Right balance in economic restructuring

It is not just in social mores that Malta is changing. The make-up of the island’s economy has been changing too, reflecting a development trend experienced over the years by other, much larger countries. Malta’s problems are magnified by its smallness and its absolute lack of natural resources but, as one famous economist said, small can be beautiful too. Manufacturing is still an important segment of the economy and, indeed, even this sector has been undergoing significant changes as Malta moved to the making of goods requiring a higher value-added content.

But there has also been a significant measure of economic diversification as new lines in the services sectors emerged and developed at a relatively fast speed in recent years. This was brought into perspective at the fourth annual conference of Finance Malta and also in Parliament during a debate on the second reading of a Bill amending financial services laws. According to Malta’s national reform programme, the share of manufacturing in total gross value added has declined from 22.4 per cent in 2000 to 13.6 per cent in 2009.

Over the same period, the share of primary industries, including agriculture, fisheries, quarrying and construction, dropped from 6.5 per cent to 5.5 per cent of total gross value added. On the other hand, the services sector’s share of total gross value added increased from 53 per cent in 2000 to 59 per cent in 2009. Dependence on tourism and electronics was reduced and replaced by emerging sectors in chemicals, aircraft maintenance, business services, information technology and financial services. The remote gaming sector is also doing well.

All these developments have been gradually changing the face of the island’s economy and bear no relation to the time when it was heavily dependent on British defence spending. Indeed, one of the largest enterprises, the dockyard, once the pride of Britain’s admiralty, is no longer in the government’s hands.

Throughout the process of change and restructuring, the constant fear was over the possibility of the economy becoming over-reliant on a particular segment. The name of the game was diversification but it has taken time for the island to branch out into new lines. Now that there has been what the reform programme calls a “significant restructuring process”, fears are once again being expressed of the dangers of becoming over-reliant on particular sectors.

In Parliament, for instance, Labour MP Alfred Sant recently warned against complacency in the financial services and remote gaming sectors, arguing that if problems were to arise in these two sectors, the economy would be put at grave risk. This, he said, was what had happened in Ireland, Iceland and the UK. In his opinion, the Maltese economy was far from balanced. Of course, Dr Sant made a good point but, to be fair to the government and to the agencies charged with the promotion of Malta as an investment location, it is not as if the Administration is unaware of this.

Ideally, there should be a healthy balance in the composition of the sectors that make up the economy but there is no magic wand to bring this about and changes often take place gradually as has happened in the case of the development of aircraft maintenance services. There are other lines that have yet to be further exploited, such as the maritime sector.

A healthy mix makes it possible for the economy to escape serious repercussions when particular lines are hit by some unexpected development.