The EU published the Regional Competitiveness Index last week, which assessed the level of competitiveness in the various territories in the EU. It published a report aptly titled: Towards Knowledge-Driven Industrialisation, which evaluates the performance of the manufacturing sector in the EU and its prospects.

The topic needs to be carefully analysed in this country as well, as on many occasions we have asked ourselves what prospects exist for the manufacturing sector in Malta.

In the EU as well as in Malta, the contribution of the manufacturing sector to the economy has diminished as the services sector gained in importance. Even so, the manufacturing sector still has a crucial role to play in our economy and it would be disastrous if we were to lose our production base. However, to maintain our manufacturing sector we need to ensure that we maintain a minimum critical mass and probably today we are somewhere around that minimum level.

Let me put things into perspective. The manufacturing sector (defined in its narrow sense and as such not including construction or electricity generation) accounts for 13 per cent of the total gross value added produced in the economy.

By comparison, financial and insurance activities produced eight per cent of the total gross value added. Manufacturing accounts for 13 per cent of the total number of persons in full-time employment, while financial and insurance activities account for five per cent.

This would mean that financial and insurance activities have a higher value added per employee; but it would also mean that the value added of our manufacturing sector reflects very much the average for the whole economy. This is one compelling reason why we cannot discount our manufacturing sector.

We should also learn the lesson from other countries. I will give two countries as an example: Greece and the UK. These economies went through a transformation process as a result of which they both lost significant chunks of their respective manufacturing sector.

The development of our services sector should not be seen as a threat to our manufacturing sector but rather as an opportunity, by using it as leverage to attract investors

It was more difficult for them to move out of the recession brought about by the financial and economic crisis of the last five years because they had lost their production base.

I also argue that one of the reasons why we have been resilient to the international crisis so far is because we still have a sizeable manufacturing sector to bank on.

We need to understand how the manufacturing sector has evolved in this country over the last decades.

Initially we could rely on our low wages and our location that used to attract investors from western Europe. As our wages rose, we lost one of the factors that gave us a competitive advantage. Meanwhile, we made gains on other factors such as the development of the skills base of our labour force, labour productivity, the quality of output, political and economic stability and a very clear European outlook.

The shape of the manufacturing sector of 30 years ago was interesting as we had a large number of companies that were essentially producing for the local market, very often protected by import barriers and a relatively small number of companies that were exporting whatever they were producing. As the import barriers went down, several of the companies producing for the local market had to close. On the other hand, those companies who were exporting expanded and in many cases upgraded the quality of their manufacturing units here in Malta. Today, our economy relies heavily on these international companies to maintain a vibrant manufacturing sector.

What is the future agenda of Malta’s manufacturing sector? I have no doubt that we should do all we can to ensure that this sector thrives in the coming years. We may have to go through another structural change in manufacturing, like we did in the last 20 odd years or so. The development of our services sector should not be seen as a threat to our manufacturing sector but rather as an opportunity, by using it as leverage to attract investors. We have to find ways and means of moving up the value chain and that requires further investment in innovation, technology and human resources.

The manufacturing sector is one of the lynchpins of our economy and we need to make sure that it remains so. The process of strengthening it needs to be knowledge driven.