Course Contents • Economic History and Macroeconomic Environments • Economic Structure • Human Resource and Employment • The Monetary System and Central Banking • Public Finance and Economic Policy • International Trade and Investment • Tourism and Gambling • The Manufacturing Sector • The Financial Sector • The Construction and Real Estate Sector
1. Economic History and Macroeconomic Environments • What kind of an economy is Macau? • How does Macau get to the current point of economic development?
1.1 The Macau Economy • A “mini” economy located at the west coast of the Pearl River. • Definition of mini economies: (i) population<1 million, (ii) independent economic institutions, (iii) international recognition as an independent economic unit.
Optimal Development Strategy • Outward looking (Reliance on external resources). • Export-oriented (Reliance on external markets). • Specialization (Leading industry).
The Family of Mini Economies • Over 200 economies. • 56 potential “minis” locating in Asia Pacific, Europe, Africa and Latin America. • Accounting for less than 1% of world population and world area. • Small is beautiful: High or medium income the majority, the wealthiest in the world (Luxembourg), 5 (2) among top-ten wealthy economies in terms of GNI (PPP) per capita.
How about Macau? • Lack of natural resources. • Sea, advantageous geographical location, human resources. • Latest population = 445 thousands (with the highest population density in the world), of which about 215 thousands economically active. • GDP about 20% of Beijing’s, 4% of HK’s. • High-income defined by World Bank since 1994. • GDP per capita=US$15,432 in 2002 (4th in Asia; 42nd in the world).
Laissez-faire Example • Low, simple and “relaxed” tax system. • Absence of meaningful capital control. • Minimum government intervention in economic activity (except casino). • Pessimism Vs positive non-interventionism. • Modification since the 1980s: increasing public sector’s share of real GDP (about 13% in 2002).
Outward Looking and Domestic Policy • Visible trade relies on the US, western Europe and China. • Invisible trade relies on China, Hong Kong and Taiwan. • Inward direct investment relies on Hong Kong (71%), China (11%) and Portugal (10%). • Pataca linked to HKD. • ΔG has little multiplier effect.
1.2 The Past • An economic history of 450 years. • Portuguese arrived at the fishing village with a population of 400 in the 16th century (1557). • Paid an annual “ground rent” to the Ming government. • China recognised Portugal’s sovereignty over Macau in the 19th century (1887). • Portugal recognised Macau’s status as a Chinese territory under Portuguese administration (until 20 December 1999).
Before the Opium War (1840) • Portuguese-promoted trade centre with a population of 13,000 (1839). • First entrance to China’s market for western merchants. • Position strengthened in the 18th century due to the closed door policy by the Qing government. • Trade links: China-Macau-India-Portugal, China-Macau-Japan, China-Macau-Philippine Islands- Mexico. • Goods traded: silk, silver, gold, opium.
After the 19th Century • Status as a major trade and commercial centre in China lost to Hong Kong. • In 1850, only 2% of foreign traders in China resided in Macau. • Failed to establish economic foundation for future, sustainable development.
What’s Wrong? • Increase in competition from other Chinese coastal cities after the Opium War. • Lack of direct transportation links with the outside world. • The decline of Portugal, the rise of Britain in Asia. • Lack of effective capital accumulation. • Over-reliance on China trade and commerce.
What’s Left? • Trade restricted to Canton and HK areas. • Refocused on fishing (fishermen=over 70% of Macau’s population in the 1920s). • Introduced a licensing system for fantan. • Opium smuggling and “pig shops” or coolie trade. • Traditional industries such as matches, fire works, shipbuilding, incense. • Temporary boom during WWII.
After WWII • Massive outflows of population and capital. • Population dropped from the all-time high of 600,000 to 187,000 in 1950. • UN embargo due to the Korean War.
1950s and 1960s • Modern industries in particular textiles developed due to Portugal’s duty-free privileges. • S.T.D.M. replaced Tai Hing Co. of the Fu family. • Western-style games, fleet of jetfoils, millions of gamblers from HK, huge tax contribution and re-investment requirements.
Take-off: 1970s and 1980s • Hong Kong industrialists established “out-processing facilities” (low-cost operating environments and industrialized countries’ preferential treatments). • Exports diversified from Portugal-related markets to North American and western European markets. • Number of manufacturing establishments: 172 (1961), 870 (1978), 2,300 plus 1,000+ unregistered “family factories” (mid-1980s).
Manufacturing-driven Growth • Manufacturing accounted for 40% of Macau’s GDP in the golden period (mid-1980s). • Textile and garments dominated (90% of total visible exports in late-1970s). • 1971-81: average annual growth = 16.7% > 10.4% in Hong Kong. 1983-1990: average annual growth=7.6%. • Manufacturing-led demand for services: Modern banking law (Decree Law No. 35/82/M); No. of banks: 10 (1970s), 21 (end-1980s).
1990s • Consistent contraction in manufacturing and correspondingly, significant slowdown in visible exports growth. • Increasing reliance on gambling (plus hotels, restaurants and retail commerce). • The rise of some other tertiary production such as banking and insurance. • Construction and real estate saw ups and downs.
What’s Wrong with Manufacturing? • Relocation to southern China. • Reduction in preferential treatments and protectionism spreading to Macau. • Failure to upgrade competitiveness by quality and technological advancement (SMEs? HK-based large factories?)
2. Economic Structure • Structural importance measured by share of GDP, share of employment and share of exports. • In 2001: Secondary=13.6% of GDP, Tertiary=86.4%.
Primary Production • Fishing, farming • Stimulating impact on some secondary and tertiary industries such as seafood manufacturing and trading, ice factory and storage. • Reasons for its decline: harbour pollution, reclamation projects, short supply of labourforce, keen competition from China. • Employment: about 300 (0.1). • Domestic seafood meets 5% of domestic demand.
Secondary Production: Manufacturing • The largest component of secondary production. • Over 95% outputs exported. • GDP share dropped rapidly from 20.3% in 1989 to 8.5% in 2001. Employment share dropped from 33% (early 1990s) to about 20% (about 40% are imported workers). • Exports in goods=35% of total exports in real terms (2002). • Lowest value added among all major economic sectors (22.7% in 2001).
Construction • A contracting industry in the 2nd half of 1990s due to excess supply, completion of major public projects, withdrawal of speculative funds, significant reduction in immigrants. • Contribution to GDP: from 4.7% (1989) to 2.0% (2001). Employment share: 7.5% (2002). • Part of exports in non-industrial services if foreigner purchases.
Electricity, Gas and Water • Import-oriented, with major valued added by Macau Electricity Co. (CEM). • GDP share: stabilised at 2-3% in the past decade. • Employment share: 0.6% of total employed workers.
Tertiary Production • Gambling dominated. • Included in “Public Administration, Other Community, Social and Personal Services” and accounted for about 32% of Macau’s GDP (2001). • Gambling tax contributes to about 70% of government revenues which finance “public administration (9.4%) and education (3.4%). • Tertiary production with higher value added (over 60% of gross output) and larger operating surplus (about 67% of value added).
Over 10 million visitors/year generate production in “Wholesale, retail, restaurants & hotels” (about 12% of GDP) and “Transport, Storage and Communications” (about 7% of GDP). • Fair estimate: Gambling and tourist industry contributes to over half of the GDP. • Employing over 70% of workforce. • Exports in gambling & tourist services about 60% of total exports.
Highly Concentrated Structure • Tertiary production over 80% of GDP, over half of exports, over 70% of employed population. • Likely to increase further at the expense of manufacturing. • Tertiary depends on gambling and tourism. • Services exports depend on gambling and tourism (over 90%).
Low Professional Requirement • Technology- or knowledge-based tertiary production in developed countries, but not in Macau. • Over 35% workforce has primary education or below, only 10% has university education or above. • Possible reasons: dominance of gambling (a fairly ordinary, low-technology industry) and public services (non-market-driven sector).
Rapid Structural Change • Secondary production accounted for 27.5% of GDP in 1989, but only 13.6% in 2001 - a loss of 14 percentage points in 12 years. • +ve: high flexibility (arguably strength of mini economies). • -ve: lacking of solid foundation, long-term investment commitment and specialised skills.
Corresponding Shift in Export Structure • Services started to exceed goods in 1991. • Exports in industrial services recorded little growth in real terms in the 1990s. • Exports in tourist services grew relatively strong particularly in the area of non-gambling expenditure by non-residents. • Exports in non-industrial services with low base but grew by over 1,000% in last decade!
Threat of Structural Unemployment • Productivity of manufacturing workers lower than that of workers in tertiary industries. • Upgrade of labourforce keeps pace with the structural change? • If not, unemployment increases as manufacturing contracts (with imported workers as a cushion). • Hindrance of economic growth (in tertiary sector).
3.1 Macau’s Population Cultural Revolution Return to Mainland after 1949 Inflows of Chinese immigrants WWII
Population Development • Increased from about 340 thousand in the early 1990’s to about 450 thousand currently, with about 96% Chinese (born in Macau and Mainland China), and less than 2% Macaense. • Natural factor only accounts for less than half of the increase; net migrants remain the major contributor to population growth. • Population inflows: legal immigrants and imported workers mainly from Mainland China, foreigners permitted to reside in Macau mainly from Hong Kong.
Highest Population Mobility • Highest portion of foreign-born population: 56% (Hong Kong, 40%; Region of Gulf Cooperation Council, 35%). • Census 2001: 47% Macau residents from Mainland China (Hong Kong, only 35%). • New immigrants: 15% residents have stayed in Macau for less than 10 years. • Economic and social impacts.
Population Quality • Dependency ratio=38.3% in 2002, which has been slightly reduced in recent years. • Ageing index on an increasing trend (from 27.2% in 1993 to 38.4% in 2002) → higher dependency ratio in the future and reduced number/growth of economically active population. • Less-educated population has consistently reduced from close to 90% in the early 1990s to below 80% in recent years.
Population Projection (2001-2026) • From less than 450 thousand to 578 thousand in 2026 at an average growth of about 1%. • Increasing proportion of female pop. (from 100:92 to 100:88) • Aging population (from less than 10% to 20%) • Median age of residents from 34 to 40. • Life expectancy reaching 80 for men and 85 for women (increase of about 3 years)
3.2 Labour • Labourforce determined by population and labour participation rate. • Labourforce = 45-50% of the population in the last decade. • Labourforce: about 214 thousands with labour participation rate reduced from the high of 66% in the middle of the 1990s to slightly higher than 60% in recent years. • Employed population: about 200 thousands (11% self-employed or family-employed).
Labour Quality • Defined by productivity. • Education attainment. • Age. • Health. • Skill. • Flexibility. • Professional qualifications and continuous training.
3.3 Employment • Employment, wage and productivity. • Underpaid? overpaid? (wage/output ratio comparison; wage index vs productivity index). • Productivity and wage highly correlated; productive workers well worth to be employed. • Wage “catch-up” for low-productivity sectors? • Labour Importation → ↑cost competitiveness?
Monetary System in Macau • The Silver Standard (Before 1906). • The Silver Standard and the Escudo Standard (1906-1941). • The “Pataca” Standard (WWII). • Gold Exchange Standard and the Escudo Standard (1946-1973). • The Escudo Standard (1973-1977). • The HKD Standard (1977-1983). • The HKD Standard and the USD Standard (1983-).
4.1 Silver Standard • A monetary system similar to those in Mainland China, Hong Kong and other Asian countries. • Chinese silver ingots & coins, Mexican Eagle dollars, silver-backed pantans, Hong Kong’s silver-backed banknotes. • Supply of money determined by the amount of silver stock in Macau.
4.2 Silver Standard and Escudo Standard • Patacas issued by BNU circulated in 1906. • Patacas with a guaranteed silver content, linked to the Escudo (under the Gold Standard) at a fixed rate of Ptc1:Esc5. • BNU required to keep monetary reserves ≧ 1/3note issues. • Exchanged for HKD in unofficial/open markets at the rate of 1:1 roughly. • Patacas poorly received and the fixed exchange rate between pataca & escudo only applied to a limited number of official transactions.
4.3 “Pataca” Standard • HKD and Chinese money lost value during wartime. • Link to escudo disturbed. • Concerns for Japanese military yen. • Patacas rose to a popular means of payment, with stern enforcement and substantial reserves (silver and acceptable foreign currencies).
4.4 Gold Exchange Standard and Escudo Standard • Bretton Woods System formally in place. • Macau adhered to the Escudo area with a fixed rate of Ptc1:Esc5.5. • Linked to all major currencies and HKD. • Stable exchange rate with HKD a real priority (devaluation in 1949 and 1967 with HKD).
4.5 Escudo Standard • Portugal notified the IMF to float the escudo. • Pataca devaluated against the HKD with the escudo. • Ptc:HKD exchange rate reached all-time low of 1.21 in 1976. • Serious inflation and disturbance to the daily business activity.
4.6 HKD Standard • Officially linked to the HKD at the rate of Ptc1.075:HKD1, with a fluctuation margin of ±1%. • End of 71 years’ official link to the escudo. • Pataca floated against major currencies with a floating HKD. • Realignment on several occasions in appreciating direction, and eventually settled at the current rate of Ptc1.03:HKD1. • BNU became the agent of IEM in 1980.
4.7 HKD Standard and USD Standard • HKD linked to USD. • Pataca’s link to HKD maintained following the failure of revaluation attempts. • Introducing the Currency Board System (100% reserve requirement) in 1989 with the establishment of AMCM. • BNU regained its exclusive right to issue banknotes (agent of the government). • BOC became the second note-issuing bank.
4.8 Currency Board System • Different from central-bank issuing system. • Exchange between Certificate of Indebtedness (CIs) and a reserve currency at a fixed rate; 100% back-up by international reserves;full convertibility. • Statutory obligation to issue and redeem the currency on demand against reserve money at a fixed rate of exchange and without limit. • Money supply not determined by the Currency Board, but BOP automatic adjustment rather than central-bank discretion.