Facing the economic challenge head-on

The price of oil is now over the $120 dollars per barrel mark. Some analysts are even expecting that it may hit the 200 US dollars per barrel mark by 2010. I strongly believe that we still need to start realising what the impact of this means. More so in a country like ours where our economy is performing well and is therefore not feeling yet the brunt of the difficult international economic situation.

Three weeks ago I had made the point that the increase in the price of oil and the increase in the prices of cereals will cause the standard of living of a significant chunk of the world population to worsen dramatically.

Today, I am even more convinced of this and the issue that we need to address in Malta is how to face this most difficult challenge. The extent of social cohesion that we have in this country should serve us well to avoid people being pushed below the poverty line or to have the extent of home repossessions that are so much the order of the day in countries like the UK. We have been capable of standing up to international economic recessions in the past as our economy has proved itself to be very versatile and resilient. However, we also need to be very realistic about what is happening around us and not assume that we are immune from all this.

There are certain areas where the economy is still fairly vulnerable. For example, when the tourism sector slows down, the whole economy tends to suffer. The same happens when there is a slowdown in the manufacturing sector, since this sector is highly export-oriented.

Over the years we have developed the services sector, opening up new activities in financial services and transportation services. However, even these sectors are very open to world developments. This element of openness in our economy has been a major contributor to our economic growth; but it may also cause us to be very vulnerable to international economic developments.

There is another aspect of the problem that needs to be understood. An economic slowdown would not only have an impact on a person's income; but it is also likely that it would have an impact on that person's wealth. Previous slowdowns may not have had caused such a double dip, as property prices kept rising as did the value of investments made. Thus a positive wealth effect dampened the impact of a negative income effect. When both a person's income and his wealth take a downward dip, the effect on consumer confidence and actual demand can be very dramatic.

There could be various ways of how to tackle this challenge. One way would certainly be by easing the tax burden to enable consumers maintain their purchasing power. Moreover, it commonly believed that when one reduces the tax burden, the tax-take could end up being greater as it serves to stimulate the economy. Easing the tax burden would serve as an incentive to work more, and hence increase productivity in our economy. One could also rightfully expect an increase in the participation rate in the labour force. On the other hand, we need to maintain our ability to attract more and more investment.

It is in effect useless to reduce the tax burden, if people do not earn more, because not enough jobs are being created. Thus, the tax package needs to be supported by an investment package, which rewards job creation to counteract any job losses. We also need to ensure that this new investment would help us to move up the value chain in the supply process.

The underpinning element of this would be an improvement of the skills base in the economy. We will not be able to attract higher value added activities to the country if our educational system and the vocational training process do not supply persons with more skills and better skills.

All this implies that facing the challenge head on requires us to have a comprehensive and balanced solution. The past experience of other countries has shown that we need to maintain a high level of social cohesion, while never losing our capability to create jobs. It is within this context that we have to face the challenge head on.