil service account
for 70 percent of government operating expenditure.
Leung has therefore determined, for financial planning
purposes, in the Medium Range Forecast that
civil-service pay will be cut by 4.75 percent.
A
cut of 4.75 percent has been assumed in order to take
into account the accumulated pay increase for certain
ranks (ie, D3 and above) since July 1997. The government
will make a final decision on the actual adjustment for
each salary band after it has considered all factors in
accordance with the existing mechanism. The existing
pension legislation stipulates that pensions and annual
allowances are to be calculated on the basis of the
highest substantive salary drawn by an officer in the
course of his/her service. Hence the amount of pension
and annual allowance to which a serving officer is
entitled will not be affected even if there is a salary
reduction this year.
The government forecasts a
consolidated deficit of HK$65.6 billion for 2001-2
(equivalent to 5.2 percent of gross domestic product),
far larger than the original estimate of HK$3 billion.
This is due mainly to revenue from land premiums and
investment income from fiscal reserves falling far short
of original forecasts.
Furthermore, the
secondary offering of Mass Transit Railway shares
originally planned for this financial year has been
postponed to the next because of changes in investment
market conditions. Fiscal reserves were estimated to be
HK$369.8 billion by the end of March this year, roughly
equivalent to 19 months of government expenditure. The
government aims at reducing public expenditure to 20
percent of GDP or below.
Yet it would be
extremely unwise to try to achieve this long-range
target in the current economic contraction. Last year,
the government proposed to reduce civil-service staff to
about 181,000, a target expected to be achieved as
scheduled in 2002-3. Assuming that civil-service pay is
cut from October 1, government expenditure in 2002-3
will increase in money terms by 0.6 percent over the
original estimate, or 6.2 percent over the revised
estimate, for 2001-2. Average annual growth of
government expenditure from 2003-4 to 2006-7 will be 1
percent in money terms. The government looks to public
expenditure to fall to 20 percent of GDP in 2006-7.
A saving of HK$3 billion in 2002-3 and about
HK$6 billion in a full year may not be worth the trouble
of putting in jeopardy a fine civil service that is the
envy of other governments. China adopted a policy two
years ago to raise government personnel pay by 30
percent per annum partly to stimulated domestic demand
and partly to combat the temptation of corruption. Hong
Kong retail sales slumped 5.9 percent by value in May -
almost double expectations - as bleak domestic
consumption and record-high unemployment outweighed a
surge in the number of tourists from the mainland. Thus
a civil-service pay cut may well turn out to be a
meaningless saving by further reducing domestic demand.
The SAR has unabashedly supported land and
property values by government action, canceling public
housing plans, supporting the equity markets and
committing huge sums on infrastructure spending and
other counter-cyclical undertakings. Yet the government,
in keeping with its outdated neo-liberal ideology,
considers layoffs and wage reductions as natural market
phenomena. Economists have generally recognized the
"stickiness" of wages in economies with strong unions
and labor contracts to be a stabilizing factor in
downward business cycles. Economists also recognize that
a high wage scale is an indicator of the strength of an
economy, not its weakness. What gives real strength to
the Chinese economy is the rapid rate of wage increases,
albeit from a low base.
During World War I in
the US, while money wages increased all around, the
lower wages increased more than the cost the living.
Labor benefited from full employment. The railroads,
shipping and shipbuilding were taken over by government,
resulting in huge increases in productivity. The same
happened during World War II.
The theory of
rising wages asserts that employers should understand
that rising wages are the only venue of assuring strong
demand for their products, supported by the theory of
technology-driven productivity increases, and the
broad-based ownership of securities to spread wealth.
Historical data show that the largest average increases
in purchasing power have taken place at recession times
when employers and bankers tried their best to keep
wages down, but the stickiness of wages made wage
deflation slower that price deflation, as in the 1920-22
depression in the United States. The result was that
when full employment returned in 1923, US workers had
higher purchasing power than they had in 1920. But the
average manufacturing worker's yearly income decreased
by $55 between 1923 and 1928, and a miner's income by
$187.
Falling wages amid prosperity were a major
structural cause, albeit little noticed, of the 1929
crash. If wages had been higher, equity prices would not
have risen as much, thus dampening the speculative
fever. Wealth effects from the speculative boom made low
wages tolerable and caused a corresponding rise in debt
without altering prudential debt-to-equity ratios. But
when the speculative bubble burst, debt-equity ratios
skyrocketed and there were insufficient wage levels to
sustain consumption. Similar conditions appear to be
facing the US economy now.
After the 1929 crash,
the economic downward spiral was caused mainly by
falling wages. Despite all promises of maintaining
production, goods could not be sold as fast as they were
produced because of a collapse of income due to layoffs
and wage reductions.
Globalization in the past
two decades temporarily kept US purchasing power
increasing despite a slow growth of domestic wages. This
resulted from still lower wages in the emerging markets.
Now the world is awash with overcapacity in relation to
low demand caused by insufficient wage levels. For the
past three years, China has been the only nation that
has adopted a wage policy to stimulate domestic demand,
which has been largely responsible for China's continued
growth in the face of global recession.
Hong
Kong cannot afford to participate in a race to the
bottom on wages to improve its competitiveness. In fact,
a very good indicator of Hong Kong's performance in its
aim to restructure its economy is to watch its wage
scale. A successful restructuring will be reflected in a
rising wage regime. It is foolhardy to cut civil-service
pay merely to balance the budget in a downward cycle. It
is penny wise and pound foolish.
(©2002 Asia
Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com
for information on our sales and syndication policies.)
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