What poverty line for Hong Kong?

  A task force under the government-appointed Commission on Poverty met on Monday to draw up the first official poverty line for Hong Kong. According to recent media reports, the group is favour of a definition of poverty as measured with the common method used by the OECD and the EU and the Hong Kong government was also inclined to adopting this model.

  While local pressure groups and some respectable academics have long been clamouring for the establishment of an official poverty line for the city, there seems to be some popular illusion that such a threshold can reflect how many people in our society are poor and how many are not or whether the livelihood of residents has improved or worsened over time.  This is perhaps because the phrase “poverty line” itself is a misleading term. Even some members of the Commission reportedly expressed surprise when they heard that the benchmark under discussion would not measure people’s material wealth and urged the government to “clarify” what it meant. (Note 1)

  If people under the poverty line are poor and those above it are not, then the poverty rate should be higher in poor societies and vice versa, shouldn’t it? Perfectly logical in common sense. But this is not the case. In 2010, the poverty rate of Germany, which was envied by its European neighbours for its relative economic strength in the aftermath of the global financial crisis, was higher than that of the struggling Hungary by two percentage points, despite the per capita GDP of the former outstripped the latter by more than 80%, for example. (Notes  2 and 3)

  Why does the poverty rate not tell how rich or how poor a society is? Take a quick look at how the OECD/EU poverty rate is calculated and one can immediately realise where the problem lies.  The mathematical formula is simple – the population under the poverty line is those whose household incomes fall below a certain percentage, usually 40%, 50% or 60%, of the median of the society.

  Instead of indicating the income levels of the general population or of the economically worse off group, this measurement of relative poverty (as opposed to absolute poverty) is rather an outcome of the distribution of income.

  Suppose 100 households lived in Town X with an income distribution like this in a given year:

Income ($)	Number of households
20	4
30	6
40	10
50	22
60	20
70	12
80	10
90	8
100	6
110	2
Total	100

  The median household income is $60. If the poverty line is drawn at 50% of that, then 10% of all households will fall below the threshold. (For the sake of simplicity the difference in the numbers of people in households is ignored here.)

  Now in the following year, 20 households immigrated to Town X, most of them with incomes above the median level. Some high earners who had been living here also saw their incomes increase. On the other hand, those living on the lowest end of the breadline made even less money this year, with some even losing their jobs and left with no income.

 

Income ($)	Number of households
0	2
10	2
20	2
30	4
40	10
50	26
60	22
70	14
80	12
90	12
100	8
110	4
120	2
Total	120

   The median household income remained at $60. However, the official poverty rate with the above definition would drop to 8.3%. This is despite the fact that the poor in Town X have actually become poorer. (An interactive graphical illustration of how changes in people’s incomes move the poverty rate can be found at http://news.bbc.co.uk/1/hi/magazine/8177864.stm.)

  Another reason why this way to define poverty is misleading is, as researchers in the academia have pointed out and at least one member of the Commission has raised in the media, that income is the sole measurement while assets are not taken into account. Some retirees may have no income at all yet enjoy a well-off material life on their accumulated wealth while some young people may earn wages which do not look but cannot afford to live on their own. As the population of Hong Kong is ageing, the age structure is expected to have an effect on the movement of such an official poverty line.

  The OECD/EU model of poverty measurement has also been criticised for setting an arbitrary standard. Why should the percentage be set at 40% but not 50%, or 50% but not 60%? However an advocate explains the percentage he or she goes for, it is after all a subjective line. Indeed where the line should be drawn has become a centre of debate in the current discussion in Hong Kong, whereas the basic concept of drawing a line in this way seems to have become the general consensus between Commission and the administration. There have been voices raising concern that the government may adopt a lower threshold to make the population under the poverty line look smaller. These are merely manipulation of numbers and I am not going into this argument of what percentage is the best for I reckon that it is unrealistic to look for a benchmark free of subjectivity and biases. In fact the OECD website presents poverty data measured with three commonly used percentages. (Note 4) It appears that Commission members and many vocal advocates for this official poverty line in Hong Kong prefer the use of one single line to avoid complexity.

  What I would like to caution against is the type of arguments like “The line should be set at 40% because Hong Kong is an affluent society” or “The line should be set at 60% because the cost of living in Hong Kong is so high”. If these logics applied, then the official poverty line could be moved as our GDP or inflation rate moved every year, which would effectively make the line meaningless. Although the setting of the line is inevitably a political process, the exercise to measure poverty statistically should not be used as a political tool to reaffirm existing views on poverty. Instead, it should be a tool with a purpose to help make policies on poverty alleviation.

  Because it is convenient, such a definition of poverty has been commonly used in many countries despite its questionability as a poverty indicator. In recent decades the study of inequality in developed countries has been moving toward a more comprehensive view, such as developing more encompassing concepts like deprivation social exclusion, standard of living and quality of life, rather than drawing a simple line on the income curve. The Hong Kong government is aware of these new options but has chosen to go for the old, established, convenient, one-dimensional measurement and NGOs speaking on the issue appear to be happy about that.

  In spite of these limitations of the OECD/EU model of the poverty line, I would not say it is totally useless for Hong Kong. As Commission member and Oxfam Hong Kong director-general Mr. Stephen Fisher has pointed out, one major function of an official poverty line is to assess the effectiveness of public policies on poverty alleviation. (Note 5) Professor CK Law wrote a newspaper article last year which gave a clear elaboration on how it could be done and readers who are interested can refer it. (Note 6)  However, for the sake of comprehensiveness and to point out some confusion in recent media reports please bear with me for being a bit repetitive here.

  Take a glance at the OECD poverty statistical table and one can spot there are two sets of poverty rates, “poverty rates before taxes and transfers” and “poverty rates after taxes and transfers”. (Note 4) By comparing the two sets of data, we can find out to what extent an economy’s taxation and welfare policies have changed income distribution.  Certainly a general subtraction does not tell us which policy is working for the poor and which is not and why, but nonetheless it serves as a reference of how effective government intervention is. More detailed analyses of sub-groups can be conducted with demographic data.

  An understanding of this use of the official poverty line (despite one does not have to agree with it) is significant in the whole discussion of how the line(s) should be drawn and, in my humble opinion, why we hold such a discussion at all. After all, why does a poverty line has to be “official”? The Oxfam can draw its own line and so can the Hong Kong Council of Social Service. The local academia is not short of studies in poverty and there is a variety of measurements available to choose from in literature. (Note 7) If the only reasons for setting a poverty line are to keep records and conduct analyses, which carry importance in their own rights, then we can be happy without an official definition, which can be authoritarian. The most important point of making an official line is to for policymaking purposes.

  Recognising this reason for making an official poverty line and the rationale behind having a “poverty rate before taxes and transfers” and a “poverty rate after taxes and transfers” should be able to alert us not to confuse the two rates. I found some recent news reports intriguing and I do not know if it were the Commission members and pressure group representatives being interviewed or the journalists who had mixed up the concepts (Hopefully not the Commission members because they are the ones responsible for the task). Some recent reports warned against “the inclusion of welfare in the calculation of the poverty line” by the government (e.g. Notes 5 and 8). I myself was stunned when I first came across the headlines and I am afraid most readers might be misled that welfare would be included in the calculation of the commonly understood single poverty line unless they take the time and effort to read some original documents. If it were the case that government welfare was included in THE poverty line which people talk about, then it would depict an extremely unrealistic picture of poverty in Hong Kong.  I appreciate the fact that there are still a wide range of possibilities of how to measure the “poverty rate after taxes and transfers” and I agree that some of the concerns raised such as the inclusion of universal services like nine-year free education might come up with the false picture of “zero poverty” is valid in this sense. However, distinguishing the two lines and conveying the real purpose of setting an official poverty line to the public is still important.

Notes

1. 1.       The Hong Kong Economic Journal, Jan 29, 2013, ‘貧窮線不代表窮 議員促釐清作用’
2. 2.       http://www.indexmundi.com/map/?v=69&r=eu&l=en
3. 3.       http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-11-064/EN/KS-SF-11-064-EN.PDF
4. 4.       (http://stats.oecd.org/Index.aspx?DatasetCode=POVERTY)
5. 5.       The Hong Kong Economic Journal, Jan 28, 2013, ‘余志穩：訂貧窮線毋須一年 倡入息中位一半劃線 憂政府降指標當滅貧’
6. 6.       Mingpao, Sept 30, ‘貧窮線用來做甚麼?’
7. 7.       See for example a brief review by Professor Chou Kee-lee in Mingpao,  Dec 17, 2012, ‘如何訂定本港的貧窮線? ‘
8. 8.       The Apple Daily, Jan 29, 2013, ‘福利當收入  貧窮線恐變粉飾數字’