Here is a tale of two cities that will gladden the hearts of

believers in free markets. In one city the

government has poured billions of

dollars into building tourist attractions and been rewarded with a modest

increase in visitor arrivals, in the other the government has hardly dipped

into its budget but allowed the private sector to do all the heavy lifting and

has seen tourism expand by a breathtaking degree.

The two cities are China’s

special administrative regions of Hong Kong and Macau.

Last year Macau received 21.99 million

visitors, setting a new record and registering a 14.6 per cent increase over

the previous year. Hong Kong, meanwhile, saw

visitor arrivals rise to 25.2 million, an increase of 7.5 per cent over 2005.

Meanwhile in the first month of this year visitor arrivals in Hong Kong

contracted by 1 per cent while Macau’s

arrivals soared by 22.7 per cent.

It is dangerous to read too much into a single month’s

record but the trend is clear ‑ Macau is outpacing Hong

Kong’s visitor business by a healthy margin.

There is no mystery why this is happening; Macau’s

visitors are lured by the growing number of casinos and little else. Hong Kong,

on the other hand, has decided to stay out of the casino business and invested

heavily in theme park attractions such as Disneyland, a refurbished Ocean Park,

and a wetlands park, which is taps into growing interest in eco-tourism.

The golden thread linking all of Hong

Kong’s attractions is that they are the products of public

investment. As a result, allegedly free market Hong Kong is the proud owner of

the world’s only nationalized Disneyland.

Total government investment in this project amounted to just under $3 billion.

Over in Macau there is no

need for the government to spend a cent on developing casinos. On the contrary,

international companies are lining up to pour cash into new gaming houses and

big American investors like the Sands and Wynn corporations are already seeing

good returns on their money. And the taxes they pay are swelling government

coffers to a level where the Macau treasury is

awash with funds.

Of course, Macau has long

been engaged in the gambling industry but its development was severely

constrained by two factors. The first was a 40-year monopoly arrangement that

confined all casino development to companies run by the Hong Kong-based mogul

Stanley Ho. This ended in 2002 and by the simple expedient of not renewing Ho’s

exclusive franchise, the floodgates of competition were opened and new

investors poured in, led by the Las Vegas casino

operators, later joined by Australia’s

Packer companies. Now Richard Branson’s Virgin group is trying to find a seat

at the table.

The second constraint on the development of Macau’s visitor

business came from China,

which had previously exercised heavy controls on permits for its citizens to

travel to both Macau and Hong Kong. These

controls have been steadily eased and mainland China

now provides more than half of the visitors to Macau,

a percentage which is rapidly growing.

Hong Kong has taken a

principled decision not to enter the casino business, despite some political

pressure for it to look at the idea. It is not entirely clear why the Hong Kong

government is so keen to keep out casinos, when even strait-laced Singapore

is forging ahead with plans for what might be described as a casino-lite

operation and other governments in the region are seriously thinking of joining

the gaming bandwagon.

One reason why Hong Kong may resist rolling the dice is that

it is constrained by the government in Beijing

which is said to have decreed that casinos are the preserve of Macau and that Hong Kong should not compete. This assertion, like many

of those concerning edicts from the Chinese government, is hard to prove

because relations between the central government and its SARs are not conducted

in a transparent manner.

However it is hard to understand why Hong

Kong has been so adamant in its refusal to join the casino

bandwagon. Around a third of the visitors to Macau come from Hong

Kong and practically all of them head straight for the gambling

tables. In Hong Kong itself gambling is far from being banned; on the contrary

the government has given the Jockey Club what amounts to an official monopoly

on gambling that extends not just to horse racing but also to betting on

overseas football matches. It would therefore be hard to claim that Hong Kong has a moral objection to gambling.

It may be argued that Hong Kong wishes to escape the

attendant dangers of criminal activity and gang warfare which were particularly

evident ahead of Macau’s formal reversion to

Chinese sovereignty in 1999. In Macau, no one

seriously believes the gangs have gone away but at least they have stopped

fighting it out in the streets. Hong Kong has reason to suspect that the close

relationship between casinos and organized crime could be a problem but it can

also look to places like the United

States where decisive action has done much

to diminish this relationship.

Meanwhile there is still plenty of space for casino growth

in Macau. Last year gaming revenues in Macau

exceeded those of Las Vegas

for the first time ever. It hosts 24 casinos and more are being built by the

day. With casinos not permitted on the mainland and gambling, at least in

theory, outlawed altogether, the market is seemingly endless. .

Hong Kong residents have long seen Macau

as a junior and slightly inferior relative; it was assumed that it would remain

in the shadows while the former British colony roared ahead. It remains the

case that Hong Kong’s economy is far more developed and infinitely more diverse

than that of Macau but in the tourism sector the former Portuguese enclave

looks set to finally pass Hong Kong this year.

Hong Kong’s answer is to

invest more of the public’s money in projects it thinks will attract tourists.

While it does so the territory is getting a bad press in the mainland not just

for high prices but for the way that Chinese tourists are treated when they

come, as most of them still do, on group tours and are led to special shops

charging inflated prices, supplied with inferior buffet meals and generally

herded around the place in a manner that belies Hong Kong’s claims to be an

open and free city.