Economic acceleration has its own risks | Mario Vella

Allow me to quote two excerpts from your recent speech (November 30) to the Institute of Financial Services:

“Fast economic growth does not happen without shaking a society's economic, social, cultural, political and institutional equilibria...”, and; “The private sector is likely to maintain a high dependence on foreign workers.  The latter, however, tend to stay for a relatively short period in Malta, which does not augur well for firms’ return on investment in human capital and productivity…”

Am I right in interpreting a correlation between those two separate observations? I.e., that the speed of Malta’s economic growth is greater than we can cope with, resulting in an increasingly unstable, precarious dependence on short-term foreign labour?

Yes, and no. Let’s look at a few facts first.

It is a fact that we have been getting more foreign labour than ever before. I suppose the only other time when anything like this happened was in 1907, with the building of the Grand Harbour breakwater. So perhaps there is a historical precedent of the same, or similar, magnitude. Another fact Is that we cannot expect to keep growing economically, without a sufficient supply of labour.

Several years ago, I had suggested that we need a huge – relatively speaking – increase to our population, if we are to register the kind of economic growth we are experiencing today. And now it’s happening. But there is also a feedback loop to all this: once you grow, and new human resources come to the country because there is a demand… then other things start happening, whether you like it or not. You need to house those people; and you need to keep them here long enough for it to make sense. This hasn’t always happened. I remember a case, in Gozo, where a factory urgently needed people, neither too low nor too high in the skills department… and the new [foreign] employees just couldn’t take living in Gozo. It was either too claustrophobic, or not cosmopolitan enough... whatever the reason, they left. Some moved to Malta, while others just left entirely.

So the long-term problem remained. Another point to bear in mind is that, in any case, the foreign workforce also pays national insurance and taxes. So at the end of the day, nothing is really lost. But employers do have issue with people not staying long enough to learn the ropes, or to deliver an acceptable level of productivity. These are facts, and I don’t think many people would disagree with them…

It was recently suggested that we need 13,000 workers this year alone. The population growth you speak of therefore seems to be also a matter of official government policy. It is not something beyond our control, but something we have invited ourselves. Are you suggesting, then, that this growth is not being managed properly?

But is it really a matter of policy? It all gets a bit metaphysical, you know. In the sense that: clearly, we need to grow enough to have a decent level of public service and public goods, and to be generally content with our state of affairs. But whether we like it or not, we also have to compare ourselves with other EU countries. There is always that benchmark; in financial circles we have our own jargon, and we call it ‘convergence’. We have to ‘converge’. And in order to do that, we need to grow… and in order to do that, we need to increase the workforce. This is why I question whether it really is a matter of policy. Another way of looking at it, is that it’s also a necessity…

But is ‘growth’ really an accurate way to measure success? It tells us nothing about inflation, or rising poverty levels, or social factors related to the cost of housing, etc…

I wouldn’t be so absolutist about that myself. Things are not that simple. We are a population that reads, watches and listens to sources of opinion that go beyond our shores. We tend to travel quite a bit – the Maltese are travelling more and more – and you can’t help making comparisons with other countries. Whether it’s the ‘right’ or ‘best’ way to go about things or not is another question, naturally… but if the emphasis is on economic growth, it is not merely because of EU policy. There is also a level at which things happen on their own. If policy-makers want to get voted into office, they need to look at the aspirations of people. And people’s aspirations are, ultimately, to have a higher and better quality of life. The issue is, perhaps, that they are not always aware of the cost… that is, the pressure that accelerated growth is putting on our physical and institutional infrastructure.

The way I see it: we started out this voyage in an old-ish car… with all the problems that an old-ish car is expected to have… especially with all the potholes, etc. But now, we’re driving very fast; even though we are in the same, old-ish car. The problem, when you do that, is that things tend to start falling off: a side mirror here, a rear bumper there… now: it might not be a perfect analogy, but I think it captures the essence of what is happening…

If I may pre-empt objections to that analogy (by the people in the driver’s seat): while the ‘car’ was old and cranky when we started out… it has been upgraded continuously ever since. Institutionally speaking, Malta in 2019 is not quite the same thing as Malta in 1964…

We have upgraded the car, yes, but we are going faster and faster. The upgrades have not been enough to cope with the acceleration. Let me give you one concrete example. There is a strange disconnect between our economic growth rates, and the results we get in the World Bank’s ‘Ease of Doing Business’ survey. It’s as though we’re about two different countries. You’d expect a country that can achieve these growth rates, to also be in the Top 25 in that list. But we come in very low [Note: Malta is currently ranked at 84 out of 190 countries].

Some of that is admittedly due to communication issues. For instance, one of the survey questions might be: ‘How long does it take for an industrial warehouse to be granted a permit in your capital city?’ Inevitably [because our capital is a World Heritage Site] the answer for Malta is either ‘not applicable’, or ‘never’. As a result, we lose a lot of points in the rankings; because the World Bank uses an algorithmic approach that makes a lot of sense for most countries… but which sometimes hits snags in exceptional cases. But apart from factors such as these, there are also indications that we make things unnecessarily difficult for ourselves.

There are still a number of delays in setting up a business locally. To be fair, the situation has improved quite a lot recently, especially with ‘Business First’ having been set up to provide a one-stop shop.  But it’s still an uphill struggle. From that point of view: yes, my feeling sometimes is that we do follow the ‘Brussels approach’ a bit too closely: requesting all sorts of extra paperwork that isn’t really unnecessary…

Yet there are other areas where Malta actively resists the Brussels approach: and one which has direct relevance to the local economy is tax harmonisation. How serious is this threat in reality?

It depends: how seriously is the EU committed to tax harmonisation? I have my doubts. When push comes to shove, Malta might find it has more allies in Europe than many people seem to think. But there Is another aspect: up to a point, your question implies that foreign investment is directly and exclusively linked to taxation concerns.

I have my doubts about that, too. Let’s be frank: just offering low tax rates, on its own, would not have created the economic miracle that is Malta today. Other countries also offer low tax, but they are not growing at the same rate as Malta. You also have to offer a functioning infrastructure, a labour model that works… it’s a whole package, and tax is only part of it.

Just offering low tax rates, on its own, would not have created the economic miracle that is Malta today. You also have to offer a functioning infrastructure, a labour model that works… it’s a whole package, and tax is only part of it

Another consideration is that, while you might succeed in attracting foreign companies through attractive taxation regimes… it doesn’t follow that, if the tax incentive disappears, the companies would automatically just up and leave. They would have established an entire network of relations here; logistically, it might still be convenient for them to stay. It is simplistic to think that there is ‘one thing’ that sustains everything; the reality is more complex than that…

Perhaps, but companies do ‘up and leave’ from time to time… even the fact that so many chose to come here, implies that they left other tax jurisdictions. What happened once, can surely happen again…

True, but even their decision to leave might have been prompted by more than just tax concerns. Our own past experience suggests this. Our first opening to the world economy did not happen yesterday, or the day before: it began to happen towards the end of the 1950s… even before Independence. A policy decision was taken – and it was retained by all future governments, including the Colonial ones – to create a long-term alternative to emigration: which, by that time, everyone could see was not a satisfactory solution to Malta’s employment issues.

So in 1958, Malta adopted the first legislation that offered certain tax concessions – ‘tax holidays’, they called them at the time – by exempting raw materials, if intended for re-export, from any duties. That made it possible for the State to subsidise factory space: given that foreign investors prefer to invest in equipment, than in stone. And it worked: Malta Rubber, Dowty, and later Trelleborg… those investments weren’t made yesterday. They started happening in 1959. And most of the major companies which came at the time, are still here today. Some of them do things that many Maltese might think aren’t even possible: like exporting industrial products to Southeast Asia, for instance. […]

Then, in the early 1970s, some things happened that were bad for Europe, but good for us. The price of steel shot through the roof; the cost of labour in the metal trade also skyrocketed; and a lot of European companies – especially German ones – started looking elsewhere. But their market was still Europe, so they couldn’t look too far away. Besides, some had bad experiences in certain third countries; so what they wanted was somewhere on the periphery of Europe, where they could do business without (among other things) language barriers.

We were lucky in that we speak English… and for this reason alone, I think we should keep it that way. But by 1979, there had been waves upon waves of foreign companies setting up locally… and over the years, we always retained the more important ones. Incidentally, in around 1972/3, then Prime Minister Dom Mintoff had caused shockwaves by declaring that Malta would do away with certain tax concessions. He argued that, if foreign companies came here, it should only be to make profits. It was probably the first major, radical knock on the head for tax incentives in this country… yet nobody left. And little by little, the legislation passed by various governments (of both hues) to administer incentives got increasingly watered down. To some extent, today’s situation is nothing like what it used to be. But I don’t recall anyone leaving because of that…

Malta may have successfully kept all those companies here… but at what cost? Doesn’t Malta’s economic model also expose us to the risk of corporate blackmail?

I don’t think our model is anything to be ashamed of; unless, that is, we want to go back to the days of going to Sicily to buy basic goods. I’d like to think those times are firmly over. But ultimately, the situation you describe is the simple cost of survival. Malta is not unique in this regard, either. I’ve worked most of my life in MDC, formerly Malta Enterprise… and I can assure you that a lot of the recent investment that came in, did not come in because of taxation… nor were we blackmailed into giving them everything they wanted or required. There were negotiations, naturally. But it’s not always under duress. Having said this, when an election comes along… well, these are big players, and they will do their best to play around. You can’t be too soft. But at the end of the day, they are here to make profits. We tend to forget that sometimes…