Continuing economic reform

At the eighth Brussels Economic Forum, held at the end of last May with the theme Global Adjustment and Economic and Monetary Union, two statements that are very pertinent to the Maltese situation were made. José Manuel Barroso, President of the European Commission, stated: "Economic reform is the name of the game today". On his part Ernest-Antoine Selliere, President of BusinessEurope, stated: "Unfortunately, governments tend to reform as a last resort - yet this is highly detrimental".

One of the several underlying issues that characterised this year's BEF was that the governments of the EU member states need to find their own paths on how to secure continued economic growth while continuing to push through structural reforms, as long as they stay within the established rules of the game. The pertinence to Malta lies in the fact that, while our economy is growing and we should enjoy the good times today, we simply cannot afford to fall into a complacency trap and take the positive prospects for the next few years for granted. As Mr Barroso stated, economic reform must continue to keep on forging ahead.

Moreover, we cannot undertake economic reform in a situation of crisis. Economic reform leaves most benefits when the change process is well managed, that is, it is well thought out and reform is introduced gradually. The concept of "steady as she goes" cannot apply, because the policy of maintaining the status quo is a non-starter. This is also why the idea of having alternative plans to change is, in my opinion, fallacious. Economic reform has to be seen as a continuing process, seeking to respond effectively to the circumstances of the time.

It is equally important to note that it is us that have to decide which is the best path to take to undertake economic reform.The rules of the game, such as the target inflation rate and the extent of the fiscal deficit allowed, are agreed within the structures of the EU. However, the nature of the changes required, their timing, and how the costs and benefits of these changes shall be distributed, are a matter that is reserved to the government of the country concerned. The EU or the European Central Bank cannot save us from our own follies if we adopt the wrong economic reforms or if we choose not to reform at all.

The experience of the last 20 years has shown us that economic reform cannot be seen as a one-off stand alone exercise. It has already been all this time that we keep on talking about the restructuring process that our economy needs to go through. The gradual liberalisation of the economy, the dismantling of monopolies (even if some still exist), the removal of import barriers, the development of new economic activities, the changes in taxation and the introduction of VAT, attraction to Malta of higher value added manufacturing, the changes in the health and education sectors, the significant investment in ICT are but a few examples of the type of economic reform we have gone through.

At each stage there were always those who foresaw doom rather than opportunities; yet the government carried on regardless. The very positive impact of all these policies, in terms of growth in the gross domestic product and in terms of employment, is evident for all to see. However, there is still a great deal of work to be done as more reforms are needed. There are a number of issues that need to be addressed, however I believe that three stand out.

There is the issue of ensuring that the growth we are enjoying today is sustained over the medium- to long- term. There is the feeling that a number of activities that are being set up in Malta are here to stay for some time. Should we take this for granted or should we do whatever is necessary to ensure that they really stay? Let us remember that these activities were set up in Malta because of our policies. Thus, just as the right policies created an environment whereby companies felt that they could set up new ventures in this country, the wrong policies can send them away.

The second issue is capital mobility once we adopt the euro as our currency. It will be easier to have domestic savings leaving our economy; it is equally easier for foreign capital to flow into the country. Will there still be the need for a high level of correlation between domestic savings, consumption and investment once we become part of the euro zone?

The third issue is the balance that needs to be created between job security and flexibility in the labour market. How will this balance change as from January 1?

There are, of course, other issues that need to be considered. In my opinion, the more issues there are, the more we need to accept that economic reform is a continuing process that needs to be managed proactively. The decisions that need to be taken in this regard are ours and do not depend on the EU.