Pedestrians cross the street behind a billboard showing a picture of US President-elect Donald Trump and Russian President Vladimir Putin in Danilovgrad, Montenegro. Photo: Stevo Vasiljevic/ReutersPedestrians cross the street behind a billboard showing a picture of US President-elect Donald Trump and Russian President Vladimir Putin in Danilovgrad, Montenegro. Photo: Stevo Vasiljevic/Reuters

Whatever opinions one may have about the style and substance of the US President-elect, one thing is certain: Donald Trump is likely to be president for the next four years and the world had better come to terms with the changes that his presidency might bring about.

Those who have written off Trump as an irresponsible maverick need to consider that, in a democracy, people are sovereign and have a right to decide who will govern them until the next electoral test comes around. The British public decided to leave the EU and I still believe that they can still make a success out of it. The US public decided that it no longer trusted traditional politicians and wanted a change in direction.

Of course, there will be economic and social consequences to these developments that may become even more dramatic if the electorates in France and Italy also decide to push aside traditional politicians who have ignored the concerns of ordinary people for far too long.

Malta will be affected by any turn of events in the US and the EU. So it is time that our policymakers start to engage in a ‘what if’ discussion on the likely consequences of these dramatic political developments on our economy and society.

One thing is almost certain: the globalisation backlash is going to get more dramatic and many economies will suffer severe shocks. The year 1989 marked the beginning of a new global mind-set where trade and physical barriers started to be dismantled. This was the time the Berlin Wall came down. Now we are likely to see new physical and virtual walls being built again.

Malta will be affected by any turn of events in the US and the EU

Traditional politicians in Europe and the US waxed lyrical about the benefits of globalisation but forgot that millions of people – including middle-class families – saw their jobs disappear. A new middle class was built mainly in India, China and other Far East countries as manufacturing sought low-cost locations. Yes, Western families could buy cheaper TVs and cars, but many of them lost their jobs.

The main winners in Western economies were those employed in financial services as money flowed to and from the east to the west. Far East developing countries transferred their excess current account balances to Europe and the US where they invested in ailing companies that desperately needed new capital.

While no one has a crystal ball to predict how Trump and his team will act on the economic front, it is unlikely that the status quo in trade and in the movement of human capital will be made easier or even maintained at present levels.

My guess is that the Trump era will bring a seismic change in world economics. The world will be managed less by central bankers obsessed with fiscal rectitude and more by politicians who will throw away the current economic rule books as they will do all they can to protect jobs at home even if this means higher inflation, higher interest rates, and the injection of a strong dose of trade destroying protectionism.

So how are we likely to be affected? Malta has one of the most open economies in the world. We practically import everything that we consume. Our physical exports are a shadow of what they used to be and instead we sell services.

Some may argue that the sale of our services have become too dependent on our efficient tax regime. Put simply, we need to ask ourselves whether there is any systemic risk in depending on our favourable tax regime for future economic growth. Major countries with big political and economic clout like the US and the EU do not look favourably on businesses not paying taxes in their countries and are likely to increase pressure on jurisdictions like Malta that promote tax advantages.

Educational reform is our best enabler for an economic plan B built on the skills and educational achievement of our younger generations. Some educators argue that we are just nibbling at this major structural reform by using politically shrewd tactics, but lacking strategic vision and the ability to implement tough reforms lest votes be lost.

Increased local consumption, a favourable tax regime that attracts volatile investment, speculative property development in an already overbuilt island… these may not provide the solid foundation needed to compete in a world where protectionism only favours best-of-breed entrepreneurs to sell their services.

Independent journalism costs money. Support Times of Malta for the price of a coffee.

Support Us