Home | Subscribe | Index Special Reports | Order past issues Table of Contents

Macao Aims for a Turnaround

Unlike most Hong Kongers in 1997, Macao residents are optimistic about reversion to PRC rule

Darlene M. Liao

After 442 years of Portuguese administration, Macao returns to PRC rule on December 20, 1999, with pomp and festivities topped off by an air show featuring skydivers from around the world. Some might question why the handover of a city of only 8.1 square miles and some 430,000 residents is worth noting. The answer, in a nutshell, is that the territory will become a PRC Special Administrative Region (SAR) and thus another test case of China's "one country, two systems" model. How well the governments of Macao and China tackle Macao's economic and political challenges, and in particular how successful they are in combating Macao's pervasive organized crime network, will foretell more than just Macao's future.

A different kind of handover

Perhaps a more important difference lies in the ease of negotiating Macao's transition. Portugal was willing to return Macao to China in 1974 (after the Portuguese revolution), whereas the British were reluctant to let go of Hong Kong. The negotiations for Macao's Joint Declaration and Basic Law were speedy in contrast to the lengthy and at times bitter negotiations over the terms of Hong Kong's handover. Another striking difference is that while Hong Kongers fought ardently to preserve the status quo, Macao residents hope that the handover will bring about change.

The PRC central government will assume control over Macao's diplomatic and military affairs on December 20. In accordance with the Sino-Portuguese Joint Declaration on the Question of Macao, signed in April 1987, the Macao SAR will be autonomous, with its own government and laws. Like Hong Kong, Macao will maintain the present political, judicial, social, cultural, and economic systems for 50 years. Portuguese and Chinese will be the official languages. Residents will continue to enjoy freedom of expression, press, movement and association, and religion, among other rights protected under the Basic Law, the SAR constitution promulgated by the PRC in March 19 93.

Macao's current Legislative Assembly of 23 deputies will serve until 2001, providing a degree of continuity. Seven members are appointed by the governor, eight are directly elected, and eight are selected indirectly. The Legislative Assembly is currently dominated by a pro-Beijing faction, which should further smooth the transition. The second assembly, which will serve until 2005, will be composed of 27 deputies. The third assembly and all those thereafter will be composed of 29 deputies, 12 of which will be directly elected, 10 indirectly elected, and 7 appointed by the chief executive.

The Chief Executive Selection Committee of 200 Macao residents elected 44-year-old Edmund Ho as the Macao SAR's first head. Ho is the general manager of Tai Fung Bank, chairman of the Macao Association of Banks, a member of the Standing Committee of the PRC's Ninth National People's Congress, vice president of the Macao Chamber of Commerce, and until recently a member of the Legislative Assembly. Soon after winning the May 15 election by a landslide, Ho, who has vowed to prioritize economic and public security issues, resigned from the legislature to prepare for his new post. As Chief Executive, the Macao native will appoint seven Legislative Assembly deputies and select five secretaries--a reduction from the current seven, reflecting efforts to streamline the government.

Sticking points

The Portuguese government maintains that Macao residents holding Portuguese passports on December 19 can still use these documents after the handover. While Portugal accepts dual nationality for the roughly 20 percent of the population that is affected, China does not. According to the PRC Law on Nationality in the Macao Special Administrative Region, all ethnic Chinese born in Macao will be considered citizens of China, regardless of whether they hold Portuguese passports or identity cards. Individuals of mixed Chinese and Portuguese background, however, will be able to choose between Chinese and Portuguese citizenship. Chinese citizens with Portuguese passports or right of residence in other foreign countries will not have foreign consular protection while in China or Macao. The law, approved by the Standing Committee of the National People's Congress, takes effect December 20.

The PLA question centers around the troops to be stationed in Macao after the handover. According to the Macao SAR Basic Law, the PRC government will assume responsibility for Macao's defense, and t he SAR government will be responsible for security concerns. Unlike Hong Kong's Basic Law, that of Macao fails to state clearly the role of PLA troops. Beijing has said that troops would be stationed in Macao for sovereignty reasons, while some senior PRC officials have said that troops might not even be necessary.

Repositioning to attract investors

By the early 1990s, the Macao government, realizing that manufacturing could no longer serve as a main engine of growth, kicked off an infrastructure development program to improve the competitiveness and attractiveness of the city. Macao now boasts a modern telecommunications system, a new ferry terminal, an international airport, a container port, and a bridge linking the Macao peninsula to Taipa island, as well as land reclamation and water purification projects. Though the government has officially completed this investment campaign, other projects are in the works, including a bridge from Zhuhai, Guangdong Province, to Taipa; a convention center; a bridge betw een Macao and Hong Kong; a rail connection to Zhuhai and Guangzhou; and an offshore oil terminal.

While Macao was investing heavily in infrastructure, property developers actively built up commercial and residential housing, leading to a property glut that persists today. Macao has been recording negative economic growth along with its neighbors in the past few years. GDP contracted 6.8 percent last year, according to Macao's Census and Statistics Department (see Table). The government is thus pinning its hopes on tourism to boost the economy in the short term. Government efforts include enlarging tourism facilities and developing related services.

The tourism sector is dominated by Macao's world-famous gambling industry, which accounts for an estimated 42-60 percent of GDP and employs 30 percent of the work force. In an effort to reduce this heavy reliance on gambling, the government has played up Macao's cultural heritage and built a new cultural center and museum.

Though Macao may be experiencing tough economic times, it is a free port, with no regulations on imports and exp orts, no import duties, and smooth customs procedures. A member of the World Trade Organization, Macao trades with more than 100 economies. Its top exports are textiles, and its largest export destinations are the United States, the European Union, and Hong Kong. Macao's top imports are raw materials and semi-manufactured goods, as well as foodstuffs, beverages, and tobacco. The city imports mainly from China, Hong Kong, and Taiwan.

Macao and Hong Kong are likely to be the only free PRC ports for the forseeable future. This, along with its various investment incentives and minimal restrictions, could be a plus for Macao in attracting investors. In addition to solid infrastructure, Macao boasts an educated, skilled labor force and moderate rents and wages. Macao also offers low tax rates; corporate profits are taxed a flat 15 percent. Companies can qualify for tax holidays, land concessions, and interest relief. For example, an interest relief scheme is in place for businesses borrowing for the purchase or construction of new industrial premises and capital equipment. Investors also benefit from Macao's lack of currency controls and debt-free economy.

China is a major investor in Macao, accounting for over 50 percent of total investment. China-based firms invested roughly $5 billion in Macao in the early 1990s. And PRC companies are major participants in Nam Van Lakes, a $2 billion land reclamation project that will double Macao's retail sector and increase the territory's total area by 20 percent.

The flip side of Macao's strong ties to China and Hong Kong, and its small, open economy, is its vulnerability to external shocks. Though the effects of the Asian crisis were not as severe in Ma cao as in other economies, not least because Macao has no stock market, trade and tourism were hit hard. Two-thirds of all tourists arrive in Macao via Hong Kong, so the steep decline in tourism in Hong Kong has spilled over. The city's gambling monopoly, the Macau Society for Tourism and Entertainment (STDM), recorded a nearly 20 percent drop in earnings in 1997--a serious blow to government coffers, as taxes on STDM earnings account for 25 percent of government revenue.

Tourism began to stabilize in 1998, declining only 0.7 percent. But tourists are spending less than before the crisis: in the third quarter of 1998, the average tourist spent 27 percent less than they spent in 1997.

Trade, too, caught the Asian flu. Prior to the crisis, Macao was already finding it difficult to compete with Southeast Asia's similar exports. The devaluations that took place in late 1997 only added to this difficulty. In 1998, while the value of Macao exports was down 0.3 percent, the actual volume fell 3.2 percent, revealing that companies were selling less, and at higher prices. Macao's currency, the Pataca, is pegged to the Hong Kong dollar, and thus indirectly linked to the US dollar. Macao has not devalued the Pataca. The situation is improving somewhat, however, with the slight appreciation of regional currencies.

Civil service and judicial woes

Only after the 1974 revolution in Portugal, and the resulting change in attitudes and leadership, did the Portuguese government attempt to modernize Macao's political and administrative systems. As part of the program to facilitate the transition to PRC rule, Macao's civil servants had to choose in 1994-95 whether to stay in Macao or transfer to Portugal. Of the roughly 7,000 civil service employees, 5,000 chose to stay. But until 1997, there were no Chinese in the government. Most mid-level civil service employees or department heads, 90 percent of whom were assigned in 1998-99, thus lack both experience and authority. Many earned their positions because of their ability to speak Portuguese and their relationships with Portuguese officials.

Finding qualified local Chinese to serve in the government will prove extremely difficult. Though the Chinese make up roughly 96 percent of the population in Macao, they dominate the business sector and are unfamiliar with how the government works. How this hurdle will be overcome remains to be seen. Some analysts suggest one nontraditional solution may be to draw these businesspeople into the government to supplement the civil service. Whatever the decision, new local civil servants will need a considerable degree of training. Officials have been sent to Portugal as well as China for short-term training, but long-term training will still be necessary.

Macao's judicial system is also scrambling to get into shape for the post-handover world. The Supreme Court of Justice was not created until March 1993, and local lawyers have been poorly trained. Though Macao University graduated its first batch of lawyers in the mid-1990s, locally trained magistrates have little, if any, practical court experience. Moreover, court sessions were all held in Portuguese until recently. Courts now feature simultaneous translation between Portuguese and Mandarin Chinese.

Macao's penal code has recently been translated into Chinese, but some laws remain outdated, dating as far back as 1901. Even a high-ranking government official has acknowledged that business laws need to be modernized.

In general, the legal system is inefficient, with decisions usually taking more than a year. Contract negotiations are also lengthy; it takes three years to complete the paperwork for a typical property purchase, for example. Thus, most cases are settled out of court. On a more optimistic note, the PRC approved Macao's desire to continue to forbid the death sentence and life imprisonment after 199 9.

Protecting the people

Democracy is not a popular concept among Macao residents. They simply desire concrete improvements in their daily lives, according to Ng and many academics and Macao watchers. In contrast to the views of the Hong Kong people prior to the Hong Kong handover in 1997, Macao residents expect the reversion to Chinese rule to lead to such improvements.

The crime wave

A number of analysts and government officials maintain that much of Macao's crime is imported. In the last three years, Hong Kong triads have tried to increase their influence in Macao. Mainland and Taiwan triads have also built a strong presence in Macao. And one government official interviewed asserts that much of the triads' firepower originates in mainland China.

Though Macao established the Operational Command Center to unite all police forces in Macao, the center has been unable to overpower the triads, estimated to outnumber police two to one. Some police collusion with triads further undermines the center's efforts . Assistance could come in the form of PRC public security forces, reportedly already stationed in Macao studying the crime situation. And the roughly 4,000 PLA troops currently guarding the waters and land around Macao have made several thousand gang-related arrests. Some Macao experts believe that triad crime will subside after reversion and that PRC rule, backed by the PLA, will serve as an effective deterrent. Others believe that the triads will temporarily ease up on the more visible criminal activities after the handover, but that feuds will continue.

Macao citizens understandably expect Edmund Ho to stop police collusion with triads and to reform the gambling industry, the battleground for organized crime. STDM's monopoly expires in 2001, and what will happen then is anyone's guess. Stanley Ho (no relation), head of STDM and the lord of the gambling industry, hopes to extend the monopoly. He argues that competition in the indus try would only increase gang-related crime.

The post-handover era

But if gambling is to continue to flourish, one analyst believes that the government must reform the industry and entertain the possibility of incorporating professional management. In its present form the gambling industry has free reign. Casinos compete by cutting prices, not by improving the quality of the service. Gambling is promoted through the regular parceling out of discounts to VIP players. No law exists to prevent this method of promotion.

The government has little choice but to rely on tourism to fuel the economy in the short term. With Macao's textiles quota scheduled to be phased out by 2004, the government is intent on building up other industries such as higher value-added processing and services. Government officials believe Macao must develop niche markets, encouraging companies to set up back office operations in Macao. A few paging companies, most notably Hutchison Telecom and Star Paging, have already relocated their bases from Hong Kong to Macao.

Reversion to PRC rule will no doubt lead to closer ties between Macao and the mainland, particularly Guangdong Province. And Macao will continue to serve as a bridge linking China to Europe via Portugal. Macao's ties with Hong Kong could strengthen, with Macao looking to the first SAR for experience, perhaps in the form of advice from the Independent Commission Against Corruption. The question is whether the PRC and Macao SAR governments can in fact turn the economy around and clean up the triads despite the PRC government's own problems with corruption and the Macao government's inexperience. Macao residents and analysts alike tend to be cautiously optimistic.

Darlene M. Liao is assistant editor of The CBR. The author wishes to thank the officials and academics with whom she met in Macao and Hong Kong and with whom she corresponded for their gracious support.