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Old economy vs new economy

John Pollacco, Head of Business Development - Bank of Valletta International, recently addressed a METCO conference themed, ‘International Marketing in the Digital Economy’. Following are extracts from his presentation, during which Mr Pollacco highlights the immense potential of the still widely underdeveloped Information and Communication Technology sector

By John Pollacco

The most over-used words of the past five years must surely have been globalisation and the new economy. Self-proclaimed ‘new and innovative’ products compete for our attention in our High Street shops, new fashion lines are launched as regularly as the seasons and new car models now appear twice a year, at least in the Maltese Islands, rather than once.

In an attempt to live up to the theme of the conference, I have selected a title that revolves around two major points - the new economy and the e-commerce benefits for the exporter.

Is Malta on the verge of a New Economy? To what extent is today's competitive environment new, as opposed to the current twist on a well-worn path? If we are indeed moving onto new ground, how might it look? What will it mean for Maltese businesses?

In tackling this subject I shall be using a three-step approach.

First, I'd like to consider the major long-term trends that are already well established in the Maltese economy. Secondly, I will highlight three new trends, or recent reversals, which I expect, will continue to grow both locally and globally in the near future. I shall be taking practical example from the banking sector, which I am familiar with.

Thirdly, I will draw together the interactions and possible implications of these established and new trends that will shape the Maltese economy in the next decade that every economic operator especially the exporter should take into consideration.

Established trends
So, let me begin with established trends, which are quite far-reaching in themselves. I would like to focus on three of them:

First, the shift from manufacturing towards services, in both output and employment; secondly, the upgrading of skills and gender balancing of the labour force; and thirdly, the shift from domestic towards international competition.

These trends are both widespread and scalable. None is unique to Malta; all are happening globally.

1. The shift from manufacturing to services
In September 1980 the manufacturing sector employed 43,000 persons whilst the private services sector employed 33,000 persons. In September 2000 the manufacturing sector employed 39,300 persons a decrease of 8.5 per cent whilst the services sector employed 51,051 an increase of 54.5 per cent over 1980. In recent years the contribution of tourism and the services sector to the Gross Domestic Product has increased by a significant extent and stands at around 37 per cent whilst manufacturing stands at around 22.8 per cent of Gross Domestic Product.

2. The upgrading of skills and gender balancing of the labour force in the· last three decades there has been a major revolution in the field of education.

· In the early 1950s the illiteracy rate for both males and females was around 10.83 per cent whilst in 1995 this decreased to around 1.4 per cent.

· The number of students proceeding to University has increased from 463 in 1960 to 7,146 in 1998. The female component gradually increased over the years to reach a total of 3,606 in 1998. This is slightly more than half the total student population. One also notes that over the years the female participation in the economy has been increasing steadily.

3. The shift from domestic towards international competition in the last decade – Malta has changed its economic environment. During the late 1970’s and early 1980's the government of the day had adopted an import substitution system. This scheme helped to industrialise the country but today this does not hold water. Given Malta's international commitments with both the European Union and the World Trade Organisation, all forms of protectionism have to be removed.
An interesting point is that the three most important income and employment generators in Malta are ST Microelectronics, Air Malta and the tourist sector. These industries are operating in the international field and are doing quite well with minimum state assistance.

The major challenge facing Malta is to assist firms that operated under the protective levies regime to rethink the way they operate. It is important for these companies to start thinking of exporting, since the Maltese market is limited and domestic demand is saturated across the board.

Globalisation and the removal of protective regimes brought about real growth in GDP and efficiency worldwide. The evidence is that these benefits are substantial for consumers who have greater range of choice, for producers who can more easily reach world markets, and for workers who can fill the new jobs that are created.

However, notwithstanding the overall net benefits, as with any major economic change, there will be winners and losers in each category.

New Trends
In the last few years there have been two main trends that have emerged namely, the decline of inflation in most advance economies and the rise of information & communication technology.

In Malta inflation is well under control. After two decades of high and variable inflation, during the late 1990’s Malta turned over the task of inflation control to an independent central bank. Monetary policy was removed from direct political control, and a clearer responsibility for price stability established.

The second new development I would like to highlight is the rapid rise of information and communication technologies (ICT). This digital revolution actually began some 30 years ago with the development and subsequent miniaturisation of chips, which made possible the personal computer.

Networked PCs replaced mainframe machines in large companies, and made computerisation practical for many small businesses for the first time. Software for word processing and easy to use spreadsheets vastly increased the range of computer users in business. Then came games, educational use and, now, the Internet. Investors quickly grasped the potential of wholly new business models it could spawn? As well as the destruction it could wreck on established ways of doing business. What moves much more slowly, of course, is the pace of adoption of new technology.

Even in the US, where investment in ICT has been strong since the 1980's productivity growth has only been rising since 1995 and Internet purchases account for less than 3 per cent of household consumption. But what we are clearly seeing is a technology that has reached the take-off stage of market penetration. If we are in the take-off stage of ICT - as I believe we are - what would be the effects on us?

The effects of ICT
·Greater competition. Comparing prices on-screen is much easier than on-foot or on the telephone. The Internet also provides a low-cost way for new producers to reach potential customers. It lowers the barriers to market entry, and that means greater competition.

·It also means lower prices. With more competition to chose from, purchasers who are price sensitive can seek out the best deals. And even if the purchase itself is made on the high street or from the usual supplier, price comparisons from the Internet can be used to negotiate a better deal.
The downward pressure on prices will compress margins in many sectors. We are already seeing evidence of this in Malta in the hotel industry and in the mobile telephony market.

However, lower margins are not the end of the story in other countries. Producers will react to the pressures on margins by seeking to reduce costs.

This is the main value of business-to-business e-commerce. It not only produces one-off savings in procurement costs, but it also makes possible continuing cost savings through reduction of inventories and distribution costs.

An example, perhaps familiar to many comes from the UK retail banking sector:

And, finally, over the medium term, the effects that I have been talking about are likely to result in productivity gains for the economy as a whole. This is where the real pay-off lies. The widespread applications of ICT by firms and their employees across many sectors of the economy, creating new ways of working and of shopping, will speed up transactions of all kinds and eliminate pockets of inefficiency throughout the economic system. The sustainable growth rate of the economy will then rise, at least for a time.

A new economy
Finally, I will draw together the interactions and possible implications of these new and established trends that will ultimately shape the Maltese economy in the next decade that every economic operator, especially the exporter, should take into consideration. I will summarise them into seven short points.

1. A decade of exceptionally rapid change. The combined forces of globalisation and ICT mean that competitive pressures will force rapid change on many companies in order to survive in a world of new competitors with new business models.

2. There will be big winners and sudden, large losers. Businesses that restructure and look at export markets will do well whilst firms that remain stuck in the old ways of operating are doomed and will lose out to competition.

3. Consumers will gain whilst traditional distributors will lose. My guess is that consumers will be the big winners. The combination of lower inflation, the new price transparency made possible with Internet shopping and greater international competition all work in favour of the ultimate purchaser. The consumer gains through greater choice and lower prices. Traditional distributors have to capitalise on there first hand knowledge of their clients and thus develop a more customer centric strategy.

4. Workers with flexibility and qualifications will gain and jobs for life will disappear. The growth of jobs in services, many of which are produced in small companies, coupled with rapid industrial change, means that people will increasingly expect to change companies as their career progresses, rather than changing jobs within the same company. Dual income households also increase worker mobility. In these circumstances formal qualification will be increasingly valued because they are intrinsically portable.

5. Keys to business success: efficiency, speed, and quality differentiation. In order to succeed in this rapidly changing and competitive world, businesses will need to make the investments or take the decisions to achieve the step-changes in efficiency made possible by the new technologies. They will need to offer customers faster, high quality services to retain their loyalty in the face of new competitors. The need for efficiency, speed and quality also applies to public sector organisations - at all levels. Local businesses cannot thrive unless government authorities move with speed and efficiency in carrying out their regulatory responsibilities, and provide high quality local education, healthcare and recreational facilities to attract new recruits and inward investment.
6. Higher economic growth and rising household wealth

It is anticipated that higher economic growth and rising household wealth is likely to result from the combination of productivity gains driven by ICT and continuing trend towards the two-income households.

7. Attract new investment and encourage export.
"Export or Die" has by now become a cliché. It worries many exporters but let me assure you these words must also linger and trouble many a politician's mind. Every Government knows that exports are the bloodline of any Nation; the absence or slow down will impede economical growth, whether we are part of the European Union or not.

It is in the country's interest that exports levels increase every year. To accomplish the desired level of exports governments must devise an infrastructure that attracts both foreign and local investments. The huge pressures which exporting companies face to market their product overseas can be achieved by sound financing, by applying the latest manufacturing technologies and by high quality standards.

These ingredients are essential for the successful exporter but difficult to achieve within a relatively acceptable timeframe without some kind of Government assistance. The incentives as published in the revised Industrial Development Act, now called the Business Promotion Act (BPA) will give those intrepid executives seeking to venture into exports a better chance in its start-up period.

Competition from other countries has made it tougher for Malta to attract foreign investment. The Industrial Development Act (IDA) of 1988 went through a number of amendments to keep up with the tough competition from other countries. The current revision will positively reconstruct the range of incentives which will enable Malta attract the preferred "qualifying activities" and the newly introduced Freeport activities, tourism related businesses and specialised high-tech industries.

The bill now also encompasses those activities that cater for niche markets that are best suited to our distinct environment. Fortunately, the bill does not distinguish between local-oriented and export-oriented activities, thus placing local investment opportunities on a level playing field with foreign investment.

The incentives are aimed at encouraging Maltese and foreign entrepreneurs to set up new projects in Malta. To maximise return from the new incentives, Human Resources Development is of utmost important especially in the IT and high-tech sectors to cater for the expected new influx of IT niche industries. Whatever state of the art techniques and advanced e-commerce employed; whatever opportunities, schemes and incentives available to encourage exporting, the economic vision should be focused on improving the firm's profitability and on building a better life for us and future generations.

I would like to close with the words of Mark Twain.
"Plan for the future because that's where you are going to spend the rest of your life."

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt