• Thu
  • Jul 31, 2014
  • Updated: 1:56pm
CommentInsight & Opinion

Wealth gap will break Hong Kong if we don't change the economic order

Paul Yip says an economic system that enriches the rich and impoverishes the poor, as Hong Kong seems to have, will one day tear apart our social fabric if we do nothing to change it

PUBLISHED : Thursday, 05 June, 2014, 2:41pm
UPDATED : Friday, 06 June, 2014, 7:13am

In his book, Capital in the Twenty-First Century, French economist Thomas Piketty suggests that in a capitalist system, the rate of return on capital is often greater than the rate of economic growth, and therefore those with wealth do much better than those who live on their salaries alone. Despite some queries raised recently about the data used, the observation seems applicable to Hong Kong.

In the past decade, Hong Kong's gross domestic product has grown by about 50 per cent, but median household income has risen by only about 10 per cent. Those who own property have done much better than those who do not. However, the proportion of home ownership here has remained at 50 per cent in the past decade.

The implementation of a minimum wage has helped to narrow the income gap; however, the recent proposed wage rise for civil servants would only see the rich-poor gap widen again; those in the high-income group would get a 5.96 per cent rise; those on low incomes have been offered only 3.8 per cent.

Hong Kong's high Gini coefficient, already comparable to some developing economies in Africa and South America, looks set to remain high. A report by the Credit Suisse Research Institute showed that in Hong Kong, the assets of a few tycoons account for 60 per cent of our wealth, while 30 per cent of households have assets of less than HK$80,000.

Our poverty study shows that the expenditure of the bottom 30 per cent of households exceeds their income. Those living in public housing do feel slightly better off as they are protected from private rental costs.

Piketty's book has drawn a lot of criticism from "free market" economists; the same people who say Hong Kong needs a low tax rate to attract capital and that it cannot be arbitrarily changed, and that we should be very concerned about expenditure, especially recurrent spending on education and welfare.

Nobel laureate Joseph Stiglitz's book, The Price of Inequality, showed us the adverse effects of economic disparity. Large companies, for example, always find ways, through political lobbying, monopolies and other techniques, to distort the market and maximise their profits. Therefore, he argued that to change these market failures, the government should use fiscal policies and regulations to generate more resources for its use, rather than continue to side with companies in order to serve the interests of only a few.

Our research findings suggest that wealth inequality leads to health disparities and brings a heavy burden of disease. While suicide rates in Hong Kong are relatively low in affluent areas, deprived areas see double the risk and are, in some cases, up to 3.5 times higher. So, we have to ask, does inequality cost lives? We need to be more innovative in alleviating poverty and fostering hope in the community.

Here are a few suggestions to do that.

First, Hong Kong has a low-tax regime, which attracts investment to the city. However, our competitive advantage should not and cannot be based only on low taxes. Many countries with high tax rates are doing well. If we rely only on this, we risk losing our competitive advantage with, for example, the establishment of the free trade zone in Shanghai. Instead, we should invest strategically in human capital to make Hong Kong more creative and competitive.

Second, Hong Kong claims to be a free market. Yet, the city topped a list of 23 economies in the "crony capitalism index" recently published by The Economist. Politically connected businessmen do well in industries (such as real estate, banking and energy) that rely on government regulation that favours the wealthy minority.

Russia ranked second, yet its "crony sectors" account for only about 18 per cent of total wealth relative to the size of the economy, as opposed to almost 60 per cent here. In this highly monopolistic arrangement, the Hong Kong economy has yet to achieve maximum efficiency as a free market.

Philanthropist Warren Buffett has complained that he is paying less tax than his secretary, saying it's unfair. Most of his wealth comes from dividends, which are taxed at a lower rate than wages in the US (Hong Kong doesn't tax dividends at all). Buffett therefore recommended that the federal government should tax the super rich, a proposal similar to that of Piketty's.

Hong Kong tycoons also give generously to charity, so we cannot assume they do not agree with Buffett. Also, if business in Hong Kong can be more socially responsible, for example, by reducing rent rises so that small businesses are not forced out, a healthy ecology can be established. Such an arrangement would actually provide more direct support to the needy in the community.

Today, Hong Kong's youth feel increasingly frustrated due to the lack of upward mobility. The city cannot afford to be a haven only for a few, while others struggle every day to make ends meet. We need to break this vicious cycle; policymakers should remember that Hong Kong will not be a happy place if things are done only for the 1 per cent.

Economic growth is important but it is only a means to an end: the overall enhancement of community well-being. We cannot ignore the public interest and simply concentrate on profitability.

The government should demonstrate wisdom and courage to put Hong Kong on a path to sustainable growth. "Winner takes all" must not be our mantra. Inclusion, not exclusion, brings growth and harmony to the community.

Paul Yip is a professor of social work and social administration and director of the Centre for Suicide Research and Prevention at the University of Hong Kong


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What Piketty hasn't mentioned in his book is that despite such low taxes in HK we have still managed to provide many social welfare for the public such as subsidized public healthcare, 12 years of free and compulsory education, public housing and if you are a local, it only costs you around HK$40,000 in tuition fee to attend university. Compare that to many countries with much higher taxes for example, in England, it now costs a local GBP 9000 a year to attend university which is more than HK$100,000. In the US, many top universities are private so you are talking about at least US$25-30,000 a year. So has high tax led to greater social mobility in these countries? One British expat family tells me it is only because they work and live in HK that they can now afford to send their kid to study at UCL. If they were in the UK, they probably couldn't even think about it. How ironic?
Mr Yip, you wrote "our poverty study shows that the expenditure of the bottom 30 per cent of households exceeds their income." In that case, apart from their income (which includes any CSSA, OALA, WITS or other handouts they receive) where do they get the rest of the money that they are spending? Or does your statistic show that your survey must be flawed, because they can't be spending what they don't have (assuming that they have exhausted their savings)? Also, your claim that HK "doesn't tax dividends at all" ignores that the fact that dividends are distributions of after-tax profits. A dividend tax would amount to a double-tax on profits.
Great points. If only Piketty was made compulsory reading to all in Legco.
well written
Please redistribute the wealth asap, and tax the fatcats with no salaries but get paid zillions of options and dividends, heavily.
Did the Hong Kong Gini Coefficient show any improvement towards the poor when Professor Yip was presiding over the Government's Central Policy Unit ? No, the other way round. And now who is the head of the CPU ? Shiu sin-por, well-known for ........, of course the pork barrel politics continues, only the players are not the same, poor Hong Kong.
Sorry but I don't like the idea of taxing dividends. Especially when the government has massive surpluses, and also wastes a ton of money pouring concrete instead of fighting poverty!
It is not a matter of tycoons giving to charity, when their net worth is valued at billion of USD, when they have land banks laying empty as they squeeze middle class Hong Kong people into cheaply constructed and vastly over priced shoe box apartments. Hong Kong is choking on the greed of the few who continue to exploit, with the full support of this government, the many. If Hong Kong does not become a more equitable society, it is finished, and we are heading quickly in this direction.
Agree. Even with the amazing tolerance of the HK people, the social schism is driving towards that direction..........a riot.
So I wonder how is Piketty's native France doing with its social model? Double digit unemployment, close to zero growth and when was the last time it had a budget surplus?
Secondly, is Gini coefficient really a reliable index? I am sure the gini coefficient of mainland China before the 1980s was much lower but does this mean the society under Mao was better?




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