Rising Income Inequality In Hong Kong: Reasons And Challenges

The Gini Index and Income Inequality in Hong Kong

Discuss about the Estimation Of Gini Coefficients Using Lorenz Curves.

According to the news article, the property market in Hong Kong is undergoing a dramatic turmoil. In response to soaring housing prices, businesses are raising prices of goods and services. This has forced people to find out extra work. The condition of income inequality in Hong Kong has reached to its worst phase. Inequality reached to the highest level since more than four decades. Rising property price affects most vulnerable groups in the society raising social tension. With a population of 7.3 million, the city is highly concentrated with individual having wealth valued more than $30 million. The Gini index of Hong Kong increased to 0.539. Property market provides the most prominent example of widening wealth gap. Almost 30 percent of the household in Hong Kong live in subsidized household. Many poor can afford only a small cubical or subdivided flat (Yiu 2017).

Poverty and income inequality being some of the issues of immense concern in the economic domain of any country or the global scenario as a whole, there are various models and measurements in the framework of economic theories for estimating the income inequality present in different geographical regions at different points of time, of which one is that of the Gini Index (Rey and Smith 2013).

The Gini Index refers to the indicator which shows the magnitude of the deviations of the wealth distribution of a country or a geographical region from the equal distribution of the productivity of the same and the same can be graphically shown with the help of Lorentz Curve, which shows the percentage of the total income (in the y-axis) which is earned by the different cumulative percentages of the population (starting from the bottom or most poor ones).

Figure 2: Lorenz Curve

(Source: Fellman 2012)

The value of Gini coefficient ranges from 0 to 1, where 0 denotes the situation of perfect equality of income distribution in the economy (shown by the line of equality in the above figure), while the value 1 denotes perfect inequality in the same (Fellman 2012). Higher the income inequality in the economy, higher is the value of the Gini coefficient and higher is the deviation of the Lorenz curve from the line of equality as shown in the above figure.

As per article, the income inequality in Hong Kong can be seen to be rising in the last few years, with the current value of the Gini coefficient being 0.539 in the recent period. The value of the same can also be seen to be increasing over the last few decades, which can be shown with the help of the following figure:

Factors Responsible for Income Inequality in Hong Kong

Figure 3: Rising Gini Coefficient of Hong Kong over the years

(Source: Forbes.com 2018)

This indicates towards the rising wealth and income gap in the country over the years, which has made a small section of the population of the country extremely rich at the cost of economic welfare of a significant share of the poor population of the country who have been becoming increasing poorer.

The rising income inequality in Hong Kong can be attributed to various factors, the most significant ones are as follows:

Demographic Composition- The demography of most of the population of the country mostly consists of low income households which are mainly formed of single parents, non-working adult population and young working people, who need to bear the burden of a big and increasing share of non-working and dependent adult population (Saunders, Wong and Wong 2014).

Low pay-scale- The pay-scales of the young workers, especially the fresh graduates are considerably low (not more than HKD10,000 per month).

Emigration-  Huge outsourcing has taken place, especially of the young population of the country, who have left the country and their family in search of economic prospects in other countries, thereby mostly deteriorating the income conditions of their families in the home country.

Underinvestment in education- The income inequality also increased due to the lack of development of proper skills and professional education for most of the popuation and the presence of costly higher education framework with low support and investment on part of the government (Egawa 2013).

The presence of striking and increasing income inequality in Hong Kong, has led to a situation, where the privileged class, due to their higher income and higher consumption patterns, have raised the overall aggregate demand in the country, the effects of which can be seen to be faced by the non-privileged and poorer sections (Li 2015). This can be seen in many of the markets, especially the housing market, where the effects of wealth gap are most visible.

Figure 4: House Price Index of Hong Kong over the years

(Source: Tradingeconomics.com 2018)

The increase in the house prices in the country is attributed to the higher demand and less than proportionate supply in of the same, which is a direct effect of the rising income inequality in the country.

For addressing the rising income inequality, the government of the country has taken several policies and strategies, some of which can be seen as follows: The primary step which can be seen to be taken by the government of the concerned country in order to increase the economic wellbeing of the majority of the population of the country, thereby trying to reduce the inequality existing in terms of income distribution is that of increment of the level of minimum wages over the time. As is evident from the above figure, the hourly minimum wage has increased from 28HK$ in 2010 to nearly 34.50 HK$ per hour in the recent period. This is expected to address to the concerned issue to a considerable extent. To ease the housing affordability conditions in the country, the government of Hong Kong provides mass housing programs, under which affordable and highly subsidized public housings are available to the those who cannot afford the high priced private ones. These houses cater to the demands of nearly half of the population of the country. However, there are huge demands for the same, as can be seen from the 153,000 general applications and 119,000 non-elderly applications under Points and Quota system. This in turn, leads to a considerably long waiting time of nearly more than 5 years for general applicants and 2.8 years for elderly one-person ones (Housingauthority.gov.hk 2018).Apart from this, the government has also targeted in encouraging increase in the private supply of housings and flats by clearing up lands and providing incentives to the private constructors. In the recent period, nearly 98,000 new homes have been added to the residential market of the country, which is expected to help in reducing the affordability crisis in the economy.

Conclusion

As is evident from the above discussion, the economy of Hong Kong, in spite of being one of the emerging and newly dominant economies in the recent period, faces economic crisis in the form of acute income inequality as well as housing affordability crisis. The income inequality can be seen to be increasing over the years, as can be seen from the rising Gini Coefficient of the country. The house price index of the county can also be seen to be increasing. In this context, the government of the country can be seen to be increasing the minimum hourly wage of the country and has also implemented public housing programs to provide housings to the lower income class although the demand for the same is still higher than the supply of the same, which in turn leads to higher waiting period for these types of housings.

References

Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Cengage Learning, 2015.

Egawa, Akio. Will Income Inequality Cause a Middle-income Trap in Asia?. Vol. 797. Bruegel, 2013.

Fellman, Johan. "Estimation of Gini coefficients using Lorenz curves." Journal of Statistical and Econometric Methods 1, no. 2 (2012): 31-38.

Forbes.com. 2018. "Beyond The Umbrella Movement: Hong Kong's Struggle With Inequality In 8 Charts". Forbes.Com. https://www.forbes.com/sites/liyanchen/2014/10/08/beyond-the-umbrella-revolution-hong-kongs-struggle-with-inequality-in-8-charts/#4d9858694639.

Housingauthority.gov.hk. 2018. "Number Of Applications And Average Waiting Time For Public Rental Housing | Hong Kong Housing Authority And Housing Department". Housingauthority.Gov.Hk. https://www.housingauthority.gov.hk/en/about-us/publications-and-statistics/prh-applications-average-waiting-time/index.html.

Leung, Charles, and Edward Chi Ho Tang. "Availability, affordability and volatility: The case of Hong Kong housing market." (2014).

Li, Jing. "Recent trends on housing affordability research: where are we up to?." (2015).

Pindyck, Robert S., and Daniel L. Rubinfeld. "Microeconomics." (2014).

Rey, Sergio J., and Richard J. Smith. "A spatial decomposition of the Gini coefficient." Letters in Spatial and Resource Sciences 6, no. 2 (2013): 55-70.

Saunders, Peter, Hung Wong, and Wo Ping Wong. "Deprivation and poverty in Hong Kong." Social Policy & Administration 48, no. 5 (2014): 556-575.

Tradingeconomics.com (2018). Hong Kong Minimum Hourly Wages | 2011-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/hong-kong/minimum-wages [Accessed 9 Jun. 2018].

Tradingeconomics.com. 2018. "Hong Kong House Price Index | 1994-2018 | Data | Chart | Calendar". Tradingeconomics.Com. https://tradingeconomics.com/hong-kong/housing-index.

Yiu, Pak. "Hong Kong Wealth Gap at Its Widest in Decades as Handover..." Reuters. June 29, 2017. https://www.reuters.com/article/us-hongkong-anniversary-wealth-gap/hong-kong-wealth-gap-at-its-widest-in-decades-as-handover-anniversary-nears-idUSKBN19I1E2.