The private business sector in Malta today cannot be an effective agent for change primarily because it is too burdened with obligations and split within itself to be an effective force. At least today it is no longer maligned.
The government, controlled by the political parties, and their appointees, regulates and taxes every aspect of private enterprise and this tends to throw firms and entrepreneurs into an umbra of caution.
Few operators speak out except in boardrooms behind closed doors. Understandably, for most, public duty comes after their direct private interests and the general attitude is to leave such matters to politicians and commentators.
If it is a general business matter, or a private matter which they wish to air, they may deign to call their contact at the Chamber or the Federation or the Retailers' and leave it up to them. Pressure on politicians is exerted but often for direct gain, rarely in public spirit mode.
That such an important sector does not carry the weight it deserves, is not forthright enough, and is not listened to enough is one of the main causes of our plight. Business, unfortunately, and this is one dark side of our culture, is generally looked at not as the creator of wealth for all but as a greedy cow which everyone has the right to milk and ride until it falters. Then we give it some fresh air, carrots and sticks, and it is on its feet again, to be gradually milked and abused again.
What is more, our structure is such that unionisation and, admittedly, past labour abuses by some employers, have led to a situation where many private sector employees tend to favour institutions other than their employers, such as unions and political parties. Such a situation, with the private sector, made up of firms and their employees, being split up around legal relationship grounds rather than economic reality - public versus private - is nonsensical but very real. The private sector ought to be much larger and carry much more weight.
The public sector can exist only if the private sector pays for it. This is as it should be since the raison d'etre of the public sector is the provision of desirable goods and services which the private sector alone would not otherwise provide. To accomplish this, the public sector was accorded the power to tax the private sector and spend. The original understanding was that there would be more properly productive (ie private sector) people than public sector people producing these otherwise unavailable goods and services, such as police, justice, schooling for all, etc. With time, however, using this power to make laws, to tax, and to spend, the public sector expanded to cover goods and services which are more efficiently produced by the private sector, to regulate matters which are better left unregulated or left to the discretion of private contracting parties, to offer certain unnecessary "welfare" services, and to employ more people than are needed to do what needs to be done.
In Malta, as a result, we are now in a position that state-dependants exceed people in the private sector and this means that there is no effective financial discipline on the public sector because the public sector votes its choice party into power. The way the system is set up, if the economy does well, tax would be higher and the public sector will swell further. If the economy does badly, dependants on the state will increase, thus also expanding the public sector as defined here.
In order to regain this fiscal discipline and in order for the private sector to be able to continue to carry the public sector - because the public sector does, indeed, produce important services, albeit generally inefficiently - two things are needed: the rapid expansion of the private sector and the shrinkage of the public sector.
The government needs to urgently get on the path to four things: first, to get rid of a lot of regulations which are merely "red tape"; second, it should also restrict the areas in which it legislates and regulates; third, as much as possible, it should regulate only on the macro level, leaving the micro level to individuals and firms; and, fourth, it should reduce the areas in which is it active via sensible, well-thought out privatisation in the public interest.
In the developed world, more and more, there seems to be this communistic mania to control and regulate everyone and everything and every action. This is reason number one why the developed countries, and Malta, have such negligible economic growth.
The government should not only privatise but its institutions should be more facilitative and open to the private sector and encourage a "can do" mentality.
Our tax laws need to be fair, respecting taxpayers' right, and observing equity. This is a fine balance. Straying too much either way, being too lenient, or being too hard, has grave consequences.
Public waste, of which there is much, needs to be attacked. There is more consciousness of this today than even a few years ago. The main source of waste in the public service, though, is disorganisation and lack of work to do. The people in public service are no different from those in the private sector except that the latter organises them better and gives them work to do since it cannot afford surplus workers.
In the public sector, especially in places with work to do, clear objectives, capable management, and a certain "isolation" from political pressures, one can find entities and departments which work extremely well, even when compared to the private sector.
I was heartened when the budget 2005 made emphasis on the need to control public expenditure and cut waste. Important initiatives include the setting up of a Financial Management and Monitoring Unit and the severe limitation on public service recruitment. The order not to replace cars during 2005 may not be too material on a national scale but gives the right message.
Our labour laws have become so complex that no employer, I am sure, knows them all, as we used to know them only a few years ago. They are also restrictive, hampering discipline and efficiency and business.
The government's tax take, in income tax, VAT, customs, fees, fines, etc, need be much, much smaller than it is now. For example, we cannot level-headedly expect people to sell and deal in property against exorbitant capital and other taxes.
An important role of the state is to open the way to new entrepreneurs and see to it that entrepreneurs are not smothered by ink-mountains of regulations which never seem to stop growing, nor by near monopolies, nor by corruption. And by "open the way" I do not mean hand-holding. Too many institutions meant to help business have taken this form. They cost more to run than the benefit they are delivering. Entrepreneurs and businesspeople often do not need hand-holding but freedom to act and do, property rights, and taxation at a reasonable level.
In the absence of entrepreneurs, competition, and new entrants, the private sector would continue to contract, our economy will get stultified, and the most important democratic redress which we need - a private sector majority, with the majority being payers of money to the government, not with the majority getting money from the government - will not take place. Without this redress we cannot get out of the vicious circle we are in, EU or not.
The EU will help us develop only if we manage to develop ourselves. Even regulations such as the Stability Pact, requiring capping of certain criteria, such as government deficit and debt, are no salvation. We all know about the statistical and other accounting fudging which certain major nations did and we have recently heard how Greece has recently revised upwards by an average of 2.2 per cent its budget deficit for each of the years 1997 to 2003. (For example, it had reported a deficit for 1997 of four per cent when it actually was 6.4 per cent; in 2000 it said it was two per cent when it actually turned out to be 4.1 per cent.) Greece's government borrowing is at 112 per cent, nearly twice the 60 per cent allowed. The EU, therefore, in itself, is no guarantee of salvation. It is we who must pull up our socks.
As things stand, therefore, we are in a vicious circle, in a tax-borrow-spend spiral with no obvious agent for change. From what we have seen so far, our new, enthusiastic prime minister, who has great people skills, who understands and is determined to fix our major problems, including the fiscal one, is having to climb a steep wall of attrition and erroneous arguments based on a "free-lunch", "beggar-thy-neighbour" mentality. It is the structure we must fix and we need to address the basic issues, such as those suggested above.
Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited (www. azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.