What is driving the stunning eruption of pro-democracy protests in Hong Kong? Normally it is described as a peaceful city where the locals focus on two major pastimes, namely horse-racing and property speculation; the eruption of pro-democracy protests that have encircled key government offices in the main business district came as a shock even to long-term residents.

Numerous articles have been written on whether China committed any “violation” of its obligations to effect universal suffrage in the city by 2017. As someone who focuses on the economic aspects of politics though, my take on the situation is different.

From my vantage point, it does appear that rising income inequality and a general improvement in quality of living have both contributed to a social impetus towards greater articulation of aspirational needs.

Let us take rising income inequality first. The widely observed (but hardly infallible) Gini coefficient indicates a nation’s income distribution from zero (complete equality) – to 1 – (which means all the country’s income goes to one single person). [1] The Gini coefficient for Hong Kong went from 0.43 in the 1970s to a stunning 0.54 by 2011. [2]

For context, the Gini coefficient for both the United States and China is around 0.43 before taxes; that for the US after taxes is around 0.35. Considering the generally low rate of taxation in Hong Kong for personal income, as well as the tax-free nature of many income streams, including capital gains, it is likely that the post-tax Gini for Hong Kong would still be above 0.5.

It gets worse. According to the World Bank Gini ranking, [3] Hong Kong is among the world’s highest in terms of inequality; all the countries worse off than Hong Kong – including the likes of Bolivia, Brazil, Colombia and South Africa – have seen rising instances of social unrest over the past few years.

As a closer peer comparison, Singapore has a coefficient of 0.48 according to the World Bank On a post-tax basis, Singapore is likely to fare much better, as local taxes are higher, including a sales tax that garners consumption-based income for the government to spend on its social housing projects.

How does the inequality manifest itself in Hong Kong? As I wrote on this site earlier this year, immediately after riots by migrant laborers in Singapore:

When the incoming head of the [US] Federal Reserve, Janet Yellen, quietly comforts global equity markets (leading to this week’s recovery after the decline for the previous two weeks), the underlying message is that central banks want to keep asset prices high (or push them higher) in order to stop the apparent economic death spiral from deflation.

That might be all well and good under traditional economics, but global trends have moved far away from the secular trend before the 2007 crisis. Since then, it has been painfully obvious that central bank policies and government stimulus efforts have ended up benefiting only the rich and left the poor much worse off. In turn, this has spawned many a protest movement including the excitable folks at “Occupy” on the one end and the “Arab Spring” folks on the other, with the Singapore riots being somewhere in between. …

It doesn’t quite take a genius to figure out that asset prices are not only too high, but also unaffordable for anyone under the age of 30 in most developed countries. In places where some assets are affordable – for example, homes in Spain – other factors such as youth unemployment have conspired to keep younger people well out of the market. (See Define Irony …, Asia Times Online, February 14, 2014).

Even without the explicit help from central banks, Hong Kong has done inequality quite admirably on its own, thanks very much. Due to the controls on key resources – land banks being the most important – barriers to entry for most businesses in Hong Kong, whether you look at retail or healthcare, not to mention banking or real estate, are extremely high.

Fully one-third to half of some businesses’ revenues go towards paying rent, leaving precious little for employees and contractors. That is why many employees of globally successful businesses that were started in Hong Kong still earn far less than people in similar positions at Silicon Valley or biotech start-ups in the US or Europe.

There are gleaming buildings in Hong Kong where a small apartment of around 1,000 square feet (93 square meters) costs more than US$2.5 million, and that would be considered “mid-tier”. A few hundred meters away from such gleaming buildings, you will see social housing where monthly rentals are less than US$2,000. People living in these estates do have social mobility (Hong Kong is particularly good at generating millionaires out of paupers and vice versa), but only at the cost of significant risk taking. Even with such risk taking, many young Hong Kong residents cannot dream of a place on the (private sector) housing ladder.

Then again, the city’s many billionaires didn’t become rich by being stupid or blind. Well aware that their own self-interest was best served by a well-educated, well-fed and safe population, they have moved the levers of government to keep sufficient social housing available to the people of Hong Kong. With wages generally on the upper end of the global market scale, people in Hong Kong can and do enjoy a fairly comfortable life by the time they get out of college into their first jobs (as long as housing is available).

Food and clothing are relatively cheap in Hong Kong, so when one’s needs for shelter are fulfilled along with those of security and family, the focus soon turns to esteem and self-actualization. In other words, the very focus on creating a social net has engendered a Maslow moment for Hong Kong – in reference to Abraham Maslow’s theory of human motivation, which describe the pattern that human motivations generally move through.

If a person cannot become well known (esteem) through his wealth or academic prowess, then politics is usually the way forward. This is particularly so when there is a fundamental dichotomy whereby the apparently libertarian society of Hong Kong is run ultimately (albeit in a very visibly hands-off manner) by a bunch of central planners out of Beijing.

The diktat of Beijing scares the people who stand to profit mightily from the central government through contracts and project approvals – in other words, the billionaires of Hong Kong. It doesn’t mean much to rank-and-file employees, who are likely to live in their small apartments for their entire lifetimes.

Beijing and its counselors could do well to recognize – quickly if they can – that what they are facing isn’t a call for democracy as much as a call for change in the way Hong Kong is run that is being driven by people who are looking to improve their own self-esteem. That’s not traditionally a fight that’s resolved with tear gas or rubber bullets, but by sitting across the table and having meaningful discussions. The city’s present chief executive is rated as highly unpopular by various newspapers; perhaps that is part of the problem here.

1. The Gini coefficient measures the dispersion of income distribution of a nation; it goes from 0 (which means complete equality) to 1 (which means all the country’s income goes to one single person). It can be expressed either as before or after taxes to recognize the impact of government’s strategies for equalizing income that necessarily involve differential (or what is confusingly called progressive) taxation.
2. See here for the Hong Kong government explaining some reasons for the rise in Gini.
3. See here, and sort by World Bank Gini.