Industrial relations (2) - Pressure from global realities

Central Bank Governor Michael Bonello has called upon the social partners to restart talks on a social pact, especially in view of the prevailing international economic situation. The social pact has not been mentioned for ages, after efforts to create one finally collapsed in November 2004 despite the good work put in by the then chairman of the Malta Council for Economic and Social Development (MCESD), Victor Scicluna. Last week this column touched upon the background to that call. It is one where there is in force a mechanism whereby a statutory wage increase is extended annually on the basis of the year-on-year rise in the Retail Price Index.

The system has its critics because the wage increase is given across the board, even where collective agreements exist, and it is not related to productivity. Some analysts have put forward food for thought on how to review the system, such as by limiting statutory wage increases to employees who are not organised in a union. But not much of a reasoned discussion has grown out of similar suggestions.

At a business meeting two weeks ago, Mr Bonello returned to his oft-repeated theme of the dire need for Malta to be more competitive, indicating his understanding that the way the international economic and financial situation impacts on Malta makes it imperative that we resort to fresh thinking on the issue. Mr Bonello said that "in today's circumstances, Malta cannot afford to be less competitive than other countries in the eurozone and we have to do something about it as soon as we can... The social pact would be a good answer to this problem."

The governor added that Malta could not continue to increase wages every time prices went up.

"We must find a way of striking a balance between compensation received by workers and their productivity," he said.

Last week this columnist opined that there will be quite a number of people within the trade union movement who will not agree with the Governor and that it will be a very brave government which undertakes a review of the cost-of-living increase system, though unions were often very reasonable and understanding with priv- ate employers who faced difficulties.

Nevertheless, if such reasoning is formalised in discussions among the social partners there is the danger that it could do more harm than good. Some union representatives might argue that there is an incipient attempt to erode workers' rights.

They might do so particularly given the pre-election mode of arguing by the government that we practically never had it so good.

Does that then mean that the Governor of the Central Bank was merely whistling in the wind, and not the first time at that, I asked. Whatever it means, the wind is definitely blowing, and rising in intensity. Last year various manufacturing entities closed down or reduced their local activities.

This year there was a long-awaited tremor when STM, the largest manufacturer, made it clear that it was passing through difficulties, induced largely by the depreciating US dollar.

The international economy has slowed down and that transmits signals that cannot be ignored by any economy, let alone one as small and as open as ours.

Governor Bonello made his remarks during a presentation on the CBM's annual report for 2007. He gave an overview of the country's economic situation last year, adding his suggestions for improvement throughout this year. According to the bank's projections, the Gross Domestic Product this year is expected to grow by 2.6 per cent, against 3.8 per cent in 2007.

This is due to a projected decline in private consumption and, subsequently, a decrease in imports. On the inflation front, the CBM is projecting an inflation rate of 3.7 per cent as opposed to the 3.1 per cent rate last year.

Since last December, this rate continued to accelerate due to steady increases in food and energy prices, largely reflecting international price movements. This was compensated by a downward trend in unemployment and a growth in job vacancies. Malta's international competitiveness recorded a small improvement last year.

In 2003, Mr Bonello explained, the unit labour costs rose but productivity dipped. Since then, there has been a decline in the rate of increase of labour costs but this still remained well above the eurozone.

When compared to Germany, unit labour costs in Malta increased dramatically last year when compensation went up by 23 per cent, compared to the increase of just 3 per cent in the productivity rate. The contribution of net exports is forecast to improve, in part due to slower growth in imports, while the pace of investment and government consumption is projected to recover next year.

At that stage the Governor turned to the subject underlying last week's column and this one: price stability. He said that this is a necessary condition for sustainable growth and job creation. With a social pact, price stability should be easier to achieve, in so far as that is dependent on domestic factors, including industrial reactions. The outlook for price disruption from the import side makes reasoned discussion based on higher productivity more urgent.

It may be that fresh discussions on a social pact will flounder as they did in 2004. Nevertheless experience is a great teacher, and the reality test even more so.

Fresh talks on a social pact should be useful even just as a learning exercise, let alone if they lead to a belated agreement which helps the country achieve better competitiveness.