The effects of the recent global economic crisis were all-pervasive and demonstrated that no economy is safe from destabilising external events.
Policymakers used to assume that if risks were managed throughout the economy at the micro level, then risks in the overall economy at the macro level would be mitigated automatically. The recent crisis has made clear that this is not the case; countries need to look at the big picture in managing risks to their economies.
A central element of this risk-management paradigm is the need for greater economic diversification, which not only reduces the impact of external events but fosters more robust, resilient growth over the long term.
Significantly, this diversification transcends the most common definition – an economy made up of several strong and balanced sectors with low correlation and interdependence among each other.
It requires diversification across other dimensions, including trade profile, concentration of human capital, sources and use of investment capital, savings and consumption patterns, enterprise base, and other parameters.
Such a comprehensive diversification strategy is a complex undertaking. Capital chases returns, and unchecked economies tend to become more concentrated over time. This concentration itself is not the danger; rather, it leaves these countries vulnerable to external events that can affect large sections of their economy.
Over time, Malta has successful diversified its economy, and this diversified fabric has allowed it to manage and absorb a number of external shocks, not least the COVID-19 pandemic.
In fact, the IMF, in its 2021 Article IV Staff Report for Malta, stated that “prior to the pandemic, Malta was one of the fastest growing economies in Europe, with a GDP growth significantly above the EU average. Malta faced the pandemic with strong fundamentals because of its well-designed economic diversification strategy that limited the impact of the pandemic thanks to the continued strong performance of sectors, such as remote gaming and ICT. These sectors, together with a rebound in tourism, are now driving a strong recovery.”
Diversification is a continuous journey- Stephanie Fabri and JP Fabri
Malta’s successful diversification efforts have also been noted by the Global Economic Diversification Index (EDI) developed by The Mohammed Bin Rashid School of Government (MBRSG). The index is used to assess the level of economic diversification in countries around the world and rank them based on their status and progress.
The Global EDI aims to understand the nature of economic diversification and the factors that directly or indirectly impact a country’s overall level of diversification. Malta is placed at 27 out of 89 countries and sixth out of the 20 western European countries assessed.
In fact, Malta is today a well-diversified economy with strong growth coming from the gaming, financial services, ICT and tourism sectors.
Notably, some sectors are more diversified than others; however, there has been a consistent drive to attract niche sub sectors throughout. The asset registration sector today not only attracts ships but also yachts and aircraft and is today a well-established centre of asset registration.
The manufacturing sector is also home to specialised and high value-added manufacturing, including generic pharmaceuticals, medical devices, security printing and automobile components. However, diversification is a continuous journey, and our economy needs more, not less.
The plans and ambitions of a truly diversified economy require two significant steps to succeed: institutional regulatory reform and workforce development initiatives.
Regarding the former, institutional regulatory reform necessitates a central economic policymaking entity to monitor and guide the national economy, including areas such as investments, exports, and innovation. It is time that Malta establishes an economic advisory council that supports the critical role of MCESD.
In addition, demographic trends will play a crucial role in any diversification strategies. Diversification is not just an economic challenge – policymakers need to look at human capital as the pivotal resource in this equation, requiring potentially large-scale shifts in education policy and labour-force development.
Moreover, they must invest in the necessary hard and soft infrastructure – ranging from transportation and technology to healthcare and social programmes – to generate the maximum benefits from an upgraded and educated workforce. Here the implementation of the National Employment Policy is critical for Malta to further diversify its economy.
A risk-management approach to economic development should seek to minimise the vulnerability of Malta’s economy to exogenous events.
A key element of this risk management philosophy is diversification in all facets of the economy – not only across a range of sectors but across other dimensions as well, specifically labour markets, export activity, enterprise base, focus of investment capital, and leveraged consumption, among others.
Such measures will require a strong institutional framework and a range of education and workforce-development initiatives.
This kind of comprehensive diversification is not simple to conceive or implement, but it will yield substantial dividends in the form of sustainable, durable, long-term economic development. The starting point for all of this is a national economic and social vision that will chart the way forward for Malta’s economy.
Stephanie Fabri is an economist and a resident academic at the University of Malta. JP Fabri is an economist and co-founding partner of Seed.