Economic growth is always the key to the future, now more than ever if membership of the European Union is to attain sustainable meaning. In the first phase of the post-Independence era, the emphasis had to be on economic development, as distinct from growth. One might, in fact, take some liberties with the concept and say ‘economic redevelopment’.
A very critical indicator of success in the drive to attract FDI is the inward flow of completely new investment
From heavy dependency on the direct and indirect influences of the spending of the British military spending in Malta, the economy had to pass through fundamental rapid change. It was and would not be correct just to refer to ‘diversification’. With the winding up of the military base – an economic decision by the British Government, which had inflicted two rundowns at its own timing, and an economic-political decision by the Labour Government led by Dom Mintoff – much more than diversification was required.
The economy had to be almost completely rebuilt, initially on industry, ship repair and tourism. That phase lasted up to and through the 1980s. In the mid-1990s financial services were targeted as another important part of the refashioned economic base. Economic growth now assumed stronger significance. Growth in real terms, as every early student of economics knows, must take place to enable improvement in the standard of living.
In Malta’s case, with its heavy dependence on exports, such growth has to be export-driven. The consumption motor, while it has to be healthy within clear limits, leaks too much into imported goods and services.
Link to that the key economic consideration that growth is a function of investment, and one is immediately reminded yet again of the old reality that we require a steady stream of direct investment in export-related activities.
That is why the composition of Malta’s gross fixed capital formation (GFCF) demands particular scrutiny. Data published by the National Office of Statistics showed up to the recent past that the largest element in that aggregate is construction of housing, and of other buildings and structures. While that included hotels, which provide a major export service, the high and rising proportion of construction was neither sustainable nor healthy, in economic terms.
The Government’s satisfaction with the rising number and value of property sales at the time needed to be much more in perspective and restrained, as events have proved.
Political references made to the level investment should be analytical. Investment to generate export-driven growth is required both in terms of sustaining and improving the standard of living, and also to bring about convergence with the higher European Union GDP growth rates in better times than at present.
Positive sentiment is a necessary intangible to encourage investment, alongside the tangibles of location, availability and reasonable cost of finance, availability of human resources, technical know-how, marketing expertise, and similar factors. It is particularly important to draw attention to the positives in the situation, to drive away despondency and to give encouragement to domestic and foreign ones considering direct investment in Malta.
That, I would think, is the main reason why official speakers make repeated references to the investment indicator.
As with other claims regarding the performance of the economy, the indicator of foreign direct investment frequently referred to should be looked into more deeply. The time-series issued by the NSO from time to time shows Malta’s international investment position. The position, as the NSO has explained in the past in the fuller balance-of-payments publication, is a statement that portrays the stock position of a list of assets and liabilities that a country owns or owes to the outside world.
Within that statement there are entries relating to foreign direct investment, out of and into Malta. Official spokespeople tend to refer to the (gross) inward figure. That stock figure has grown significantly. One should derive satisfaction from the generally upward trend. Nevertheless, one should also note the detailed composition of this aggregate.
The aggregate is made up of assets held in Malta at the end of each year by foreign investors having a direct investment interest in resident enterprises. It includes new equity capital and reinvested earnings of foreign investors having direct investment in resident companies, as well as loans received and/or given to/by such investors, trade debits and/or credits with direct investment entities, as well as acquisitions of immovable property in Malta.
The breakdown of the stock figure makes it clear why much more critical assessment of the extent to which Malta is attracting new foreign direct investment is required. The continued presence of foreign investing entities, retention and ploughing back of profits is very important and should be highlighted. Given that enterprises are continually moving towards maturity, a very critical indicator of success in the drive to attract foreign direct investment is the inward flow of completely new investment.
Malta Enterprise, the Central Bank and the National Office of Statistics should collaborate to make that figure available on a regular basis. Partial information elicited through sporadic parliamentary questions is hardly enough to shed proper light on such an important variable, which also happens to be one that is very difficult to winkle from the complicated structure of balance of payments data.