The signs that the economy is overheating have been clear for some time. Still, the government is comatose, unable or unwilling to react or, even worse, in denial of the country’s stark realities. The risks of spiralling inflation, an outdated economic model, and increasing public discontent over the country’s direction are rising. Action must be taken to cool down the economy.
A Malta Employers’ Association (MEA) survey has confirmed the heavy dependence of businesses on imported labour. According to the MEA director general Joseph Farrugia, Malta could be experiencing a wage-price spiral as the present high inflation is not only caused by extraneous factors.
Farrugia again urged the government to choose a strategic direction “rather than try to chase everything all at once”. The tourism lobby, which is beginning to understand that mass tourism may not be the ideal way forward, made a similar recommendation.
The reasons why the economy is overheating originated in the strategies adopted by former prime minister Joseph Muscat. His strategy of “growth at all costs” was helped by liberal labour market policies implemented by present Finance Minister Clyde Caruana when he led JobsPlus.
For a time, low-cost imported labour helped many businesses, especially in the tourism sector, to keep costs down. Many micro and small enterprises with business models of doubtful economic viability cropped up. Indiscriminate support to these businesses resulted in financial support schemes that shifted the risk from banks to taxpayers. While such support was justified in the years of COVID, it has encouraged some businesses to keep operating even if their economic viability remains shaky.
The economy must no longer depend on low-cost imported labour, local private and public consumption, and a mindset underpinned by an illusion of wealth
Traditional monetary tools, like raising interest rates, will not resolve Malta’s high inflation challenge. The low interest rate scenario of the last decade has done Malta’s overheating economy no favours. It just encouraged and boosted economic activity based on increased production rather than investment in technology and improved productivity.
The economy must no longer depend on low-cost imported labour, local private and public consumption, and a mindset underpinned by an illusion of wealth. The government has a comfortable majority in parliament to define and implement a re-engineering strategy to direct the economy on safer trajectories.
Still, there are serious doubts about the quality of leadership in the cabinet. Lack of action may be attributed to the conflicting opinions among ministers on what needs to be done. Even Clyde Caruana has spoken out about the need for a change in economic direction, one which does not rely on a construction industry which has uglified Malta and negatively impacted the quality of life of many of us. Implementing change is not for the faint-hearted. The necessary changes, as recommended by various business leaders, will likely give rise to resistance from those who fear they will be adversely affected by economic policy changes.
The urgency for a re-engineered economic model is not just about votes.
It is the government’s prime responsibility to take the lead in promoting change. If current policymakers continue to live in denial and engage in groupthink, they should be replaced by experts with a good grasp of why the current economic model must change to ensure long-term sustainability.
In a democracy, political leaders are expected to engage and lead the public through the pain of restructuring to build a better future. Solid political leadership was never about just winning the next elections.