For one reason or another, be it the international economic slowdown, be it political tensions that have evolved into armed conflict, be it acts of terrorism, optimism has been very scarce anywhere. The impact on demand in our major markets for manufactured goods, tourism, investment has been quite severe and this in turn has impacted on our economy.
This has not allowed our economy to grow at rates we had grown accustomed to. The small size of our economy and the need to have a sustainable fiscal deficit have both not helped.
Government expenditure had to be reined in and could not be used to stimulate the economy as used to happen in the past, even though the fiscal deficit remained high. On the other hand, given the small size of our economy, there shall always be a limit as to the extent to which our economy can grow thanks to domestic demand.
This is a policy option that large economies have, but we do not. In any case growth resulting from domestic demand or from a loose fiscal policy shall always be short-lived, and tends to create more problems than it solves.
During all this time, the world economy did not stay still even though it did not grow. With globalisation taking even more root and with the emergence of economies all seeking to attract international investment, seeking to develop their tourism sector and seeking outlets for their manufactured goods, we now have to face a ball game that is significantly different to that of just 10 years ago. We are having to compete with countries that up to just 15 years ago have been considered as risky for doing business with.
In this country, the organisations representing the business sector have called for policies and strategies that aim to increase the competitiveness of firms operating in Malta. Such increased competitiveness would mean increased profits such that Maltese firms would be in a position to export more; would mean that more tourists would visit Malta because holidays would be cheaper; and would mean that it would be easier to attract international investment because of the prospects of increased profit.
Probably a correct assessment and the path trodden by other countries in this respect would prove that this assessment is correct. However, what this has meant in other countries is widespread redundancies, as if the only contributor to a loss of competitiveness were the wage bill.
In reality the loss of competitiveness is due to more than just one factor. In fact I had argued in a previous contribution that one needs to look at the issue from the perspective of increasing productivity.
In any case Malta has grown on the basis that its international comparative advantage mainly lays in that it was a low-cost location. We have attracted international investments in manufacturing in the past because we have a lower cost base and not because we have strong research and development facilities.
We can make a similar point with regard to tourism. We say Malta has become too expensive, we do not ask ourselves how we can increase the value of what the tourist gets for what he or she pays. We have achieved good results in this respect, but is it valid anymore?
Somehow increasing individual productivity in businesses and collectively in the whole of the economy is seen as being more of a long-term solution than increasing competitiveness. Seeking to increase competitiveness through a reduction in costs, although positive and good for any company, is a measure that would only safeguard a company's survival in the short term. Eventually costs would start to creep up again and in a world where prices are expected to continue falling, profitability problems would return.
On the other hand, increasing productivity would mean reducing the cost per unit produced (be it a good, be it a service) in the long term.
An analogy to this is whether a company should seek to sell more on the basis of a lower price or on the basis of better value for money. I believe that a company should seek to sell more by offering better value for money. Increasing productivity is like offering better value for money. This is because to achieve increased productivity we need to change our ways we do business so that skills and creativity can flourish, in other words it adds value to what we do.
It has been claimed all too often that our economy needs more high value-added activities and that our approach has to be based increasingly on high skills. However, this argument has been applied to the new activities we can attract. It has not been applied to our present activities. It is as if the newer activities need to be high value-added but the current activities (which we must keep anyway such as producing water and electricity or providing financial services) do not need to be based on higher skills and that these two would live happily side by side.
The truth is they cannot. High value-added activities need to be supported, if they are to thrive, by other high value-added activities. If we wish to move up the productivity ladder we need to start with what we are producing today in our economy. Eventually newer activities shall be attracted on the strength of what we would have managed to achieve.
We would need to start by tackling our cost base to make some short-term wins, but in the medium- and the long-term we would need to add value to whatever we produce.