The Central Bank of Malta recently published its annual report for 2003. As with previous annual reports it contains a governor's statement that provides an overview of the performance of the Maltese economy during the past year as well as developments in the monetary sector. It also addresses some policy issues and, in a very tactful manner, makes recommendations as to what are the preferred options for the Central Bank. The Central Bank governor makes reference to the slow economic growth that we have had in the past three years and the imbalances that we have in public sector finances and in our balance of payments.

He claims that the combination of these factors require policies that aim to improve the competitiveness of firms operating in Malta. Moreover, he claims that since there is evidence that suggests that these negative economic trends are the result of both structural and cyclical factors, "corrective action must focus on strengthening the economy's supply capabilities". The governor then lists some of the implications of this statement. I believe this is a very important statement as to the type of economic strategy that we need to adopt and should not be seen as part of an academic debate as to whether Malta should have demand-led growth strategies as opposed to supply-led strategies.

The need to focus on the economy's supply capabilities may be seen to be a case of stating the obvious by some. We are a very small economy with no natural resources and where we need to import most of our requirements, be it raw materials for our manufacturing sector, be it equipment of any nature, be it food for the Maltese consumer. Probably the total amount of international trade (that is imports plus exports) per capita that Malta has, would place us among the top 10 countries in the world, excluding those that export raw materials such as oil, and emphasises the openness of our economy.

The issue is not whether one is stating the obvious or not. The issue is that the various measures that need to be taken and the various interventions that need to be made by the government in the economy and society at large should have as their main focus a key question. Do they add to the supply capabilities of our economy? Taking a practical example we can focus on the broad issue of government expenditure. There is agreement that the fiscal deficit should be reduced and that it should be reduced primarily by reducing expenditure rather than increasing revenue.

However, reducing expenditure would raise some eyebrows in that it could reduce the amount of money injected by the government into the economy, thereby possibly reducing domestic demand. What a supply-led growth strategy would imply is that such comments would become irrelevant, if reducing government expenditure would enhance the productive sector's competitiveness. Obviously the issue would become one about those areas where government expenditure should be reduced and how this reduced expenditure would release resources that can be used for more productive purposes.

Being more specific, the welfare reform and the pensions reform should be designed in a manner that would not stifle productive resources but would rather enhance such resources. Health services, although having very important social objectives to meet, must also take account of the need that they should not absorb an unsustainable amount of resources that would necessitate an increase in taxation for it to be affordable. Then there are other initiatives that are more aimed at providing business with an incentive to invest. One needs to make sure that these initiatives are not surrounded by procedures that are so bureaucratic that they serve as a disincentive for investment.

If supply-led growth is seen as the preferred strategic option as the governor of the Central Bank is suggesting, it needs to be endorsed by all the social partners. It is useless to indulge in rhetoric on principles and what have you if there are no sound strategies to back those principles.

We speak of the social pact and of the need to hammer out an agreement among all the social partners on how to address the current economic situation of the country, through a list of obligations that these same social partners are willing to take on. The overall strategy of supply-led growth for Malta may provide a very valid framework.