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1 Introduction
‘The Death of Hong Kong’
Fortune magazine, 29 June, 1995
‘Oops! Hong Kong is Hardly Dead’
Fortune magazine, 28 June, 2007
On 1 July 1997, the Chinese government resumed exercise of sovereignty over Hong Kong and at the same time marked the end of British rule in Hong Kong. The transfer of sovereignty over Hong Kong from the United Kingdom to China is known as ‘the Handover’ internationally. Thousands of reporters from media all over the world flocked to Hong Kong to witness and report this historic moment. At that time, most people were sceptical of the so-called ‘One Country, Two Systems’ concept put forward by Deng Xiaoping and predicted Hong Kong would lose its lustre soon after the handover. The general sentiment in the Western world was best reflected in the cover story, ‘The Death of Hong Kong’, published in Fortune magazine in 1995, which predicted that Hong Kong would lose its role as an international commercial and financial hub after returning to China. Ten years after the handover, Fortune magazine wrote another story ‘Oops! Hong Kong is Hardly Dead’ and publicly admitted that it had been wrong.
In 2010, Hong Kong’s GDP per capita was 67.3 per cent of that of the United States. However, this ratio cannot fully reflect the standard of living of an average Hong Kong resident. This ratio uses nominal GDP per capita and relies on prevailing exchange rates, which not only reflects the differences in the cost of living in different countries but also distorts the differences in real income. A widely used method to adjust for the differences in cost of living is the purchasing power parity method. Based on the purchasing power parity approach, the 2011 estimates of GDP per capita of Hong Kong and the United States were US$ 49,300 and US$ 48,100 respectively (US Central Intelligence Agency 2012). This stylized fact suggests the average living standard of Hong Kong residents was comparable to, if not higher than, that of the United States. To develop from a fishing port to becoming a service economy with living standard comparable to that of the United States is a remarkable achievement. Although Hong Kong is proud of this, are the general population able to enjoy the fruit of the economic success? This monograph aims to study the income distribution of Hong Kong from a variety of perspectives.
1.1 Economic Growth and Income Distribution
One of the best ways to see how Hong Kong performed before and after the handover is to study the labour market conditions, and to look at the changes in unemployment rate in particular. Table 1.1 presents the statistics on the labour force and unemployment rate. From the Table, we can see that before the handover Hong Kong’s economy was strong and the labour market was vibrant with full employment, in the practical sense, for a long period. The unemployment rate hit a record low of 1.1 per cent in 1989. During the period from 1982 to 1996, the size of a labour force increased from around 2.5 million in 1982 to around 3.16 million in 1996. It means the total working population increased by 660,000 persons, or 26.5 per cent, in fourteen years. This was an enormous increase in a small city like Hong Kong and would create substantial pressure on its economy.
Even if we put aside housing problems, health care problems and infrastructural problems associated with the increase in population, Hong Kong needed to find ways to create job opportunities for this additional manpower. Table 1.1, however, presents a striking picture. From 1982 to 1989, while the working population kept increasing from 2.5 million to 2.75 million, the unemployment rate kept declining from 3.6 per cent to 1.1 per cent. The empirical evidence suggests that Hong Kong was not only able to create new jobs to accommodate the extra manpower, but it was also able to reduce the unemployment rate further. When the labour force continued to increase, the unemployment was still consistently maintained at a very low level.
Table 1.1 Labour force and unemployment rate in Hong Kong: before and after the handover.
Sources: Census & Statistics Department (2012). Table 006: Labour Force, Unemployment and Underemployment. Interactive download of longer data series, http://www.censtatd.gov.hk/showtableexcel2.jsp?tableID=006 (Accessed on 19 October, 2012).
Before the handover, Hong Kong’s economy was booming and looked promising but the historic handover in 1997 marked an unwelcomed turning point. After the handover, the lowest unemployment rate was recorded in 1997, which stood at 2.2 per cent. A year later, the unemployment rate more than doubled to 4.7 per cent and further rose to 6.2 per cent in 1999. Hong Kong was not only unable to create new jobs to accommodate the increasing labour force but also experienced a net loss in number of jobs.
Before the handover, the income inequality problem worsened despite healthy economic growth. The Gini Coefficient increased from 0.451 in 1981 to 0.518 in 1996 (Census & Statistics Department 1993, 2007). After the handover, the income dispersion continued to widen while Hong Kong experienced economic recession for a few years. The economy picked up again with positive growth in more recent years. The 2011 Population Census results revealed that the latest Gini Coefficient rose to 0.537. Chapter 2 investigates the relationship between economic growth and income distribution of Hong Kong. It also examines whether Hong Kong residents can enjoy the fruit of the economic success or if they have been hard hit by economic downturn.
1.2 Economic Restructuring and Income Disparity
Within a few decades, Hong Kong successfully transformed from a fishing port to a labour-intensive manufacturing base and then evolved into an international commercial centre. The rapid economic transformation was surprisingly not associated with a painful adjustment in the labour market. When Hong Kong experienced rapid economic growth, new employment opportunities were created in new industries. These new vacancies represented an increase in the demand for workers, which perfectly matched the increase in the supply of the working population as discussed earlier.
A small city with only 1,104 square kilometres, Hong Kong’s economic success was recognized internationally. For example, Hong Kong was one of the largest trading economies in the world and one of the busiest container ports in terms of throughput. However, economic restructuring inevitably brought along changes in industrial composition. While some new industries emerged, some other industries were displaced. At the same time, some occupations became obsolete, while new occupations and professions appeared in the labour market.
In the early 1980s, the manufacturing sector dominated the labour market, which employed over 40 per cent of the workforce. The latest census report, however, revealed that the manufacturing sector only accounted for less than 5 per cent of the working population in 2011. On the contrary, the services sector recruited the highest number of workers in recent years, especially highly skilled professionals and managers and administrators. The labour force now mainly comprises ‘white collar’ workers although it was once dominated by ‘blue collar’ workers a few decades ago.
Chapter 3 analyses the relationship between economic restructuring and income dispersion of Hong Kong. There is a general perception that economic transformation is one of the major factors contributing to rising income inequality. Income distribution by industry will be carefully examined in Chapter 3, which aims to document empirical evidences to refute this misconception. We also employ a decomposition analysis to study the changes in variance of log income. In analysing the rising income disparity, it is important to study the wage growth of workers by industry as well as income growth by occupation. Decomposition analysis will be used to see if changing occupation composition has any significant bearing on income distribution.
1.3 The Expansion of Higher Education
Economic restructuring unavoidably leads to a significant shift in employment share by occupation. When Hong Kong transformed from a labour-intensive manufacturing base to a skill-oriented services hub, the labour demand changed from low-skilled workers to well-educated professionals and administrators. Long before the handover, Hong Kong’s education system followed closely the British ‘elitist’ tradition and access to tertiary education was strictly controlled. The number of first-degree places and post-secondary non-degree places were carefully planned. The first two universities, the University of Hong Kong and the Chinese University of Hong Kong, were established in 1991 and 1963 respectively. At that time, no more than a few percentage points of the age cohort 17–20 could receive university education. When Hong Kong moved towards a service economy, it required a much higher supply of well-educated workers. The big question is, when employers wanted to recruit more skilled workers, did the supply match their market requirements?
The changing market demand and a student movement in mainland China triggered the first expansion programme of higher education in 1989. At that time, Hong Kong enjoyed rapid economic growth, which created a larger pool of relatively well-off middle-class people. When the economy became more and more affluent, parents would fight for every opportunity to send their children to university. Unfortunately, local universities could not satisfy the market demand and well-off parents had to send their children abroad for further studies. Many youngsters were sent abroad by their families, mainly to the United Kingdom, the United States, Canada and Australia, and most of them chose to return to Hong Kong after completing their university education. This also increased the supply of graduate workers in the labour market.
After the handover, the government aimed to make Hong Kong one of the most important international financial hubs. It knew that the first expansion of higher education launched in 1989 could not fully satisfy the changing market requirements. In order to achieve the new policy objective, the government developed new strategies and the first strategic change was to launch the second expansion of higher education in 2000. A number of post-secondary institutions were upgraded to universities and the number of first year first-degree places increased further to accommodate 18 per cent of youngsters of the relevant age cohort. The second strategy was launching the Brand Hong Kong programme in 2001 and the creation of a slogan, ‘Asia’s World City’, which aimed to position Hong Kong to become the world city of Asia.
With the two waves of expansion programmes, the proportion of degree holders in the population increased sharply from 3.4 per cent in 1981 to 18.0 per cent in 2011. Generally speaking, the two expansion programmes would improve the quality of the labour force. There is a general perception that providing youngsters with better education opportunities would help to alleviate the income inequality problem. However, increasing the supply of workers with higher education could lower the returns to tertiary education. Chapter 4 examines the effects of the expansion of tertiary education on income distribution. This chapter also documents the upgrading quality of the labour force over the last three decades and analyses the earnings premium for higher education in Hong Kong.
1.4 Public Housing and its Redistributing Effects
The analysis of income distribution in this book (see Chapter 2) is based on the original household income and takes no account of the redistributive effects of various anti-poverty measures taken by the government. Some developed economies, such as the United States and the United Kingdom, publish statistics on post-tax household income distribution, which takes into account the effects of taxation on income distribution. The first-ever official thematic report on household income distribution in Hong Kong was published in 2007. Apart from analysing the household income distribution using raw income data, it also attempted to assess the redistributive effects of government intervention on income in the public policy arena (Census & Statistics Department 2007).
In the 2007 and 2012 thematic reports on income distribution, the statistical authority made a number of assumptions to estimate and then deduct from the household income the imputed value of salaries tax, property tax, rates and government rent paid by members of the household. Similarly, they also imputed the education, housing and medical benefits received by households. They estimated that the Gini Coefficient of the post-tax post-social transfer household income would reduce from 0.537 to 0.475 in 2011.
In fact, the official thematic report was not the pioneering work in estimating the redistributive effect of social benefits on income distribution. In the monograph Income Inequality and Economic Development, published in 1997, I had already worked on the redistributive effective of public housing. This earlier work was further developed, extended and published in Urban Studies in 2007.
Public housing programmes in Hong Kong affect almost half of the population directly and the other half indirectly. In mid-2012, 29.1 per cent and 17.1 of the population were living in public rental housing and subsidized home ownership housing respectively (Hong Kong Housing Authority 2012). The government planned to build an additional 75,000 public rental housing units between 2012/13 and 2016/17. The public housing tenants pay a rent well below the market rates and the subsidies they received is a transfer in kind. In analysing the household income distribution, this transfer in kind should be included as part of the household income.
In the 2007 journal article, I employed two methods to estimate the housing subsidies received by public housing tenants and included the transfer as additional household income. The article used a subsidized-to-market rent ratio method and an imputed rent method to convert transfer-in-kind of public rental housing into equivalent monetary value. Empirical results show that the provision of public housing alleviates the income inequality problem. However, the amount of public expenditure required to achieve the same improvements in Gini Coefficient and other inequality measures is small relative to the actual public expenditure on housing. Basically, the provision of a large amount of public rental housing units is not a cost-effective method in reducing income disparity and the government is advised to reconsider its public housing programme. Chapter 5 presents the 2007 Urban Studies article as an independent chapter of this monograph.
1.5 Increasing Poverty and the Working Poor
Whether it is intentional or unintentional, widening income dispersion is always interpreted as rising poverty. In fact, income inequality and poverty are two distinctive concepts. Poverty is pronounced deprivation of well-being (World Bank 2000) whereas income disparity is not associated with deprivation. Generally, poverty is defined in either absolute or relative terms. Absolute poverty measures whether one’s income allows one to secure the minimum basic necessities, which include a bundle of goods and services that are regarded as essential to the physical needs of an individual or a family. On the other hand, people are held to be in relative poverty when they lack the resources to obtain the type of diet, participate in activities and have the living conditions and amenities that are customary in the societies to which they belong. One could be classified to be in ‘relative’ poverty even if one’s income is able to secure the minimum of basic necessities.
Most economists prefer to use the absolute poverty approach to define poverty, whereas politicians and pressure groups often choose the relative poverty approach. In September 2012, the Hong Kong government announced its intention to define an official poverty line (Ip 2012). Defining a suitable poverty threshold for households of different sizes and composition is no easy task. Chapter 6 discusses the absolute and relative poverty concepts and highlights the difficulties in drawing a widely accepted poverty line.
Moreover, the term ‘working poor’ has frequently appeared in the media in recent years. With a working population of around 3.5 mill...
