Productivity, productivity, productivity

One word very often captures it all, despite the fact that economics is a complicated affair. When it comes to opening a business, like a retail outlet or - stretch the point - a hotel, it is location. Location, location, location, advisers tell you with almost tedious emphasis. Consultants on how to improve economic performance stress investment and exports, and they too capture the two objectives in one all-encompassing word - productivity.

Productivity is the name of the economic game. It has to overcome a considerable amount of buffeting, such as that which comes from an uncompetitive exchange rate and the cost of public bureaucracy. Taking such factors as given, productivity is the prime requirement for economic growth, since it is key to investment, without which sustainable growth does not take place.

Central Banks invariably depart from their monetary sphere to stress the need for increased productivity in making economic analysis. Under the long governorship of Michael Bonello the Central Bank has been particularly insistent on that key objective. The bank and its Governor returned to the theme in the institution's annual report for 2009.

The report gives a succinct analysis of the global downturn and the banking crisis during 2009, and how they affected Malta. Our banking system was well attired to absorb the international impact of the financial debacle. The real economy was inevitably affected, yet it moved into recession later than most and operated less deeply in it as well. Inflation ran counter to that in the rest of the eurozone but employment, though rising, did not reach the dramatic heights of some other eurozoners. That went for the fiscal deficit as well.

The outlook for 2010 and 2011, paradoxically, is comparatively darker. The bank forecasts real GDP growth at 1.2 per cent this year and 1.8 per cent in 2011. But the driver will be domestic demand (consumption), with the contribution of net exports declining in both years. The current account balance as a percentage of GDP will also turn negative. That is hardly the economic prescription a small import-dependent country like ours requires. As a result the general government balance - the fiscal deficit - will deteriorate from an estimated 3.8 per cent of GDP in 2009 to four per cent in each of the following two years. Creative accounting might tweak that, but the reality is inescapable.

All that will take place in a post-crisis environment of heightened competition and rigorous fiscal consolidation, points out the bank. Moreover, while domestic wages have tended to outpace wage growth in our trading partners, and that against a background of smaller productivity gains, a number of countries in Europe are experiencing wage cuts or freezes and the creation of social pacts aimed at enhancing competitiveness.

The bank's prescription in that challenging context follows as day follows night. Malta must preserve a negative inflation differential vis-à-vis its trading partners, particularly given the tendency to overshoot euro area inflation in past years. Once Malta's competitiveness remains vulnerable to developments in wages - and since where they persist, cost disadvantages result in weak export performance, external deficits and deterioration in key competitive indicators - this area has to be addressed with revised policy measures.

That is especially so since Malta has not been able to generate wealth fast enough to close its income gap with the euro area and has sustained the income level not with investment but largely through consumption.

As a result policy changes, the bank feels, should shift the focus of budgetary policy more so from distribution of wealth to creating value. Translated - we cannot distribute what we don't create. The bank once again recommends cost-reduction and productivity-enhancing reforms. These have become more urgent than they already were before the crisis. How can they come about? Among other things, according to the bank and the Governor, by ensuring that wage growth is in line with productivity and reviewing the wage indexation mechanism (i.e. the statutory Cola), further progress with structural reforms, such as in health and pensions, and by strengthening competition in product markets and reducing the cost of bureaucracy.

The proposals by the bank and the Governor call for critical discussion. The possibility that it would start - seriously - in the Malta Council for Economic and Social Development was washed away. I should think that it is in the interest of all the members to put their nose back to the grindstone. Time is running out. Much soul-searching is required against a backdrop of a hostile international environment. We have to consider not only what our trading partners are doing, but more so our competitors. And they are not sitting on their hands and wasting their time in huffing and puffing.

The global economic recovery is going to be weak for some time. Only those who can truly compete will benefit from it. That will remain true even if, or when, the world economy becomes more robust. If nothing else the spectre of a declining export contribution to our GDP should make our social partners take a fresh hard look at themselves and at the wisdom of their stances.