(This essay was published in Hong Kong Economic Journal on 12 October 2016.)


The government announced on 19 September that around 31,800 households had applied for the Low-income Working Family Allowance and 20,633 were approved. According to the government’s Hong Kong Poverty Situation Report 2014, the number of households below the official poverty line is about 360,000 after deducting cash subsidies, and 270,000 households if both cash and in-kind benefits are deducted.


Initially the government had expected about 200,000 households would benefit from the Low-income Working Family Allowance, but only about 10 percent of the estimated number qualified. The government is now considering simplifying the application form and relaxing the restrictions.


All programs have teething difficulties, but it is unlikely that any reasonable adjustments will bring the number of qualified households anywhere close to 200,000. Oxfam, which is a strong advocate of the government’s scheme, had estimated based on its own research in 2014 that there were 189,500 households below the poverty line.


Why did both estimates so grossly miss the mark?


The government calculations were based on the quarterly General Household Surveys. I have checked these numbers and can confirm that the estimates are correct and competently done. There can be only one conclusion: the incomes in these surveys must have been grossly under reported. Hence, many of the so-called poor are not really all that poor.


What you self-report to a person who comes to collect information in a survey, and the amount of income you are prepared to enter on an application form for the Low-income Working Family Allowance under oath, are very different matters. Under-reporting income is a criminal offence when you apply for a government subsidy.


Like many economists I have always doubted the usefulness of the poverty line as a concept to characterize and define poverty.


So, in an attempt to understand poverty in Hong Kong, I undertook to study the problem over the past two years. I have written scores of articles on the topic which were recently collected in a book entitled: Fixing Income Inequality in Hong Kong. The following are the key highlights of what I have learned.


First, during the period 1976-2014, the individual earnings of men in the bottom 50% of the income distribution increased on average by 2.5% per annum in real terms; women did slightly better at over 3.5%. Among the top 10% of the income distribution, men’s earnings increased on average by over 3.5% per annum, and women’s by over 4.2%. This has contributed to greater inequality in individual earnings over time. The primary cause for this has been the rising pecuniary rewards to more education.


Differences in education opportunities impact not only individual earnings, but also household income inequality. Empirically, it is by far the single most important factor in accounting for the rise in household income inequality in recent decades.


Second, during the same period, household income inequality increased even more than the inequality of individual earnings. Five factors have contributed to this: ageing, positive marital matching, continued influx of unskilled immigrants, family breakdown, and public rental housing allocation policy.


Third, ageing has been an unusually important cause of the rise in household income inequality. This is because our population swelled during the years 1945-51 when vast numbers of immigrants arrived, increasing the population from 600,000 to 2.3 million. The high postwar birth rate of this cohort created a huge baby boom generation that is now retiring.


The rapid swelling of households headed by retired individuals with no income has artificially boosted the number of zero or low-income households. This has caused the measured household income inequality to increase in the past decade and will continue to do so in the coming two decades.


Consider housing circumstances by age. Some 27.4% of households with heads less than 65 years of age lived in public rental housing in 2011 (528,000 out of 1.9 million households). But among households with heads aged 65 years of age or older, that proportion leapt to 48.3% (237,000 out of 490,000 households). This composition of tenants in public housing estates will continue in the decades ahead.


Interestingly, poverty rates among economically active households (before cash and in-kind transfers are included) have been remarkably stable – averaging about 7.8% during 1985-1994, 10.5% during 1995-2004, and 9.8% during 2005-2014. There is no consistent pattern of rising inequality. The overall household poverty rate of economically active households is the most appropriate driver.


In 2013, the US poverty rate was officially 14.5%, but this did not include the value of non-cash benefits and refundable tax credits. If these omissions were added the true poverty rate would have been between 4.5 and 8.5% depending on how the omissions are valued.


Fourth, rising inequality in individual earnings reflects the higher rewards of more education. Empirically we also observe a clear pattern of positive marital matching, with more highly educated men having a tendency to marry more highly educated women. This, too, contributes to greater observed household income inequality because highly educated women tend also to work nowadays.


Fifth, China’s opening has led to a huge influx of unskilled immigrants. The first wave of 300,000 (mostly men) came in 1978-80. This was followed by a rise of cross-border marriages that has continued to  the present time, as low-income individuals find spouses across the border and bring them to Hong Kong for family reunion.


Since many who have come do not work, the individual earnings and household income inequalities probably are not immediately impacted. Nevertheless the influx has increased the proportion of unskilled workers in the population and most probably further depressed unskilled wages relative to skilled wages over time as these immigrants entered the labor force.


Sixth, family breakdowns have risen dramatically in the past three decades. Our current crude divorce rate is top five in the world at 3.1 per thousand population. Divorces everywhere, and similarly in Hong Kong, occur much more frequently among low-income households. The economists’ explanation is that it is more costly for the rich to divorce because family assets have to be divided.


When a low-income family is divided into two after divorce, you create two even poorer families. This increases the observed household income inequality over time, even though individual earnings inequality may not be much affected.


The unusually fast rising and high divorce rates in Hong Kong are a by-product of the greater ease of cross-border marriages. The cumulative number of cross-border marriages in the years 1986-2014 was 680,017, or 40.3% of all marriages during this period. Alongside that, the numbers of both divorces and cross-border remarriages have increased. The cumulative number of divorces was 365,229 divorces over the same period, while the cumulative number of cross-border remarriages was 130,040, constituting 44.3% of all remarriages.


This has led to a swelling of household formation among low-income households. It has also led to a rising number of single parent households concentrated among low-income households. In 2015, there were 89,900 single parent households with children under 18 years of age, of which 50,100 (or 55.8%) were in the public rental housing estates.


In 2011, among households with heads under 65 years of age, the numbers of divorced individuals living in public rental housing estates and other types of housing accommodation were, respectively, 98,000 (43.4%) and 128,000 (56.6%). This implies that individuals living in public rental housing estates were twice as likely to divorce than those living in other types of housing accommodation given that only 27.4% of all households live in public rental housing estates.


An even gloomier picture emerges if we look at this from the perspective of household income distribution. Some 67.4% of all divorced individuals (numbering 66,000) living in public rental housing estates were in the lowest income quartile, against 29.7% (38,000) of those living in other types of housing.


The key poverty issue in Hong Kong is therefore not abject poverty (although there are such sad cases), but the rising economic divide that is widening household income inequality. The problem begins in the home.


High divorce rates and cross-border marriages have driven large numbers of low-income families into single parent and broken families, creating more low-income households and making them even poorer. These families also tend to be poorly educated, which exacerbates their low-income status especially when you consider that at the upper tail of the household income distribution, educated women are marrying educated men and are staying together. Most worrying are the long-term consequences these forces will have for intergenerational mobility and inequality.


The real social issue facing Hong Kong is not growing abject poverty, but the rise of near poverty where growing numbers of lower middle-income families are sinking into low-income ones. This is not an economic issue. Even if we could create more high value-added jobs, this would do little to lift low-income households out of near poverty. More education opportunities, on the other hand, would make a difference by reducing the proportion of unskilled workers. But this effect would be seen only in the very long run after the bulk of the unskilled population ages.


The seventh and final insight I have gleaned from my study is that the allocation of public rental housing units creates perverse incentives for divorce among low-income families. One party of a divorced family remains in the public housing units (usually women with children), while the other party moves out (often to rent sub-divided housing in the private sector). But if the latter remarries, they become eligible to apply for public rental housing again.


This situation has contributed to growing numbers of divorces and cross-border remarriages among low-income divorced individuals. In 2011, 39.1% of pubic rental households with heads less than 65 years of age had a family member who had emigrated to Hong Kong within the past 20 years. Bringing in more unskilled immigrants through family reunion has further swelled the number of low-income households and contributed to family breakdown.


High divorce rates are an important driver of the rising demand for sub-divided housing in the private rental sector, and of rising rents. They have also contributed to the cramped living conditions that Mr. Ho Hei-Wah of the Society of Community Organization recently featured in a photo-exhibition. The growing number of homeless individuals is also a by-product of divorce. Those individuals and families that have to eke out a living while living in tiny sub-divided flats or on the street are probably the most abjectly poor in Hong Kong.


The growing difficulty of becoming a homeowner keeps low and lower middle-income households in “near poverty.” Many are concentrated in the public rental housing estates and have little hope of escaping such “near poverty.” They are stuck, and so are many of their children.


A policy to foster homeownership among this group of households would reverse the perverse “divorce subsidy” of the current public rental housing program. It would moderate rising household income inequality, reduce housing pressure at the low end of the market, lighten the burden on the abjectly poor, and most importantly tackle the real problem of “near poverty.”


Homeownership is a means to escape “near poverty” for many. It provides security in family formation, retirement support, and building ties with the next generation. For most people their home is the only asset they own besides their own human capital. It is the economic and social foundation for personal liberty and a free society.


This is the story I want to tell about Hong Kong – inequality here is not really so terrible and neither is abject poverty, but there is a lot of near poverty related to the growing proportion of unskilled residents stuck in housing units they do not own.


Last Thursday, I joined some 40 other Chinese (language) writers at Hollywood Plaza on the occasion of the Golden Book Awards. There I heard a most encouraging story. One of the writers, Gill Mohindepaul Singh (喬寶寶), whose award winning autobiographic story is entitled Made in Hong Kong (香港製造),spoke with eloquence and conviction about how Hong Kong society has offered opportunities for him and how his efforts had borne fruit. Listening to him I sense hope. Liberty is alive in Hong Kong and will grow even stronger when homeownership is within the reach of all.


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