Two faces of Malta’s economy

The World Economic Forum’s Global Competitiveness Re­port 2010-2011 is based on a complex formula comprising over 100 variables. It presents a number of neat classifications which hide its conceptual and methodological limitations. Still, it is a useful benchmarking exercise. The report relies on a mix of data and perceptions. The latter are gathered through an extensive executive opinion survey.

In these last years, Malta has been positioned among the “innovation-driven” economies. This is the top category and consists of 32 economies whose GDP per capita is higher than €12,760 and which are not dependent on the export of raw materials. Malta has a GDP per capita of €14,344 and meets both these criteria. A pro-government Sunday newspaper recently boasted that Malta is now in the premier league.

The snag in this is that whereas our GDP per capita places Malta in the top-tier group, our overall competitiveness placing (50th out of 139 countries) belongs to the third division: A group of economies referred to as “efficiency driven” and whose GDP per capita is between €2,250 and €6,755. The 2010-2011 Competitiveness Report exposes all the contradictions and duality of our economy.

Malta achieves high points with regard to financial services, openness to trade and foreign investment, telecommunications infrastructure, auditing standards and the intensity of local competition. Also, our country is deemed to have little organised crime, a good education and health system and it is not plagued by HIV and malaria. We also have decent institutions (except for scientific research ones).

However, Malta belongs to the Third World when it comes to the quality of our roads, burden of government regulation, electricity and government debt. Malta gets low marks in labour market efficiency, primarily due to our hire and fire practices, flexibility of wage determination and low female participation. Our enterprises score poorly in customer orientation.

Dualism results from the economic trajectory Malta has chosen since the 1960s. Malta’s economy has been divided between a foreign-owned, technology-modern, export-oriented productive sector and an indigenous, domestic-market-oriented sector. Globalisation, the shift towards services, liberalisation and EU membership made us believe that this dualism would melt way. It merely changed its skin, exposing all the fault lines of our economy.

That our economy is facing serious structural challenges is confirmed by a very unlikely source: the pre-Budget 2011 document prepared by our Ministry of Finance, the Economy and Investment. This document notes that despite industrial diversification into pharmaceuticals and airplane maintenance and the growth in financial services and online gaming, Malta has been gradually losing export market shares in total world trade which are resulting in consistent deficits in our current account.

Pre-Budget 2011 concludes that the productive capacity of our economy is being eroded and the external sector is not contributing to our growth. Our economy is becoming increasingly “inward looking”. For a small open economy like ours, a proud member of a 500m single market, this is an anathema. Moreover, economic diversification has not even been sufficient to keep us running on the spot.

The acid test of an economy lies with its balance of payments. Deficits in the external account need to be offset by an inflow of capital. It is success in this area that has kept our economy going. Over the years Malta built a significant stock of foreign direct investment. Estimated at 102.1 per cent of GDP, this is 40 percentage points higher than the EU27 average.

Pre-Budget 2011 states that some 60 per cent of Malta’s stock represents capital inflows to the financial sector. It adds that it is not clear whether “such flows relate to balance sheet transactions of a financial nature or inflows directly related to productive investment” (58). Coming from our Finance Ministry this is a worrying statement on two counts: That substantial foreign investments have no impact on our economy and that our ministry says it is uncertain as to what is really happening.

Still, foreign ownership of local economic activities is becoming a key issue. On prevalence of foreign ownership the competitiveness report ranks Malta in 65th position. There is a price to pay for the deepening foreign ownership of our economy. We keep selling our assets to overseas interests (HSBC, MIA, Freeport etc.). The government has been selling Malta by the pound. In the meantime, the local private sector has not been investing aggressively enough outside the property sector.

Malta has liberalised important economic sectors such as retailing which are being increasingly dominated by foreign corporations. Generally business in Malta is becoming more concentrated to the detriment of small enterprises. These are some of the main reasons why the benefits of economic growth are not reaching the people. Our society is becoming in­creasingly polarised between the dominant and the rest, the haves and the have-nots, the education-rich and education-poor.

Pre-Budget 2011 states that competitiveness is “desirable only if it is a means to enhance the welfare of Maltese households” (63). This is not happening. According to Eurobarometer, one in every three Maltese is either poor or on the verge of poverty. For them Malta is surely not in the economic premier league.

fms18@onvol.net