A macroeconomic dimension

Malta's future economic development hinges on the competitiveness of its business. To be competitive, Maltese firms will have to be successful in an environment where competition in the markets is intensifying and where dependence on subsidies and protection is no longer an option.

At the same time, Maltese business is expected to meet continued increases in wages and living standards. This is true irrespective of whether firms are targeting the domestic or export markets, as this distinction will become increasingly blurred with Malta's entry into the EU single market.

The need for Malta to be competitive has recently been highlighted by statistics indicating that although Malta's per capita productivity is just under 70 per cent of the EU average its prices and costs are almost 90 per cent of those in the EU.

The obvious implication is that Malta can no longer compete on the basis of low wages. Even if it can, this option is not a suitable medium-term strategy if a country wants to upgrade the living standards of its citizens.

An appropriate strategy would be to step up labour productivity to promote competitiveness and at the same time upgrade the quality of life of the Maltese people. However, it is clear that progress remains to be done in improving productivity in Malta.

This issue must be addressed with urgency if the country is to benefit to the maximum possible extent from globalisation and EU membership.

Much has been said about these issues, in one way or another, over the past few weeks.

It is heartening to observe that the major stakeholders in the economy are no longer turning to the government for subsidies and protection in order to improve their livelihood but are realising the nature and extent of the impending economic challenges and advocating improvements in the supply-capabilities of the economy.

Calls for currency devaluation are nowadays a thing of the past.

The need for lower state-induced costs and innovation practices are being highlighted instead. Likewise, unsustainable requests for closed shop arrangements in labour relations are being replaced by the realisation of the need for better education and lifelong training.

It is now imperative to quickly and effectively move towards the implementation of measures to support competitiveness. Such measures stand on three pillars.

The first pillar consists of measures at the level of the firm. They essentially concern the implementation of best practices on the marketing side and on the supply side of the individual business. This is what business restructuring is essentially about.

The second pillar involves measures at the sectoral level. There are a number of gains that individual businesses could make by exploiting synergies with other businesses, sharing complementary interests.

The formation of business clusters would be a case in point. These measures require a coordinating role by government institutions or business associations.

It is considered that substantial progress is being achieved in Malta on these two levels, thanks in good part to the organisations to be involved in Malta Enterprise and to the Malta Tourism Authority among others.

The third pillar involves issues at the macroeconomic level. It is indeed useless for individual firms to adopt best practices and for sectoral clustering arrangements to be developed unless there is a suitable macroeconomic framework to support these efforts.

Issues like an excessive and inefficient absorption of resources by the public sector, high wage and price inflation and insufficiencies in the educational system and in the physical infrastructural services can be extremely damaging to competitiveness.

They could potentially destroy the effects of efforts made by the social partners and interested organisations at the firm and sectoral levels.

It is therefore proposed that a concerted effort be made to improve the country's competitiveness at a macroeconomic level.

This does not entail the formulation of a definite economic plan, as the doubtful usefulness of such has been proven across countries and over time.

Rather, this involves the creation of the best possible conditions for the competitiveness of its individual firms and business sectors to flourish.

This has to be done in an over-arching and comprehensive manner, involving and integrating all aspects of macroeconomic competitiveness, as any one of them could prove to be equally crucial to the economy's success.

Drawing on a number of studies and experiences, locally and internationally, regarding the success factors involved in the macroeconomic dimension of competitiveness, the Economics Department of the University of Malta recently compiled a draft competitiveness strategy document. This strategy is based on 10 essential requisites, namely:

¤ reducing the fiscal deficit by curbing expenditure through efficiency improvements;

¤ rendering the legislative process as business-friendly as possible;

¤ improving infrastructural services, mainly in the utility and scientific/technological fields;

¤ improving the focus of education on problem-solving and technical skills;

¤ providing the right incentives for innovation and research and development in a small country;

¤ providing public administration services efficiently and transparently;

¤ reconsidering the relation between wage levels, productivity and taxation, also through the provision of better information to assist the collective bargaining process;

¤ reforming the welfare system so that social objectives are met in a sustainable manner;

¤ ensuring competitive business market conditions so as to provide firms with incentives to improve their performance and

¤ continuing to promote Malta as an investment location by focusing on the specific kind of new business which Malta needs at its present stage of development.

The macroeconomic dimension of competitiveness, and its monitoring, should be undertaken within the Malta Council for Economic and Social Development, where all social partners are represented.

It is, however, important that the council obtains the necessary resources, mainly of a technical nature, so as to be able to undertake this function and express informed opinions and recommendations in this regard.