Macau’s economic freedom score is 70.3, making its economy the 34th freest in the 2015 Index. Its overall score is 1.0 point lower than last year, reflecting declines in labor freedom and monetary freedom that outweigh small improvements in the management of government spending and fiscal freedom. Macau is ranked 9th out of 42 countries in the Asia–Pacific region, and its overall score is well above the world and regional averages.
Macau has one of the world’s highest economic growth rates, driven largely by gambling and tourism. However, over the past five years, its economic freedom has declined by nearly 3.0 points, led by large declines in labor and monetary freedoms. Its economy is now well down in the ranks of the “mostly free,” and prospects for more diversified development are unclear.
Despite this disappointing trend, Macau’s long-standing history as a free port city and its openness to international trade and investment provide strong foundations for economic freedom. The judiciary largely respects property rights, and the government has stepped up enforcement of anti–money laundering efforts. Taxes are low, and government spending is prudent.
Macau was colonized by the Portuguese in the 16th century and became the first European settlement in the Far East. It became a Special Administrative Region of China in 1999, and its chief executive is appointed by Beijing. Under China’s “one country, two systems” policy, Macau enjoys a high degree of autonomy except in matters of national defense and foreign policy. Macau is one of the world’s largest gaming centers, and gaming-related taxes accounted for 85 percent of government revenue in 2013. Much of the island’s economic activity is driven by Chinese tourists. Manufacturing of textiles and apparel, once the mainstay of the economy, has largely migrated to the mainland. Macau’s currency is fully convertible into the Hong Kong dollar, which in turn is pegged to the U.S. dollar.
Beijing’s crackdown on corruption and tax evasion caused casino revenues to decline in 2014. A proposed law that would grant outgoing chief executives immunity from criminal charges sparked public demonstrations and was dropped in May 2014. Macau has its own judicial system with a high court; the legal framework is based largely on Portuguese law. Property rights and commercial contracts are secure.
Macau’s top individual income tax rate is 12 percent, and its top corporate tax rate is 39 percent. Gaming and gambling account for a large portion of both tax and overall revenue, which is equal to 34 percent of domestic production. Public expenditures are 16.5 percent of gross domestic product, and there is no public debt.
Macau’s overall regulatory framework is relatively efficient, but reform efforts are largely absent. On average, it takes three to four weeks to incorporate a business. Licensing requirements vary by type of economic activity. The labor market lacks dynamic growth and remains highly segmented. Monetary stability has been relatively well maintained, but government subsidies to households quadrupled between 2008 and 2014.
Macau has a 0 percent average tariff rate. Non-tariff barriers are low. Foreign investors receive national treatment. A relatively small financial sector, dominated by banks, provides a range of financial services. The banking system, dominated by banks owned by China and Hong Kong, remains stable and well capitalized, with a very low rate of nonperforming loans.