Friday, May 4, 2007

Unrest in Macau... lessons for China

Macau has been in the world headlines recently, for both good and bad reasons. A few weeks ago, I discussed Macau's rapid growth (real GDP grew 16.6% last year: see my earlier post here). Now they're back in the headlines, for protests that turned violent and police firing warning shots into the air (a YouTube clip of the action is here).

So what are Macau residents protesting about? In economics, we often focus on average or aggregate wages, without paying enough attention to the full distribution of those wages. I was guilty of that in my earlier post, in which I argued that average real wages have grown spectacularly in recent years. It turns out that while many people in Macau are benefitting from growth, a significant minority feel that they're being left behind, and are seeing no benefits from the increased construction, gambling, and associated service industry growth.

What lies beneath this dissatisfaction? It's not as if the people who were protesting are worse off than they were before the rapid growth! Well, it turns out that people appear to derive utility not just from the level of their income, but also from their relative status in the economy. That is, I'm happier being poor if you are also poor. But if I observe you becoming better off while I am not, that imposes a negative externality on me. I feel worse off, even if I enjoy the same level of consumption as before. It's called the "relative income hypothesis" (RIH).

I would expect that the power of the RIH to affect utility is non-linear. If changes in status occur only slowly (for example, over generations), consumers slowly adjust to their new-found status or lack thereof, without any major loss of utility. However, the more rapid is the change in status, the more difficult is the adjustment process, and the greater is the loss of utility.

Coming back to Macau, rapid economic growth results in rapid changes in relative status. The Macau SAR government should be very careful to try to redistribute wealth from the newly wealthly to those who have not benefitted from growth to ensure political stability. The simplist way to achieve this would be to levy a progressive tax on income, and offer more generous social welfare payments to the poorest of Macau society. Given that there are currently no income taxes in Macau, this may be a very difficult policy change to make. Maybe that's why I'm an economist and not a politician!

Need I point out that Mainland China, with growth of approximately 10% for many years now, has the potential to replicate the tensions in Macau, but on a much larger scale. Only time will tell whether the government in Beijing is doing enough to ensure social stability, by ensuring that the poor are not completely left behind by China's rapid development.

1 comment:

clemens said...

Why are there no riots in HK?