The case for a social pact

The most recent review of the Maltese economy by the European Commission shows that much remains to be done to underpin our economic growth prospects with long-term policies that promote competitiveness. The most significant recommendation that captured the attention of the media was the advice to eliminate, or at least reform, the mandatory cost-of-living adjustment mechanism known as COLA. So, is COLA really behind our decline in competitiveness?

According to The Economist’s Guide to Economic Indicators, “Competitiveness depends on the productivity of our workforce. Labour productivity reflects capital investment and offers a guide to capital productivity. Other factors that affect labour productivity include social attitudes, work ethics, unionisation, and perhaps most important, training. These are not measured directly by economic statistics.”

The level of private investment has been falling in the last decade. In 2000 private gross fixed capital formation was 13.3 per cent of GDP while in 2009 this figure fell to 12.1 per cent. The average private investment to GDP in the euro area was a whopping 19.1 per cent of GDP in 2009. The Pre-Budget 2011 document states that being the lowest compared to Malta’s main EU competitors, “the level of private investment presents a major cause of concern, particularly since one-fifth of this investment is directed to the housing sector”.

Although Malta still attracts substantial foreign direct investment, 60 per cent of the stock of FDI takes the form of capital inflows in the financial sector and so relates to balance sheet transactions rather than investment in the real economy – investment in plant and machinery which enhance productivity.

At the risk of sounding too technical, I need to highlight some other statistics. The ratio of wage adjusted labour productivity (i.e. value added per person divided by average personnel cost) remained practically static between 2000 and 2009. Put in a simple way, the percentage increase in productivity in the total economy was roughly equivalent to the percentage increase in wages. But this statement hides a very worrying trend.

In the period 2000 to 2009 some economic sectors fell behind in the productivity race. The sectors of wholesale and retail, hotels and restaurants, transport and communication, and real estate, renting and business activities have all seen their labour adjusted productivity ratio falling. The sectors winning in the productivity race were the social and personal services, health and social work and electricity, gas and water supply. Interestingly, the financial intermediation sector also showed a significant drop in the adjusted labour productivity ratio between 2000 and 2009. This probably means that the increase in wages in this sector has been accelerating at a faster rate than labour productivity.

The Commission’s comments go further in revealing why our competitiveness is falling. “The size of Malta’s economy lends itself to market imperfections, with competition being very limited in some markets, leading to high mark-ups, for instance in the electricity sector. In addition, administrative and regulatory burdens, particularly the inefficiencies in the administration of support programmes and the non-transparency of existing regulation, are weaknesses that characterise Malta’s business environment.”

What is more worrying, the Commission takes a dig at our current educational strategy. While commenting that the targets set by government for improvement in the educational attainment of our students may not be ambitious enough, the Commission’s third recommendation urges the government to “take measures to reduce early school-leaving by identifying, analysing and measuring its causes by 2012 and by setting up a regular monitoring and reporting mechanism on the success rate of the measures”.

I am convinced that what the Commission is urging us politely to do is to first identify the causes of the failures in education of the past two decades before we spend money on measures to improve the situation. When we discover the cause of the problem we then need to monitor regularly the results of the measures we take to remedy this situation.

So, eliminating COLA is unlikely to get us back on the competitiveness fast track even if automatic wage increases linked solely to inflation is not tenable. The time has come for the formation of a social pact in which the government, employers and the unions agree to address all the weaknesses threatening our future prosperity.

The issue is complex because not all economic sectors face the same challenges. But digging our feet in and refusing to aim for a compromise to improve our competitiveness that demands sacrifices from all stakeholders will only lead to decades of economic sluggishness.

jcassarwhite@yahoo.com