Adapt or Die

Clinging to the status quo has its perils

No economy exists in a vacuum—even one as blessed as Macau. At first glance, sitting next door to the most populous political entity on Earth (i.e., Mainland China)—a place where the citizens love to test their luck, but where casino gambling is technically illegal—looks like a licence to print money. It is, but Macau does face significant structural challenges. Its gaming tax rate at nearly 40% of gross revenue is among the highest in the world, even if its personal and corporate tax rates are not. With each year that passes, more jurisdictions and more supply of land-based product with lower taxation on the gross come onto the market in Asia. At the same time, China’s high rollers show an increasing inclination and ability to travel further afield for their casino entertainment. The argument that what high roller gamblers in Macau lose in tax off their gross stake they gain in terms of tax free personal spending doesn’t really wash. Most of their living expenses while they’re in town such as accommodation and catering are effectively absorbed by the casino operators and agents in the form of ‘comps’.

Macau also displays a significant tendency toward public affluence and private squalor—almost the diametric opposite of the description the Canadian-American economist John Kenneth Galbraith gave to United States’ society in the mid 20th century. A major issue for Macau is that its people are largely under-educated, and under-achieving. This matters because it can have a restricting effect on any attempts at economic diversification, which in turn could affect the long-term value of investments in the Macau economy. Under-achievement in the educational field—such as an inability in some cases even to speak Mandarin let alone English—also has an impact on service quality in a service-driven economy touted by the government as a world-class tourism destination. Singapore, the next jurisdiction to enter the Asian casino gaming market, suffers from no such underdevelopment of its human capital.

Grasping the nettle

There are no signs so far that Macau’s political leadership is tackling the cause of that particular structural weakness. Simply expanding college campuses won’t cut it when school leavers can walk into a well-paid job as a casino dealer with few formal qualifications. There are two possible ways to implement a structural reform. One is to bar Macau residents aged under 21 from working in casinos. The other is to bar all visitors aged under 21 from casinos. Policing an employment ban would be far easier than policing a blanket ban. This idea was actually touted by Edmund Ho last year before the economic downturn took hold and was supported in principle by, among others, Dr Stanley Ho.

The argument for the move appears strong despite the current recession. On paper, Macau has one of the highest rankings for gross domestic product (GDP) of any economy in East Asia. How that GDP is distributed is an important issue. It’s beyond dispute that the near 40% of the gaming gross paid in taxes by the casino industry is of huge benefit to the local population. It allows the government to spend money on infrastructure, to subsidise the living costs of low-paid workers and to build a budget surplus for emergencies. In practice, the distribution of the net wealth generated by the economy is lopsided. A small number of highly qualified people earn the bulk of the money, and a large number of under-qualified or unqualified people earn average or below average incomes. To keep the whole economy ticking over, the territory adopts what is essentially a developing world model. This is to import management and professional experts to run its most important industries (principally gaming and real estate development), while locals remain under-represented in senior management roles in those and other industries.

Easy options

This situation is tolerated among the locals because lawmakers have designated that casino dealer jobs are reserved for permanent residents. This means that school leavers have the opportunity of moving quickly into casino jobs paying well above the local average—typically 15,000 patacas (US$1,900) per month. In reality, unless the dealers acquire other skills and experience they can quickly find they are in a gilded cage, with little chance of promotion or any opportunity to switch professions.

If Macau is to broaden its economic base beyond the casino sector, as suggested by China’s Vice-President Xi Jinping on a visit to the Macau and Hong Kong SARs in April, then Macau’s Chief Executive-elect will need to think about getting young people to stay in education for longer. There is no quick fix to achieve this, but the raising of the casino employment age would probably be the best and easiest-to-implement policy measure available to the politicians.

If anyone among Macau’s current upper echelon of lawmakers understands the value of education, it’s Mr Chui. According to media reports he holds a bachelor’s degree in community health from California State University, and a master’s degree and PhD in public health from the University of Oklahoma.

A difficulty facing Mr Chui is that there are competing pressures. The last thing the casino operators want during an economic downturn is upward pressure on wage costs, resulting from an increase in the casino employment age. Dr Stanley Ho went on record recently on The Pearl Report—a current affairs series on one of Hong Kong’s English language commercial channels TVB Pearl—blaming the foreign operators for inflating dealer wages by in effect starting a pay war in the early heady days of market expansion after 2004.

Policy risks

Were the Chief Executive-elect Mr Chui to raise the casino employment age, then the new rules are unlikely to be applied retrospectively. In other words, those under-21s already working in casinos would be allowed to stay on. Nonetheless, it would effectively remove a whole generation of school leavers from the casino job market. To do that at a time when the number of casino tables is still going up in Macau (albeit more slowly than in previous years) could only have an inflationary effect on dealer salaries.

A way to prevent that would be for operators to form a ‘cartel’ or price-fixing agreement on wages of the sort recently announced by Las Vegas Sands Corp and Melco Crown Entertainment Ltd regarding a ceiling on commission paid to VIP agents. Such arrangements are illegal in mature markets such as the United States, Australia and the European Union as they are considered to be against consumer and worker interests. In developing markets such as China, there are no such legal constraints.

Tough call

Unless the operators were given an assurance they would be allowed to cap casino worker wages, it seems unlikely they would support a rise in the casino employment age to 21. For the Chief Executive-elect to propose raising the minimum age during a recession without creating any immediate, quantifiable return in terms of building the economy, would certainly require boldness and a willingness to overrule lobbying by the casino industry.

The political leadership in Mainland China has shown on a number of high profile occasions it is willing to put the public interest ahead of private interest. The example closest to home in Macau is when last year China began restricting the issuing to its citizens of Individual Visit Scheme travel permits for Macau. Other examples are China’s one child policy (though that appears to have softened as of late) and the capping of personal borrowing within the domestic banking system.

Cynics in the West might argue this is because China’s leaders don’t have to test their popularity in Western-style democratic ballots. Yet if there is one factor that stands out above all others in terms of Asia’s economic development model versus that of the West, it is the willingness in Asia in general and China in particular to think long term.

If Macau’s Chief Executive-elect wants to prove his patriotic credentials with Beijing he may need to make some tough decisions on structural issues that reap rewards tomorrow, rather than simply presiding over a ‘steady as she goes’ administration that deals only with the needs of some of his constituents today.