South-Western College Publishing - Economics  
Exporting Inflation
Subject Hong Kong Economy
Topic Developing and Transitional Economies
Key Words Inflation and Deflation
News Story

The economic effects of deflation, a period of generally falling prices, are well defined and documented by economic analysts. When sustained deflation occurs, it can lower wages, decrease rents, and lower property values in the affected economy. Hong Kong has experienced such deflation for a period of nearly six years and has suffered the expected results.

Hong Kong's deflationary period has pulled down salaries, reduced rental incomes, and destroyed property values in this formerly thriving market economy that is now an autonomous Chinese territory. Unemployment remains high and a large number of workers are underemployed, taking part-time jobs because they cannot find full-time work.

Tung Chee-hwa, Hong Kong's Chief Executive, acknowledged the difficult past in a recent speech. "When we look back on the past seven years, it's hard to believe what we've been through: the bursting of the asset bubble, the collapse of the property market, years of deflation, the erosion of personal wealth, high unemployment, consumer pessimism, reduced public revenue and SARS," he said. "It was enough to cause anxiety in even the most confident of communities, and it certainly put a crimp in Hong Kong's style."

Tung Chee-hwa notes that he thinks the territory could prosper by integrating its economy further with mainland China, where the economy is growing and prices are rising. Rising prices are associated with rising profits for firms and the profits are an incentive for businesses to hire workers.

The consumer price index did edge up in July by 0.9 percent over a year earlier. This increase ended 68 consecutive months of deflation. An economist at Deutsche Bank, Ma Jun, reported that prices in China were beginning to pull up prices in Hong Kong because the territory buys much of its food and other goods from the mainland. "Chinese inflation is now being exported to Hong Kong."

(Updated October, 2004)

Questions
1.

What are some of the economic effects of deflation?

2. Discuss how rising prices can improve an economy that has suffered from deflation.
3. Why are firms willing to increase hiring practices when prices are rising?
Source Keith Bradsher, " After Years, Hong Kong Sees Return to Inflation," New York Times Online, August 24, 2004.

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