Observers may well ask if Malta’s open economy can stand to gain by emulating the US authority’s rescue plan – lower interest rates, rigorous tax cuts and a weaker dollar – a strong stimulus largely absent in Eurozone.
At a recent visit to Dublin, I was amazed by the wealth and affluence enjoyed by all from taxi drivers to restaurant owners and naturally the industry captains within the booming financial sector. This has not been so evident in the past and many attribute this success to shrewd politicians who managed to wrestle out of previously inward-looking mentalities and instead think of smart solutions ‘out of the box’.
Naturally there have been myriad stories of the racing Celtic Tiger which has surpassed all its competitors in the past decade by its prowess and efficiency. After the slowdown in 2001 and 2002, Irish economic growth began to accelerate again in late 2003 and 2004. The Irish media considered this an opportunity to document the return of the Celtic Tiger – commonly referred to in the press as the “Celtic Tiger 2” and “Celtic Tiger Mark 2”. In 2004, Irish growth was the highest, at 4.5%, of the 15 “old European” states (the European Union, pre-May 2004), and a similar figure was forecast for 2005. These rates contrast with growth rates of 1% to 3% for many other European economies, including Germany, France, and Italy.
This year Malta just managed a GDP growth rate of 2.6%. What is the secret recipe for Ireland’s success story? After successive governments led by politicians such as Charles Haughey, Ireland was transformed from one of the poorest countries in Western Europe to one of the wealthiest. Disposable income roared to record levels, enabling a huge rise in consumer spending. Concurrently unemployment fell from 18% in the late 1980s to 4.9% by the end of the boom, and average industrial wages grew at one of the highest rates in Europe. On average their per capita income is twice that of Malta.
A lot has been achieved by clever use of tax incentives linked to a no-nonsense approach at welcoming huge manufacturing units that were attracted to Shannon airport as a designated area for development. But this was not the only reform that created such a boom in a short space of 10 years. Attention was given to assist the indigenous economy by helping small and medium-sized enterprises to grow and prosper.
There is no doubting the importance of small and medium-sized entities in the enduring success of Ireland. But by comparison we do not seem to think small and act big. Recently Dr Gonzi, PM and minister of finance, lamented that not much has been achieved to imbibe a new culture of efficiency and pragmatism by top civil servants towards small and medium-sized manufacturing firms serving the domestic sectors. A fresh initiative is imperative to regurgitate an armoury of incentives and aid packages to SMEs.
Many times we read in successive budget speeches that excessive bureaucracy is the parasite of our economy and we should do our utmost to eliminate it as it slows down our entrepreneurial culture. It goes without saying that SMEs must find the necessary encouragement through adequate fiscal tools, access to venture funds and the elimination of avoidable charges such as government-induced costs.
The GRTU advocates an open policy towards SMEs and strives to put them at the forefront of a diverse business spectrum. On a positive note, Malta Enterprise, which is a distilled version of METCO, IPSE, and MDC now disbanded, now falls under the finance ministry. One hopes that ME will revive aid programmes to small business such as the provision of subsidised services, namely mentors and business diagnostics.
Another practical idea to spur innovation has been the setting up an incubation centre by IPSE. Certainly the success of the Celtic Tiger within the realm of SMEs cannot be ignored. By sheer contrast there is still a lingering doubt that SMEs do not provide stable employment opportunities. Many still say – why should I work for a small company?
The answer is that working conditions in a small entity can be very different from that of a large organisation. To their advantage, small businesses tend to offer an informal atmosphere, an all-for-one camaraderie, requiring more on-the-job versatility. Usually they offer better opportunity for career advancement and salary increases may be rapid in a growing company. Workers are involved in the entire organisation rather than in a narrow department. The environment is less bureaucratic, however practice shows that inevitably workers have less job security due the high rate of failure associated with small businesses. It is certainly not a job for life as can be enjoyed with government or state organisations.
Another disadvantage is that a dominant leader can control the entire organisation. This may lead to more ‘political games’ or manoeuvring.
Small business has to be more proactive to survive in a competitive environment set by globalisation. Therefore, one finds that the ones that survive have characteristics such as competitive price structures, good product mix, superior customer service, and excellent after sales services.
Surely these are early days for local SMEs to come to grips with such new concepts and some resistance to change is inevitable. Unfortunately SMEs suffer from availability of finance to grow their business. In particular it is pertinent to ask why Malta failed to integrate its trade policies within the European Charter for Small businesses, by fostering an entrepreneurial attitude with a co-ordinate educational reform at MCAST level. Can some of the EU funds earmarked for 2007-13 be partly allocated to promote better prospects, particularly covering the export potential of small businesses?
Considering the open market for EU countries how can ME ensure effective regulatory frameworks and sound economic management practices that nurture entrepreneurship? Releasing more funds in the economy means untying precious funds that are relentlessly collected in corporate taxes. We are probably the only country in the new accession countries without a smaller corporate tax rate for smaller enterprises. Again, inflation which is creeping relatively high is a disincentive against internal growth for SMEs. Yet just by incrementing the internal bank rate will not help matters but will result in a more expensive cost of borrowing.
Observers of the international economic scene may well ask if Malta’s open economy can stand to gain by closely emulating the US authority’s rescue plan. Their current strategy to revive US sluggish economy is by the use of the three policy levers. These consist of lowering interest rates, planned and rigorous tax cuts and finally a weaker dollar. As we shall see later on, one finds that this three prolonged policy which sends a strong stimulus is largely absent in Eurozone.
Or shall we copy the latest move by the German chancellor who is trying to jolt her faltering economy back to life with tax cuts and tightening on expenditure? As a member of the Eurozone, Germany joined the Stability and Growth pact seven years ago with a pledge not to run budget deficits larger than 3% of GDP. Critics now say that Germany’s lacklustre economic performance is entering its fourth year. This is prolonging high unemployment particularly amongst SMEs. For the past four years, Germany breached the 3% threshold and is currently paying punitive fines for doing so.
Pundits lament that the Eurozone can only come out of its sluggishness by further tightening of recurrent expenditure accompanied by austere measures in order to reduce waste and generate better prospects for employment. There is wide consensus to tackle the problem facing SMEs which is currently in the news following the seminar “Thinking Small in an Enlarging Europe”. Solidarity towards small businesses is expected from the Chamber of Commerce, Federation of Industry, GRTU and certain politicians. Yet all we seem to glorify is mega projects such as ‘Smart City’ catering for the thousands.
Pragmatists remind us all that the time is now ripe for deeds and not empty talk and posturing. Deflationary pressure is hitting our export markets and the relative strength of the lira versus the dollar is also negatively affecting our exporters. Let us hope that domestic consumption at our main export markets improves and small business in the export sector can look forward to an increase in demand for products.
Few realise that most new job growth comes from SMEs. Small businesses are an economic powerhouse providing the island with a wealth of jobs. Let us nurture small business – they can be helped to remain smart and sustainable.