III. General orientation of Hong Kong-Macao economic relationship in a new era
1. Defining the new era
By the new era, we are referring to the new historical period of Macao's return to the motherland on 20th December 1999 as the second special administrative region of the People's Republic of China(PRC) and of its immediate entry into the 21st century. In that period, essential changes will occur in the relationship between Hong Kong and Macao, from being administered by the British and the Portuguese respectively, to a special relationship between the two SARs under the principle of "one country, two systems", in the sovereignty of "one country"- the PRC, as continuing their capitalist system and style of life for another 50 years. Their return will bring new opportunities to the development of economic relationship between the two regions and thus bring such a relationship into a new historical era. It is certainly meaningful,both historically and realistically, to explore the change and development of economic relationship between the two regions,in order to motivate economic cooperation between them, and to progress Macao's economic development.
2. Identifying the basis of the general orientation of Hong Kong-Macao economic relationship
In this research report, we will identify the general orientation of Hong Kong-Macao economic relationship base on: (1)comparative advantages of Hong Kong, Macao and the Pearl River Delta within the framework of regional cooperation and allocation in the south China; and (2) Macao's economic orientation in regional cooperation and allocation.
2.1 Comparative advantages of Hong Kong, Macao and the Pearl River Delta within the framework of regional cooperation and function allocation in South China
Since the 80's, as China's adoption of "open door" policy progressed, Hong Kong and Macao's manufacturers moved their labor-intensive production lines to the south China, especially to the Pearl River Delta area, resulting in the format of "front store and back-yard mill" between the regions. This sort of industrial relocation has pushed forward comprehensive cooperation between the regions in terms of investment, trade, finance and other sectors.A tied regional economy force has formed. Therefore, the orientation of Hong Kong-Macao economic relationship in the new era must be determined on the basis of an analysis of comparative advantages of the three places.
Hong Kong and Macao have long been parts of China that were under foreign administration and both belongs to island economy, implementing free port policy, with simple and low tax regimes. Having a lot of similarities between them, they were always referred by Mainland China as "Hong Kong-Macao".After the twohave returned to China, they will become two individual SARs of China, with separate tax regimes, continuing the free port policy,simple and low tax regimes, and will maintain their existing system of capitalism and style of life for another 50 years. Therefore,comparing with the Pearl River Delta, Hong Kong-Macao will remain as linkage for Mainland China and the international societies, in addition to being service centers for the neighboring regions. On the other hand, the Pearl River Delta will continue to be a vast back-up and production area for Hong Kong and Macao, supplying sufficient, low cost land and labor, and huge market potentials.
However, great differences remain between Hong Kong and Macao. The two are not on par economically. The fact of "Big Hong Kong, Small Macao" is a reality that must be realized. In terms of size, Macao had a population of 422 thousand in 1997,and an area of 21.45 square kilometers, which is 6.5% and 2.0% of Hong Kong respectively. In terms of current prices, the GDP of Macao in 1997 stood at MOP58.47 billion, which was an equivalent of only 5.3% of that of Hong Kong, if computed in Hong Kong dollars. In comparison, Hong Kong's advantages are comprehensive.However, Macao also has its unique advantages. Differences between them may be seen in:
(1) Hong Kong is a well-known international metropolitan city, with a modern and open capitalistic economy, while Macao is mainly a regional tourist and gaming city, a backup service base for its peripheral areas, where capitalistic economy has not yet reach the standard of modernization and internationalization.
(2) Hong Kong is the finance center in the Asia-Pacific region,with a fairly sound monetary and financial system and a developed finance market where a lot of financial tools are available. Hong Kong has ample foreign exchange reserve, and enjoys a stable and healthy finance. In comparison, Macao's monetary and financesystems are relatively weak and simplistic, relying heavily on Hong Kong.
(3) With the advantage of having one of the world's best three natural harbors, Hong Kong plays its full role of a free port,acting as the most important trading transit port for Mainland China and the Asia-Pacific region, and in very close contact with the international market in terms of commercial, trade and transportation. On the other hand, Macao has long been unable to fully utilize the advantage as a free port because of its lack of a deep-water seaport, and have had to use Hong Kong as a transit port.
(4) Hong Kong and Macao have their own preference in their international connections. Although Hong Kong's international connections are global in dimensions, its priority has, however,been placed on the United State, Japan, Europe, and South Asia.On the other hand, due to its relations with Portugal, Macao has placed emphasis on relationship with the European Union, the Latin dialect countries and South East Asia, which is not without its own potential advantage.
(5) Hong Kong and Macao have transformed to become service economies. However, Hong Kong's economic structure is diversified, with fairly developed sectors of finance, trade, real estate,tourism and information technology etc. while Macao's economy structure is relatively simple. In 1997, simply the tourism and gaming industry accounted for as much as 45% of the GDP, and as pointed out in a report by McKinley & Company in the United States, there is a characteristic feature of "polarization" about Macao's economic structure.
(6) Compared with Hong Kong, Macao is a city with longer history and was historically a place where the Oriental and Occidental culture and religions mix, with a "museum" style ofurban scenery and rich historical relics. In contrast with Hong Kong's relatively fast pace of life, Macao is more of a leisure "European" town. Moreover, Macao is well known for its casinos, reputed as "Oriental Monte Carlo" and has long been a tourist and gaming spot for its neighboring regions. Therefore, Macao is more endowed with the qualities for developing the tourism and gaming industries.
(7) Compared with the rather high operation costs in Hong Kong, Macao has the advantage of being low cost. It is estimated the cost of living in Macao is only 40% of that in Hong Kong land price. Rents are only approximately 17%, and salaries for employees are only approximately 40% of those in Hong Kong. Besides, Macao has a set of more flexible import labor system.
(8) Hong Kong is in a fairly high degree of integration and cooperation with the various regions in the south China. During the 20 years of development, the format of" front store and backyard mill" has been established, in which Hong Kong plays a strategic role of being a business metropolitan and service center for the region. On the other hand, competition between Macao and neighboring Zhuhai has became increasingly apparent since the beginning of the 90's. One of the key reasons for this is that Macao is an economy of small scale, without a deep-water sea port, and is unable to form a close-nit strategic relationship with its backyard regions, especially Zhuhai, the west side of Pearl River Delta and the middle and down reaches of the Xijiang River. However, the situation improved since late 1995, when the Macao International Airport began to operate, and Macao began to emerge as transshipment station between Mainland China and Taiwan.
2.2 Macao's economic orientation in regional allocation and cooperation
The orientation of the economic relationship between Hong Kong and Macao in the new era should no doubt be studied inconjunction with the economic orientation of Macao in the context of regional cooperation and allocation. In fact, since the early 90's,studies based on its comparative advantages or advantages in international competition have been undertaken regarding Macao's economic orientation within the framework of regional cooperation and function allocation. At the end of 1990, such study was began by a report entitled "Macao's Development Prospect in the Next Ten Years " published by McKinsey & Company, an American company, appointed by the Macao government. According to the report, Macao had come to a dead-end on its way of freewheeling development, and it should, by taking advantage of the large-scale infrastructure development that was then underway, re-identify its economic development strategy. The best alternative was to make use of the strategic benefits from "the potential and attractive economies of growing southern neighborhoods in China", strive to develop into the "regional strategic pivot". That was the first positioning for Macao's economy. Unfortunately, that research fell short of elaborating in detail what was embodied in the concept of that positioning, leaving room for misunderstanding that Macao should become a manufacturing center in the south China. In the perspective of the research as a whole, the so-called "strategic pivot" should encompass not only the manufacturing, but also that of services, especially of tourism and gaming industry. However, it is undeniable that the research placed its preference on uplifting Macao's manufacturing industry, which was to a great extend due to Macao's reality. In the 80's, the manufacturing industry once took over tourism and gaming by becoming the top industry. By the early 90's the lifting and transformation of the manufacturing industry became one of the critical tasks for Macao. Unfortunately,the study failed to achieve the result of saving the downsliding of the manufacturing industry.
Afterwards, the growth of Macao's export manufacturing industry obviously slowed down. There was a great demand in " speeding up industry transformation, so as to sustain prosperity of the economy". Under these circumstances, in 1994 a specialist group from the National Science Commission, after one year's research,issued a report titled "Towards Developing Macao's High Technology Industries". The opinion was that the development of high technology industries had already become the principal of today's world economic growth, and that Macao should go by that world -wide tide, and aggressively create conditions for the drive for hightechnology, so that Macao 's economy may re-vitalize. In specific,Macao should " take advantage of the talent from Mainland China in high technology and combine with Macao's political, economic and social potentials, thus creating an environment for developing high technology industries. Efforts should be brought to bear on biology and information technology, where points of growth may be nurtured, and new industries may be created, so that Macao will shine again ". However, that study was regarded as being too detached from Macao's reality, as the whole foundation for developing high technology industries was even weaker, in terms of the scale of enterprises, technical support, and scientific talents,than that of Hong Kong, which rendered high technology industry development in Macao unsustainable.
In 1996, Macao's economy experienced a period of negative growth. Export manufacturing has dropped to less than 10% in the GDP, and the emergence of high technology industries was unforeseen. Under such circumstances, a joint group of specialists from The Research Association of Hong Kong & Macao Economic of Guangdong and Associacao das Ciencia Economics de Macao undertook another comprehensive and in-depth research on Macao's economy, and In early 1997 published a paper titled "Strategies forMacao's Economic Development". This paper has aroused a large feedback from local community. The paper based on cross-section study of the comparative advantages and constraints of Macao's economy recommended Macao's economic position as "a regional trade service center". This positioning was apparently a specified rendering of the orientation of "regional strategic pivot" identified by Mckinsey & Company. In its concept, emphasis is shifted from the manufacturing to trade services, including tourism and gaming,financial and commercial. In contrast to the study by the National Science Commission, this one substituted high technology industries with the service industries that "are already spouting and growing and will become future new industries for Macao's economy ". It has also pointed out in emphasis that "in order to revitalize Macao's economy, we need to revitalize the tourism and gaming industry first, and "bring to full the leading role of tourism and gaming industry so that other industries may be motivated along the way of development ". Compared with the two previous papers, this one has greatly uplifted the strategic position of tourism and gaming industry in Macao's economy. This concept did in fact reflect the reality of the economy at that time, while in 1996, the tourism and gaming industry accounted for as much as 43% of the GDP. However,critics said that the concept of a "regional trade service center" could easily mislead to neglect the important position of tourism and gaming industry, and that the meaning of trade service was not clear and exactly defined.
The book "Stability and Prosperity-Development Strategy for Macao's Economy into the Next Century" was published in August 1997.Compared with the previous three researches, this book apparently places the hope of revitalizing Macao's economy on tourism and gaming industry, positioning Macao's economy as "to maintain its free-port regime, to enhance function allocation and coordinationwith Hong Kong and Mainland China, with a view to become an international all-in-one tourist center, with the gaming industry as its core of attraction and use the tourism industry to activate the development of Macao in economic and social terms." In its opinion,the fledging tourism industry, which is noted as an " ever-green industry " in modern society, is continuously booming. That actually reflected the real situation of Macao, where its export manufacturing industry was declining, while the tourism and gaming industry was continuously growing.
However, according to our research, taking the tourism and gaming industry to lead the economy as long-term strategy needs deeper thinking. One of the most important advantages of Macao's environment of investment is that it is the other free port, apart from Hong Kong, on the southern border of China. And, in comparison with Hong Kong, Macao's economic support and associated international markets are different from Hong Kong's.The west side of Pearl River Delta is economically backing Macao;the middle and lower reaches along the Xijiang River a vest region that stretches northwestwards, besides it is associated with the EU and the Latin dialect countries. This is Macao's notable and unique strategic advantage. From a long-term strategic perspective, it would be a heavy loss, not just to Macao, but also to Hong Kong and China if Macao failed to explore and take advantage, to the greatest extent, of such an important role of the intermediary.
From the above analysis of the four influential studies, Macao's orientation of economic development in the new era is gradually revealed. According to our research, the economic orientation of Macao in the regional cooperation and allocation in the new era must be based on Macao's international competitiveness and its strategic potential advantages, of which the two most important aspects are (1) the comparative advantage of Macao's tourism andgaming industry in regional cooperation and allocation; and (2)the combined advantage of Macao as a free port, its geographic locations and its international connections. On the basis of these two strategic advantages, Macao's economic orientation may be redefined as: under the framework of "one country, two systems",maintaining and strengthening the function as a free port, striving to become an all-in-one city of tourism and gaming industry plus intermediary trade and commercial services under regional cooperation and allocation, and led by these two industries to develop into a modernized and multiplex economic structure, at the same time promoting a sustainable development of Macao's overall economy which leads to stability and prosperity of the society.
Under this economic orientation there are two specific development objectives: 1) To become a synthesized tourism and gaming city, i.e. "Las Vegas in Asia", aiming to transform the present tourism and gaming industry, with casino business as its core, into a synthesized tourist service industry which is comprised of gamingtravel, vacation-travel, sightseeing-travel, culture-travel, businesstravel, conference-travel and exhibition-travel, etc.; 2) to become a regional city of intermediary commercial and trade services, in addition to being a backup service base for Hong Kong , the west side of the Pearl River Delta and its peripheral areas; as being a transit station for Taiwanese investment in Mainland China,connecting the Mainland , especially the west side of the Pearl River Delta and areas around the middle and lower reaches of the Xijiang River , with international trading cities in the EU and the Latin-speaking countries. The booming of the intermediary commercial and trade service industry will undoubtedly accelerate the transformation of Macao's economic structure, so that it will become multiplex and upgraded, activating the economy as a whole.
These two objectives can be mutually complementary. From the mid-short-term point of view, Macao may concentrate on becoming a synthesized tourism and gaming city in Asia, and complemented by becoming a city of international intermediary trade and commercial services. But from the mid-long-term view point, strategic position of the latter role shall become more important as conditions for it gradually matures, and become one of the major forces in the development of Macao's economy.
2.3 General orientation of Hong Kong-Macao economic relationship in the new area
Based on the analysis of this study on the comparative advantages of Hong Kong and Macao and on Macao's economic orientation in regional cooperation and Macao's economic position in relation to Hong Kong in the new era can be defined as "utilizing advantage to a full extent, through bilateral cooperation for mutual benefits, and thus achieving prosperity together". Under the principle of "one country, two systems", Hong Kong and Macao are politically two equal SARs under the central government of the PRC.Economically they should enhance cooperation on the existing basis, achieve a division of function to be mutually complementary and thus achieve prosperity together. In the new historical era,Hong Kong has to be the most important commercial cosmopolitan city in Asia and the main service center for economic regions in the south China. At the same time its comparative advantages and overall economic structure will still undergo constant changes. Economically Macao should at the same time adjust according to the changes in Hong Kong's advantages to extend and complement its function.On the other hand, Macao should also explore and make use of its own advantages to the greatest extent avoiding defects and place emphasis on being different so as to fully act as Hong Kong'sfunctional sideways and complement. Base on bilateral cooperation,it should keep an allocation of function to be mutually complementary and thus achieve prosperity together. Such a bilateral cooperation on the part of Macao should mainly include:
(1) As a unique key link in the tourism triangle area covering Guangdong, Hong Kong and Macao. Macao will become a synthesized tourism and gaming city in the region, i.e. "Las Vegas in Asia";
(2) Macao will become a regional city of intermediary commercial and trade services, linking the Mainland, especially the west side of the Pearl River Delta, areas around the middle and lower reaches of the Xijiang River, with the EU and the Latin-dialect countries;
(3) Macao will develop into a science-&-technology exchange and transfer center between Mainland China and other international countries, especially the EU;
(4) As a supplement to Hong Kong's international finance center, Macao will develop into a offshore finance center which incorporates capitals in search of a tax haven and practical businesses;
(5) Macao will develop into a base for high added value manufacturing as a complement to Hong Kong;
(6) Macao will develop into a transit point for Taiwan businesses investing in Mainland China and the EU;
(7) Macao will develop into a backup service center for Hong Kong and other peripheral areas, with the advantage of quality life and low costs;
(8) Macao will develop into a satellite city of Hong Kong, as an extraterritorial residential area.
In this relationship of function allocation and bilateral cooperation, Hong Kong will continue to be one of the motivationsfor Macao's economic development and to become modernized,diversified and international. Vice versa, the full role of Macao's functions will be conductive to consolidating and enhancing Hong Kong's international position and competitiveness. The two will be mutually benefited.
