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Hong Kong's English Language Industry
A problem of severe market distortion
economic modelling (index | the market for high-level competence)

Graph 2a - Market Supply and Demand - The Case for Distortion

Surplus, cost, and economic loss - the critical areas

Provision of Qh

  • Aadlo = social cost of providing Qh.
  • Aaemo = amount paid by government, private industry, and the general public to obtain Qh.
  • Abem = profit received by the private sector for providing Qh.
  • Aagmo = social benefit from providing Qh.
  • Aagmo - Aadlo = Adgh - Ahlm = net social benefit from providing Qh.

Provision of Qe

  • Aadhk = social cost
  • Aaghk = social benefit
  • Adgh = net social benefit
graph 1 | graph 2b | index

full-width viewing of this page is recommended

click on graph for quick reference to points h, m, and s

Market demand (graph | index)
Dh   The line DhDh is the region's demand curve for high-level English language competence. As the Hong Kong government provides low-level language competence as a quasi-public, quasi-free good, there is no effective demand curve for low-level competence.

Market demand for high level English language competence
- Those who demand high-level English language competence can be divided into tthree overlapping groups:

  • Households that purchase high-level competence in order to insure that their children receive the best possible training,
  • Private sector employers who utilize English language competence in a variety of ways and activities to achieve specific ends . Among these activies are included teaching, advertising, purchasing, sales, customer service, contract negotiation, research, etc.
  • Public sector employers who seek to make the English language Hong Kong's second or third regional language (see Law-Fan 1999, p. 8 - opens to new window).

All three groups compete for the same talent in the market place, and all three are desirous of the highest level of competence possible. Unfortunately, they are often unable to obtain it.

Like most other economic goods the demand for English language competence increases with falling price. Among students language competence is only one skill among many that students seek to acquire. Among employers the situation is of course similar; there are many competing inputs employed to produce the same or similar number of goods and services. Accordingly, as a productive input or consumptive good the English language has many competitors. Falling marginal consumer utility and firm productivity mean diminishing desire with increasing consumption and utilization. This notion applies to all consumers of the English language, whether they are government agencies, private sector firms, or individual households.

Market demand for low level English language competence - As low-level competence is provided to the market as a quasi-free good, many who would like high-level competence, but are unable to afford it, employ individuals with low-level competence at no additional charge. If low-level competence were not supplied free of charge and there was thus a market for it, its demand curve would lie somewhere below that for high-level competence. This notion is useful when calculating the utility derived from the employment of individuals beyond the equlibrium quantities Qe and Qh for high-level competence.

Market supply (See graph 1)

Market equilibrium (graph | index | graph 2b)
Ph, Qh   Equilibrium market price and quantity for high-level language competence occur when the demand for, and supply of high-level competence are equal -- point m.
Pe, Qe    In order to understand the severe market distortion created by the Hong Kong government's quasi-public, quasi-free provision of low-level competence, it is useful to imagine a different point of equilibrium that reflects the true cost of high-level language competence -- not simply that of the high-level market premium. The price and quantity for this equilibrium are found where the demand curve for high-level competence intersects with the effective social marginal cost curve for high-level competence at point h.
Pf, Qf  

As low-level language competence is supplied to the market free of charge, it is essentially a free good and noneconomic in nature.

High-level demand for low-level competence begins at that point where the cost of supplying high-level competence exceeds the price consumers are willing to pay for high-level competence - point m. Since low level competence is free, however, no market for it appears, and the amount employed is equal to Qf - Qh.

An oversold, undersupplied commodity - the East Asian language paradox (graph | index)

At the same overall level of demand DhDh the amount of high-level English language competence which the market provides (Qh) is greater than that which would be provided (Qe), if those who employed high-level language competence were made to pay the full social cost of their purchase.

Pe > Ph

Qe < Qh

Hong Kong government and industry are already receiving more than they deserve, but are complaining that they are unable to obtain enough. How can this paradox be explained? Are there truly not enough high-level competent speakers to go around, or are industry and government simply unwilling to pay the price required to insure their presence?

On the one hand, industry is already obtaining more high-level competence than that for which it pays (oversold). On the other hand, the regional government is not fulfilling its promise to make Hong Kong a fully bi-literate, tri-lingual regional economy -- namely, to provide sufficiently high-level competent individuals at no cost to everyone (undersupplied). Paradox resolved.

This paradox arises because government has promised something that can only be provided by making sacrifices that government is unwilling to make (see discussion paper under Cultivating the soil for further understanding - opens to new window).

The provision of high-level competence in a distorted market (graph | index)

The social cost of providing Qh high-level competent individuals is given by the area, Aadlo. Those few in government, private industry, and education, as well as those among the general public, who employ these high-level competent individuals are paying only Aaemo. Moreover, a large portion of this social cost Abem is rechanneled as profit into the hands of privately run English language schools.

In summary, industry is getting more than it deserves, government is not living up to its promise, and the suppliers of high-level English language competence are making a killing. Unfortunately this is only the tip of the iceberg, but let us not be hasty, because it is in this three-way relationship where much of the debate takes place. Moreover, a closer look at the tip of the iceberg reveals that the people of Hong Kong are probably much worse off than the diagram suggests.

The net social benefit of providing Qh under the current system is given by the following relationship:

Aagmo - Aadlo =

(Adgh + Aadhmo) - (Ahlm + Aadhmo) =

Adgh - Ahlm

A close inspection of the areas enclosed by Adgh and Ahlm shows that a simple shift in demand can have a dramatic effect on the net social benefit derived from the employment and consumption of high-level English competence. This relationship is captured in the following table:

Demand   Direction of shift Change in Adgh Change in Ahlm  Change in
net social benefit
 increase    right increase decrease increase
 decrease   left decrease increase decrease

Though we do not yet know empirically where the point of social equilibrium (point h) resides, we have every reason to believe that the current level of demand is far higher than what it would be, if many of the myths about the English language were removed from public awareness (see discussion paper under Developmental state approach - opens to new window). With the needs myth removed the demand curve would rotate to the left and the positive, albeit inefficient, net social benefit would quickly disappear, or even become negative.

Getting what you pay for (graph | index)

By now it should be apparent that those who employ and supply high-level English language competence are receiving a terrific bargain financed by the general public. What is more they are clamoring for an even better bargain -- namely greater net social loss!

So what would happen, if government were to keep its promise, supply industry with adequate high-level competence, but make industry pay the full price of its provision? In short, what would happen, if the market distortion were removed? Certainly the current administration would have to surrender its foolish language policy and stop promising all of Hong Kong a linguistic social environment that it cannot possibly achieve.

In graph 2a above, the entire social loss from providing high-level competence below cost is removed at that point where the demand curve for high-level competence and the socially effective supply curve for that competence intersect - point h. Here the net social benefit from providing high level competence is equal to Adgh. Mathematically speaking, this amount is the difference between the social benefit obtained from the provision and use of high-level language competence and the social cost of providing it.

Adgh = Aaghk - Aadhk

Comparing this value with that found when government, industry, and the general public were paying only the private sector premium, we observe the following

Adgh > Adgh - Ahlm

Not only is the net social benefit larger when high-level competence is supplied at Pe, Qe, but it is also decidedly positive, as the social loss associated with Ahlm disappears. The above relationships are summarized in the table below.

    Adgh Ahlm Net Social Benefit

Pe,Qe   A > 0 A = 0 A > 0
Ph,Qh   A > 0 A > 0 A > 0
A = 0
A < 0

The potential for improvement does not end here, however. So far, we have only examined the problem of social efficiency to the left of Qh and Qe. The more important social loss occurs to the right of these two points beneath the tip of the iceberg.

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