Mission competitiveness

Two of Malta’s foremost economists have a plan - getting the country back on its feet. But is that too much to ask from Maltese savoir-faire and the gruelling politics of our ministries and social partners? MATTHEW VELLA meets Prof Lino Briguglio and Gordon Cordina.

Competitiveness could be a dirty word. Take-overs, lucrative mergers, slashed prices, devaluated currency and opportunism. For today’s Malta, competitiveness is the next tidal wave after EU accession.
And Prof Lino Briguglio and Gordon Cordina have stepped out to address the question of competitiveness. The two academics have broken with tradition to come from out from behind the university desks and put their minds at the country’s service.
Their national conference, organised in collaboration with the Commonwealth Institute and the Foreign and Finance Ministries, edges out on a national strategy aimed at treating the problems facing the economy as a whole.
The country’s financial state is in ailing condition. Briguglio and Cordina have outlined decade-long rants on government inefficiency, investment attraction, welfare, and state expenditure. And they also proposed solutions. The question is, how much will spill over from their conference onto the decision-makers:
"Malta depends on exports, and we shall be the most export-dependant country in Europe, so you have to be competitive," starts Prof Briguglio.
Cordina says there’s no other road: "We spent ten years on import-substitution which did not work and another ten on fiscal expansion. The only road we are seeing is integration in the global economy, and that was the real question for EU membership, to have access to a greater market."
Briguglio and Cordina are taking the EU debate a step further. Now that Malta is practically in, the country has to look to achieve that competitive edge in terms of supply.
"We have a lot of pockets of exports," Briguglio says. "For example, we depend a lot on printing material export. We produce currency notes for a lot of countries, and we are also very competitive in the fields of plastics and electronics.
"So out of every Lm100 we sell, 50 per cent are purchased by residents and the other half by non-residents, including tourists, and therefore these are exports."
However, Cordina reminds, for every Lm50 sold to non-residents, the island imports Lm60, "and that is where the real problem for the Maltese Islands lies. We cannot continue year in, year out with this deficit until all our reserves are cleaned out. We have had capital inflows such as privatisation, FDI, and re-investment finance this deficit but this is unsustainable. This is usually the beginning of the road towards a financial crisis. We have to be more competitive in order to resolve this balance of payments problem."
This is why we have to adhere to the single European currency, the economists stipulate:
"We import and export a lot from and to Europe. If we have exchange rate volatility, that will contribute to further risks for business - impeding business or increasing costs when hedging against that risk," Cordina says.
"A concrete advantage is that when we shall adhere to the euro, we will see our interest rates decrease by half to one percentage point. Since the Maltese lira is a small currency, we always have to offer an interest rate premium. That premium can end once we enter the eurozone to the benefit of our country’s producers.
"When the euro was created Maltese tourism suffered two blows. One of them was that Spain, Portugal and Greece no longer had exchange rate instability. The second was that their interest rates decreased greatly compared to Malta’s. So many of our hoteliers changed their operative currency to the euro, but they were also risking that if the euro appreciates their repayments would increase, which is what is happening now."
In their report, Briguglio and Cordina have outlined Malta’s disadvantages: additional transport costs as an island; a tight labour market with relatively low unemployment, leading to poaching of jobs the fact that our limited space makes cement factories and refineries makes them no-go areas.
Briguglio - "The attraction we can offer is innovation and efficiency."
Cordina - "And so we cannot keep on saying that Malta attracts FDI. We have to be choosy. We need small outfits, because our labour force cannot service large factories, and we are already out-priced by Tunisia and Eastern Europe.
"These industries have to bring great capital commitment, and bring technology, skills, and be able to pay the wages Maltese workers expect. They have to be value-added industries. Malta has to market well for its FDI."
Brigulgio – "If you have an output that pays 80 per cent in wages, that industry might as well go to Tunisia. But if you have an industry based on 50 per cent capital and profits and 50 per cent wages, we can compete in that way. High capital content can permit higher salaries."
Cordina – "Let’s also keep in mind the best fish we have is the one we have already caught. Re-invested earnings from those companies which have settled here have created most jobs in Malta. We have to nurture these companies, as has happened with those industries which started out with a couple of workers and multiplied its workforce over the years."
Amongst the "ten golden rules" for the achievement of competitiveness, the two economists have mentioned the need for a stable and resilient macroeconomic environment. The recently-published government finance figures have revealed a worrying economic scenario, and action has to be taken sooner than later.
"Government is conscious of this situation and knows it will be punished if it does not mend the situation. Government will have an uphill struggle because of uncontrollable expenditure which cannot be reduced, namely public sector wages and welfare, and these contribute greatly to the deficit. Solutions have to be found. It will have to control its deficit in any case since we have to join the euro," Briguglio says (the eurozone’s Growth and Stability Pact limits adherent countries’ budget deficits to three per cent of their GDP – Commission President Romano Prodi has called it a "stupid pact" in the past).
"The fiscal deficit rule may carry with it certain social costs, but the right decision-makers can carry out this exercise without great social costs. Certain disincentives in our labour market can be removed, for example generous unemployment benefits which could encourage workers to draft legal work."
Cordina – "The costs of not controlling the deficit now are greater than if we never join the EU, because if we want to enjoy the full benefits of membership we have to join the euro, and through that control our fiscal deficit.
"But in any case we had to control our fiscal deficit. If government is absorbing Lm6 out of every Lm100 we produce, whilst in other countries governments absorb Lm3, those extra Lm3 are a burden on our production costs. We have to reduce our fiscal deficit through reduced expenditure, not through increased taxation.
"We have had great response from social partners, constituted bodies and ministries. We are expecting that government will see the need to finance a new committee within the Malta Council for Science and Technology – the Competitive and Technical Committee. We would like to insist we are not in competition or trying to reinvent the wheel. But this committee can provide ongoing reports and monitoring for the sake of business and the economy. We want to see competitiveness on the top of the national agenda."
Benchmarking will also have to be one of the country’s starting points. Briguglio stresses the need to have countries’ records pushing us further into the efficiency stream, and teaching us how to do things better. Likewise the need for plans on cost overruns, time overruns, project descriptions and the control of wastage in the public sector. Briguglio says that in the run-up to accession, the public sector rose to the occasion, a sure sign that efficiency is not a misnomer in Malta’s bureaucracy:
"You have 2,000 heroes pushing the country ahead", Cordina says, "in all levels, mainly middle-management. They are motivated and working to make the system better…and hoping to see it work better."