How to eradicate poverty - at least by the official definition

Government's definition of who is poor in relative terms is puzzling but shows its concern over city's inequality, which has grown enormously

PUBLISHED : Thursday, 03 October, 2013, 12:00am
UPDATED : Thursday, 03 October, 2013, 2:54am

At the weekend, the Hong Kong government rolled out its latest big idea: an official poverty line.

In its wisdom, the government decreed that anyone earning less than the median household income shall be considered poor.

In household income per capita terms, that's roughly HK$3,600 a month. At that rate, one million Hongkongers are classed as poor, even after factoring in welfare payments.

As chief secretary Carrie Lam explained in an opinion piece published in this paper, the government's new yardstick "reflects a wish to better understand the poverty situation and an earnest desire to provide clear policy direction for poverty-alleviation measures".

These are worthy ambitions, but the measure of poverty the government has chosen is something of a head-scratcher.

Using its definition, we could not just alleviate poverty, but abolish it entirely at a stroke.

All the government would have to do would be to impose a punitive 100 per cent marginal income tax rate on anyone with a household income greater than, say, HK$15,000 a month.

The proportion of households earning less than HK$4,000 a month has risen from 5pc to 7pc

That would lower the city's median household disposable income per head to a shade over HK$5,000, promptly lifting the vast majority of Hong Kong's paupers out of poverty - at least according to the government's definition.

Granted, that's not a helpful suggestion. but it does illustrate one of the weaknesses of the government's approach.

Setting your poverty line relative to median income is a little like having an education secretary who declares that all children should get above-average exam grades. Your policy is never going to succeed.

To be fair, government officials realise this. "Given the relativity concept, poverty cannot be eliminated," Lam acknowledged in Monday's opinion piece.

However, by choosing to define the poor in relative, rather than absolute, terms, the government has revealed that what really bothers it is not poverty, but inequality.

On absolute measures of poverty, Hong Kong performs admirably. If you look at the Asian Development Bank's definition of the poor as those who subsist on the equivalent of a household income per capita of less than US$2 per day, then even adjusting for Hong Kong's high prices the number of local residents living in absolute poverty is negligible (see the first chart).

But perceptions of poverty are relative. In Hong Kong it is the contrast with the city's wealth that makes the conditions suffered by our poorest so shocking. Our problem is not poverty so much as inequality.

Here Hong Kong's performance is altogether less impressive. Not only is the distribution of the city's wealth enormously skewed, with vastly more struggling poor than comfortably rich (see the second chart), but the distortion is getting more and more pronounced.

Over the 15 years between 1996 and 2011, the proportion of households earning less than HK$4,000 a month rose from 5 per cent to 7 per cent.

Over the same period, the proportion of richest households earning more than HK$50,000 a month shot up from 9 per cent to 15 per cent.

This is an ugly trend, and the government is right to be concerned.

However, officials must resist the temptation to go for a quick fix by throwing money at the problem. If you could eradicate relative poverty by giving people money, countries like Britain with comprehensive welfare systems would have solved the problem decades ago.

Instead, tackling worsening inequality will be a generational challenge, taking at least 20 years, and focusing on improving opportunities.

The shame is, if the government had started the job back in the late 1990s, maybe we wouldn't have a million Hongkongers today officially labelled as poor.