(This essay was published in Hong Kong Economic Journal on 28 October 2015.)

 

I attended the 2015 Commission of Poverty Summit where Chief Secretary Carrie Lam presented an analysis of the poverty situation in 2014 and the poverty figures for 2009-14. Her main points can be summarized as follows:

 

First, the number of households below the government-defined poverty line increased from 541,000 in 2009 to 555,000 in 2014, but the number of poor people living in such households decreased slightly from 1.35 million in 2009 to 1.33 million in 2014. But once these numbers are corrected for recurrent cash transfers made by the government, the number of poor households actually decreases, from 406,000 to 383,000, while the number of poor people decreases from 1.04 million to 962,000. Government policy interventions have therefore made a significant impact on reducing the number of households and people below the poverty line.

 

Second, the number of elderly people living below the poverty line increased from 366,500 in 2009 to 436,400 in 2014, implying a growth of 19.1%. After correcting for government recurrent cash transfers, the growth rate is significantly smaller, increasing only 3.9% from 282,900 to 293,800. Nevertheless, the number of elderly poor is forecast to rise significantly despite government transfers because of rapid ageing of the population.

 

Third, among economically active households, the number of people living below the poverty line decreased from 829,000 in 2009 to 759,000 in 2014, implying a drop of 8.4%. After correcting for government recurrent cash transfers, this number decreased from 634,000 to 537,000, which is a drop of 15.3%. Among economically inactive households government recurrent cash transfers the corresponding drop in the percentages was from 8.9% to 15.2%. The population poverty rates among economically inactive households declined from 62.2% in 2009 to 57.6% in 2014; these poverty rates were significantly higher than those among economically active households that declined from 10.7% to 9.0%.

 

I was delighted to hear Mrs. Lam point out the importance of getting people to work in order to alleviate poverty. The drop in the numbers of poor people during 2009-14 is to a large extent the result of a robust job market. She anticipated that when the Low-income Working Family Allowance begins to take effect, the poverty rate might further decrease, although she cautioned it might not be sufficient to offset the rise in elderly poverty rates.

 

Mrs. Lam also had a very important message that unfortunately got lost in the subsequent media reporting. She pointed out that the elderly poverty rate is not well measured because the elderly typically have no incomes, and the construction of the poverty line does not include assets.

 

I have always had reservations about using income to define the poverty line for this reason because it unavoidably overestimates the number of elderly poor, fuelling exaggerated claims about the incidence of elderly poverty. For this reason, also, I have always discounted some of the claims of politicians and advocates of the elderly poor.

 

The government’s poverty line can be used in a smart way to obtain a better measure of the poverty rate in Hong Kong. This approach applies the poverty line to those households headed by working adults between the ages of 20 to 64. Figure 1 plots household poverty rates for the period 1985-2014 using the same General Household Survey data that the government uses to derive its poverty estimates. The household poverty rates include government recurrent cash transfers and are presented separately for economically active and inactive households. The overall rate is also shown.

The most fascinating result is that poverty rates among economically active households have been remarkably stable – averaging around 7.8% during the first decade 1985-1994, 10.5% during the following decade, and 9.8% during the third decade 2005-2014. The overall household poverty rate is similar across these three decades because it is dominated by economically active households, which constitute on average 77% of all households with working-age heads. Not surprisingly, when we look at economically inactive households, the poverty rates are high, averaging 55.0% over the three decades.

 

The low poverty rates in the first decade could be attributed to the early period of China’s opening, when local manufacturing expanded across the border. This enhanced productivity in Hong Kong and benefitted many less-skilled workers. The poverty rate rose during the second decade (1995-2004), which included six recession years following the Asian Financial Crisis. The poverty rates in the third decade (2005-2014) reflected a robust job market, although the labor productivity of the less-skilled did not experience the same fast growth rates as seen in the first decade.

 

What does the government poverty line tell us when it is applied to households headed by elderly individuals age 65 or above? Figure 1 shows that household poverty rates among economically active elderly households are about 50-100% higher than households headed by working age adults. This difference is expected since elderly workers have passed their prime working years so their wages are generally lower.

 

Household poverty rates among economically inactive elderly households are high, but in the past decade (2005-2014) they were not higher than the rates of economically inactive households headed by working age adults. Since elderly households are mostly retired and some have assets, their poverty rates are likely to be significantly overestimated. Policy measures should focus on getting the economically inactive in working age households to re-enter the labor force. This would not only alleviate poverty rates immediately, but prevent future elderly poverty rates from rising.

 

The share of economically inactive households headed by working age adults has increased from 3.0% in 1985 to 7.5% in 2014. Why has there been such an increase? In 2014, the total number of economically inactive households headed by working age adults was 140,000 (with 193,000 working age adults living in them). The number of economically inactive households classified as poor numbered 77,000 (with 111,000 working age adults living in them).

 

These are very large numbers and warrant further investigation. Interestingly, these numbers are of the same magnitude as the recorded numbers of adult working age persons (174,900) who reported themselves as not in the labor force for no compelling reason in the 2011 Census – a compelling reason being someone who is sick, a homemaker, a student, or in prison. Moreover, their numbers have risen dramatically – they were historically quite small, at 34,900 even as late as the 1996 By-Census.

 

Could it be that government’s numerous recurrent cash and in-kind transfers are creating two incentives – one to alleviate poverty and the other to encourage poverty? I have been told that the Hong Kong government has 221 programs providing different benefits to people who are in need of assistance.

 

The new Low-income Working Family Allowance will target poor households by creating incentives for them to work. Existing transfer programs were not so specifically targetted. Helping those who need assistance is a non-specific poverty goal. Many of these programs could have inadvertently incentivized individuals to become economically inactive.

 

Government social welfare expenditure per capita began to rise rapidly in the mid-1990s. This has correlated with the rising number of individuals who have chosen to drop out of the labor force. Figure 2 plots the percentage of the population by age group that is not in the labor force for no compelling reason and against the inflation-adjusted government social welfare expenditure per capita.

It appears to me that the widespread perception of a spectacular rise in poverty rates in the past decade or so is not substantiated. The evidence shows that the economically active household poverty rate has risen modestly, not phenomenally, since 1985. The government’s recurrent cash transfer has done a reasonable job in keeping the poverty rate within bounds. It might have inadvertently provided incentives for more people to drop out of the labor force, and thereby created some of the poverty that society is trying to alleviate. This is something we should be equally concerned about.

 

The alarming media headlines are overdone. This is not to say that there aren’t families who are destitute, and even obscenely so amidst rising prosperity. It is perfectly understandable that these are seen as newsworthy stories, but they do not provide the full picture. The wealth gap, especially due to property prices, has indeed risen dramatically. However, this is not the same as poverty and it is not what the poverty line measures.

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