What is needed is a clear, coherent industrial strategy
In the last three decades many European countries as well as the US saw their manufacturing base shrink as companies shifted the mass production of consumer goods to China, India and Vietnam. Western political leaders argued that this process was inevitable as the tide of globalisation was irreversible.
It is now becoming cruelly evident that those countries who put all their trust in the services industries, like financial services and property development, are realising how weak their economies have become. They are wondering whether they should start promoting the need for a “march of the makers” – a term coined by the British Chancellor of the Exchequer, George Osborne, to highlight the importance of rebalancing the economy through a new coherent industrial strategy.
In Malta we followed this trend too. We now have a manufacturing sector that is a shadow of the powerhouse it was in the 1970s and 1980s. The former importance of manufacturing has gradually been taken over by services mainly connected with the financial sector and electronic gaming. Tourism has continued to assert itself as one of the main engines of our economy but in the last decade has shown signs of sluggish growth as new investment became less pronounced than what it should have been.
In the last two decades property development too experienced a boom but is now facing bleak times. No major investment in the higher end of manufacturing has made news and many believe that some of the manufacturing enterprises that still exist today date back from the 1970s and have experienced insufficient upgrading in the technology they use and therefore face an uncertain future. So are we being realistic when we emphasise the need for a new industrial strategy?
As pointed out in a recent supplement of The Economist “there is no doubt that mass-produced goods will continue to be made in factories using traditional subtractive methods for a long time yet, although with increasing automaton and flexibility”. It is unlikely that we will attract any significant investors to consider Malta for such manufacturing ventures. So far the main thrust of our industrial strategy has been based on cutting taxes and “red tape” to lure direct foreign investment, as well as exploit legal loopholes in some countries regulations to convince potential industrial investors that Malta was the right place for their future ventures.
Tax incentives and the control of bureaucracy are good “nice-to-haves” in an industrial strategy aimed at attracting direct foreign investment. Jamaica has a five per cent top personal income tax and Albania has a 10 per cent corporate tax rate, and yet there is no rush of wealth creators to open businesses in these countries. But there are far more important critical success factors. What are really needed are a solid industrial infrastructure, skilled workers, basic research and development, and export marketing for small firms. Investors look for good growth prospects, technological progress, quality of labour force and sound physical and administrative infrastructure when deciding where to invest their money.
The amount of money we spend on research and development is a mere 0.63 per cent of GDP while that of the eurozone is 2.09 per cent. Admittedly small countries like Malta have to struggle to attract the right kind of investment in R&D as we do not have the critical mass of small enterprises that are usually needed for such research work. We have taken the right decision to promote the building of the life sciences park as biological sciences are one of the growth areas for future manufacturing.
We now need to lure major international companies to base one or more of their research centres in Malta. To impress these investors we must be able to prove to them that they will indeed find the right quality of workers for their research set up and factories in Malta. This could well be our Achilles’ heel. Local young bright science graduates will not want to wait in some dead end job until they find a vacancy advert that satisfies their aspirations. They will more likely want to try their luck abroad.
Our banks too need to play a part in this “rebalancing” of our economy. Our more established manufacturing ventures need to upgrade their operations by investing in new technology in order to remain viable. If our banks are not prepared to assist in this process because of a heightened risk aversion, then it may be time to set up an industrial bank to promote investment in new manufacturing.