ASIAN AFFAIRS ANALYSIS THE REAL SOCIAL STRUCTURE OF HONG KONG This analysis is an extract of the issue nș19 of Asian Affairs (Hong Kong: a difficult transition) THE SOCIAL STRUCTURE OF HONG KONG Hong Kong was ranked eighth in the world for its per capita income in 1995, before Switzerland, France, Germany, or the United Kingdom. In 2001, Hong Kong was still ranked in the same league as France, the Netherlands, Germany or Japan with about US$24,000, and was by that standard a richer economy that the Australian, the British or the Swedish one. It is in fact a statistical fluke, 'an illusion of wealth' says James Tien. Yet many are using it as a proof of Hong Kong’s wealth. The per capita GDP indicator is the least serious of all the indicators a government can look at to know what sort of community it is running. One indicator that is easily accessible is the tax base. (We will later on, when looking at the budget issue, show how important the concept of public taxation is to a democracy). If Hong Kong’s per capita was around US$24,000 (HK$190,000), the number of taxpayers in the city actually paying salary taxes would be expected to be close to the number of employees (around 3 million). Yet, quite recently Anthony Leung, the Financial Secretary speaking in the Legislature Council said: 'among the population of 6.7 million, only 1.3 million are taxpayers, of which only 13,000 need to pay the standard tax rate, that is a salary tax rate of 15 per cent.' In Hong Kong, to pay taxes, one needs to earn more than HK$108,000 a year if he/she is single. If we take the average benchmark of a household in Hong Kong at 3.3, on average each tax declaration pertains to a couple with at least one dependent or more as relatives and parents can be added as dependants in addition to children. To pay taxes, such a household will have to reach an income level of no less than HK$241,000 (US$30,897). To pay the maximum rate of 15%, the income of the household has to be no less than HK$2,620,000 (US$335,897), or HK$1,450,000 for a single household with no dependent. Based on Anthony Leung's statement, one can assume that in Hong Kong, 13,000 households have a taxable income of no less than HK$2,620,000. Thus, if we consider that each of these households is made up of 3.3 people (which is an overestimation) we can deduct that about 40,000 individuals enjoy a minimum per capita income in the range of US$101,000 (a per capita income is the assumed income of each individual, children and adults alike). Further data from the tax department indicate that another 53,000 households are between HK$900,000 and HK$2,620,000. This group could be qualified as the super-rich individuals of Hong Kong, the elite. Yet, at most the group is made of about 200,000 individuals (2.9% of the population). And, from the data of the Tax Department, it is known that a further 135,000 households (or taxpayers) may have a per capita income of US$24,000 per member of the household (which means that the tax return pertaining to that household is at least 3.3 times the per capita income). What does that mean? That at most, 650,000 individuals, less than 10% of the population, actually have a per capita of US$24,000. The conclusion is that 90% of the population has a per capita income below US$24,000. Among them, tax data indicate that about 1,600,000 individuals are members of 500,000 households earning between US$12,000 and US$25,000. Once we allow for the average number of people for households, thus dividing by about a third the income of the family to have the individual per capita income, the average per capita income is likely to be US$7,575 for each individual. That leaves the rest of Hong Kong, 4,7 million people, with a per capita income below US$7,575. If the government had some doubt on the not so pretty picture delivered by its own tax records and dismissed it with the classic argument that people tend to avoid taxes (although the computerization of the system in Hong Kong leaves little leeway to the taxpayers), it may still ponder over the fact that out of 3,041,000 employed workers, only 1/3 earns between HK$108,000 a year (USD13,846) and HK$241,000 (US$30,897) a year. The rest, the Financial Secretary said, earn less. That, at the same time, they are considered enjoying a per capita income of US$24,000 a year is thus a mystery (1). It is of course a crude approach to gauge the validity of the per capita figure that is used to measure up the wealth of the 6.8 million people living in Hong Kong. But Alan Lung from the Hong Kong Democratic Foundation is not surprised: 'Hong Kong is not a developed country. If anything, it is just at the top of the developing countries' he says. Incidentally, a critical aspect of such imbalance in the distribution of wealth that comes to light and is of paramount importance to explain the current deficit is the fact that, not only the average population of Hong Kong does not live on a per capita income of US$24,000, but to pay a salary tax, one must have a per capita income that is 28% above it at about US$32,000. Only 18.9% of the whole Hong Kong population is likely to be at that level. Thus the tax structure excludes 82.1% of the population. Another obscene consequence is that probably more than half the civil servants are also outside the tax bracket and do not pay taxes, (and do not contribute to a pension plan that is passed on to the community). Why then is the per capita income so inflated? There can only be two sources of errors: either the GDP is inflated or the population is underestimated. As we know, the characteristic of the Hong Kong economy is that it is the center of an enormous trade totalling about three times the size of the domestic economy (US$440bn against US$145bn). Therefore the GDP reflects badly the domestic economy. It is inflated by hundred of billions that are only paper money bringing little or no benefits to the population. As James Tien observed during a discussion 'the majority of the population does not benefit from such economic activities that are concentrated in the banking and financial sector'. Why then is the government using a flawed benchmark? To be consistent in its inconsistency. The colonial government has always inflated the per capita income of the population, but the reasons have evolved over time. Originally, and up to the mid 1990's the bureaucracy was always underestimating the number of people living in Hong Kong. The motive was that it would allow for underinvestment for basic services. Schools, hospitals, and other infrastructures were determined on a population that was about 10% below the real number of people living in the colony. The mistake started probably genuinely, when the floating population was important and it was hard to keep track of the refugees, but somehow the colonial administration discovered that the divergence had enormous advantages. As no governor wanted to be seen as having impoverished the colony, the per capita income kept increasing with little relation to the reality year after year. In those days, and until the end of the 1980's the trade figures of Hong Kong were more or less in line with its domestic economy since Hong Kong was still a manufacturing center. Re-export trade was then minimal and the local stock market was not a financial center but a casino. Hong Kong Bank was still considered a local bank and Bank of China did not even exist in the radar screen of the financial analysts. With the opening of China in 1978, soon the re-export trade overtook the domestic trade that, by the end of 1980's, had started to crumble because of the relocation of its manufacturing activities across the border. The surge in trade directed to China or coming from China inflated the GDP figures to the point that the government had to consider that a 'GNP' would have to be worked out, to reflect all the activities generated by Hong-Kong based companies, which now employ through subsidiaries about 5 million people in the Pearl River Delta. Notwithstanding, the GDP grew rapidly, inflated by trade paper money and transitory foreign direct investments. The service sector replaced the manufacturing sector as the largest employer and the per capita income jumped. The inflation, which was rampant at close to 10% a year for a decade, while the peg protected the exchange rate at 7.8, did the rest. Hong Kong, technically, became super-rich. By the mid 1990's, Hong Kong people were in US dollar paper money richer than their UK counterparts (who had seen their per capita income expressed in US dollar badly affected by the melt-down of the pound sterling). That it was a fallacy was evident but the bureaucrats had a vested interest in maintaining it was a reality. The level of pay of the civil service was looking reasonable as long as Hong Kong was ranked in the top ten economies in the world. If Hong Kong had been ranked at number 45 or below, it would have been hard to justify the salaries of the senior civil servants, which were two or three times higher than those of their homologues in the leading economies of the world. That Hong Kong was broadly an economy on par with sophisticated European countries with vast public resources and infrastructures was always a charade. Hong Kong has never been as wealthy as its colonial master, the United Kingdom, whose per capita income is actually far below that of France and Germany. Hong Kong, as a city, is in another league, much closer to Kuala-Lumpur or Bangkok than it is to London. That fact has yet to be accepted by C.H. Tung. The resistance of the government to look squarely at the distribution of wealth has two self-serving motives. The first one is that, if Hong Kong is rich, it can pay for the most expensive administration of the world. If it is poor, it makes the current pay-level unacceptable and unsustainable. We come back here to the heart of the debate about public finances that C.H. Tung is trying to evade. The second motive for Hong Kong’s officials to live a fantasy is a dogmatic one. To admit that the Hong Kong society is far poorer than proclaimed would destroy the virtue embodied in capitalism. It would have a far-reaching impact on the chimerical values the Heritage Foundation attributes to Hong Kong's capitalism. We have mentioned already that this foundation has constantly ranked Hong Kong as the world's freest economy because its government does not engage in public policies that would reduce the inequality of the society. The law of the market is supposed to be unimpeded. That Hong Kong is actually a cartelized economy, as William Pesek Jr recently wrote in the Herald Tribune, is conveniently forgotten. But if Hong Kong is the closest you can have nowadays to a pure capitalist society, then it is of paramount importance that it be wealthy as well and that such wealth benefit the community at large. Hence the use of the inflated per capita GDP. If it were not the case, some might be tempted to seriously ask what capitalism is about. The skeptics can use three other indicators to corroborate the fact that the community is far poorer than previously thought. They are however strictly ignored by the Hong Kong officials. The first one is the level of poverty, the second one relates to income distribution (giving the answer to where the money goes), the third one is the Gini indicator widely used by social academics to measure up economic equality. Those indicators are generally ignored in countries where, either political representation is weak, or wealth disparity is no longer significant. In Hong Kong, since wealth disparity is significant and those indicators are ignored, one is led to conclude that political representation remains weak, which is the case. After all, C.H. Tung cannot be voted out of office and so far the leaders of Hong Kong have never run for election. The new ministers did not need to present themselves to the public either. The majority were former bureaucrats and the others were, for the most, unknown personalities before their appointments. Thus, inequality can be ignored because a backlash against the establishment is never translated into votes (as can be seen with the scandal surrounding the purchase of a luxury car by the Financial Secretary, days before announcing a major increase in car registration taxes, which was not enough to force his departure from the government while it is obvious that he has lost all credibility). In Hong Kong, where officials and businessmen are flooded with researches on the elusive “competitiveness advantage”, there is no official data providing the number of people living below poverty line. However the Confederation of the Trade Unions (CTU) worked one out. The result of its research was appalling. There are about 385,600 households, a rise of 13,7% since 1996, living below the poverty line. That number translates into a poverty level higher than in Indonesia at the end of the Suharto era. Yet, Indonesia was known as a poor third-world country, and Hong Kong as a wealthy economic tiger. To determine the poverty level, the CTU used the classification of the OECD, so it provides a number that can be benchmarked against those of other countries. 385,600 households live on half the median household income which has been worked out by the CTU at being HK$62,400 a year (a level that further corroborates the conclusion arrived at using the tax data). As a household is 3.3 people, it means that 1,284,000 Hong Kong residents live in a household having a total income of HK$31,200 a year (US$4,000). They represent 18,8% of the population. Their per capita income is about one-third that figure, that is to round up HK$10,000 (US1,282). They are the super-poor of Hong Kong. The CTU has worked out that another 31.2% of the population lives on a per capita income somewhere between US$4,000 and US$8,000. If accurate, and it looks it is, the research confirms that most of the population has a purchasing power far lower than what is in the government’s booklets and the IMF reports. The largest group of people, an obviously silenced majority, has a disposable income below US$8,000 per year. Thus there is little doubt that the real per capita income of the average Hong Kong resident is anything between 1/6 and 1/3 of the official per capita income used by the government. The gap, or shall we say the gulf between the two figures is a sad reflection of the wealth disparity of Hong Kong. In that respect, Hong Kong's social structure is certainly that of a world-city, with a profound divide between the proletariat and the elite, but it is nothing the government can be proud of. Could it be that C.H. Tung and the Financial Secretary remain totally ignorant of the situation? There are signs that it is not the case. To UNDERMINE the significance of the divide, the government officials go to great length to mask the situation, accusing if necessary the poor of being rich people trying to pass themselves for destitute in order to get some money from the government’s pocket. The message the government wants to convey is that there are not so many poor, that people are smart (2) and that the government (not the rest of the community) is generous. Such accusations are baseless and rather callous. They have been denounced by many caring organizations. Nevertheless, because of its weak political representation, Hong Kong entertains the fiction that the poor are always abusing the kindness of the benefactors. We will see why later on. In the meantime, the arguments are used to justify that a cut of 11.1% per cent cut in the Comprehensive Social Security Assistance (CSSA) budget will not be as bad as it looks (3). Finally, for those who doubt that the difference could be so large, because it remains unacknowledged at the political level, there are two other data that deserve consideration. One comes from a study released by the Chinese University of Hong Kong. It reveals that from 1981 to 2001, households with the lowest income failed to increase their share of total income. Furthermore there are signs that the relative income of the poorest actually fell during the period. In 1981, 20% of the population with the lowest income earned about 4.6% of the total household income. The figure increased to a peak of 5% in 1986, then receded to 4.3% in 1991 to stand at 3.2% only in 2001. That 410,000 households, about 1,400,000 people, are living on just 3.2% of the total income of Hong Kong is a reality. It may explain why C.H. Tung outlines in his Policy Address that welfare spending is increasing, but clearly he is misguided when he attributes such an evolution to the effect of “globalization’ or other fancy economic concepts. The hard fact is that the polarization of the society along economic lines is at an unprecedented level. It is all the more obvious that while the poor get less from the total, it is not the middle-class that benefits but the rich. The 20% of households with the highest income earned 50.4% of the total income in 1981. It more or less remained in the 50% range in the 1980's but jumped to 56,3% the year before the handover and rose to 56,5% in 2001. This evolution certainly justifies the argument that 80% of the population shares only 43.5% of the income and therefore that the real per capita of a middle-class Hong Kong individual is about half the official per capita figure used by the Hong Kong government to promote the image of a wealthy city. Translated into monthly income, the above data revealed that the income of the poorest families has fallen from a peak of HK$44,016 a year (US$5.643) in 1997 to HK$25,600 (US$3,282) two years later, a drop of 23.3% in a decade. As deflation has yet to stop, it is quite probable that the average income has crashed through the US$3,000 level in 2002. At the other hand of the spectrum, the Asian crisis and all the factors mentioned by C.H. Tung to explain the economic downturn have yet to dent the income of the wealthiest of the city. The average income of the top 20% earners in Hong Kong was HK$346,200 a year (US$44,384) in 1990. It rose to HK$436,764 (US$55,995) in 1997 and in spite of the Asian crisis and the crash in the housing market, to HK$445,380 (US$57.157) in 1999, a total rise of 26,1% in a decade. Thus, while the poor saw their share of the pie dropped by 23.3% in a decade, the rich managed a gain of 26,1%, increasing to an extraordinary level the wealth divide. A last data to look at is the so-called Gini coefficient Social scientists use the coefficient to measure equality in society with zero representing absolute equality and one representing absolute concentration of wealth at the top. Statistics elaborated by the World Bank over many years show that in a developing country, the Gini coefficient is weighted in favor of the largest number in the population. It is the characteristic of a developed nation and is true of regardless of its political system. The United States, Canada, the European countries share a Gini coefficient in the range of 0.4. The United States, with less social harmony is at the upper range but quite below 0.5. China, in that respect is becoming a developed society, or at least an equalitarian one, with its Gini at 0,36. In developing countries, where usually the wealth is concentrated in few hands and obscene disparity often the norm, the Gini coefficient is surging towards one. That is the case of Mexico, with a Gini at 0.525, far higher than Indonesia, not exactly an example of social harmony between extreme poverty among the masses and extreme wealth among its Chinese population, yet managing a Gini at 0.48. Using this indicator, Hong Kong is not London, or New York or Paris; it is Mexico, with the same Gini at 0.525. That was before 110,000 households became negative equity holders because of the property crash. That was before the budget 2003/2004 was announced, a budget that targets the middle class, more than it does the elite (see chapter 4 on that issue). There is every indication that Hong Kong’s Gini between 2003 and the end of the term of C.H. Tung will increase. Therefore social harmony is not increasing. By that benchmark it is fast decreasing. There is a reason for that. Hong Kong has yet to catch up with the modern world. Being for 150 years a colony has left the population at large without adequate representation against the merchant elite, hence the total lack of balance and check in matter of public policies. For the time being, it plays in favor of the elite. Hong Kong’s wealth is a delusion and a per capita income of less than US$10,000 would provide a more accurate picture of the wealth of its community. Hong Kong is made of people with considerable less purchase power than it is generally believed. Its real per capita income is not that far above the per capita income of the middle class of its neighbors, Shenzhen and Guangdong, where per capita income are the highest of China at above US$6,000. Furthermore, while the Hong Kong people, to the exception of the elite, have seen a contraction of their per capita income after 52 months of deflation, the per capita income of their neighbors keeps growing at a rate of 10% a year on average (even faster in Shenzhen). Deng Xiao-ping had allowed fifty years for the Pearl River Delta to be integrated. The current trend in the per capita income points to a much faster process. May 2003
Notes: 1.- The spread of the taxable income parallels the Gini spread. :2.- Anthony Leung, while defending his budget in February 2003, made a more provocative remark. 'Hong Kong people are damned to misery for the hedonist times they have enjoyed' he said. He later on had to apologize, saying that he had used an inappropriate analogy. He was lambasted in a radio-talk show, where a caller surnamed him “a squandering brat”. 3.- The number of people receiving welfare benefits has hit an all-time record high of 258,000 in July 2003 (1.2% more than June), according to government figures. Professor Nelson Chow from the Department of Social Work and Social Administration, the University of Hong Kong, stated that 1 out of 8 families received CSSA and it's a high rate. But in line with the attitude of the government, instead of seeing this development as a proof of an increasing poverty, he attributed the rise to an abuse and suggested a revision of the CSSA system. Hong Kong: Adifficult transition | |||
 | | | |