Changing our economic model

There has been ample correspondence in the media about the need for Malta to change its economic model and introduce new avenues for growth. This is expected considering regular deficits and mounting national debt but resulting GDP growth has baffled all and sundry – the latter making us among the best performers in Europe. Former finance minister Edward Scicluna had insisted that cheap labour was required for Malta’s economy to remain competitive but he was contradicted by his successor, Clyde Caruana who has said that our economic model needs to be overhauled. In reality, the country’s cost competitiveness is being placed under pressure by a shortage of local talent as young nationals keep leaving the country while replaced by thousands of low-skilled TCN’s. The finance minister is anticipating that the country’s population will increase to 800,000 by 2040, yet he never admits that the present economic model built on cheap labour can be unsustainable.

The current model focuses more on domestic expenditure and sporadic attempts (less on export growth) to control inflation as a brave attempt by a hushed up “Stabbilta” scheme signed with major food stores and importers to reduce prices on selected products. It has been in operation covering about fifteen important food categories. This may be a good start and if properly maintained leads to a better choice to shoppers of items with a guaranteed 15% price reduction – let us hope the scheme gathers momentum and is expanded to cover a larger shopping basket. Another major economic policy is the importation of low-skilled East Asian workers which today account up to one in every five residents. Such a policy has the disadvantage of providing a solid base of foreign workers who feel discriminated by poor working conditions. Farmers, bus and hail-car drivers and teachers are all striking – protesting against unfair low wages. For instance, historically Malta had strengths in industries such as finance, gaming, pharmaceuticals, construction, selling Golden passports/visas and intensive tourism. There are foreign owned enterprises that make good profits due to factors such as low-cost labour, good education, English speaking bureaucracy, efficient shipping lines, unparalleled tax incentives, assisted factory premises and the Single EU market. This is vaguely how one can quantify the economic model that has been in vigour during the past decade.

The question arises: has globalisation’s been fully exploited by Malta’s current economic model? To answer this question, first we must point out the complexities and challenges posed by geopolitical tensions and trade restrictions, which do hinder the free flow of goods and services across the Mediterranean (and beyond). These restrictions can indeed create barriers to implementing the famous Ricardo’s theory of comparative advantage in its ideal form. Here’s how these factors in Malta can be impacted by the application of the globalization forces. Ideally, this allows countries and firms to adapt to market changes more quickly by reallocating resources and adjusting their specialization patterns. Let us congratulate efforts by Malta Enterprise to promote factory facilities available within our limited resources to help grow GDP to higher levels and reduce accumulated country debt.

“However, it’s important to acknowledge that globalization also presents challenges, such as concerns about job displacement, income inequality, and environmental sustainability”.

However, it’s important to acknowledge that globalization also presents challenges, such as concerns about job displacement, income inequality, and environmental sustainability. Famous 18th century economist Adam Smith came out with the unique concept of “invisible hand” and its efficaciousness in guiding growth. His theory describes how individuals pursuing their self-interest in a free market economy inadvertently contribute to the overall wealth and well-being of society.  Smith argued that when individuals and firms seek to maximize their own profits and utility, they are guided by market forces to produce goods and services that are valued by consumers. Through the mechanism of supply and demand, prices adjust to reflect the preferences and needs of consumers, leading to efficient allocation of resources and overall economic growth.

On the contrary, famous 20th century economist John Maynard Keynes advocated for active government intervention, particularly through fiscal policy (government spending and taxation) and monetary policy (control of the money supply and interest rates), to stabilize the economy and achieve full employment. He challenged the idea by Adam Smith, that free markets always lead to full employment and stable economic outcomes, particularly during periods of economic downturns or recessions. He argued that in such situations, market forces alone may not be sufficient to restore economic equilibrium. Keynes advocated for active government intervention to stabilize the economy and achieve full employment. Keynes’s advocacy for government intervention represents two different approaches to economic policy, and they have been applied in various ways throughout history, including during the stellar administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. While Reagan and Thatcher implemented deregulation, tax cuts, and privatization initiatives that aligned with free market principles, Malta has shied away from such policies.

“Malta may be prioritizing partisan objectives over economic efficiency, leading to running of most government agencies by political loyalists who rule like they own the country”.

Back to the present, we are faced by regional conflicts and political considerations, such as those currently between Israel and Arab states, Russia and Ukraine or China and Taiwan. Such adverse factors can impact trade relations and hinder the realization of comparative advantage pontificated by David Ricardo.

Malta may be prioritizing partisan objectives over economic efficiency, leading to running of most government agencies by political loyalists who rule like they own the country. They secure their tenure due to their close allegiance to Castille. Can we base our hypothesis that in such situations, we are encouraged to change present economic model to one which focuses more on exports and less on domestic market, low-wage cohorts and voter benefits (eg issuing of cheque handouts prior to elections). The present model on its own will not be conducive to restore economic equilibrium and discover new export markets say in the lucrative AI sectors. Efforts to tackle inflation are omnipresent as it poses a major hindrance to export growth. While inflation appears to be slowing down, there is still the risk of higher oil prices and increased shipping costs due to environmental regulations and the issues in the Red Sea, with rebel attacks on the US and UK merchant shipping. There are those who advocate for a serious discussion how to fine tune our economic model and go altruistically for high tech education and the maximization of untapped export potential. 

George M Mangion

Senior Partner – PKF Malta

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