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Some reflections on the Maltese economy in 2020 – E.P. Delia

10 Feb 2020 15:01 | Deleted user
The Accountant – What's Next?  –  Winter 2020 (MIA Publication)
Commentaries on ‘the state of the Maltese economy’ extol the success of the ‘country’s recent economic performance’. They refer to rates of growth in the 4% plus region, fiscal surpluses, reducing national debt to GDP (Gross Domestic Product) ratios, and the steady expansion of employment possibilities which registered higher female activity rates than hitherto and a strong surge of inward migration. At the same time, though, they ‘lament’ that Malta lacks a long term economic vision which ‘must focus on sustainability and respect for our resources, the environment, and the quality of life for all’ given that the number of Maltese ‘at risk of poverty’ is approaching the 90,000 mark and the built-up area stretches from Valletta to St Paul’s Bay. They also warn that the Maltese Islands are facing a credibility-and-trust challenge primarily arising from a malfunctioning regulatory institutional set up.

Such conflicting synthesis leads one to query whether the economic success of recent years has been envisaged, policy induced and controlled, or  whether it was the outcome of a series of uncoordinated ‘ad hoc’ measures taken over time that impact society and, hence, the economy adversely in the long run. They give rise to a situation of short term success but long term instability, a scenario that is echoed in various reports submitted by the EU Commission and the International Monetary Fund. Measures include the volume and quality of basic infrastructure in public utilities, educational and health facilities, the pension and health funding system, and extensive training in relationship building for all. In the short term there has been asymmetric application of financial and fiscal tools, such as a low interest rate regime and an expansionary fiscal stand boosted by non-tax revenue sources, which contributed to produce the recorded macroeconomic indicators referred to above, and to the surge in property prices and the ensuing rise in rents.
It has to be recalled that societies, and hence economies, are continuously ‘restructuring’ themselves. The size and composition of the population – by age, gender and nationality – impinges on the mix of consumer units – conditioning tastes, incomes and hence the demand for goods and services - and service providers – aptitudes, skills and enterprise. The multitude of decisions taken are mainly conditioned by the framework of legislation ruling international and local relations, as reflected in the movement of goods, capital and labour services, in the process affecting the respective pricing structures. Such decisions are time-framed and refer to the public and private sectors.
As noted above, statistical data suggest that aggregate demand for goods and services has remained steadily buoyant both in terms of domestic demand and exports. This has been especially so for the services sectors, primarily the sectors engaged in leisure and finance. However, there are signs that the expansion rate is slowing down and the economy may be entering into a phase of ‘consolidation’.
The constraints that had become apparent referred to the supply of qualified personnel ‘at the right price’. This phenomenon has been addressed by a relatively heavy inflow of labour, which by itself boosted aggregate demand further (investment in accommodation and demand for day-to-day consumer goods). It also put pressure on population-related services like law and order, health and education.
The total population numbers 500,000 of whom around 100,000, or 20%, are non-Maltese. (For comparative purposes, the share of foreigners in the Italian population of 60 million is less than 9%). Coupled to a low birth rate, and a net outflow of Maltese, mainly the young, this means that the Maltese population hovers around the 400,000 level, of which 130,000 are aged sixty years and over. And, there are more males than females in the age brackets relevant for labour market considerations. Males outnumber females by around 6,000 up to age 65. Evidently, such demographic trends have to be deliberately considered when evaluating a social-cum-economic vision for Malta and Gozo.
Besides, the recorded value for the Gross Domestic Product underestimates the true value of total output. Estimates vary over time but they could even range between 20% - 30%. Moreover, as the number of foreigners increase, both as employees and shareholders, it is the value of the Gross National Income (GNI) that matters as an analytical gauge. Non-Maltese workers and shareholders transfer elsewhere part of the income they earn in Malta as wages and profits. Presently, the value of Malta’s GNI is less than that of the GDP. Today’s foreign investment entering Malta, boosting the present aggregate demand, will create a stream of revenue outflows in the future.
To identify whether economic activity in Malta is eyeing long term sustainability one has to address two sets of issues, namely, the stability of the existing set of rules conditioning the international movements of goods, capital and labour; and the projected life-span of the present net immigration model that has been supporting the recorded economic growth.
Malta is a member of the single market of the European Union, of the Euro-area and of the British Commonwealth. The United Kingdom terminated its EU membership and will be redefining its relationship with the EU in the coming months. In a sense Malta’s own relationship with the United Kingdom will therefore reflect the ultimate agreement entered into between the UK and the EU. And it will also emanate from the evolutionary steps taken within the EU and the Eurozone to proceed with the ‘European project’. This latter development envisages further institutional integration of policy making and procedures regarding international relations, trade, the single market, finance, taxation and also political representation.
‘Europe’- whatever that term may mean – did not respond with the same degree of success as some other countries to the international challenges in financial stability and geopolitical decision making. Europe is still fragmented in thought and policy formation and implementation. This condition tends to accelerate population migratory movements within the bloc and, in turn, the rapid ageing of selected regions. It is experiencing bouts of indecision among its various member states, with some national governments finding difficulties even in their own formation and sustenance. And there does not seem to be a clearly-defined set of objectives with a related time frame for implementation on which member states totally agree. The ‘nation state’ is the base of every government’s consideration. Whatever contributes to the growth of output and welfare within a particular state is ‘fair’ even is this comes about at the expense of another state within the group.
So the evolutionary path that the EU group finally decides to follow would represent a re-drawing of the parameters within which decision-making by both the public and the private sector in the Maltese Islands will be made. This critical consideration for future development is omitted from descriptions of future economic growth scenarios.
Similarly missing from analysis is any reference to the demographic-economic model in place, whereby at present some 10,000 immigrants are allowed in to support further economic expansion. It is not clear what commentators mean by alluding to the attraction of new economic sectors unless they specify how such sectors are to be integrated with the present demographic realities. Vague references to educational support cannot be taken to be indicative of a sound policy framework. Quality of trained personnel matters, and it should never be sacrificed to breach the constraint of numbers.
This same demographic-economic model conditioned for some time the costs of labour by restraining wage increases. But by expanding economic activity under a wage-constraint mechanism – which is itself ‘controlled’ by means of the Cost Of Living Adjustment (COLA) mechanism in place for almost three decades – it could well be that operators did not focus as much attention as they should have done on labour productivity in the first place and total productivity to follow. This signifies that the sectoral restructuring that was expected to take place was being undertaken at a slower pace than economically desirable. And wages remained stuck.
Now that the demand for accommodation, that arose fast in the wake of the flow of immigrant personnel, has been gradually rendering rented accommodation beyond the means of the average Maltese worker, and the prices of accommodation itself has put purchase out of reach, the issues of housing affordability, family unit formation, life styles, and poverty have surfaced. They are interrelated. They represent the group of people, many of them young, who have to make key decisions regarding their future when faced with uncertainties regarding their ability to compete in fast-changing labour markets.  They may simply have not prepared themselves sufficiently well, through formal and informal education, to compete in areas of activity where the salaries suffice to meet the growing demands. Future technology may compound their problems as certain jobs may be even replaced by machines. Self-fulfilment is a long-term process and the multifaceted approaches that lead to it must be on-going and periodically tuned to meet the ever-changing needs of the individual, in particular, and of society as a group.
Interpreting economic results from macroeconomic data has its validity, but reality is somewhat more complex than a few data may reveal. It demands more information which must be timely and as exhaustive as possible. Analysts have to compile such information to ensure an appraisal that approximates reality.

E.P. Delia published studies on the demographics, macroeconomic policy and sectoral development in the Maltese Islands. Recent publications include ‘Ethical investment in a dynamic society’ (2012) and ‘Evaluating Malta’s political economy’ (2017)

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