An assessment of Malta’s economy over the past decades has shown that it is more diversified, dispelling the impression that new activities like financial services and gaming have taken root at the expense of other sectors like manufacturing.

The paper, drawn up by Central Bank of Malta economist Aaron Grech, also concludes that the services sector exhibits a third of the volatility of industry – clearing up another misconception.

“The transformation of the Maltese economy is the result of the appearance of a large swathe of new services operators, rather than the disappearance of existing industrial operators,” the report stated.

“The first decade post-EU accession for Malta was characterised by job-rich economic growth. The increase in employment was the largest in any decade since independence. By contrast, the overall percentage growth in gross value added was below that in previous decades,” it continued, noting that between 1995-2004, gross value added (GVA) grew by 69 per cent, but only by 62 per cent in the following decade.

The report also found that employment in industry and agriculture as a share of total employment has declined

Certain sectors have seen phenomenal growth: computer programming has grown its GVA more than sixfold in the past decade, while the sector which includes gambling and betting saw its share of GVA increase from 2.1 per cent to 8.5 per cent.

In 2004, Malta had the eighth highest share of services in its GVA among the EU countries, but by 2014, it had the third highest. However, in the last decade, industry’s GVA also rose – by 17 per cent – although its composition has changed remarkably. In the 1980s, 17 per cent of all industrial workers were involved in the manufacture of clothing and footwear; by 2014, the share had dropped to just four per cent – one-tenth its level in absolute terms. The largest five manufacturing sectors now account for 62 per cent of industrial jobs, down from 71 per cent in 1995.

The same thing applies to tourism: the share of employment was just 7.5 per cent in 2014, compared with 11.5 per cent in the 1980s, in spite of the fact that in absolute numbers employment was up by 50 per cent.

The report also found that employment in industry and agriculture as a share of total employment has declined – but that this is probably due to the firms becoming more capital intensive and productive.

Looking at the diversification of the economy, the report noted that the top five sectors by GVA (see box) represented 43.2 per cent of the economy in 1995, but only 39.6 per cent in 2014.

“The expansion of labour-intensive services activities has played an important role in the decline of the economy’s apparent labour productivity in recent years and the associated growth in unit labour costs, despite a relatively low rise in compensation,” Mr Grech wrote, casting light on yet another economic indicator that has been repeatedly raised as a red flag.

“More positively, the diversification towards services could help dampen cyclical fluctuations. The services sector exhibits a third of the volatility shown by the value added of industry.”

Share of gross value added by broad economic sector

Source: Aaron Grech (2015)

Top 5 sectors for GVA increase