Is social inequality a necessary stage towards development? Hong Kong Case.

Abstract
It is internationally acknowledged that today’s societies are getting more and more unequal. There is in fact a common tendency of a widening of the gap between extremely rich and extremely poor people, while the middle class is being eroded. The phenomenon is not only typical in developing countries, but also in fully developed areas. So has become crucial to understand what is the link between inequality and development, if there’s any. Traditional economic scholars in fact think that inequality is the inevitable price to pay for a fast economic development. However, this is not the only possible view and economic development is not the only important value. An interesting approach to analyse this relationship is studying the current situation in Hong Kong.

Hong Kong has been on the front page of newspapers for the protests that have haunted the city for months. The manifest origin of these protests is the citizens’ need for democracy, but there is a tacit cause too: the rising level of social inequality within Hong Kong dwellers. Hong Kong in fact is the example of a middle-income city in which the level of social inequality has kept growing for decades, but at the same time the overall economy has been developing at high speed.
This paper’s aim is to find another possible pattern towards a more equal and comprehensive development, through the analysis of indexes as Gini coefficient and GDP.

1.Hong Kong specificity
The first index that must be considered when studying inequality is Gini coefficient. In Hong Kong, Gini coefficient of household income -the index that measures the inequality level- rose from 0.43 in 1971 to 0.48 in 1991(Hong Kong, Social Indicators of Hong Kong, 2016). Moreover recent studies revealed that Hong Kong’s Gini coefficient was over 0.533 in 2006 (Hong Kong C&SD, Population By-census Summary Results, 2006), placing the city among the most income-unequal societies in the world, alongside the poorest African and Latin American countries. But Gini coefficient in Hong Kong didn’t cease to grow, reaching 0,537 in 2011 and the further peak of 0,539 in 2016 (Hong Kong C&SD, 2016 Population By-census), the highest since the city began keeping records on income equality.
However, to deepen the analysis of Hong Kong’s social inequality, should be taken into account another index: social mobility. Many have in fact proved the existence of a correlation between social mobility and development: for some scholars social mobility may be a precondition for development in the society (Davis, 1962), whereas some others claim that development itself may create the conditions for a growing social mobility (Tyree et al., 1979). Research studies focusing on Hong Kong have revealed limited opportunities for people moving higher in the social ladder. First, concerning earning mobility of local work force, a high percentage of workers was trapped in the same quintile of earnings ladder over the five-year period of 2003-2008 (62.9%) and the ten-year period of 1998-2008 too (47.2%) (Hong Kong, “HKU study”, 2010). Furthermore, there is a statistically significant link between the socio-economic status of parents and their children not only in educational mobility (Chou, 2013) -there’s 73.6% probability that parents with a degree will have children with a degree as well- but also in occupational mobility (Research Office Legislative Council Secretariat, 2015) -there’s 42.8% probability that children will have the same job as their parents- suggesting low inter-generational social mobility. On the contrary, educational mobility showed a positive trend, as people with post-secondary education more than doubled in twenty years, increasing from the percentage of 11.3% of the total population in 1991 to 27.3% in 2011(University Grants Committee UGC, 2012), even if this increase is almost exclusively due to the two-year sub-degree programme provided by the self-financed sector (Yip, Peng, 2018).
Therefore one might think that Hong Kong’s economy hasn’t benefited from these inequalities. Instead, Hong Kong’s Gross Domestic Product (GDP) has grown 180 times between 1961 and 1997, pushing the city to the highest positions in world rankings (International Monetary Fund). Hong Kong’s economy even touched the peaks of 8.7% of real economic growth in 2004. Not to mention that before the dramatic fall of GDP due to 2019 protests, Hong Kong’s real economic growth was still positive, with the percentage of 3.002% (Hong Kong SAR China, World Bank) and, with the only exception of 2009, had been positive for decades.
Another important Hong Kong’s specificity is its laissez-faire economy (Chow and Papanek, 1981): the absolute liberal approach of the city’s government towards international firms on its territory has undoubtfully increased its growth, but has also had negative consequences on its citizens’ quality of life. In fact Hong Kong -the freest economy in the world (The Heritage Foundation, 2019)- seems not to be able to manage an issue that is a source of inequality in the city: the housing policy and housing distribution. Imposing practically no taxation on corporations, Hong Kong must raise funds from other sources: land and buildings are leased to privates by the government itself. The city’s governments in fact traditionally owns all the lands and sells or leases it to private developers. Land sales is in fact Hong Kong’s second source of revenue, about 30% of all revenues (Hong Kong, Research Office of Legislative Council Secretariat, 2016-2017). This operation of course puts large limitations on Hong Kong’s housing policy because the prices continue to grow and in many cases there’s no possibility to find an affordable accommodation in the city. The result is that per capita residential space in Hong Kong is just 16 square meters, compared to 36 square meters in a mainland city like Shanghai. Moreover, nearly 45% of Hong Kong’s residents live in public rental or subsidized housing (Our Hong Kong Foundation). It is clear how these deficiencies in housing policy contribute to the raising level of social inequality in the city.

2. How social inequality would be beneficial for (economic) development
At this point -to be able to understand Hong Kong situation- we should identify what is the mutual influence between social inequality and development from a more general and theoretical perspective. There seems to be in fact a quite common pattern for economies with high GDP like Hong Kong: they tend to have higher Gini Coefficient too.
This empirical observation is confirmed by theories, as some scholars believe that a certain degree of social inequality is necessary to reach growth and development, at least at an initial stage. In fact inequality would, in their view, provide higher incentives for growth, encouraging people to work harder to earn better salaries (Partridge, 2005). It would also improve growth in poorer countries – to the extent that it contributes to channel resources to high-income individuals with more propensity to save- so increasing investments (Galor and Moav, 2004). The most known of these scholars is the economist Kuznets. Kuznets, in mid XX century, assumed that the relationship between growth and inequality doesn’t follow a linear pattern. Instead it would create a curve with an inverted U trajectory. The theory of Kuznets’ curve reports that in developing countries -where labour shifts from agricultural sector to industrial and urban sectors- the level of income inequality initially increases, then peaks and in the end decreases, so creating the inverted U shape curve mentioned before. The three phases are due to the different speed of economic growth: fast before the peak of inequality and slower after that point (Kuznets, 1955). This view has led to the establishment of austerity policies and of functional inequality theory because, in many developing countries, governments were willing to increase social inequalities to reach their goal of economic growth, on the assumption that inequality would eventually decline by the organic processes of development (Grigoli and Robles, 2017).
In Hong Kong case is clear that high social inequality has permitted investors to collect more funds for their investments, thereby sustaining the city’s economic development (Chow and Papanek, 1981) and ensuring the possibility for the city to become today fully economically developed.

3. Bourdieu’s theory on class
Before a deeper examination on the relationship between social inequality and development, is important to make an overview on the definition of social inequality and class. An interesting point of view is offered by Bourdieu, the famous French sociologist, in the eighties. Bourdieu was convinced that the concept of social class was bound to the concept of capital. Capital is, according to Bourdieu, an “accumulated labour which, when appropriated on a private, i.e., exclusive, basis by agents or groups of agents, enables them to appropriate social energy in the form of reified or living labour”(Bourdieu, 1986). On the contrary, social class is not defined by a property -not even capital itself. It isn’t even defined by a group of properties -as sex, age, social origin, ethnic origin, income, education level and so forth and so on- nor even by a chain of properties, like the position in the relations of production. Class is instead described by the structure of relations between all the pertinent properties which gives its specific value to each of them and to the effects they exert on practice (Bourdieu, 1984). So social class is essentially the relation between different capitals within a group of properties, a very different definition from the traditional Marxian idea (Marx and Engels, 1848) of class as an economical subdivision. In Bourdieu’s view, this difference in capitals -and so in class as well- creates inequality.

4. Other forms of development and inequality
From the theories reported before, may appear that social inequality is the price to pay for reaching a full development of the country. This statement might be true if we consider the concept of development solely as economic development and growth. However this view is far from the sustainable development concept hoped by the United Nations, in particular it collides with goal ten of Sustainable Development Goals to be achieved by 2030: reduced inequalities.
An innovative perspective on development takes into account not only economic development, but also human development index (HDI). This index measures a country’s level of development with other parameters, without reducing the discourse to economic or financial matters. Concepts like health (in the form of life expectancy at birth), education (through mean years of schooling and expected years of schooling) and living standards (in the form of gross national income per capita GNI) become crucial (“HDI – three dimensions and four indicators”, HDRO). Human development means expanding people’s substantive freedoms. It is different from economic status alone, as, what people actually choose to be and do—their achieved functioning—is enabled by income and wealth but is distinct from it (United Nations, 2019). Human development could be also defined as “the freedom that a person has in choosing from the set of feasible functionings, which is referred to as the person’s capability.” (Atkinson, 2015). In brief, Human development’s aim is to channel broader capabilities into a few observable and measurable achieved functionings, for instance the capability to live a long and healthy life is associated with the -measurable- indicator of life expectancy at birth.
Surprisingly, Hong Kong’s human development index (HDI) is quite high, positioning the city at the fourth place out of 189 countries and territories. Its value for 2018 is in fact 0.939, uninterruptedly increasing from 1990 (UNDP, 2019). On the contrary, Hong Kong’s problem is de facto inequality: adjusting human development index with the coefficient of human inequality (IHDI), a loss in human development of 13.2 percent is registered -due to inequality in the distribution of the HDI dimension indices.
While, concerning inequality, there’s another improvement that takes its steps from Bourdieu’s theory and develops a new concept of development. Despite income disparity is the main core when analysing social inequality, there is a new perspective to be added: the economist Amartya Sen’s. In his view, development is individual empowerment and freedom and the kind of inequality we should be considering is inequality of capabilities, or the capability deprivation. Capabilities are defined as people’s freedom to choose what to be and do. Therefore, they cannot be reduced to income and wealth alone (Sen, 1979). Nor can they be defined as utility and measured by people’s actual choices, for that would obscure real differences in how individuals use income for achievements that they value. Thus, capabilities are closely related to the concept of opportunities and the objective of a welfare State should be granting everybody the same opportunities: defending people from famine, poverty or natural disasters, giving them safety and freedom. Acquiring this theory, human development index is the most efficient method to measure a very minimal list of capabilities and “getting at minimally basic quality of life” (Sen, 2005).

5. How social inequality would be detrimental for development
As seen before, human development is certainly not empowered by social inequality; but economic development could be weakened by inequality too. There are in fact additional theories confuting the idea that social inequality would be a necessary stage for high economic development.
Recent empirical studies have found that higher income inequality can be associated with lower growth (Cingano, 2014), including in developing countries (Neves et al, 2016). According to the endogenous fiscal policy theory, there would be a negative link between inequality and growth because of two mechanisms: an economic mechanism -positing that capital, income and taxes lower the private firms’ returns to investment- and a political mechanism -predicting that higher inequality would induce more redistribution of capitals as poor individuals would prefer larger tax rates (Bertola, 1993). Practically the growing inequality would become at some point unacceptable to voters, the majority of them is in fact poor or middle-income: they would eventually insist on higher taxation on firms and would oppose pro-business policies. The consequence would be a reduction of the incentives to invest (Alesina and Rodrik, 1994). In extreme cases, inequality may also lead to political instability, with consequent harmful effects on growth (Keefer and Knack, 2000). Moreover, according to human capital accumulation theory, in presence of unequal financial market, the ability to invest of different individuals depends on their income or wealth level. Consequently, poor individuals may not be able to afford worthwhile investments, the ones that have high rate of return to both individuals and society (Galor and Zeira, 1993). For example poor households may choose to leave full- time education, if they cannot afford the fees. In this case, society would lose consistent strata of professionalized human capital, with obvious reduction on development rate and social mobility. Lastly, in presence of increasing low-income households, there is an obvious decrease in domestic demand. This causes lower growth too (Krueger, 2012).
The three phenomena described before all co-exist in Hong Kong unequal system. Its consequences are clear analysing the impact of Honkongers’ protests on the city’s GDP: protests arising from middle-income strata of the population, demanding democracy and less inequality, have had a negative impact on growth. This shows that, despite initially high economic growth, inequality will cause in the long-run a reaction from the voters and decreasing economic development. As a consequence, according to these theories, the consideration of inequality rates is crucial. In fact, being aware of the distribution of income is a necessary stage to understand the working of the economy because -as the Nobel Prize winner Robert Solow of the Massachusetts Institute of Technology (MIT) stated: “heterogeneity is the essence of a modern economy” and the models that have dominated macro-economics until now exclude this complex landscape (Solow, 2003).

6. Policy making to reach sustainability
At this point what shall be done is to study the possible solutions for a more sustainable policy. What policy should be applied in cities like Hong Kong to reduce social inequality, still granting a degree of development?
According to Atkinson, there are some fields that need to be developed to tackle inequality: technological change, employment and ethical pay policies, progressive taxation and social security for all. Starting with technological change, policy makers should make technological change their specific concern, encouraging innovation in a form that increases the employability of workers and emphasises the human dimension of service provision. In other words, access to technology, which today is a large source of inequality, should become a mean through which redistribution becomes possible. In fact, the progresses made in the economy as a whole, thanks to technology, will permit to obtain rising investments and value in public services (Baumol, 2012). Alongside technological change, also employment and ethical pay policies become essential keys to solve inequality. Atkinson’s proposal consists in the adoption of a specific target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it. The public employment would be voluntary in a public body or in a non-profit-making institution. A similar policy was actually achieved in USA as the Public Employment Program (PEP) in 1960’s War on Poverty (Kershaw, 1970). At the same time, there should be a national pay policy, consisting of a statutory minimum wage set at a living wage, and a code of practice for pay above the minimum, agreed by all the stakeholders (Atkinson, 2015). Regarding progressive taxation instead, a return to a more progressive rate structure for the personal income tax is claimed, with marginal rates of tax increasing by ranges of taxable income. This is a traditional mechanism to tackle inequality: increasing taxes on rich people and lower tax rate on poor ones. A simple approach that could be applied in Hong Kong too: leaving the laissez-faire economy to impose (even minimum) taxes on firms and corporations as well would certainly, to some extent, disincentive investments but would also resolve the main problem of inequality due to wrong housing policies. In particular, revenues would be collected from taxation and not overexploiting the land leasing system. The last proposal is granting social security for all: the renewal of social insurance, raising the level of benefits and extending their coverage (Atkinson, 2015).
All these policies would enlarge the welfare system, though without compromising economic development: just reinvesting capitals.
In every country -more or less developed- the grant of political liberties, the creation of social occasions, the improvement of education systems, the creation of competition and wide international markets, the establishment of land reforms and of public incentives for infrastructures and export would improve growth and reduce inequality at the same time (Sen, 1999).

Conclusions
The relation between development and social inequality is complex and articulated. For sure a link between the two exists, as inequality has positive effects on growth in the short run, but disastrous effects in the long run. What policy makers should focus on is not only economic development, but also human development, as the creation of minimum living standards for the citizens and the reduction of social inequality are ethically correct and have positive effects on the economy too. The fifth paragraph has shown how social inequality could impact negatively on growth and Hong Kong is an example of the phenomenon. Protests won’t stop until democracy and the improvement of living standards will be reached, paralyzing the economy and reducing GDP. It is clear that improvement of citizen’s rights -and so the possibility to live a happy life- is fundamental and can’t be sacrificed for a temporary and uneven economic development.