Analyzing the Relationship Between Economic Growth and Social Welfare in Hong Kong

Nobel Memorial Prize winner for Economic Sciences Milton Friedman said: “The existence of a free market does of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the ‘rule of the game’ and as an umpire to interpret and enforce the rules decided on.”

The Hong Kong government has done Friedman proud — yet it may also have not. It has provided a cozy environment where businesses can thrive within a “small government, big market” framework, foreign investments pour in at an exponential rate, and tax rates unchanged and remain one of the world’s lowest.  But its pragmatism and conservatism in maintaining an atmosphere conducive to economic growth have, however, not contributed a positive correlation to or proportionality vis-a-vis its social welfare spending. This becomes more pronounced in the context of its aging population where forecasts peg the number of the elderly (65 and up) hitting 33% between 2021 to 2030 (Park, et. al. 2012). Based on current figures, 1 of every 3 elderly in Hong Kong is classified poor.

Government operates a social welfare budget of around 2.59% of its GDP. In contrast to its counterparts in the East Asian welfare economies league, Hong Kong’s aggregate spending for social welfare is second lowest. It is lower compared to Taiwan, Korea and Japan; and slightly higher than Singapore, which, unlike Hong Kong, has successfully mobilized the private sector in extending social services.

It is interesting then to assess the economic growth of Hong Kong against a backdrop of its efforts to improve living conditions of Hong Kong residents, address issues from a more developmental than remedial approach, provide equal opportunities to marginalized sectors, particularly the elderly, and deliberately fill in income gaps brought about by the same market mechanisms that have kept its economy in the pink of health. In examining the relationship between economic growth and social welfare, and, correspondingly, economic policy and social policy, the paper delves on a comparative review of the ideal versus the actual situation in Hong Kong. It moves further to discuss the welfare state model, in order to grasp relevant concepts that prevail in highly redistributive economies, and tackles the debate on which between economic policy and social policy should influence or dictate the other. Before concluding, the paper contextualizes Hong Kong, in large part to illustrate the irony in what it ably economically can, yet has not been able to do in terms of social welfare.

The Ideal vs The Actual 

The ideal equation is: economic growth equals improved social welfare spending. As one country grows richer, it naturally increases its capacity to provide for more of those who are in need. It has more resources to establish a “catch up” mechanism where those who are at the bottom rung of the socio-economic ladder are pulled up, in order to bridge income gaps. Mori (2001) argues that economic growth is ideally translated to promotion of one’s well-being from both physical and social dimensions, and that long-run growth requires a corresponding investment in social capital. Although well-being is a tough variable to measure, as it may involve self-assessment, the goal is for many below the socio-economic ladder to be convinced of a marked increase in the prospects of a good life.

But social policies in Hong Kong have been conservative vis-a-vis its economic policies. Government is sensitive to shake up the market and send a wrong signal of control. Hong Kong’s economic policies have been the very magnet that have attracted trillions of dollars of investments for the sheer ease of doing business. It has managed to keep an attractively low tax system, carrying out only three direct taxes at the following maximum rates: 16.5% profit tax, 15% salary tax and 15% property tax (Cheung, T., n.d.).  Over a span of 40 years, Hong Kong has managed to wiggle around a year-on-year increase in GDP growth rate, averaged 2% between 2014 and July 2016; its GPD at USD309.93 billion in 2015 (Trading Economics, 2016).

So has this economic opium that thrust Hong Kong to great prominence in the international community been translated to sufficient social welfare for the elderly?

Not quite. Hong Kong’s Gini coefficient at 0.54 alone paints a grim picture of considerable income disparity. The Social Indicators of Hong Kong plotted out Hong Kong’s Gini coefficient between 1981 and 2011 over which period, from 0.45 in 1981, it hit 0.54 in 2011 — a movement farther away from the desired below-0.2 Gini to indicate equitable income distribution. Poverty rate in 2015 was at 14.3%, with rise in figures based on other poverty indicators, i.e. poor in inactive households, attributed to an aging population (Hong Kong Poverty Situation Report, 2015). Unemployment has turned worse for low-skilled workers, adding more weight on their shoulders when social arrangements necessitate care for aging members of their families.

The Hong Kong government is divided between “left” and “right” thinking. There is a push from one end to be redistributive, for government to provide more and cater to more, and for those in the upper rung of the socio-economic ladder to cascade resources to those who barely can live a decent life. But at the opposite end is the “right” thinking that is concerned most about the interest of the business and private sector, careful not to effect changes that would require higher taxes, and limit the market’s ability to meet public needs and demands, usually with profit-oriented leaning.

What is happening in Hong Kong is, however, the reverse of what is ideal. As the South China Morning Post quoted former Hong Kong Central Policy Unit head Leo Goodstadt: Hong Kong has a “third world” level of spending on social welfare (Ngo, 2013). There is still strong resistance from the market for fear of extractive implications, from government for fear of a red bottomline and eventual bankruptcy, and from the majority of the people who, apart from being cold to putting in for the elderly outside their own circle, still subscribe to a Chinese culture where support for the elderly is largely the responsibility of families. But alongside the boom of the Hong Kong economy are bumps that deter equitable distribution of resources across its population. The poor have grown poorer at the same rate that the rich grow richer. On top of the concern on social services, Hong Kong people contend with increasing housing prices. Forbes released results of the Demographia International Housing Affordability Survey where Hong Kong registered a median housing price of around USD520,000, which is 30% higher than the median housing price in New York, USA (Chin, 2014). This has caused significant housing issues among the elderly who, absent family support, live under harsh conditions in sub-divided units (infamously known as “cage houses” for extremely limited space provision), or wait in vain for subsidized government housing.

From an ideal equation where economic growth dictates a correlational enhancement in social welfare spending, Hong Kong still needs more work in improving social welfare relative to income disparity and its aging population. In 2015 alone, Oxfam HK (2016) noted a rise in the number of poor elderly by 14,700, compared to statistics in the previous year. Oxfam (2016) laments the failure of the Hong Kong government to enhance more pro-poor polices, aim for more solid retirement protection for the elderly, and encourage a trisector collaboration among government, society and the private sector.

The Hong Kong government has relied on the Comprehensive Social Security Assistance (CSSA) and the Social Security Allowance (SSA) schemes, but the rate of utilization is not necessarily indicative of sufficiency given high cost of living. Even as social welfare is made available within these schemes either through age qualification (65 years old) or means test, the qualifications are restrictive, intrusive and somehow robs the elderly of some dignity. These guidelines ride on a double-edged Chinese culture that promotes family values on one hand, and potentially exploits hard conditions involving the elderly, on the other. Children need to sign on a document that ascertains conformity with their parents’ receiving welfare. While the intention is good, it ironically leaves the decision-making on the fate of the elderly with their children and families. It makes more intense the dilemma confronting families over which between practicality and culture and preserving the family’s reputation they have to side with. As the Legislative Council articulates, the upside is a reinforcement of the responsibility of young people to their parents, that they have to see to it that their parents are cared for, following Confucian value of filial piety, and, as well, prevent over-reliance on government (Social Welfare Advisory Committee, 2010). But more young people find themselves rotating within a vicious cycle where they, too, have found it difficult to provide for themselves and their own families.

The Welfare State: Economic Growth and Social Welfare 

Hong Kong is popularly referred to as one of the East Asian welfare economies together with Japan, Singapore, Korea and Taiwan. This is relative to aggregate social welfare spending as percentage of GDP. The Organization for Economic Cooperation and Development (OECD) cements the concept of welfare in the fundamental principle of promoting and protecting both economic and social well-being of its citizens. Within this framework, economic policy and social policy play complementary roles. One seeks to impact and benefit the other. Kwok (2003) echoes these concepts espoused by the OECD, explaining that in an ideal welfare state, government pursues the protection and promotion of the social and economic well-being of its citizens through equal opportunities, equitable distribution of wealth, and a conscious public responsibility to support and provide enabling mechanisms for those unable to live a good life. The welfare state model illustrates how economic policy tends to be receptive and responsive to social issues, thus being more open to influence by social policy.

Reflecting on the relationship between economic growth and social welfare in Vietnam, Do (2016) offers insights applicable to Hong Kong. Do (2016) defines economic growth as a primary factor and material condition for social problems; when the economy is improving, correspondingly, social conditions improve. But while economic growth is the most popular gauge of development, it alone cannot be the ultimate measure or the single litmus test for development. Do (2016) argues that economic growth is a necessary condition, a core driving force; but apart from an analysis against growth rates, development has to be gleaned from the quality, social targets and beneficiaries of economic growth rates.

Economic Policy and Social Policy Debate 

So which influences what? Is it economic policy that dictates social policy? Or is it the other way around? Does economic growth bring about a trickle down effect on social development?

In the context of Hong Kong, economic policy sets the boundaries within which social policy moves. At 17%, social welfare accounts for the government’s second largest expenditure across all policy areas (Social Welfare Department, 2016). Of this percentage, around 71% is allocated for CSSA and SSA where around half of the beneficiaries are the elderly. This leads to the Hong Kong government’s conclusion that the SAR’s social welfare program is among the world’s highly developed. Many, like former Central Policy Unit head Goodstadt, refutes this, describing the social welfare spending in Hong Kong as disproportionate to what it can very well afford.

Social welfare spending has to be viewed in relation to the actual conditions related to the elderly. Even a commissioned environmental scan by the Social Welfare Advisory Committee cites the rapid growth of the aging population in Hong Kong, which puts greater pressure on Hong Kong’s economy for more social services and financial assistance to the elderly (Legislative Council, 2010). The Hong Kong government is, however, bent on ensuring that its administration of social services does not translate to over-dependence and further erosion of family values as regards care for the elderly.

Hong Kong’s free market approach to running the government somehow hinders social development with respect to the elderly. Its low-tax environment and conservativeness in imposing additional tax burden on its people have also resulted to recurring problems involving the elderly to be unaddressed. Long-term care, the provision of adequate housing, and a more secured financial mechanism to support the elderly remain a challenge to the Hong Kong government. With the elderly comprising 16 % of Hong Kong’s population of 7 million, and the increment in social welfare spending for them either nil or negligible, social policy loses its complementation value to economic policy. From lack of provisions for Hong Kong’s growing elderly vis-a-vis its extreme wealth in the form of reserves and GDP, one can draw an assumption that Hong Kong’s economic policy tends to view less for their continuing value and productivity in the society. Social policy then fails to be that impetus to create economic policy reforms to bridge the gap and achieve what Do (2016) describes as a combination of economic growth and progress with social fairness.

Contextualizing Hong Kong: Social Welfare vs GDP 

Hong Kong is among the world’s richest economies. Since the 1970s, it ranks first on the list of the World’s Most Economically Free, and second in World Competitiveness by Swiss-based International Institute for International Development. Recently, in September 2016, Hong Kong clinched ninth place in the World Competitiveness Ranking, although this is two ranks lower than its spot last year (World Economic Forum, 2016). Hong Kong has also lived up to being a free market. Among 189 countries, World Bank (2016) ranked it fourth in terms of Ease of Doing Business and third in terms of Starting a Business (first in both categories is New Zealand).

What Hong Kong, however, has in economic strength it is starting to be weak in quality of life index. The Centre for Quality of Life of the Hong Kong Institute of Asia-Pacific Studies at the Chinese University of Hong Kong (2016) has released its report that the quality of life index in Hong Kong as of 2015 has decreased on its second consecutive year. From 102.95 in 2014, it dropped by 1.12 points in 2015 (CUHK, 2016). Interesting to note that in the same CUHK report, the Social sub-index has decreased by 0.72 points, its lowest over a 13-year period.

Based on figures from the Central Intelligence Agency of the US Government (n.d), Hong Kong ranks 10th in inequality of family income distribution, next to Namibia, Honduras and Zambia; Singapore is 32, Japan is 74 and Taiwan is 102. Hong Kong’s Gini coefficient at 0.54 is the highest among developed economies. This rising inequality is largely attributed to a growing number of households with low-incomes and single-earning members, an increasing unemployment rate, especially among young people, and a fast-aging population characterized by high life expectancies. This also mirrors an observable increase in median income among those with high earnings and an unchanged median income among low-earning Hong Kong employees.

In 2015, the GDP of Hong Kong was pegged at USD309.93 billion, and its GPD per capita at USD36,117 (Trading Economics, 2016). By its on finance management principle, Hong Kong only utilizes around 20% of its GPD for public expenditures. Out of this total government spending, 6.21% represented the aggregate government spending on social welfare in 1995, compared to Taiwan’s 11.10%, Korea’s 10.61% and Japan’s 15.84%. In contrast, figures for non-East Asian welfare states or economies were higher. The percentages of their aggregate spending on social welfare alone are higher than Hong Kong’s total spending against GPD: United States at 20.84%, United Kingdom at 28.62%, Germany at 32.97%, and Sweden, being the highest, at 44.73%. Note that for Hong Kong, of the 6.21% aggregate spending on social welfare, only 1.22% was allocated for “social security and welfare”. This figure increased to 2.58% by 2014 — a decline from 2.59% in 2013.

Conclusion

Two questions guide the overall assessment of the impact of Hong Kong’s economic growth on social welfare. First: Does economic growth translate to more resources for poor people? Second: What influences the relationship between economic growth and social welfare?

On the first question: Does economic growth translate to more resources for poor people?

In the ideal context: Yes. The conditions capacitate government to translate income to economic activities and social services for marginalized sectors. But achieving dynamism requires a combination of government intervention and market mechanisms. However, in the Hong Kong context: Not enough. While there can be a conservative upward trend in social welfare spending, the same is (a) marginal with respect to its strong GPD; (b) insufficient in relation to its counterparts in the same economic competitiveness ranking; and (c) short-sighted with respect to its fast aging population and low fertility rate.

On the second question: What influences the relationship between economic growth and social welfare?

In the case of Hong Kong, where economic policy influences social policy, the extent to which economic growth impacts social welfare can be influenced by: (a) a keen interest to maintain reputation as world’s freest market, further encouraging investments and competitiveness through low taxes; (b) a Chinese culture that imposes social welfare responsibility on family and views acceptance of social welfare as admission of being “lazy”; and (c) a diverse yet dominating political and business interests in policy-making.