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Abstract: In the past 15 years since the reverting of the sovereignty of Hong Kong to China, both of Mainland China and Hong Kong have benefited from their economic integration. However, large improvement space still exists in this integration procedure, for the poor technical efficiency performance of mainland China and the lack of technical progress in Hong Kong. Thus, we seek in this report to explore the economic integration between mainland China and Hong Kong SAR from a technical efficiency perspective. This report is organized as follows. First, an overview of the economic integration between the two economies is provided; and then a brief introduction of the technical efficiency status of the mainland China and Hong Kong is given; at last how to implement economic integration between the two economies from a technical efficiency perspective is discussed, followed by a conclusion of this report.
The economic integration between Mainland China and Hong Kong SAR has always been a hot topic since the reverting of the sovereignty of Hong Kong to China. Standing at this point in time of the 15th anniversary of the return of Hong Kong to look back to the integration of the two economies, we may find that both of them have benefited from this integration. For instance, with the development in the past 15 years, Hong Kong has become the mainland's biggest overseas investment source, the largest overseas investment destination, the most important trading partner and also the most important contract projects and labor services market(Wu 2012).
However, large improvement space still exists in this integration procedure, for the poor technical efficiency performance of mainland China and the lack of technical progress in Hong Kong(Li et al. 2011). Thus, we seek in this report to explore the economic integration between mainland China and Hong Kong SAR from a technical efficiency perspective. But before that, to get a better understanding of the economic integration, I'd like to look back to the existing literatures on economy integration by answering the following three questions: (1) what is economic integration, (2) why to integrate, and (3) how to implement economic integration.
1.2 What is economic integration?
According to the existing literatures in economics, economy integration refers to "the extent to which resources contributed by different alliance members and subsequent operations using these resources are effectively blended into an alliance's value chain to the point where if one member withdraws, the remaining members suffer great loss(Yadong 2008)". In general, it is about interdependence between exchange members with respect to resources pooled by these members and the subsequent operations utilizing these resources. Here, interdependence refers to the degree to which alliance members interact to determine an outcome jointly, which can be further divided into three categories, i.e. pooled, sequential, and reciprocal interdependence. In the context of interest in this report, economy integration means an economic arrangement between different regions (i.e. mainland China and Hong Kong SAR) marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies.
1.3 Why to integrate them?
Generally speaking, the aim of economy integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement. The more integrated the economies become, the fewer trade barriers exist and the more economic and political coordination there is between the member countries. On the one hand, by integrating the economies of more than one country, the short-term benefits from the use of tariffs and other trade barriers is diminished. On the other hand, the more integrated the economies become, the less power the governments of the member nations have to make adjustments that would benefit themselves. In periods of economic growth, being integrated can lead to greater long-term economic benefits; however, in periods of poor growth being integrated can actually make things worse. In practice, many countries or regions have had a try to economic integration, such as North American(Rugman 1993), European Union(Simonds 2012), Mexican(Alarcón 2003), and Nordic countries(Benito et al. 2003).
1.4 How to implement economy integration?
Economic integration is not an exogenous phenomenon but rather a strategic decision by all alliance participants, and is not automatic for it requires joint efforts from all parties(Yadong 2008). In general, there are varying levels of economic integration, including preferential trade agreements (PTA), free trade areas (FTA), customs unions, common markets and economic and monetary unions. Besides, four attributes (including input growth, adjusted scale effect, technical progress, and efficiency growth) compose the economic and productivity growth of mainland China and Hong Kong(Li et al. 2011). For the poor technical efficiency performance of mainland China and the lack of technical progress in Hong Kong(Li et al. 2011), large improvement space still exists in this integration procedure. Thus, we seek in this report to explore the economic integration between mainland China and Hong Kong SAR from a technical efficiency perspective.
The rest of this report is organized as follows. First, the technical efficiency status of the mainland China and Hong Kong is introduced; and then how to implement economic integration between the two economies from a technical efficiency perspective is illustrated, followed by a conclusion of this report at last.
2. The Status of Technical Efficiency in Two Economies
Technical efficiency, which is defined as the ratio of observed output to maximum feasible output(Aigner et al. 1968), is another component of Total Factor Productivity (TFP) apart from technical progress and scale effect(Kumbhakar et al. 2000). It has been studies in both (1) industry-level such as commercial banks(George et al. 2011; Liu 2010), insurance(Yao et al. 2007), and iron and steel industry(Movshuk 2004), information and communication technology(José et al. 2009), and (2) country-level such as China(Kalirajan et al. 1997; Yiping et al. 1998) and United States(Lin 2009). There are two types of integration: one type involves increasing integration of the Hong Kong economy into the Chinese economy; the other type involves control by mainland Chinese firms over assets located in Hong Kong(Huang 1997). In this section, the technical efficiency status of both mainland China and Hong Kong is introduced, with the hope of providing the reasons for exploring the economic integration from the technical efficiency perspective and establishing foundations for the third section.
The mainland China's economy is essentially composed of three sectors, state industry, rural industry, and agriculture, which accounts for about 70% of the gross output of the economy and 75% of total employment (Wu 1995). Before the reform, the mainland China's economy was characterized by resource distortion and economic inefficiency, because of state planning(Perkins 1986) and a closed-door economic policy of self-sufficiency with a socialist ideology characterized by state-ownership and communes(Li et al. 2011). With the reform and open-door policy carried, the mainland China's economy has taken on a new look. For example, it has experienced increase in output and productivity growth since reform. However, technical inefficiencies remain and represent a significant drag on mainland China's productivity growth(Li et al. 2011). Take the iron and steel industry for example, while the production possibility frontier of examined enterprises was shifting upward, their technical ef¬ciency did not improve signi¬cantly, and was even deteriorating in the mid-1990s(Movshuk 2004). Besides, the technical efficiency in Mainland China's economic development presents significant regional differences (Li et al. 2011). Overall, the mainland China is still in poor technical efficiency performance, thus, it needs to learn from others. In contrast, Hong Kong, as the most open and liberal economy in the world, has enjoyed a high level of technical efficiency, to be specific, Hong Kong's positive technical efficiency changes contrast sharply with negative efficiency changes in mainland China(Li et al. 2011).
In sum, the differences in technical efficiency between mainland China and Hong Kong with the latter having higher technical efficiency than the former, would make it possible to further boost the two economies' integration. In the next section, how to implement economic integration between mainland China and Hong Kong from technical efficiency is discussed.
3. Economic Integration from Technical Efficiency
Given that both mainland China and Hong Kong face a challenge of an essential factor to their total factor productivity (i.e. mainland China is poor in technical efficiency, while Hong Kong's technical progress is low), it's necessary for them to learn from each other's strong points to offset one's weakness, and ultimately achieve a win-win objective. As the focus of this report is technical efficiency, the following part provides a discussion on how to learn from Hong Kong for mainland China. Specifically, we think that efforts should be made to it from the following three aspects: (1) the exchange of top talent; (2) the cooperation in higher education; and (3) further reform and adjust international trade.
3.1 Enhance the Exchange of Top Talent
The original reason for technical inefficiency in mainland China is the lake of top talent in some industries. Given that Hong Kong is a place that plenty of top talents gather around, the mainland China should encourage some of these talents to participant in the professional resources exchange between the two economies by decreeing a series of policies. For instance, the Chinese Thousand Person Plan could be more open to the professionals in Hong Kong. Meanwhile, it's essential for some professionals that are necessary to Hong Kong to be exchanged from the mainland China to Hong Kong through the Admission Scheme for Mainland Talents and Professionals. Only after that can the two economies benefit from the integration in a long term.
3.2 Enhance the Cooperation in Higher Education
Looking back to the development history of Hong Kong, we can see that education always played an important role in its policy, especially for higher education. Thus, in order to fundamentally solve the problem of shortage of top talent in mainland China, it's necessary to enhance the cooperation with Hong Kong in higher education. Although some universities in mainland China have participated in cooperation projects with Hong Kong's universities, the number of people involved is very limited. Therefore, one option for the mainland China is to expand the cooperation scale. In addition, in order to encourage more students to attend in these projects, it is very important for the education department of the mainland China to make sure about the corresponding degree authentication for those students in the cooperation projects.
3.3 Further Reform and Adjust International Trade
Since the end of the Second World War, Hong Kong has been one of the fastest growing East Asian economies; with sovereignty reversion to China in 1997, it is even more relevant to see how economic freedom is shaping and adapting to the new environment(Li 2012). Thus, similarly, further reforming and adjusting its international trade to suit growth and ef¬ciency improvement is necessary for mainland China to maintain a sustainable, high-speed development(Zhou et al. 2011). To be specific, foreign direct investments have an important and large positive effect on technical ef¬ciency, but it should be further encouraged to neutralize the downward trend of the effect. What's more, the mainland China should attach great importance to its infrastructure policy and reappraise the infrastructure development policy to positively impact technical ef¬ciency.
In conclusion, this report explored the economic integration between mainland China and Hong Kong SAR from a technical efficiency perspective. After an overview of the economic integration between the two economies, how to implement economic integration between the two economies from a technical efficiency perspective is discussed. Specifically, this report proposes three actions that can be used to improve the technical efficiency in mainland China: firstly, enhance the exchange of top talents with Hong Kong; secondly, enhance the cooperation with Hong Kong in high level education; and thirdly, further reform and adjust international trade by learning from the successful experience of Hong Kong.