Macau’s gambling addiction

Macau’s gambling addiction
By Murray StassenThursday, October 31st, 2013

Referred to by some as the Las Vegas of the East and the Monte Carlo of the Orient, analysts and investors are wondering if Macau can add long-term sustainability to the list of things the city-state is known for

Macau’s economy is booming. By the second quarter of this year, GDP had grown by 10.2 percent and the unemployment rate is currently at around 1.9 percent. The former Portuguese colony is a phenomenal success story. Macau’s revenue has overtaken Las Vegas’ six times over in little over a decade and it is now considered the top gaming destination in the world.

Gaming revenue was $38bn in 2012 and the industry saw a 21.4 percent year-on-year increase this September. Two thirds of Macau’s visitors are from mainland China, where gambling is becoming the ‘sport’ of choice. Macau is currently the only place in China where gambling is legal and according to government statistics there were 1,881,588 Chinese visitors there in August alone, an increase of 15.1 percent from the year before.

History shows us that the bigger the boom in a monotype economy, the bigger the potential for a crash

With impressive figures like these that show growth in revenue and a healthy market share, why cast a shadow of doubt over its future success? The sustainability of economic growth is questionable because Macau relies primarily on the gaming industry for this growth.

Lawmaker Jose Coutinho sums the situation up thusly: “Macau is a complete illusion of prosperity because what we are building is only casinos, rooms and some shops with famous brands.”

Coutinho is not alone in his criticism of the reliance on a single industry for economic prosperity. Business leaders from the region, like Pansy Ho, daughter of gambling mogul Stanley Ho, have spoken out about the lack of economic diversity. She told China Daily last year that “if we don’t want Macau’s growth to eventually find itself at a stalemate, we need to start thinking quickly on how Macau can continue its impetus.”

Lack of diversity

William Thompson, Professor Emeritus of Public Administration at the University of Nevada, and an expert on the gambling industry, has also expressed his doubts about the longevity of growth in Macau. He explained on the TDM talk show that the success seen so far “is almost a danger, because with that kind of success why would Macau want to change?” With a lack of economic diversity being Macau’s major weakness, it is worth looking at what steps are being taken to prepare for a potential decline in the gaming industry. The answer to this, so far, has been to invest in industries that support and complement the gaming industry, such as leisure, retail and entertainment, rather than investing in separate industries which may allow Macau to be weaned off its gaming-industry-fuelled monotype economy in the event of a decline.

Macau’s single economy is unique and perhaps temporarily safe in that it is not necessarily vulnerable to factors such as technological advancements, mechanisation, or depletion of natural resources. In Nigeria, for example, the sole reliance on oil reserves is resulting in a lack of investment and development in other sectors. The agricultural and tourism industries are suffering considerably and unemployment and poverty are increasing despite healthy oil-related revenues. Diversification of the Nigerian economy is necessary for long-term economic stability; however, corruption is blamed for the current inefficiency, unemployment, poverty and hunger.

In Detroit, the reliance on the unionised auto industry resulted in decades of job losses, reduction in population size and eventual bankruptcy. In the simplest of explanations, after the unions in Detroit secured higher wages and benefits for workers, car manufacturing became more expensive for the ‘Big Three’ (GM, Ford and Chrysler) than European or Japanese competitors. The ‘Big Three’ are partly to blame for Detroit’s decline due to work being outsourced for lower wages. The over-reliance on one industry and the lack of forethought to use the revenue from the auto industry to invest in other sectors resulted in a lack of other sectors and a large unemployed workforce lacking the skills to work in them, even if they did exist.

While the situations in Detroit and Macau are vastly different, there are useful comparisons to be made. A mono-cultural economy does not really work in the long term. There are similar characteristics that can be found in each economy. For example in Macau, as is the case in Nigeria, the dominant industry is suffocating other business sectors and the economy and the workforce are becoming more and more reliant on the dominant industry as a result.

Socioeconomic concerns

Macau is starting to see its fair share of social and economic dilemmas developing as a result of the monolithic gaming industry. Fung Kwan, Professor of Economics at Macau University, suggests that a “labour shortage has been an ongoing problem for Macau” and that “the recent casino developments have exacerbated the problem and we’ve seen the casinos nabbing labour from other sectors. Labour cost for the whole of Macau is rising.” Casinos offer higher pay and better working conditions, often including holidays, accommodation, meals and health insurance. Local businesses struggling to compete with the incentives offered by the casinos lose a sizable chunk of their workforce.

In a government study, foreign workers, paid at a lower rate than locals, are cited as the key to countering this problem. Restrictions on the amount of foreign workers mean that there is still a high demand for locals and the lure of the high-wage-paying casinos is creating a new generation of workers without a broad range of skills, limiting them to life in the casino. In the event of the industry declining, many people will struggle to find work elsewhere.

Macau’s small size and population density limits its potential for growth. Macau is the most densely populated region in the world, with around 20,497.34 people per square kilometre.

According to government statistics, 19,578,498 people visited Macau from January to August 2013. There were 2,871,088 visitors in August alone, an increase of 7.1 percent from the same month a year before. More foreign workers and the growing number of visitors are placing an incredible strain on the local infrastructure that is not yet adequately developed for the city to function smoothly with such large numbers of people. There are public housing shortages as well as congestion due to an inadequate transport system. There are plans in place to improve the transport infrastructure, though; for example, the elevated Macau Light Transit Rail is currently under construction and should be operational by 2015.

The development of the new $5bn Hengqin Island theme park shows that there is an effort being made to diversify the economy of the region. Investors are hopeful that Hengqin, a 10-minute drive from Macau, will attract tourists from Macau, the mainland and globally. Homes, entertainment facilities, offices and a hotel are being built on the island and it will improve the tourism infrastructure in the Pearl River delta. Gambling will not be allowed on Hengqin, but it has still attracted investments worth $39bn. Pansy Ho told Reuters that they ‘’need to work on a plan to assimilate and to make sure that in the future, Macau would be in the centre of things but also integrated with the development and the future of the whole Pearl River delta.”
Hotel operators from Macau want to invest in non-gambling ventures, like golf courses and sports stadiums on Hengqin. Investments like this are perhaps a good way for the gaming industry to help diversify the Macau economy. Improved leisure and entertainment facilities will still only be complementing the gaming sector rather than offering an alternative. Officials and business leaders would like to see Macau become a centre for conventions, leisure, sport, entertainment and tourism with gaming acting as the catalyst that sparked the boom.

Lack of investment

Although Macau’s economy continues to grow each year, its reliance on gambling to fuel the economy may end up being detrimental to the city’s long-term success. A lack of investment in local industries poses a problem for extending the appeal of Macau beyond wealthy gamblers from mainland China. History shows us that the bigger the boom in a monotype economy, the bigger the potential for a crash. This can be observed in Detroit, where the sole reliance on the manufacturing industry resulted in a lack of opportunities when the industry declined, causing bankruptcy and widespread poverty. However, it would not be entirely fair to compare these two cities, as there are a number of unique contributing factors that set them apart.

Macau has a lot of challenges ahead to secure its long-term success. Social and economic problems caused by the gaming industry need to be reviewed and resolved. Macau also faces fierce competition from Singapore’s gaming industry, the potential of legalised gambling in Japan, as well as the Chinese government’s testing of ‘cashless casinos’ in one of China’s other special economic zones.

For now, Macau is making an unprecedented amount of money thanks to its gaming sector; however, the economy will need to be diversified if it is to remain the economic success it has become. Saying that, the rapid growth has happened in a relatively short amount of time, so the government does have the funds and sufficient time to invest in other business activities, but what these will be remains to be seen.


http://www.worldfinance.com/infrastructure-investment/government-policy/macaus-gambling-addiction