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Thursday 24 Aug 2017 | 18:49 | SYDNEY
Thursday 24 Aug 2017 | 18:49 | SYDNEY

Inequality in Hong Kong: The divorce factor



22 April 2014 15:38

Hong Kong is famously unequal. The measured Gini coefficient is among the world's highest. It is praised for 'economic freedom' yet also criticised for 'crony capitalism.' 

It's well known in political science that, worldwide, folks care less about wealth inequality per se than lack of opportunity. People don't mind that the enterprising rich do well; what grates is that elite families should unfairly perpetuate their status (eg. by marrying other rich people, hyper-training their children, passing on large inheritances) and thus entrench social class.

Hence the anguish about inter-generational mobility: whether children of low-income families can rise up the socio-economic ladder. Harvard's Raj Chetty has now published a long awaited blockbuster study on the fortunes of American families — some 40 million individuals — since 1980. The survey was expected to confirm the worst: the end of the American dream. That same suspicion is shared by Hong Kongers. 

Consider the famous 'Great Gatsby curve': who doubts that immobile societies are also unequal ones?

The Great Gatsby curve

But the Great Gatsby curve is a statistical trompe l'oeil. It confirms our biases with a single lazy observation. Cross-sectional surveys depend entirely on the selection of data. If you choose other countries, or delete 'outliers', the trend line can be rotated at will. So can correlations, which are also lazily assumed to be 'causal' in one direction or another.

Chetty's US study is far more rigorous, looking at a huge continuous sample over time. Surprisingly, his study reveals that, nationally, the chances of a low income family having higher income kids has actually been fairly steady. The lowest quintile household has about a 30% chance of ascending relatively in the next generation, roughly the same as before. The ladder of mobility in America appears intact.

But here's the bad news: the rungs of that ladder have widened.

As feared, the gap between top and bottom has expanded dramatically. There is fierce debate about what has caused this (technology and globalisation being the two most plausible explanations) but there's no doubt that life's lottery has higher stakes now. Opportunity is still in reach, but the consequences of succeeding or failing are far greater.

So now to Hong Kong, where Professor Richard Y C Wong at HKU has run virtually the same analysis as Chetty. His findings are similar: Hong Kong is unequal, but still a place where many kids can improve upon their parents' relative status if they have smarts, drive and a supportive household environment. But what are those magic ingredients that enable Hong Kong households to raise mobile youngsters? This is a serious matter. Hong Kong has one of the world's most pressured environments for raising competitive children.

Professor Wong finds a few key factors explaining how Hong Kong families can succeed. Unsurprisingly, education is crucial; the Hong Kong Institute of Education thinks the rich have almost four times better university enrollment prospects than the poor. Another factor is neighbourhood; ambitious households tend to live alongside other aspirants while families in public rental housing estates struggle from one generation to the next. But the most important factor is family structure. Divorce is a mobility killer, and Hong Kong's divorce rates are soaring.

This matches the US experience. In his book Coming Apart, Charles Murray examines the polarisation of 'white America.' The author of The Bell Curve is controversial, but here his focus on whites is useful. Statistically, he controls for race, removing ethno-cultural factors in socio-economic status. Murray's allegorical Fishtown has all the same problems of a low mobility suburb in Hong Kong: bad schools, bad adult influences and role models, teenage pregnancies, elective unemployment, and, tellingly, broken families. 

Why does family structure matter so much, and why is the problem worse in Hong Kong? Because when housing prices are extremely high, broken households struggle. An intact family can have two income sources. Single parents must work long hours, meaning less parenting time, lower educational attainment and higher delinquency. 

As an economist, Wong has a conservative bent. He is particularly critical of social welfare programs which support or encourage single-parent households. He notes divorce rates are three times higher in rental housing than own-home households. When separation is expensive, families really do stick together. Wong advocates dialing back public rental housing programs, and instead adapting the Home Ownership Scheme to Singapore's Housing and Development Board model, which applies stronger incentives for home ownership, even for the poor. 

So real estate, which has caused so much gain and pain in Hong Kong, now looms in the mobility debate too. Wong is probably right about securing poor households with their own homes, although many societies (think Germany) have low home ownership rates yet high mobility. And the genesis of the US housing crisis was a well-meaning pledge in 1999 to bring home ownership to the poor, and we know how that ended for low earners.

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