The restructuring of Hong Kong's economy has contributed to a skewing of the distribution of income in Hong Kong.
One of the consequences of structural change in Hong Kong, arising from increasing economic integration with the Mainland of China, seems to be greater disparity in the distribution of income in Hong Kong.
Economic integration has involved, among other things, the migration of the manufacturing sector of Hong Kong into the Mainland, where labour and other costs are lower. This has led to the loss of jobs for many manufacturing workers in Hong Kong. With the lack of job opportunities in other sectors of the economy, structural unemployment in the economy has gone up quite significantly. The absorption capacity in these sectors for surplus workers from the manufacturing sector has also been adversely affected by generally slow economic conditions in recent years, even though retraining programmes have gone some significant way in addressing the mismatch in skills arising from this structural change. In the circumstances, the take home pay for the workers affected, even if they were lucky enough to have managed to seek alternative employment, must have gone down in relative terms and most likely in absolute terms as well.
On the other hand, putting aside the cyclical effects in the world economy and so in international trade, the migration of operations to the Mainland must have meant sharp increases in profit margins for manufacturers, given that they sell their products at world prices. The migration of manufacturing processes to the Mainland, or indeed to other lower-cost areas, has of course involved significant relocation expenses (quantifiable) and the assumption of (non-quantifiable) risks on a variety of dimensions. But the very impressive pace of reform and liberalisation in the Mainland and the generally accommodative policy stance towards foreign direct investments have led to the risks being increasingly manageable and with diminishing probability of materialising. To the extent that the handsome profits are booked in Hong Kong, one can say, in rather simplistic terms, that there has been a redistribution of income from labour to capital, or, dare I say, from workers to capitalists.
I believe that this development is one reason why the measured distribution of income in Hong Kong has become more skewed - an increase in the Gini coefficient or the area between the Lorenz curve and the "diagonal" of even distribution. But I say all this without making any subjective judgement about the merit, or otherwise, of this income re-distribution effect. In any case, the current process of market-led structural change in Hong Kong is not something that can be resisted or reversed. It would be disastrous to do so. Hong Kong has to cope with it and make the best of it. Furthermore, there can be no objective judgement on the optimality of the Gini coefficient. Once, in university, I tried to construct an econometric model that optimises the Gini coefficient by reference to some measure of economic well-being, making use of data from a cross section of economies. I soon found it extremely difficult to define economic well-being objectively and measure it accurately. I also failed to find any statistically significant correlation between even the most simplified measure of economic well-being - economic growth - with the Gini coefficient.
Whatever the cause, a redistribution of income in a particular direction is bound to be unsettling for some and welcome for others. It is in the nature of human beings that those who benefit will largely keep quiet about it, if only to ensure the maximum sustainability of that direction. Those who have been disadvantaged, on the contrary and understandably, will voice their concern. It is, of course, the responsibility of the Government to address these concerns. Realistically, the nature and the relative emphasis of Government responses depend to a significant extent on the characteristics of the political framework. But, politics aside, as Hong Kong grapples with this issue, it is perhaps important to recognise that focused policies on enhancing education and skills will bring much greater long-term benefits to the community than income redistribution policies. Policies in the latter category tend to introduce distortions in the labour market and increase the share of social spending in public expenditure, which, in the light of experience in other economies, undermines fiscal sustainability. Furthermore, some inequality in the sharing of an ever-increasing pie seems to be better for all than more equality in the sharing of a small and stale one.
Joseph Yam
6 February 2003
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