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A lot has been written of late about the need for Malta’s economic fortunes to improve. Surely one cannot be critical of the positive strides in economic progress reached in the early 1990’s but economists remind us that in recent years, our economic performance has been weak and there is nothing in the foreseeable future that may cause it to change course.
Exports for the first two quarters have nose-dived by 17 per cent. The latest economic figures do not provide much room for cheer, with gross domestic product down 0.1 per cent in the first quarter. But the economy is on the mend says the party spokesman. This mantra has been sung using different score sheets by politicians to the party faithful. All sing in unison that the island crucially depends on exports and productive investment. In plain terms this means we need to witness more sales of goods and services to foreigners and attract new investment in capital projects.
Certainly this all looks like a merry go round of previous electoral melodies that both major parties have been singing to the electorate for decades. According to their manifestos both parties suggest that the patient is not to be shock treated but will be administered the medicine in gradual doses. Can we forget how the Nationalist Party in 1998 had promised to be less drastic and act more socially? It scored points with the electorate simply by criticising the draconian measures proposed by the MLP in the 1996/98 interregnum. Measures then encompassed tighter controls over medical supplies, a higher tariff for water and electricity and a hands-on approach to the loss making government enterprises such as the Drydocks. Now the political metamorphosis of the Opposition seems to be coming of age and they will also want to sugar the pill. All this means the opposition will no longer be talking of the financial “hofra”.
Critics of the economic regeneration plan penned by the MLP are quick to point out that while cosmetic changes have been proposed albeit a comprehensive plan of how the economy could flourish was hardly ever attempted. Is this the melody political patrons are playing in order to conserve their power base? Rather then concentrating relentlessly on reducing the deficit by collecting more taxes pragmatists advocate more co-ordination among the ministries. In theory this would lead to less overlap in commercial initiatives presently undertaken by Malta Enterprise, the Malta Financial Services Authority and our diplomatic representation in Brussels.
Economists have prescribed various alternatives each according to their school of thought. In particular the popular trend in modern economic theory is that of monetarists. These are a group of economists so named because of their preoccupation with money and its effects. The most famous Monetarist is Milton Friedman who developed much of the Monetarist theory we learn and practice today. Monetarism is essentially an extension of classical theory which was developed in the 1960s and 1970s and was used extensively by Margeret Thatcher to try and solve the entangled economic phenomenon of her period. The attractiveness of this theory in solving our economic model is based on the fact that in our case inflation is creeping upwards while unemployment is also edging up.
Analysing the figures released by NSO one notes a lack of equilibrium created by a relatively high inflation and a high interest rate of 3.25 per cent compared to Eurozone countries .The problem is compounded due to the marginal increase in the jobless queue. On a positive side it is heartening to hear government has given the green light for land reclamation projects and having identified a site for an 18 hole golf course. This change of heart matches the dictum of neo-classical theory as it pronounces a solution to a shortage of jobs by creation of large scale projects. Hopefully, if the projects are well monitored they may result in an equivalent increase in output of goods and services (supply) .The classical solution concerns government approved capital projects which boost demand and in turn will lead to an increase in expenditure to buy those goods and services (demand). In a perfect equilibrium there will not be any shortage of demand and in theory there will always be jobs for all workers - full employment. If there was any unemployment it would simply be temporary as the pattern of demand shifted. Of course the creation of demand for jobs by initiating public sector pipe-dreams is an old hat. We all heard it before when millions were poured into building the Great China Dock and expanding shipbuilding capabilities when similar facilities in Europe have started to been phased down because of a recession in shipbuilding . We can easily name other hair-brained projects that still haunt us and remind us of the burgeoning public sector deficit that fashioned the debt mountain. To be fair, this does not mean that employment was not created in the short term but of course it was not sustainable due to excessive red tape, political interference while some projects lacked commercial viability.
Now is the time to revisit the neo classical theory and study the success of the privatised entities to see how effective they are. Some economists prefer that in the coming budget for 2006 our minister of finance announces a long term plan to secure economic sustainability while providing an impetus for industrialists to improve their competitiveness. Obviously all agree about the need for Malta to win back competitiveness in a globalised world and a liberalised market. A golden opportunity beckons…shall we take it on the hop?
gmm@pkfmalta.com
The author is a partner in PKFMALTA ,an audit and business advisory firm.
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