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Breaking point

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

In his book, C, 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, 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 . 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.

This article appeared in the South China Morning Post print edition as: Breaking point
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