Shifting ground

In a recent address to the Economic Policy Symposium, Christine Lagarde, president of the European Central Bank, spoke about ‘Policymaking in an age of shifts and breaks’.

She was evidently speaking from the perspective of setting a monetary policy for the eurozone. However, her message was so clear that it challenges us all − and especially governments − to think about economic policy in general.

In brief, her message was that over the past years, global economies have experienced three shifts. They are: changes in the labour market and the nature of work; accelerating climate change and the impact on the energy markets; and a deepening geopolitical divide and rising levels of protectionism.

The backdrop of these shifts is the economic impact of coronavirus, the increase in public sector expenditure to mitigate its impact and the supply chain bottlenecks.

This has led to a significant rise in inflation and consequently the decision of central banks to increase interest rates. It is as yet not known how permanent these shifts will be, and as such it is getting more difficult to predict the way the economic cycle will develop.

I believe that these pointers can be applied to Malta as well.

Whether we like it or not, we are at a crossroads and the direction to take will shape our economy and our society in the years to come. This became more evident when the minister of finance stated that our current economic model needs to be evaluated to see whether it can be sustained in the medium and long term.

The labour market in Malta has changed not only significantly but dramatically over the last years. We have increased our reliance on third-country nationals (non-EU citizens) doing menial jobs, who have not added one iota to our skills base. Several businesses have traded quality for price and the only way they can survive is through cheap labour. We should have been moving up the value chain but instead, we are, at best, static or moving downwards.

We need to have clarity in our economic objectives and a commitment to achieve them

In those areas of the eco­nomy that have a higher value-added, we have had a shift in the nature of work. It is these sectors that we need to stimulate further and we need to build the skills to undertake a quantum leap to move our economy to the next level.

The second shift is accelerating climate change. From what I can see, in Malta there is no denial of climate change like there is in other countries. However, I doubt whether we are appreciating enough the full impact of climate change on our economy.

We have invested heavily in renewable energy sources, part of which has been rendered useless by the permits that have been dished out for high-rise construction. With regard to this issue, we need an objective debate to be fully prepared for the future.

The third shift mentioned by Lagarde is the geopolitical divide and rising protectionism. Whether it was by design or by chance, over the last 20 years, our economy has benefitted greatly from globalisation. The level of exports of goods and services is proof of this.

We can grow our economy only if we export goods and services and attract foreign investments. How the current international economic situation will affect foreign investment and exports is still to be seen.

In her address, Lagarde emphasised the need for clarity in objectives, flexibility in analysis and humility to understand the limits of what we know today. These three characteristics are required by us as well.

We need to have clarity in our economic objectives and a commitment to achieve them. We need to be flexible and not dogmatic in our approach to the various challenges, and we need to be humble to recognise that what we know today may not be relevant for tomorrow’s challenges.

As the ground continues to shift, economic policymaking in this country will become more difficult. This does not mean that we do nothing. It means, rather, that we have to aim for sustainable economic growth for our benefit and that of future generations.