Inflation? What inflation?

The opposition is spreading the image of a country that is being bled to death by a rampant rise in the cost of living. It keeps quoting from a study, commissioned by the GRTU, which found that inflation was public enemy No. 1. This study - 'Exports, Inflation and Value Added', written by Professor Joe Falzon - claims that higher prices have gobbled up the growth in what most of our industries pay in wages and even what they earn in profits.

But what inflation are they talking about? Considering that the inflation rate is below three per cent, I cannot figure where the Socialists get the gall to join the chorus. Have they forgotten that the rate of inflation in 1997 when they were in office was above three per cent? During the past decades, the inflation rate hit 7.1 per cent in 1979, no less than 15.8 per cent in 1980 and 11.5 per cent in 1981. Younger readers and those who suffer from amnesia may need to be reminded that in those days the MLP was running the show. Now that was real inflation, and it was not the only problem we faced back then. Nowadays we do not even come close to an inflation problem in the traditional meaning of the phrase, even if in terms of the convergence criteria that we have to meet to adopt the euro, we lately seemed to be cutting it close.

If one removes the impact of oil price increases from the recent inflation rate, one will end up with inflation in the one to two per cent range. We have no control over the oil price explosion. It appears that energy and fuel price increases barely spilled over into secondary price increases.

In short, there is no serious inflation problem. Setting aside energy and fuel prices, part of the residual inflation seems to be stemming from higher food prices. It is hard to understand how food prices could be rising, given the proliferation of retail outlets and the ease with which food items are being imported from Sicily. In fact, all it takes to join the crowd of importers from Italy is a pick-up and a round trip ticket on the catamaran. Maybe the GRTU should call up the retailers and traders that form the backbone of their membership and ask them point blank: Why aren't food prices falling? Or at least why do they not stay stable? Is there a whiff of any restrictive practices?

In any case, the recent liberalisation of trade was a break from the past and I wonder whether the collection of price statistics has been keeping up with changes in the wholesale and retail business. Are recorded prices reflecting the greater variety in products and the wider choice of retail outlets that provide the consumer with the opportunity for savings?

The rest of the study is equally fascinating. It claims that the manufacturing sector lost one fifth of its workforce in 1995-2005. However, reality is a little more complicated. First of all a number of jobs have been spun off by manufacturing firms into separate establishments that provide services to manufacturing.

Prime examples are providers of ICT services. Increasingly, services that previously were provided in-house and therefore counted as part of the manufacturing sector are now supplied by contractors and classified in the services sector. This is a worldwide phenomenon. In Malta, as elsewhere, more and more jobs outside manufacturing are supported by the manufacturing sector.

Services are becoming a larger source of income and employment in many countries. Growth in Malta's services sector is evident in the proliferation of service providers in areas like ICT, accountancy, legal services and so on, often also selling their services abroad. Here again, the collection of the necessary statistics may be failing to keep abreast of the full dimension of this continual process of regeneration.

Labour-intensive activities in manufacturing have been hit by severe competition from China, India, and elsewhere. Even North African and Central American labour costs are becoming uncompetitive. Maltese wages are relatively high and unless we are prepared to accept deep cuts in living standards, we are not likely to compete successfully in labour intensive activities. Import controls, along the lines of our pre-EU membership days, are not the solution. The previous arrangement where consumers were compelled to purchase the local product was no solution at all. It was hardly a recipe for growth, especially given the tiny size of the domestic market.

In fact, the amount of investment by most protected firms was insufficient precisely because, given a captive market, most had little urge to invest in a better product or to reduce costs. Increases in wages or profits in these protected industries usually came from one place: higher prices paid by Maltese consumers.

Nowadays the Mintoff-era industrial policies almost sound funny. Who can forget the days when there was only one kind of chocolate, produced here thanks to the transfer of the 'necessary technology' from, of all places, China? (Back then China was not quite the industrial giant it has since become.) That chocolate was not what most consumers would have chosen, but they had little choice. You needed a permit to import chocolate.

Aside from certain exceptions, Labour governments thought along Stalinist lines, focusing mostly on industrial monsters owned by the state and made to employ as many workers as possible, even if successive labour corps still had to absorb the remaining thousands of unemployed.

By contrast, today's factory is a lean operation that may be employing fewer workers, but their productivity and pay are boosted by the machine intensity of the operation.

The GRTU-commissioned study finds that compensation per worker in manufacturing increased by almost twice the rate of inflation in 1996-2005. The author seems to want to brush this aside as the "survivor bias".

As unprofitable firms make their exit, the remaining firms are the more productive ones and the average wage rises. This restructuring is vital. It is painful in the short run but inevitable, healthy and beneficial over the longer stretch. Even though a number of jobs are lost in the process, the fact that the unemployment rate has remained mostly unchanged shows that the economy has been generating alternative employment.

What is important is that we do not get sidetracked in a pointless debate on inflation, but instead concentrate on taking the measures that will promote productivity growth.

micfal@maltanet.net