United Nations Asia-Pacific Leadership Forum "Sustainable Development for Cities" 26 February 2004 Hong Kong - Rising to the Employment Challenge Speech by Mr Matthew CHEUNG Kin-chung, JP Permanent Secretary for Economic Development and Labour (Labour) Hong Kong Special Administrative Region Government

Ladies and Gentlemen,

It gives me great pleasure to address this conference and talk about economic growth and job creation under the theme of "Sustainable Development for Cities".

2. A city is a large community and as such is an organic entity. It has life and needs to be sustained if it is to survive and grow, particularly in an increasingly globalising and competitive environment. There are many ingredients to sustain the development of a city. Amongst these, economic growth and employment stand out as two key underpinnings.

Challenge of Structural Unemployment

3. Hong Kong used to enjoy virtually full employment in the eighties and early nineties. Jobs were plentiful and wages high. However, the Asian financial crisis in 1998 plunged Hong Kong into its worst economic downturn for half a century. Deflation persisted and unemployment soared in the ensuing few years. The situation has been compounded by Hong Kong's economic restructuring and transformation into a knowledge-based and higher-value added economy. As a result, the unemployment rate of our workforce of about 3.5 million has been stubbornly high, hovering between 5% to 8% for the past few years. The outbreak of the Severe Acute Respiratory Syndrome (SARS) in early 2003 added to the problem, pushing unemployment to an all-time high of 8.7% in the summer of 2003, leaving 309,000 people out of work.

4. Whilst the Hong Kong economy has been steadily recovering and the unemployment rate came down distinctly to 7.3% in the fourth quarter of 2003, it still represents a high level of unemployment. As we are facing both cyclical and structural unemployment, job creation and overcoming the mismatch between supply and demand in the labour market will remain a major challenge for the Hong Kong Special Administrative Region (HKSAR) Government. Indeed, facilitating economic growth and restructuring and tackling unemployment rank high on the Government's agenda.

5. Economic transformation is nothing new to this vibrant city. In the eighties, with the opening of China's economy, many of our factories moved across the border into the Pearl River Delta to take advantage of the significantly lower cost of production. As a result, a large number of manufacturing jobs was lost in Hong Kong. However, many workers managed to shift from manufacturing to the service sector. The transition was generally smooth and almost seamless. Total employment in the manufacturing sector decreased from 34.1% of the workforce in 1987 to 9.7% in 1997 and further to 6.0% in 2002. Conversely, extensive employment gains were seen in the service sector: rising from 55.6% of the workforce in 1987 to 79.5% in 1997 and further to 84.1% in 2002.

6. But the challenges facing us this time are much tougher. The current phase of structural transformation towards higher value-added and knowledge-based activities tends to cause greater adaptation difficulties for the local workforce than ever before. For the local workforce, moving from one sector to another horizontally is obviously much easier than moving up the skills ladder vertically. This is particularly so when a third of our labour force has educational attainment of only lower secondary or below.

7. Globalisation and the information technology (IT) revolution, though not unique to Hong Kong, have brought about new trade and investment opportunities but, at the same time, exacerbated the on-going relocation of production processes and out-sourcing of certain white-collar jobs outside the territory. The process has continued to chip away employment opportunities in the lower strata. These, coupled with the substitution of labour by capital equipment and corporate downsizing for greater cost savings to enhance competitiveness, make lives all the more difficult for workers with low skills and low educational attainment.

Addressing Manpower Mismatch

8. According to the Government's recent manpower projection, by 2007, Hong Kong would have a manpower supply surplus to the tune of some 134,000 for those with lower secondary education and below. On the other hand, there would be a shortage of manpower supply of 102,000 for those with post-secondary education or above.

9. To address this mismatch, the HKSAR Government is adopting a multi-pronged strategy. In essence, it covers four approaches. First, upgrading our workforce. Second, improving the business environment. Third, embracing new technology. Finally, enhancing employment opportunities. I will elaborate further.

10. As clearly spelt out by the Chief Executive, Mr Tung Chee-hwa, in his 2004 Policy Address last month, the main tool for promoting economic restructuring and establishing a knowledge-based economy is to invest substantially in education and to strategically raise the competitiveness of our labour force. To quote the Chief Executive, we believe that "every cent spent on education is an investment, not an expense". And we have put our money where our mouth is - currently, education accounts for a hefty 24% of our Government expenditure. This amounts to HK$61 billion (US$7.8 billion) in 2003/04.

11. The extensive education reform carried out in our primary and secondary schools over the past years has been on the right track. It seeks to provide more scope for developing an individual's potential and encourage youngsters to further their studies. A substantial amount of resources has been devoted to providing school places for students who are willing and able to continue with their study. We have also set a target of 60% participation rate for post-secondary education by 2010/11. To provide different avenues for further studies, we have also introduced senior secondary schools which offer students diversified, practical and vocation-oriented curricula; and associate degree programme to provide students with a valuable stand-alone credential so that they can take up employment at associate professional level or pursue further studies at local or overseas universities later.

12. We are also establishing a qualifications framework to provide learners with a clear articulation ladder. Moreover, to promote life-long learning, we established the Continuing Education Fund with HK$5 billion (US$641 million) in 2002 to subsidize adults wishing to pursue continuing education. We have also strengthened the training and retraining of our workforce through two statutory institutions, namely the Vocational Training Council and the Employees Retraining Board, to help them adjust to the knowledge-based economy. Together, these training bodies provided some 222,000 training and retraining places last year.

13. Our efforts in education reforms and skills upgrading will bring long-term benefits but this is not enough. We are also opening our doors to talents and professionals from elsewhere, whom we believe will help enhance Hong Kong's economic vitality and create more employment opportunities. We have a relatively liberal regime to attract them to come and work here. Not only are they allowed to bring their dependants, they may apply to become permanent residents of Hong Kong after a continuous stay of at least seven years. To tap the vast Mainland market of talents, we have introduced the "Admission of Mainland Talents and Professional Scheme" since last July. As at mid-January, some 1,600 Mainland talents and professionals were approved to come to work for companies in Hong Kong.

14. On the other hand, with a closer economic relationship between Hong Kong and cities in the Pearl River Delta and promising career prospects resulting from a rapidly developing economy in the Mainland, the number of Hong Kong residents working there has almost quadrupled in the past 10 years. In 2003, there were about 240 000 Hong Kong residents working on the Mainland. It is expected that with the further integration of the two economies, the mobility of talents from both sides will be further enhanced.

Improving Business Environment

15. Apart from nurturing and encouraging cross-fertilisation of our human capital, we will also build on our strengths to make Hong Kong a great place for doing business. It is heartening to note that for the tenth year running, Hong Kong has been voted the freest economy by the Heritage Foundation. What is more, according to the latest "World Investment Report 2003" released by the United Nations Conference on Trade and Development, Hong Kong was named again the best performing host economy for foreign direct investment (FDI) in Asia, and still held the position as the second largest recipient of FDI in Asia, after the Mainland. Despite the challenges of SARS and the difficult economic condition in the first half of 2003, Hong Kong attracted HK$115 billion (US$15 billion) in FDI for the first three quarters. This already surpassed the total amount of FDI in 2002 by HK$40 billion (US$5 billion).

16. Hong Kong's business environment is attractive to foreign investment on several counts. Not only do we have a very safe society, well-developed infrastructure, simple and low tax system, free flow of goods and information and liquid capital markets, we also enjoy the rule of law, judicial independence and a level playing field. Nevertheless, we must not be complacent. We must keep up our efforts to reduce red tapes and relax excessively tight regulatory regime to give more room for business to thrive. It is our firm belief that a free market can allocate and utilise resources more efficiently, and has a greater capacity to foster creativity, provide economic impetus and create employment opportunities. In recent years, we have redefined the Government's role in the property market, cut fiscal spending, trimmed down the size of the civil service, etc, so as to allow the market to play an even greater role in the economy. To further step up our efforts to improve the business environment, attract foreign investment and create jobs, the Financial Secretary has recently synergised four advisory committees into a high-powered think-tank under the title of Economic and Employment Council.

Embracing New Technology

17. In a fast globalising world, Hong Kong no longer enjoys the competitive edge of low-cost, low-value production or services. It is imperative for us to embrace advanced technology and innovation. Over the past few years, we have built facilities such as the Science Park and Cyberport. We have promoted research and development through the Research Grants Council, the Innovation and Technology Fund, the Applied Science and Technology Research Institute and the support given to various technological enterprises and "incubator" projects. This will, of course, take time to come to fruition but it is a good start. We also have the hardware ready to take on the knowledge-based economy. In 2003, 68% of all local households had personal computers, and close to 90% of them have access to the Internet. Our mobile and broadband Internet penetration rates are among the highest in the world. We will publish an updated Digital 21 Strategy soon to harness the benefits of IT for the entire community.

Building on Our Strengths

18. As we move up the higher-value added and IT ladder, we have not forgotten those in our workforce who have difficulty in keeping up with the pace of economic restructuring. We will continue to strengthen those sectors that can absorb a large number of relatively lower-skilled workers. The tourism sector, for example, is a case in point. In support of tourism development, a new scheme allowing residents of some Mainland cities to visit Hong Kong in their individual capacity has been introduced since mid-2003. Also, major new tourist attractions, namely the Hong Kong Disneyland, the Hong Kong Wetland Park and the Tung Chung Cable Car System are all targeted for completion within the next two years. We will continue to raise our quality of service to enhance our reputation as a "shopping paradise" and "gourmet paradise".

19. The logistics sector currently engages 6.3% of the labour force, accounting for some 200,000 jobs. The Government is committed to maintaining and strengthening the role of Hong Kong as the preferred international logistics and transportation hub in Asia. Capitalizing on Hong Kong's geographical location, world-class infrastructure and our long and well-established economic partnership with the Pearl River Delta area, we will continue to enhance our connectivity with the hinterland to achieve synergetic benefits, and to enhance our overall competitiveness in the provision of integrated logistics services. Key initiatives such as the development of a Digital Trade and Transportation Network system and a value-added logistics park will further upgrade our competitiveness, and will no doubt create gainful employment at all levels within the logistics sector. The commencement of the Closer Economic Partnership Arrangement with the Mainland (CEPA) also provides room for growth of the logistics sector.

20. As at early-February 2004, 374 kinds of Hong Kong products, many of which used to attract high tariffs, now enjoy zero tariff concession in the Mainland under CEPA. These include certain electrical and electronic products, textile and clothing, watches and jewellery, just to name a few. And all the rest will go tariff free on 1 January 2006, at the latest. Furthermore, service providers of 18 sectors, such as the legal, accounting, medical and telecommunications professions, can now enjoy market liberalisation measures, some even beyond Mainland's WTO commitments, when operating in the Mainland. These market opening and liberalisation measures will no doubt bring about unprecedented opportunities to local businesses as well as foreign investors, and directly and indirectly create employment in the process.

21. Investing in our human capital and improving our business environment will take time to yield results. In the meantime, high unemployment for those with lesser education, lower skills and limited job experience remains a hard nut to crack. In his 2004 Policy Address last month, the Chief Executive stressed that the Government would earmark an average of HK$29 billion (US$3.7 billion) per year for capital works projects for the next five years. In addition to laying the infrastructural foundation for Hong Kong's future development, these projects together are expected to generate some 45,000 construction and technical jobs each year.

HK$1.2 Billion Employment Measures

22. Although the local unemployment situation is improving, the Government has decided to devote HK$1.2 billion (US$154 million) to implement three employment measures. This comes at a time when we are striving to reduce the Government's fiscal deficit and demonstrates our determination in tackling unemployment. We will extend about 11,700 temporary jobs in a wide range of public services, including cleaning, health, welfare, leisure services and tourism. We will also roll over the highly successful Youth Work Experience and Training Scheme for another two years to place about 10,000 young people into employment. Finally, we will introduce a one-year pilot scheme to train and assist 1,000 young people to become self-employed.

23. In addition, we will continue with the existing measures to help place the middle-aged into jobs through the provision of a training allowance to employers and the promotion of the market for local domestic helpers. We will also continue to run the Youth Pre-employment Training Programme, which aims to enhance the employability of school leavers aged 15 to 19 through a range of employment related training, workplace attachment, career counseling and support services. The Labour Department will step up its employment service to help the jobless re-enter the labour market as soon as possible. Last year, the Department placed a record high of 66,100 people into jobs.

"Can-do" Spirit to Thrive

24. Ladies and gentlemen, as you can see, we have left no stone unturned in promoting employment and enhancing the employability of our workforce. We will continue to minimize skills mismatch by upgrading the efficiency and capability of our workforce. The Government will continue to play the role of a facilitator to maintain Hong Kong's attraction as a business hub.

25. Let me sum up by saying that Hong Kong is facing multiple challenges resulting from globalisation and intensified competition, economic restructuring and corporate rationalisation. But with challenges come opportunities. We are adopting a multi-pronged strategy which combines pragmatism with vision. Given our advantageous geographical location, well-developed infrastructure, rule of law and integrity, position as a regional financial and services hub, and close tie with the fast developing Mainland economy, Hong Kong is well placed to forge ahead and take advantage of the benefits of globalisation. I have every confidence that this dynamic and cosmopolitan city - this city of "can-do" spirit - will not only rise to the challenge but also thrive.