Why Is the Philippines the Home for Chinese Offshore Gambling?

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ASEAN Beat | Economy

Why Is the Philippines the Home for Chinese Offshore Gambling?

The Philippines’ unique economic structure explains why nearly all Chinese FDI is being funneled into one sector: gambling.

Why Is the Philippines the Home for Chinese Offshore Gambling?
Credit: Pixabay

In October 2016, Philippine President Rodrigo Duterte’s visit to China brought $24 billion worth of Chinese foreign direct investment (FDI) and overseas development aid (ODA) for the Philippines. While the actualization of the majority of these projects was not realistic, Chinese FDI increased in the Philippines compared to that of the previous Arroyo (2010-2010) and Aquino (2010-2016) administrations. According to actualized FDI data of the Central Bank of the Philippines, which is recorded by examining bank deposits and conducting surveys with investors, China and Hong Kong’s FDI inflows had already reached $1.04 billion by March 2018. The majority of this FDI has actualized in the form of the offshore gambling sector, which has not only saved Philippine real estate from a bubble, but also enabled sustained economic growth and boost short-term employment. Nevertheless, negative effects have been documented on long-term employment, housing prices, and social cleavages.

This essay examines three reasons why the Philippines has become the predominant home for Chinese offshore gambling investments, a trend that started during Joseph Estrada’s brief term as president, continued throughout the Aquino presidency, and now has massively expanded since Duterte.

A Weak Export Economy

First, the Philippine government has been unable to attract a substantial amount of FDI in manufacturing and other sectors that target the export market. This ultimately is because of the failure of consecutive Philippine administrations to build a strong manufacturing economy or adequately invest in the natural resource industry in order to be competitive in the export economy.

Generations of Philippine politicians and bureaucrats have attempted to institutionalize government owned and controlled corporations (GOCC) as growth-enhancing and revenue-providing measures. Instead, many of these were privatized as assets and sold to private entities. The remaining GOCCs consistently incur annual losses, leading to government bailouts and misallocated resources. These GOCCs are populated by appointed consultants to pay off debt after every election or control the corporation for political ends. Put simply, employment in these companies simply fulfills political promises made by politicians to their allies, or regional elites to their constituents.

In contrast to Philippine GOCCs, government-led corporations (GLCs) in Singapore are value-adding, self-sufficient, and productive. These corporations not only provide value to their exports, but also innovate, research, and plan. Similarly, Malaysia’s GLCs and Indonesian state-owned enterprises (SOEs) in select sectors, though patronage runs amok, generate annual returns and attempt to compete in the export market. As such, Chinese SOEs and private corporations partner with GLCs in Singapore and Malaysia and the sectoral SOEs in Indonesia due to their stronger role in the economy and powerful connections in the government, fulfilling both political and productive goals. While imperfect, employment in these corporations is stricter and subject less to political opportunism. In other words, there are more autonomous technocrats who attempt to expand their “reign” across jurisdictions and offset politicization.

Conversely, the majority of GOCCs in the Philippines are relatively weak and unproductive, becoming conduits for politicians to fulfill their goals. This explains the absence of Chinese manufacturing FDI in the Philippines. Instead, Chinese companies opt to participate in construction contracts funded by Chinese aid due to the Philippine government’s more embedded role in that sector.

Other East and Southeast Asian economies have induced the private sector to invest in manufacturing, innovate, and research. In the early 20th century, the Japanese directed Mitsubishi and Toyota to pursue car production despite heavy financial losses for decades. The South Korean government initially guided their chaebols to pursue manufacturing investment, despite the Korean private sector outgrowing state control to pursue profit-oriented ends. South Korea, Malaysia, and Indonesia had cronies too, yet these private sector allies were rewarded for their relatively successful investments in the manufacturing or natural resource sector. In contrast, Philippine politicians even before and during the Marcos administration simply subsidized and directed state assistance to their private sector allies despite their failure to compete, which resulted in inefficiency and heavy losses for decades. The non-crony private sector leaned away from the dominance of the cronies in the manufacturing and technology sectors, investing in malls, real estate, land, and luxury hotels and casinos.

A Consumption-Based, Inward-Focused Economy

Second, the weakness of Philippine GOCCs and the destructive effects of rent-seeking led Philippine oligarchs to consumption-based markets, ones that are dominated by selling goods and services inside the Philippines rather than competing outside the country.

Indeed, the wealthiest Filipinos monopolize or dominate certain sectors in their areas. For instance, the Ayalas, Sys, and Gokongwei own Ayala Malls, SM, and Robinsons across the country, respectively. Since the 1990s, these families have pivoted toward real estate or high-rise condominiums connected to their malls. The Razons are crucial to shipping and logistics; the Aboitizes once competed in logistics but now profit through power generation, which they acquired during the Arroyo administration. The Villars, who used state power to spearhead and expedite their real estate projects, have a strong grip on low-cost private housing.

While economic elites have a diverse portfolio of investments, these families typically concentrate their money in a select number of sectors, serving as the partners for foreign investors who wish to do business in the country. Because Philippine consumers are the target, Philippine oligarchs simply attempt to corner the market in order to sell their goods without innovating or improving their services as much. The domestic market target also explains why Philippine conglomerates have attempted to keep Chinese and other investors out of the country, as foreign investments could shrink the market share of the elites.

The dominance of the private sector in the service sector and malls ties in perfectly with the Philippines’ main development strategy since the 1970s: the export of low- and high-skilled labor. Indeed, this is one of the few sectors where the Philippine state remains specifically strong, partly due to the mobilization of civil society actors to protect migrants’ rights. The Philippines sends doctors, engineers, and teachers to the United States and Europe, domestic helpers to Hong Kong, Taiwan, and Singapore, and seamen across the world. These workers have fueled and kept the Philippine economy afloat by sending remittances to the country, while the government benefits from currency conversation and subsequent taxation revenues from the income of establishments and the spending of consumers. Families of overseas workers spend their transmitted money inside malls owned by oligarchs, fueling the consumption-based economies and domestic market reliance of the Philippine economy.

Most recently, the Arroyo administration constructed the legal framework for the business process outsourcing (BPO) sector in the country, which led to an infusion of Western capital and the demand for back office service work for multinational corporations. Public relations and accountancy work for telecommunications, airlines, and even computer companies can be found in the Philippines, which led to steady rates of growth and an emerging middle class. The issue with call centers, however, is that the demand for it might decrease with the emergence of artificial intelligence.

The Perfect Home for Chinese Casinos

This segues perfectly as to why Chinese offshore gambling has increased in the Philippines: the consumption-based economy that relies on malls, hotels, and internal markets generate a suitable ecosystem for offshore and onsite casinos.

Gambling dominated much of Macau’s economy during Portuguese overlord rule and autonomy from China. While Hong Kong handled banking and mainland Chinese acquired export manufacturing, Macau’s economy relied on visits from Western, Australian, and Japanese tourists spending a few days in the small city-state, indulging on gambling, malls, prostitution, alcohol, and luxury accommodations. But rising real estate prices and legal actions by China against Macau’s gambling elites are pushing the migration of gambling capital elsewhere. The domestic economic landscape of the Philippines explains why much of Macau’s capital is moving here: it sees the Philippines as a similar prototype of what Macau was before the Chinese government’s increased scrutiny. A corruptible police force, the strength of the local governments, and the importance of Philippine oligarchs in the service sectors make it a prime destination for Macanese gambling capital.

Apart from the Philippines’ ideal configurations for gambling money, other Southeast Asian states have proven unable to meet gambling capital’s needs. Myanmar, Laos, and Cambodia may have cheaper real estate, and do serve as locations for onsite gambling, but these economies also do not have the Philippines’ luxurious malls, hotels, and onsite casinos, which all attract wealthy tourists. The Philippines also has stronger infrastructure that attends to tourists and gamblers’ needs, boasting opportunities to gamble offline in safe venues. Furthermore, the Southeast Asia riparian states are also geographically closer to Beijing, which makes it more dangerous for Macanese capital, since gambling is illegal for mainland Chinese citizens.

Indonesia and Malaysia may have better infrastructure, but these countries are also limited by the religious regulations of their constituents. While offshore gambling operations do exist, it is only in far-flung areas away from the cities and limited to the export processing zones. In Thailand, the mobilization of monks and the state’s position against gambling limited offshore Chinese investments. The higher real estate prices of Jakarta, Kuala Lumpur, and Bangkok also discourage any expansion for gambling capital. In addition, because these countries have an export portfolio in their economies, Chinese firms have invested in their manufacturing, technology, and natural resource sectors. That empowers economic elites in these sectors to influence political elites, whose interest are met by political capital generation, employment, and economic growth. The export-oriented nature of these economies makes economic elites or firms interested in gambling less influential in government circles.

In sum, the structure of the Philippine economy — relying on consumption, exporting labor to acquire remittances, and possessing a strong internal market — and the nature of Philippine elites’ capital accumulation make it logical for offshore gambling firms to invest in the country. The Philippines’ relative autonomy from the Chinese government also encourage Macanese capital to invest in the Philippines, knowing that their Philippine host state allies can protect them from Beijing’s reach.

Alvin Camba is a Ph.D. Candidate at the Johns Hopkins University and a pre-doctoral fellow at the Global Development Policy Center at Boston University. He is currently co-authoring a book on China’s Belt and Road Initiative in South and Southeast Asia.