The fallout from the SARS1 epidemic of 2003 has fueled the debate over the causes of Hong Kong's long-term economic problems. While one popular view largely blames low-cost competition from China, our new study finds that the roots of the city's ills lie at home, as do the potential remedies.
SARS certainly further weakened Hong Kong's economy, reducing GDP growth in 2003 by an estimated 1.4 percent as consumer spending and tourism declined. But the economy had been battered already. Since 1998, property prices in Hong Kong have fallen by more than 70 percent, and in 2003 unemployment jumped to more than 8 percent, from 2 percent before the SARS outbreak.
Such grim statistics, many fear, mean that Hong Kong's position as the leading intermediary for trade and investment between China and the rest of the world is being undermined by China's emerging metropolitan areas, particularly Shanghai. The prevalent view seems to be that Hong Kong's high-cost operating environment is driving economic activity away and unemployment up and that this trend will continue until prices fall into line with those in China. Our study, however, found evidence to the contrary.
Is Hong Kong's recent unemployment a result of...