Turning the corner

More than a year after hitting one of the worst economic turbulences in living memory many countries are taking stock of the situation to determine whether they can confidently say that they have turned the corner.

As is to be expected, political leaders ranging from Gordon Brown to Silvio Berlusconi are claiming that their respective countries have fared better than other countries. They quote various reasons to substantiate their claims all of which are valid, but they only look at a particular aspect of the difficult process of exiting this recessionary cycle.

In our case, there have undoubtedly been aspects of the way that we managed the crisis that were successful. The assistance given to manufacturing companies faced with a dramatic fall in external demand for their services was well conceived and executed. One just hopes that this salvage operation was indeed a temporary measure and that these companies will from now on continue to navigate the choppy waters of international business on the strength of their competitive advantages.

I am not convinced by claims that the fact that our unemployment rate is not bigger today than that of other countries is a result of something that we have done extraordinarily well. The fact that a large proportion of our jobs are in the recession proof public sector partly explains why the current recession has not resulted in more unemployment in Malta.

Another reason is the low labour participation rate and the heavily regulated labour market that may have the effect that our economy creates fewer "marginal" jobs than other economies. By "marginal" jobs I mean jobs that are easier to create in an economic boom, but also easier to eliminate in an economic slump.

The assessment of how we are fairing in the management of this ongoing economic downturn can be more comprehensive if we note what independent reporters, like Moody's Rating Agency and the European Commission, have commented on Malta' efforts to exit the recessionary tunnel. Beyond the headline comments that the media and some politicians adopt to reinforce their self-serving agenda, one can find some sobering comments about the future prospects of our economy.

The European Commission's excessive deficit procedure update on Malta issued in January 2010 states: "Public expenditure (in Malta) is still subject to discretionary decision in the implementation phase, while the budget lacks a clear medium-term focus in the sense that the multi-annual projections presented in the annual budget are not underpinned by an articulated medium-term strategy, nor by an indication of the broad measures to achieve them."

Put in another way, the Commission seems to be saying that we are tackling the short-term weaknesses of our economy rather successfully, but the longer-term ones remain largely unaddressed.

Another comment on the same issue has been made by Moody's: "Fiscal consolidation will be challenging, since subsidies, state aid, public wages and entitlement spending are all high compared to it rating peers. The room for manoeuvre is limited, as 65 per cent of the revenue flows are cyclically sensitive, and 70 per cent of the expenditures are fixed commitments pensions, benefits, health care, and interest payments).

Additional fiscal risks are represented by the government's renewed pledge to reduce income taxes further, to continue to provide free universal healthcare and to fund improvements in higher secondary and tertiary education."

A possible interpretation of this technical assessment is that there is little connection between the political vision of a strong social welfare system available for all and the wobbly public finances that are being managed on a day-to-day basis with little commitment so far to fix what is structurally weak in these finances.

Political visions are important because they can create the public opinion traction that is so necessary to build popular consensus for change. Politics will only be relevant to most ordinary people if it makes concrete and credible proposals to improve their lives.

By most measures our economy has not faired badly in the last 18 months. I am particularly encouraged by the commitment of private industry to invest in the improvement of their businesses. The Island Hotels new investment in their holiday complex and the extension of the Seabank Hotel are such examples.

But I am not convinced that we can credibly claim that we have indeed turned the corner. We can only feel happier about the future when we acknowledge the structural weaknesses in our economy, and take appropriate action to address them.

jcassarwhite@yahoo.com