Everyone knows about Hong Kong, possibly the most important financial centre in Asia, which sits on the eastern side of the Pearl River Delta in southern China. Not so many people know about Macau, the city that was ruled by the Portuguese for more than four centuries until 1999, and where gaming is legal. Gaming is not legal in Hong Kong and Macau's half a million residents made a modest living off visitors from Hong Kong until 1999.
But now Macau has a higher per capita income than Hong Kong. After the last budget, Macau residents were given cash handouts and no longer depend on Hong Kong tourists. Visitors come from other parts of a booming China and even further north from places such as Korea. Of course, it may not be fair to compare the fortunes of Hong Kong, a city of nearly seven million people and a sophisticated economy, with that of Macau, a city of less than a million people that depends mostly on visitors. But even making allowance for this, Macau may have lessons for Hong Kong.
It has undergone fundamental changes in the past 10 years. Until it was handed back to China in 1999 by the Portuguese, the gaming industry of Macau was dominated by one company controlled by a local tycoon named Stanley Ho. His properties suffered from a lack of new investment and contributed to Macau's standing as a seedy experience. All that changed after the handover of sovereignty. Mr Ho lost his monopoly and the property sector was thrown open to US companies such as The Venetian, MGM and Wynn. These companies have built themed resorts and diversified their establishments from solely gaming casinos to attract other tourists.
The results have been a spectacular success. Macau is reaping the fruits of a courageous government decision that took on a long and deeply entrenched monopoly, and liberalised and diversified it. It could not been an easy decision to arrive at or implement, but it had to be done if Macau were not to fade into history as a seedy town with some Iberian influence. Hong Kong, too, has many entrenched monopolies and the government is very much part of that. This may come as a surprise to the "parachute" intellectuals from American think tanks who routinely declare Hong Kong the "freest" economy in the world, but all land in Hong Kong is owned by the government, which sells it on a 99-year lease to landlords who build high-rise residences and shopping malls.
Property development is dominated de facto by four companies. They are the only ones with the capital and holding power to work with the government to "develop" the land. Profit margins for property developers in Hong Kong are about 40 per cent, twice the norm in the rest of the world, while Hong Kong residents are being squeezed into ever smaller and more expensive apartments. The "average" apartment in Hong Kong is 450 square feet, which means that a lot of them are smaller than that.
It is true that direct tax rates in Hong Kong are low: the maximum personal tax rate is 15 per cent; the corporate tax rate is 16 per cent; and there are almost no tariffs on imported goods and no sales tax. This is how Hong Kong gets its "free" market reputation. But the high property prices, which disproportionately benefit the large real estate companies and the government at the expense of other businesses and residents, acts as a large "hidden" tax.
Property is the most important and obvious oligopoly in Hong Kong but there are many others in retail, transport and even ports. It is certain now that Hong Kong, where GDP growth rates are about half that of a sizzling China, has the difficult job of confronting its monopolies and re-structuring its economy for the greater good. It will be difficult both economically and politically but it can be done. Macau has already shown the way forward.
business@thenational.ae