March 10, 1999	atimes.com

China ANALYSIS: Economic impact on Hong Kong of an influx of immigrants By Standard Chartered Bank Summary * The influx of a large number of immigrants will put pressure on various aspects of the community in the short term. However, the increase of immigrants will increase demand for services and this will result in faster economic growth and more employment. * Public expenditure on services for the immigrants will increase, but this increase will be offset to some extent by the increase in taxes due to a more active economy. * The increase in immigrants will have a dampening effect on wage increases for the less skilled workers. But wages for the skilled workers may benefit. There will also be some upward pressure on asset prices. In late-January, the Court of Final Appeal (CFA) in Hong Kong made a judgement in a case regarding the right of abode for the children of Hong Kong residents under Article 24(3) of the Basic Law. In broad terms, the CFA decided that children (a) who are born outside of legal marital relationships, so long as the child's father or mother is a Hong Kong resident; and (b) whose parents gained Hong Kong residency status after they were born, should have the right of abode in Hong Kong. Before this CFA ruling, these two categories of children did not have such rights under the administrative arrangements set up by the Hong Kong government in conjunction with the authorities in the Mainland. Furthermore, the CFA also asks the Hong Kong government to make proper arrangements to enable these children to claim their right of abode within a reasonable period of time. Current arrangements are such that these children have to wait in a long queue, sometimes for 10 or more years, before they could come to Hong Kong. The exact number of immigrants qualified to enter Hong Kong has yet to be ascertained. A survey by the Hong Kong government shows that at the end of 1995, Hong Kong residents who married in the Mainland had about 320,600 children living in the Mainland. Some of them should have come to Hong Kong since then under normal immigration procedures. But new cross-boundary marriages have continued and new babies are born in the interim years. Additional children would have been added to the qualified list, now that illegitimate children are included. And when new immigrants in Hong Kong hav e gained their residency status in Hong Kong, their children who were born before they came would also qualify. But overall, it is likely that there are roughly 400,000 children in the Mainland who are qualified to have the right of abode in Hong Kong, possibly more. The ruling by the CFA has raised the possibility that there would be a sudden influx of these people into Hong Kong. This has naturally aroused a lot of concerns in Hong Kong. To absorb these people within a short time would pose a strain on existing public services and government resources. There are also concerns related to unemployment and the impact on wages of existing workers. It will be argued in this article that while an immigrant wave would pose some short-term adjustment difficulties, there are also positive effects on the economy in both the short term and the long-term. What is more important is the policy response of the Hong Kong government - can Hong Kong turn this issue from a crisis into an opportunity ? CHARACTERISTICS OF THE POTENTIAL IMMIGRANTS While the exact number of potential immigrants has yet to be ascertained, a glimpse on the characteristics of these people could be seen from the survey done in late-95 and early-96. This survey estimated the number and the characteristics of the children who were born and were still living in the Mainland of Hong Kong residents who married in the Mainland. This survey shows that about 20 percent of them are children who require schooling places in primary and secondary schools. A substantial proportion of them are adults and about 10 percent of them are already over 50 years of age. Impact on public services provision Immigration is a sensitive issue in most communities. An influx of new immigrants would certainly pose some strain on the provision of public services. In Hong Kong's case, however, the negative impact should not be exaggerated. Assuming a total immigrant population of around 400,000 who will come in the next two years, this represent an increase of an average of 3.1 percent in population a year. This compares with an average increase in population of 1.3 percent per annum in the last decade. As the vast majority of the new immigrants are likely to live with immediate family, housing needs are largely met by having a more crowded living environment for the families concerned. Medium term, the demand for both public and private housing will increase. This means that housing investment has to be stepped up now. But this is likely to have a net positive effect on the economy, particularly at a time when Hong Kong is facing an economic recession. The demand for school places by the immigrant children will have to be met initially by having more students in existing schools. This means that the program of improving the quality of education, such as the replacement of half-day primary schools by full-day ones, would be slowed down. Longer term, more new schools will also have to be built on top of the 16 ones which are already included in the current government program to cater for the needs of the increase in immigrant children. Traffic congestion in many places would get worse because of the sudden increase in population. But investments in public transport in recent years should be able to cope with the increase in demand - indeed given that many transport operators (buses, railway, taxis, etc) are having a problem of inadequate demand right now, the arrival of these new passengers is most welcome. THE DIRECT MACROECONOMIC IMPACT OF THE IMMIGRANTS The increase in demand for various social and consumer services by the new immigrants will lead to increased employment and business opportunities for the economy as a whole. More teachers, social workers, policemen, sales staff, etc. will be required. The increase in business opportunities will also lead to increased investment. The short-term impact on economic growth is therefore positive. A substantial proportion of the immigrants are adults who would join the labour force. Many of them however, would have some difficulties initially adjusting to the demands of the local labour market. Thus unemployment is likely to rise initially. But so long as the incentive for these immigrants to work is not eroded by overly generous unemployment benefits, history has shown that the immigrants normally are highly-motivated to adjust to, integrate into and contribute to the local community. Experience in recent years shows that the immigrants as a whole are more likely to apply for social security benefits than the local population. There would be some drain on government resources. However, this would be mitigated to a certain extent by the increase in taxes the government would get from a more active economy. The direct impact on the balance of payments is ambiguous. Increased consumer demands by the immigrants would lead to more imports. But this would be offset by the likely increase in capital inflow as a result of more investment opportunities. The net impact is unclear. But in any case the scale of this impact is small. Impact on wages and asset values The adults within the immigrant population, taken as a whole, are likely to be less well educated and have less territory-specific skills than the local labour force. It will take some time before they could compete directly with the local workforce. But given time, the unskilled workers in Hong Kong are likely to face more competition. In the mean time, however, as the increase in immigrants is likely to lead to an increase in economic activities in the first instance, the existing unskilled workers in Hong Kong are likely to benefit from more job opportunities. Experience in the past suggest that an influx of immigrants would not lead to a fall in wages, but rather slow wage increases for a few years to come. The better-educated and skilled workers in Hong Kong as a whole are likely to benefit from the increase in immigrants. The demand for their services would increase as demand for services by the new immigrants arise. They would also benefit when the immigrants seek employment, as the latter would complement their skills rather than compete with them. In practice, since there are both skilled and unskilled workers in the new immigrant population, the impact on specific job skills could differ quite considerably. But more generally, a sudden influx of immigrants would lead to an increase in the relative prices of assets (land, property, knowledge and expertise) versus wages. Owners of such assets in Hong Kong (who include both skilled and unskilled workers) would therefore benefit. Immigration is the main source of labour force growth in Hong Kong and helps to reduce population aging problems Hong Kong has long been an immigrant society. Results from the 1996 By-census show that about 40% of all residents are born either in China or elsewhere. Even for the rest of the 60% of the people, a vast majority have their parents or grandparents born in the Mainland. Economic prosperity has resulted in Hong Kong having one of the world's lowest birth rates and highest life expectancy. As a result, aging is becoming an issue in recent years. Furthermore, the population structure is such that labour force growth has been slowing in the last decade. This resulted in a labour shortage and rapid increases in wages during the late-1980s and early-1990s. Immigration is therefore beneficial to Hong Kong in the long term. Building up more links with the Mainland Apart from providing more people to Hong Kong, immigrants also bring with them a lot of connections and links with the Mainland. Experience in the past has shown that the immigrants are a major force in helping to integrate the economies of Hong Kong and the Mainland. Various studies have shown that the immigrants in general earn less than the native workers, even after they have settled down in Hong Kong. This is because the past education and experience of the immigrants are less valuable as compared with those of the locals in a rapidly changing economic environment. But because immigrants earn less in employment, they are more likely to be entrepreneurs after they settle down. Table 3 shows that immigrants who lived in Hong Kong for more than 6 years have a higher chance of becoming a self-employed person (such as being a hawker) or an employer. A lot of anecdotal evidence also suggests that many of these immigrants used their knowledge of the Mainland to their benefit. It could be argued that the entrepreneurial spirit of many of these immigrants contributed to the rapid economic progress in China and the integration between Hong Kong and the Mainland during the 1980s and 1990s. History may well say that the influx of immigrants into Hong Kong in the late-1990s helps to further this same process in the next millennium. However, Hong Kong needs to manage the current situation well and turn it into an opportunity. However, a few things are crucial: (a) Social security benefits for the immigrants must not be overly generous. Immigrants have contributed to Hong Kong's success because they are motivated and are determined to improve their own livelihood. This would be undermined if generous social benefits are given to them once they arrive in Hong Kong. (b) The inclination to allow the children from the Mainland to enter Hong Kong but not the mothers of these children must be resisted. There are indications that the government may follow this mistaken route in order to allow the qualified children to enter Hong Kong as soon as possible. Instead of taking individuals, the government should take in families. This is not only a humanitarian concern. It is also important not to continue creating single-parent families, which destroys a lot of the benefits of immigration to Hong Kong and creates a lot of future problems. (c) To cushion the impact of a sudden influx of too many people, the qualified applicants should be given the assurance that they could come to Hong Kong any time they like. When that assurance is given (by both the Hong Kong and the Mainland authorities), the qualified immigrants would prepare themselves well before they come and they would avoid rushing into Hong Kong. Indeed, many of the adults who have the right of abode in Hong Kong may want to stay in the Mainland if they know that chances of getting a job in Hong Kong is low and living in the Mainland is a better choice for them. (d) In so far as the children are concerned, the earlier they are allowed to come to Hong Kong, the better. Early arrival of the children would enable them to be educated and trained to meet the needs of Hong Kong and enable them to integrate themselves better into Hong Kong. (e) Hong Kong should take this opportunity to review its immigration policy in conjunction with authorities in the Mainland. For a long time, Hong Kong could only agree on an intake quota with Beijing and had to accept whoever was released by the Mainland. The current system results in many undesirable consequences, not least the resultant increase in single-parent families in Hong Kong (in many cases where the children are allowed to come to Hong Kong but not the mother) and the widespread complaints of corruption. This is an unreasonable practice inherited from history. Authorities in other cities in China have the power to decide who could reside in their cities. Hong Kong should be able to determine its own immigration priorities and approve applications on its own. The importation of skills from the Mainland which Hong Kong requires, for example, should be given more flexibility. (For more information, contact Kwok Kwok Chuen, Chief Economist, NE Asia, Standard Chartered Bank. Tel: (852) 2821-1614 Fax: (852) 2877-0637.) (Asia Pulse)

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