This week in Economics Society, Perlie presented on inequality in Hong Kong, comparing it with the levels of inequality at the national level in other countries.
The discussion focused on the following areas:
- What is Income Inequality? How is it measured?
- Inequality in Hong Kong
- Causes of Inequality
- Why does inequality matter?
- The way ahead
Put simply, it is a situation in which there is great disparity in income of individuals within a society. It is measured by the Gini coefficient whereby a Gini coefficient of 0 represents perfect equality and a Gini coefficient of 1 represents perfect inequality. A Gini coefficient of 0.4 is generally regarded as the international warning level for dangerous levels of inequality.
Inequality in Hong Kong
In 2012, Hong Kong has the highest level of income inequality in the developed world (Gini coefficient of 0.537). Other MEDC (More Economically Developed Countries) countries with high level of income inequality include Mexico, Chile and Turkey. Perlie pointed out that although the GDP per capita of Hong Kong was high at US $34259, despite this level of growth, in the past decade, the monthly income of the bottom 10% decreased by 20%, while the income of the top 10% increased by some 60%. Moreover, only 10% of the city’s wealth is held by the bottom 40%, while the top 10% holds about 40% of the city’s wealth and inequality has been on the rise since the past three decades. In simplistic terms, the extent of inequality can be noted by the following statistic: the top 10% are almost 18 times richer than the bottom 10%.
Causes of inequality
Perlie highlighted that these varied to a large extent across economies. In Hong Kong, these are observed to be those described below. These can be categorised into two overarching titles referring to the underlying cause:
I] Free Market Economy
- Low Tax Rate – The tax rate for the highest earning group is 15% which is significantly lower than the OECD average of 41.5%. It has never exceeded 16.5% in the past two decades, despite the fact that the wealth gap is constantly widening. The Hong Kong Gini coefficient is 0.475 (based on post-tax post social transfer monthly household income), which is still higher than danger level of 0.4. Lower tax revenues also mean lower government spending. This is illustrated by the following chart which shows the level of Gini coefficient and levels of government spendings of Hong Kong compared to other developed countries:
- High Property Prices – The real estate has long been considered a relatively ‘safe’ investment tool because overpopulation has led to demand exceeding supply of housing, pushing house prices up. The ease of interest rates and mortgage lending further has meant that those that can obtain a mortgage can afford to invest in properties. The increased demand for properties has also raised the rents. This further distorts equality in the society as these rents become a source of unearned income for the owners of properties. The chart below plots the house price rises in Hong Kong compared to other countries:
II] Labour Market Disequilibrium
- Globalization – With the progress of globalization, Hong Kong lost its competitive edge in the manufacturing industry and was forced to turn to the tertiary sector production, in particular banking and finance. This has caused structural unemployment (unemployment resulting from a decline in an industry. As a result, the unskilled workers from the manufacturing industry have found their incomes eroded due to occupational immobility.
- Immigration Policies – As migration of unskilled workers seeking better job prospects from China is common, competition for unskilled work is tightened. This drives the wages for unskilled work down, further increasing the disparity between the incomes of individuals in society.
Inequality in the world: an overview
It was mentioned that Hong Kong is not the only economy that faces the problem of inequality. Income inequality has risen in most countries in the world over 2006-2011, driven by rapid population ageing, rising unemployment and government spending cuts in advanced economies. In America, for example, the income of the wealthiest 20% of Americans rose 14% during the 1970s, when the income of the poorest fifth rose by 9% only. In the 1990s the income of the richest fifth rose 27% while that of the poorest fifth went up only 10%. The gap is an ever-increasing one.
Why does inequality matter?
Dominique Strauss-Kahn, the Managing Director of the IMF between 2007 and 2011 argued that inequitable distribution of wealth could “wear down the social fabric”. He added: “More unequal countries have worse social indicators, a poorer human-development record, and higher degrees of economic insecurity and anxiety.” In “The Spirit Level”, a bestselling book of 2009, Richard Wilkinson and Kate Pickett argue that inequality “gets under the skin” and makes everyone worse off, not just the poor. Therefore, inequality, provided that the extent of it is too wide, is undesirable not only due to moral reasons, which may indeed be the most compelling, but also due to social and economic ones.
Although it was highlighted that there is no one simple solution to this problem, the discussion came to end with Perlie arguing for greater state intervention to decrease the extent of inequality that exists in Hong Kong. She argued for the establishment of a broader and more effective safety net for those with very low incomes, using taxes from the wealthy.
The talk ended with several questions ranging from ‘whether governments should intervene in the free market in order to tackle inequality’ to ‘how the education and health systems functioned in Hong Kong’. Any further discussion on this topic is hugely welcome. Thank you to all those who attended.
Hope you all have an enjoyable half-term!