The myth of a booming town: a two-sector model of Macau economic growth

Xinhua Gu and Li Sheng

China Economic Journal, 2009, vol. 2, issue 2, 187-202

Abstract: This paper builds a trade-based equilibrium, two-sector model to reveal the inefficiency of a foreign-dominated, gaming-biased, bubble growth in Macau. This fast GDP growth that has not led to much real development as measured by the effective GNP would likely have adverse impacts on the city's long-term prosperity. We employ the model to analyze why various gaming markets have adopted differing tax rates. This work provides a rigorous argument against the problematic attempts to push for low tax convergence in the Asian gaming market. To neutralize the damaging effects of foreign domination in the local economy, we offer several policy recommendations for reviving home businesses and enhancing domestic welfare in Macau. It is suggested that enforceable laws should be made to prevent the foreign firms with cross-market operations from stealing away Macau customers, that differential taxes on casino operators and income taxes on player winnings should be chosen to support Chinese-owned casinos and curb pathological gambling, and that a sovereign wealth fund should be established to stop too much of Chinese gaming money from being lost too fast and foster Macau's economic autonomy by reducing its overreliance on foreign concerns for output growth.

Date: 2009
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DOI: 10.1080/17538960903083509

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