Increased social welfare may not hurt economic growth

Updated: 2012-07-27 06:45

By Alfred M. Wu(HK Edition)

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A Hong Kong lawmaker has recently described poverty in Hong Kong by citing some touching stories. In Sham Shui Po or Mong Kok, she met many little boys helping their parents to collect waste papers. After earning roughly HK$10 each time, they returned home for school courses, sleeping early due to tiredness. In the meantime, celebrities in town spend several thousand HK dollars just for an ordinary dinner.

Thus, when the government announced last month that the Gini Coefficient (after taxes and transfers) in Hong Kong remained roughly the same over the past five years, a public outcry erupted. Gini Coefficient, ranging from 0 (perfect income equality) to 1 (maximum inequality), is used by economists and practitioners regularly. Furthermore, Gini Coefficient has some far-reaching policy implications. A widely held view is that once Gini Coefficient reaches a certain level, the likelihood of social unrest will increase sharply. That is probably why the HKSAR government was uneasy with Gini Coefficient before taxes and transfers and chose to report the lower figure.

The SAR government even argued that Hong Kong's Gini Coefficients are analogous to other important metropolitan cities such as New York. This argument is pointless, however. The lawmakers and scholars in social welfare complained that it was a kind of political window dressing. Some even argued that it was data falsification.

To be candid, the government's argument is correct but meaningless. The American government even said the same thing three decades ago when Gini Coefficient before taxes and transfers in the US passed 0.4 in the 1970s. Today some Americans are still suffering from grave income inequality. Thus, comparing the Hong Kong situation to some American cities embarrasses the policy makers in Hong Kong in reality. Many people in the business sector and even in the public sector firmly believe in the assumption that poverty is caused by globalization; thus the SAR government can do very little to address the problem. The research over the negative impact of globalization on income equality is inconclusive and contentious in reality. Thus why not think about Hong Kong's own factors shaping rising income inequality and the wealth gap?

One of the most daunting factors is that many high-ups in Hong Kong believe that increased social welfare will hurt economic growth in the long run. That is, the welfare state encourages laziness in society; meanwhile welfare spending will crowd out private investment. The wise solution thus is to suppress the development of the welfare state in Hong Kong. Parallel to that assumption, some senior businesspersons and policy makers in government advocate the trickle-down effect - when the cake of the economy grows, the poor will get a slice of the cake eventually.

Nevertheless, the assumption has proven superficial for the past couple of years around the world. Many prominent economists in the developed countries confess that the trickle-down effect did not occur in reality in the absence of proper government intervention. Donald Tsang, former chief executive, in June 2012 withdrew his support for trickle-down power and shared with lawmakers that "I used to believe that different social strata could enjoy the fruits of economic development as a result of the trickle-down effect. However, there were discrepancies between the theory and reality."

As the trickle-down effect does not work in many countries, Hong Kong is no exception. Very surprising is that policy makers in Hong Kong were so obsessed with the assumption. Even though some experts told Donald Tsang and his aides about the negative impact of the dysfunctional welfare system on society, no one among the top wholeheartedly promoted appropriate, effective measures to address a growing wealth gap and pertinent issues in Hong Kong.

Academic studies have suggested that the welfare state may not hurt economic growth. Professor Peter H. Lindert at the University of California, Davis traced back the relationship between social spending, taxation, and economic growth in the developed countries over a hundred years. His central argument is that the welfare state did not pose a real threat to economic growth. He concluded that if the American government realized this point much earlier, the US could have the same economic growth with a more equalized society.

Chief Executive Leung Chun-ying is rightly promoting a quality of life-centered approach wherein poverty-alleviation and housing issue are the pillars of the Hong Kong style "new deal". The housing problem is intertwined with both poverty and income inequality. As a commentary in China Daily aptly pointed out that the land policy is associated with a widening wealth gap between the land owning class and the landless class, which contributes gravely to income inequality in Hong Kong.

Not waiting for his first policy address in October, CE Leung Chun-ying unveiled a number of crucial measures to help needy citizens. Nevertheless, commitment rather than money is more important in practice. Donald Tsang sent out HK$200 billion "sweeteners" to citizens; nonetheless it turned out the measures failed on many fronts. Instead of one-off measures, the new administration should foster a long-term commitment to social development in Hong Kong.

The author is a current affairs commentator.

(HK Edition 07/27/2012 page3)