(This essay was published in Hong Kong Economic Journal on 25 June 2014)
Poverty, near-poverty, and inequality are issues of increasing concern in most societies. Poverty is about standards of living. In poor agricultural societies the vast majority of the population lives in poverty. In rich industrial societies that percentage is significantly lower. This is true even when rich societies adopt a definition of poverty based on a standard of living that is higher than in poor societies. For example, a poor family in a rich society may have a higher standard of living than a rich family in a poor society.
Inequality is about the distribution in standards of living among people in a society and it is a different phenomenon from poverty. Inequality exists in both rich and poor societies. Typically, inequality is greater in poor agricultural societies where only a small number of elites are very well off and the rest are uniformly poor. Industrial societies are usually much more equal than agricultural ones, but inequality still exists and in the past three to four decades it appears to have worsened in one sense, and one sense only: that of inequality within individual countries.
Poverty Line Is Not a Useful Statistic
This has happened even though inequality in the world as a whole has improved significantly. The rapid growth of China and many other emerging economies has reduced the number of poor people in the world enormously. The World Bank’s millennium goal of eliminating poverty – defined as living on less than US$1.25 per day – by the year 2015 is close to being achieved. Income and standards of living across the world are becoming far less unequal than in the past.
In rich societies, only a very small percentage of the population is actually destitute and in poverty. These families comprise no more than 5% or at most 10% of the population in normal times. In Hong Kong, where the official poverty threshold is 50% of the median household income, about 15% of people live in poverty. In dollar terms, that threshold currently amounts to HK$17,400 per month for a family of four (including regular social welfare cash benefits). This comes out at US$18.60 per day per person, or 15 times the poverty level defined by the World Bank for the world’s population. In the US about 16% of American households live below their poverty line, which is currently US$23,000 per year (or HK$14,950 per month) for a family of four.
Of course, not every family living below the poverty line in rich societies is genuinely in poverty. The poverty line is a snapshot of a point in time. These families are at different stages of their lifecycles, and direct comparisons of dissimilar families are very difficult. Even the number of family members normally varies over the lifecycle. The notion that a “line” can separate poverty from non-poverty is ridiculous. If HK$17,400 per month is the line for a family of four, does that mean such a family with an income of $18,000 is not poor? And can one meaningfully compare a single mother with one child to a couple with no children, even if we ignore age and other differences? No wonder a US Federal Court Judge has said the poverty line is a useless statistic.
Still, poverty does exist and alleviating poverty is about devising policies to help the poor and improve their standard of living. There are two approaches to doing this. First, we seek to find out the causes so we can tackle them. Second, we want to devise policies to raise the standards of living of those in poverty, for example, by giving them income support.
Invest In the Next Generation
There has been a lot of debate on whether the effects of income support programs to alleviate poverty are long lasting or short lived, and whether the effects carry to the next generation. Does income support help improve intergenerational mobility? Yes, if parents invest the additional resources received in their children. No, if they do not do so. Can society then “make” parents invest in their children? This will be more expensive because forcing people to change their behavior is not costless. There are also arguments about whether this is ultimately feasible, in addition to ethical issues about parents’ freedom of choice. Don’t parents know best?
There is of course another option and that is for government to mandate investment in children and provide this directly. There are two questions here: is government sufficiently competent and adequately motivated to do an effective job? And if not, and it outsources such services, how do you monitor the behavior and performance of the agencies involved? Would it be easier and cheaper than monitoring the willingness of parents to allocate income support to their children?
Research into these questions has yielded mixed results and opinion is sharply divided. Poverty alleviation policies remain politically charged, socially divisive, and colored with strong moral tones. Any real chance of solving poverty issues must rest on a solid empirical knowledge of their causes, and a clear understanding of the effects of proposed policy remedies so that more problems are not inadvertently created.
Middle Class Challenges
Poverty has been around for a very long time in human history. It became a “problem” after industrialization succeeded in alleviating poverty on a large scale, but failed to eradicate it altogether. The remaining pockets of poverty seem to be resilient to social medication. The most aggressive policy on poverty was America’s Great Society Program in the 1960s initiated by President Johnson, but it, too, did not succeed.
In recent times, another important and related problem threatening our society is the “sinking middle class”. Some believe this is more serious than the poverty problem because it affects far more people. The “sinking middle class” refers to the large percentage of people who do not appear to be able to earn a sufficient income to be comfortable.
Some of the most important things for a comfortable life have become very expensive – health, education, housing, getting married, raising children, and having a 30-year retirement life. It is also becoming increasingly difficult to be sufficiently productive to bring in an income for living comfortably. I would guess that half the population in rich societies are part of the “sinking middle class” today.
Although people’s standards of living have not fallen in terms of the number of cell phones and other mobile gadgets they can afford, or the amount of clothing, food, or regular consumer durables they can buy, it is the bigger, more important items that are moving out of reach. Consider that the median household income for a family of four in Hong Kong is HK$34,800. What proportion of people earning that income would feel sufficiently confident to own a home, afford quality education for their children, afford quality medical care when they become sick, retire in comfort, and feel that their children could do the same?!
Demand and Supply Factors of Poverty
What has happened to our society?
Many people have their favorite answers. Most of the time their answers are not incorrect, but they are at best a small fraction of the truth. Unfortunately, many people have no interest in the complete truth. They prefer to hold onto their prejudices and engage in endless political bickering. But to alleviate poverty, near poverty and inequality, we need to get to the truth, however complex it is, for otherwise there will be no solution.
There are usually two broad approaches to understanding poverty, near-poverty, and inequality – a demand side approach and a supply side approach. The two are not totally independent of each other, but the difference in emphasis is real. The supply side approach focuses on individual characteristics, family background, community and neighborhood factors and the like to explain why individuals are poor. The demand side approach focuses on economic conditions such as business cycles, secular economic trends in the rise and fall of nations, and secular technological trends affecting the fortunes of industries and occupations. Below, I outline some of the key issues in both supply and demand factors.
Four Major Supply Factors
Individuals with more human capital have higher earnings. Tackling poverty and near poverty means supporting those lacking in opportunity to augment their human capital from an early age. Human capital is acquired through three institutions: (a) the family, (b) the school, and (c) the community. Each provides learning and nurturing activities. Strengthening them represents an investment in children.
For (a), poor families and broken families (meaning single parent families) make fewer investments in their children. Rising divorce rates are a major reason why children are failing in life. Hong Kong’s high divorce rate is among the top ten in the world.
For (b), education is costly because it requires intensive teacher time. A university graduate has to spend 16 years in fulltime learning (not counting nursery and kindergarten). Assume schools have a teacher to student ratio of 1 to 40 and universities a ratio of 1 to 20. This implies that in a teaching career of 36 years, a teacher can produce only 72 students up to university graduate level. Not a great deal of advance over Confucius over 2000 years ago. It also means that as the demand for education increases with economic growth the share of teachers in the working population must also rise.
To have quality learning, one has to have quality teachers and attend quality schools and universities. This is of course even more expensive. Modern information technology can assist up to a certain point, but it cannot replace the face-to-face encounters between teacher and pupil that are critical for quality education.
In Hong Kong, as well as elsewhere, the training of teachers and the incentives to motivate them in their work have much room for improvement. The organization of teaching and learning is critical to the training of the future generation and to our future, and I fear society itself will fail if it fails in this task.
For (c), community learning opportunities are important too. Hong Kong has a fully developed civil society with numerous charitable voluntary services that help the less fortunate. Unfortunately, Hong Kong’s low-income families are now increasingly concentrated in public rental housing estates that provide a limited and homogeneous living environment located far from the urban center. These estates provide neither a nurturing nor stimulating environment outside the home and school.
II. Medical and Health
Individuals in good health live longer. Those who expect to live longer invest more in human capital because the return to every dollar invested can be utilized for a longer period of time and yield a higher rate of return. The rich live longer too and invest more in human capital. Rich societies therefore spend more on medical and health care. Quality medical and health care can be very expensive for those in poverty and near poverty.
Hong Kong subsidizes medical health care heavily by making hospital care essentially free to all. This implies rationing of services as demand greatly exceeds supply. Such an approach is superficially egalitarian but essentially forces the vast majority of those in poverty and near poverty to mediocre care as a result of rationing. Grievances are particularly strong among those in near poverty, as they demand more. A far better way to subsidize such a service is to expand the supply of medical and health care personnel.
The shortage of housing is a worldwide phenomenon in rich countries. Congestion in urban cities, where the population most wants to live, has made land very scarce. Rigid government regulations have made redevelopment difficult, while building codes and planning rules have made housing supply increasingly limited. The problem is compounded by special interest groups that prefer less development to more development. The groups that seek to preserve countryside living – conservationists, heritage lovers, and other environmentalists – have demanded limits on building heights in city centers that have contributed to making housing very expensive.
This is an area where governance has failed totally to coordinate conflicting interests. Small minorities have been able to prevail over society’s wider interests by hiding behind rules and regulations and manipulating the law. That politics have developed to this stage, often in democratic societies, reflects the erosion of the rule of law and the triumph of the rule of lawyers, as Professor Niall Ferguson has pointed out.
IV. Old Age Retirement
If you have a long life but a low-income, you should be worried. How should society arrange to support the elderly poor? When universal social pensions were introduced in Britain at the end of World War II, men and women could start receiving pensions at 60. Life expectancy at that time was also 60. Today it is 80 but the pensionable age has not caught up, and that is why the pension scheme is bankrupt. Reforming it is politically difficult and politicians have been kicking the can down the road for decades.
If Hong Kong opts for universal social pensions today, then the scheme will be bankrupt even before it gets off the ground. Life expectancy will continue to be extended and any system with a fixed retirement date will face bankruptcy. Introducing such a flawed scheme breaks the intergenerational social contract between children and parents that for centuries and throughout human history has assured children take care of their parents in old age and parents invest in their children when they are young.
The state today is very vulnerable to being hijacked by vested interest groups and shortsighted politicians. It is no longer a reliable institution for delivering old age support compared to partnerships between parents and children.
On the demand side, the most important change is technology. The two central enabling technologies mankind has discovered so far are electricity and information technology. They have been transforming our world and will continue to do so. But everything we know today suggests there is no guarantee that the new technology will mean everyone who wants to work will be able to find a job that is sufficiently rewarding for a comfortable life.
The wage differential between skilled and unskilled workers has been widening for over 30 years and there is no sign it will stop. Robotics, new materials, and digital technology will allow companies to shed many jobs at the low end of the skill spectrum. The middle class must become far more skilled to move up or risk being hollowed out. Parents, even poorly educated ones, know this already. And that is why so many of them are feverishly putting their children through a dozen training programs to develop the necessary enabling skills in the hope that they will rise above the crowd left behind by the advance of technology.
For those unable to develop the hard skills necessary for success in the new economy, there is still the prospect of developing soft skills. A technology driven economy is also predominantly a service economy. But the rewards will go to those who are able to master people skills and who acquire an appreciation for quality service and attention to detail.
The 21st century will bring new challenges for addressing poverty, near poverty and inequality. These are not the same as the challenges society experienced in the 20th century. We have the opportunity to learn from the failures of the last century, when the state threw money at its problems to little avail. Hopefully now, we will learn to be smarter. But from the way politicians and advocacy groups talk about poverty and inequality, I cannot be too confident. Their rhetoric is still that of the last century. And they appear to have only a very limited appreciation of the challenges we face today.
Niall Ferguson, The Great Degeneration, Penguin Books, 2013.