Economics & trade

More competition - higher prices

The most popular subject in Talkback (the SCMP's curious letter column that isn't) seems to be problems with Pay TV, and specifically the sports channels.

This is an interesting example of greater competition not having the normal effect of reducing prices.  Quite the contrary in fact - the cost of subscribing to all the sports channels in Hong Kong is much higher now than it was a few years.

There was a time when all you needed was a subscription to Cable TV (and for your building to have Star Sports).  Now you would need Cable TV, PCCW's Now Broadband TV and TVB Pay Vision (Star Sports has, of course, become a pay channel on Now TV).  On top of that, there are now several extra channels dedicated to specific sports (Golf, Cricket, Basketball), and of course they cost more.  If you add all that up it is certainly not cheap - though it's hard to imagine that anyone would have all the extra channels.

Greater competition drives up the price that the channels pay for rights to various sports, and that gets passed on to viewers.  It's happened in the UK, where Sky Sports used to have exclusive rights to the Premier League, but now Setanta have some games, so you need to pay an extra £10.00 for their package on top of £34.00 for all the Sky sports channels.

However, two things make Hong Kong different from the UK

  1. In HK, almost all the sports channels are exclusive to just one platform.  In the UK you can choose satellite or cable and still get all the channels - although cable TV are in competition with Sky, they still carry all the Sky sport and film channels, and a Sky dish will pick up Setanta Sports.
  2. In HK, you have little choice but to sign an 18 month (or longer) contract.  In the UK, most people are on monthly contracts.  If you have an 18 month contract for Now's golf channel you are stuck with it even if they lose the rights to the events you want to watch.

When you consider that there is no guarantee than any given channel (or combination of channels) will continue to hold the rights to any event indefinitely, it's easy to see how you can end up paying for one channel and then have to pay extra because another channel has acquired the rights. 

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Great, but also wrong

It was only a few weeks ago that Milton Friedman was commenting on the Education Vouchers for Nursery Schools fiasco, and at the time I was slightly surprised that he was still alive and kicking.  He died on November 16, 2006, aged 94.

The Economist described him as the "most influential economist of the second half of the 20th century" (A heavyweight champ, at five foot two), and I'm sure they're correct.  My problem here is that monetarism, the policy which he persuaded several governments to adopt, simply didn't work.  Instead, central banks have proved far more adept at controlling inflation than he expected - though to be fair, I don't think anyone could have anticipated the way that inflation has been brought under control in recent times. 

He was also wrong about Hong Kong (as most people are):

If Mr Friedman had a favourite economy, it was Hong Kong. Its astonishing economic success convinced him that although economic freedom was necessary for political freedom, the converse was not true: political liberty, though desirable, was not needed for economies to be free. Why, he asked, had Hong Kong thrived when Britain, which controlled it until 1997, was so statist by comparison? He greatly admired Sir John Cowperthwaite, the colony's financial secretary in the 1960s, “a Scotsman...a disciple of Adam Smith, his ancient countryman”. And how much more, Mr Friedman wondered, might America have thrived had it kept its government as small, relative to its economy, as the island entrepot had done?

There was an article last week on Asia Sentinel, explaining some of the ways Friedman got it wrong about Hong Kong:

What Friedman cared not to notice about the Hong Kong of the era of Cowperthwaite and later was that in three key areas of policy affecting the people the government was more socialist than its UK counterpart.

At one time 60 percent of the people lived in subsidized housing, mostly rented cheaply from the government, and some in Home Ownership Scheme flats, provided with cheap land and sold to lower-middle-income households.  Even now that public housing has low priority and the home ownership scheme has ended, some 50 percent of the people still benefit from this massive intervention in the marketplace.

The intervention also partly accounts for the low apparent ratio of spending to gross domestic product. If the cost of the subsidized housing land were accounted for at market prices in the government budget, the ratio would be significantly higher.

Hong Kong people have also enjoyed almost free medical treatment at government clinics and hospitals. Friedman was against “free” medicine elsewhere but failed to notice it in Hong Kong. Likewise, education, at least up to the secondary level has long been almost entirely funded by the government.

Well, I have to disagree about medical treatment.  There certainly are government clinics, but the reality is that most people here pay for their visits to the doctor (or at least their employers pay), whereas in the UK the overwhelming majority rely on the NHS.  However, the point about housing is valid, and I'm afraid that anyone who doesn't understand the implications of this policy simply doesn't understand how the Hong Kong economy works. 

It's not surprising that the simplistic view of Hong Kong (as a place with low taxation and 'small government) is so widely held, but it's puzzling that a brilliant, world-renowned economist should fail to dig a bit deeper and understand the full story. 


Price Wars and sweatshops

I recently wrote about sweatshops and suggested that there was a conflict between the "social responsibility" policies of large retailers and the pressure they put on their suppliers to cut prices.

It seems I am not the only one who thinks this may be a problem, as this report in The Guardian points out.

Using their power at the top of global supply chains, companies with ruthless buying practices are squeezing their suppliers to deliver faster and more cheaply, according to Oxfam. The effect is to drive down wages and compromise the welfare of the workers.

I mentioned Tesco and Wal-Mart, and the Oxfam report criticizes them, but of course they say that "they enforce rigorous codes of ethical trading". Of course!


Up, Down, Good, Bad. Understanding the peg.

Earlier this week I noticed this story about how the currency peg is making it more attractive to invest in equities or property. Then another piece yesterday, worrying that the Hong Kong Dollar is falling in value and that this may cause interest rates to rise and slow down the economy.

We need to get this into perspective - these are tiny changes in the value of the Hong Kong Dollar, which hasn't moved more than 1% from US$1 = HK$7.73 for many years.

What has been happening is that HSBC and others have reduced the interest rates they pay to savers almost to zero, but the official base rate hasn't changed. The effect of this is fairly marginal, given that they were previously paying (I think) 0.1% per annum. This is more a confidence thing - people have had long had money in the bank but were nervous about investing in property and equities, and now they feel more confident. The amount of interest paid by banks on money in savings accounts has low in Hong Kong for a long time, and no-one can have kept money there for the return they were getting!

Still, I suppose they have to write something!


Sweatshops

Simon notes an interesting blog that I have seen before but don't read regularly, Asian Labour News.  It's put together by Stephen Frost, who is a Research Fellow at the Southeast Asia Research Centre, part of the City University of Hong Kong, and it is described as "an online database of news about workers in Southeast Asia and China and the issues that affect them."

He has noticed an article in Reason magazine about sweatshops:

"Want to improve the lives of poor workers in developing countries? Then rush out and buy a pair of Nikes or Levi Strauss jeans"

They are suggesting that it is actually helpful to workers in Asia to buy products from well-known brands and large retailers that are sourced from Asia.  The logic being that these companies pay higher wages and enforce better working conditions, and that foreign investment "is positively correlated with the right to establish free unions, the right to strike, the right to collective bargaining, and the protection of union members."

When I first visited a factory in China several years ago, I was fairly horrified by what I saw.  Then, after discussing it with various people, I realized that it was not as simple as it first appeared.  For one thing, most of the workers only stay for a few years, and the amount they can earn in that time is more than they could hope to earn in their home villages.  For another, it isn't really appropriate to judge living or working conditions in a factory in China by the standards of Hong Kong or the UK.  Yet, nevertheless, most companies could afford to provide decent accomodation for their workers and ought to pay them a decent wage.

So is it true that the large well-known companies pay better and provide better conditions for their workers? 

Well, in fact these well-known companies don't normally own factories, but instead sub-contract the work to other specialist manufacturers, many of which are headquartered in Hong Kong.  These companies are expected to meet the minimum standards set by their customers and also have to compete (on cost and quality) to win the business.  If the big names aren't proactive in checking that these standards are actually followed, the factory owners are always going to be tempted to cut corners.  I have seen production lines in China that are dedicated to producing products for one well-known company (that does carry out checks) which obviously do meet the expected standard, but I don't believe every company is as vigilant as that.

One of the obvious contradictions here is that large retailers such as Wal-Mart and Tesco are now extremely powerful and can drive a very hard bargain with their suppliers.  This in turn forces those suppliers to cut costs, and often prompts them to source goods from Asia to take advantage of low labour costs.  Can you simultaneously be negotiating hard on how much you pay and enforcing high standards in the factories?  

In relation to the current problems with Avian Flu in Thailand, I was somewhat surprised to find that the UK imports large quantities of chicken from that country, mainly for use in processed food.  I have already linked to this article from The Guardian:

"Waitrose and Marks & Spencer do not buy any chicken from outside the EU for their processed foods, but the decision not to use cheap Thai or Brazilian meat is believed to have added £10m a year to M&S's costs. Most other retailers have sourced the cheaper products."

In case you were wondering, Waitrose is a posh supermarket owned by the John Lewis Partnership.  If you buy food from M&S or Waitrose you will pay higher prices, but for higher quality and closer supervision of the supply chain.  However, the low prices offered by Tesco and Wal-Mart seem to be a more successful proposition, with both companies highly profitable and gaining market share.  When given the choice, most consumers seem to prefer low prices.

So how can you tell which companies really care about the working conditions and salaries of factory workers in Asia and which ones are mainly concerned with cutting costs?  Search me!    


The Big Mac Index

This week's Economist has an updated "Big Mac Index". This attempts to use the price of a Big Mac to determine whether currencies are valued correctly. It also gives you an idea where you might not want to go on holiday with children (assuming they like going to McDonalds).

This summer we went on holiday to the country with the most expensive Big Mac in the world ($5.11), which is quite a shock when you live somewhere that has one of the cheapest ($1.55) and close to the very cheapest (China - $1.23). Next time we'll go to Thailand ($1.51) or Malaysia ($1.33), I think!

The prices in McDonalds tend to be indicative of prices generally, though obviously that is not always true. We all know that salaries in Hong Kong are much higher than in Thailand, or even Malaysia, yet that is not reflected in the Big Mac index. As it happens, UBS did some research on how long it would take an average worker to earn enough to buy a Big Mac and calculated that it would take a Thai worker 50 minutes, but an American only 12 minutes. Hong Kong comes in at 13 minutes, which sounds a little high to me. More details on this survey can be downloaded here.

As to which currencies are under-valued, well the Hong Kong Dollar and Chinese Reminbi both appear to fall into this category based on this data, whereas the Pound and the Euro appear to be over-valued. However, as far as I am aware the Big Mac index is not a good leading indicator of changes in exchange rates, and there is no reason to suppose that this is about to change!

So, in truth, the Big Mac index is just a bit of fun.


Quotas (again)

There's an excellent article in this week's Business Week called "The Folly Of Slapping Quotas On China" which sets out the argument against quotas. It is by Laura D'Andrea Tyson from the London Business School, and she argues that the United States benefits from cheap imports and the main losers are other countries that export to the States (mainly Central and South America and the rest of Asia). Worth reading (and the magazine is worth buying).


The real economy

Jake van der Kamp is back, and today he cautions against reading too much into the retail sales figures. It is a standard fallback for newspapers to print stories about economic statistics without caring whether they are significant or not. House prices are one favourite in Hong Kong, and retail sales are another. Recently we had encouraging GDP numbers and they were splashed all over the front page with the interpretation that tourists from the mainland were spending more money in Hong Kong, as if that was a major factor.

The problem for most journalists is that they don't spend much time (if any) understanding the real economy, and since almost everyone goes shopping it is tempting to assume that the retail sector is important to the economy.

Jake points out that over the last 10 years the nominal size of our economy has risen by more than 40 per cent but retail spending has stayed the same (well, it rose up to 1997 and then fell back). So it is much less significant than it once was. We all know that prices of many items have fallen significantly in the last few years, and that will be one reason for the change. The other is that retail sales figures exclude services, which are taking a larger slice of what people spend.

Also, as Ron has quite rightly pointed out that tourism contributes very little to the economy.

How many people were aware that last year (and again this year) many Hong Kong companies were very successful in exporting goods to the United States and Europe? Yes, the goods were mainly manufactured in China (or somewhere else in Asia), but that's a lot of companies employing people in Hong Kong.

Yet it's still retail and tourism that seem to get most of the attention.


97% Fat Free?

There's an interesting range of opinions on display with regard to the government's plans to make it mandatory for packaged food to be labelled with nutritional information. BWG complained that it was pathetic that it was going to take so long to introduce these laws, Phil agreed, but Conrad is totally against the idea:

If there was sufficient consumer demand for such labels, the food companies would be applying them voluntarily. They aren't. Requiring it by law will raise the price of selling packaged foods in Hong Kong. That price increase will will be passed on to the consumer. There's no such thing as a free lunch, much less a free, nutrition labeled, lunch.

Rather surprisingly, I find myself agreeing with Conrad that there is no need for the government to get involved. Already many imported products have detailed labels, and many local brands do the same, and I feel sure that within five years (which is the government's timescale) it will be the norm.

However, I have to take issue with Conrad's rather idealistic view that the market always delivers what the consumer wants. It's a lovely idea, and one that enables economists and politicians to defend the free market system, but we all know that it doesn't always work. The devil, as they say, is in the detail. Or, to put it another way, consumers always have a limited choice - there may be three or ten brands of mayonnaise on the supermarket shelves, but that doesn't mean that I can find one that is made with olive oil and unpasteurised eggs. Supermarkets control which brands are available, and especially in Hong Kong where cartels rule supreme, choice very often comes a poor second best to profit maximisation.

If we really had a free market system then I am willing to believe that consumer preferences would be accurately reflected in what was available, but we're a long way from that!