12 October 2005

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Business Today

Industry report bursts bubble on economy

Matthew Vella

Economist Edward Scicluna’s assessment of the pre-budget document presented by government has burst a bubble of perceived ‘resilience’ and ‘success stories’ plied by a Nationalist government which is postponing real economic change.
Roped in by the Federation of Industry for its reactions to government’s pre-budget report, Scicluna delivered a cheeky assault on claims that the Maltese economy “may be said to have held its ground in the context of such an adverse international environment.”
Malta’s problems, Scicluna argues, are to be sought internally, refusing to be drawn in ubiquitous government justifications that Malta is facing external challenges from global slowdowns in industrial production, rising oil, and prolonged uncertainty on EU membership.
Instead he looks at Malta’s eastern cousins in the EU, which have been registering incredible growth figures in the last three years – they are “small open economies facing the same international problems and reforms, much bigger than ours no doubt. Their trade, like Malta’s, is very much oriented towards the EU. They are imposing the same EU regulatory framework and follow the same EU directives.”

Scicluna bursts the bubble on government’s glorification of success stories which are regularly overwhelmed by consecutive quarters of dips in GDP and hyperbolic praise of a “resilient” Maltese economy.
“Malta’s level of development has reached a level which could afford the country to delay on a number of much needed structural reforms and corrections to the economy. One may, like the pre-document does, call this resilience… when a country postpones serious efforts at renewing and reforming its economy and infrastructure, and instead start nibbling at its past savings and wealth, or worse by shifting financial burdens on future generations, that country is said to be living on borrowed time.”
The FOI report also comes in the wake of a worsening trade gap as total imports for the first eight months of 2005 declined by 3.5 per cent to Lm829.7 million, and exports went down by Lm81.3 million – overall, the visible trade gap widened by Lm51.5 million to Lm308 million over the same period in 2004.
"The trade and other related monthly economic statistics should not just be read in the sense of whether they confirm or not the disputed recessionary state of the economy,” Scicluna yesterday told Business Today. “More significantly they are tracing in real time a negative trend which is predicted by our increasing lack of price competitiveness. If there would be no convincing evidence that this has been stabilised or reversed through some major policy change, the resulting economic data would be expected to remain dismal for months to come.”
Scicluna offers suggestions on various fronts, focusing on both manufacturing and tourism sectors, which have been on a downward trend in the last five years – having failed to influence external demand, Scicluna goes for competitiveness and productivity gains.
He calls for a serious rethinking of the fixed peg euro currency, instead going for the flexible 15 per cent fluctuation in the ERMII, invoking IMF wisdom that in economies with sluggish growth, and where “real exchange rate misalignments are common, a more flexible regime might be called for.”
As Scicluna says, when a fall in GDP is not met with a shedding of labour, productivity suffers, increasing the cost of labour: “the result is loss of competitiveness, lower exports, lower GDP.”
But if the euro peg was flexible, Scicluna argues, “it could compensate somewhat, partially correcting this increasing external price misalignment… a buffer against external shocks.”
Scicluna also proposed three crucial cuts in public expenditure for a successful fiscal consolidation, namely attacking the unsustainability of early retirement schemes on health grounds, tertiary education student allowances, and the high levels of government manpower.


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