Outgoing Malta Employers’ Association boss Joe Farrugia tells Mario Xuereb the Maltese economy needs a critical transformation and ‘job destruction’.

MX: Do you think the economy is in good shape?

JF: The general macroeconomic indicators are positive. We have low unemployment and inflation is more or less under control. Public debt increased to €10 billion or so, but is still under the 60 per cent threshold of the Maastricht criteria. We also face the excessive deficit procedure. But in spite of these problems, there is nothing really worrying about the general macroeconomic indicators.

But there are issues with sustainability. How long can we sustain these trends? Are we attracting new sectors to our economy?  I think there is a sense of stagnation on that front. To what extent can Malta remain competitive? How is economic sustainability being synchronised with the well-being of the general population? Because, after all, the whole scope of having a better economy is for people to have a better quality of life, both materially and also according to other parameters, as well as environmental ones.

MX: Finance Minister Clyde Caruana suggested in an interview that Malta has to change from being “labour intensive to something that is more capital intensive, something that produces more value added?”  Is the time ripe for a new economic model?

JF: I agree.  One hundred per cent.  The problem is that it is long overdue. Even the MEA has been expressing the need for the economy to transform itself in this direction.

MX: In which direction?

JF: Way back in 2017 we issued a document about Malta’s demographic challenges. We were seeing worrying trends whereby the growth of our economy was becoming dependent on the influx of foreign workers and more people living on the island, so this increased our dependency on construction and related services for economic growth. And at the same time, there was no concurrent strategy to support the increase in population with the supporting infrastructural base. Today we have more than 100,000 people officially registered as working who are non-Maltese, which is a significant percentage of the total labour force.

MX: You are making an argument about overpopulation but in 2017 you were vociferous on the need for the government to address the excessive bureaucracy when it came to employers wanting to hire third-country nationals. Don’t you think your two arguments are contradictory?

JF: It’s not contradictory. We’re saying bureaucracy to employ third-country nationals should be reduced, to enable an easier process. But that doesn’t mean we should open our doors to anyone who wants to come and work here, or that we should design the economy in a manner that depends on the influx of foreign employees. What is contradictory, really, is trying to control the supply by having an overly bureaucratic process in tandem with a growing demand for workers. And that’s why a balance needs to be sought.

MX: Has that been achieved or not?

JF: Not yet. Rather, I feel we are depending even more today on foreign labour, and this, of course, is transforming the entire demographic structure of our country. Out of 4,000 live births in Malta, close to 25% do not occur in Maltese families. In other words, in Malta we have a low fertility rate. 

MX: Are employers really ready for the change or are they reluctant to move away from a model that relies on foreign workers?

JF: Change can be painful, but employers play to the tune of government strategy. The government’s role is not to run the economy itself, but to design a strategy, to have a vision for the economy, which in turn creates opportunities for investment and employment. 

MX: In your opinion, what is keeping the government from implementing a different economic model?

JF: I think the government has played safe. It has a simple but unstated strategy.  Because we never came across an electoral pledge or economic plan which stated that we shall pump and prime the economy through excessive construction, and through it, we will attract more foreigners living on the island, and consequently this will generate aggregate demand and the economy will expand.

But on the other hand, employers were noticing the signs of the times, so rather than shifting their investments to new economic sectors, many investors played safe and said that if there is a guaranteed return from building blocks of flats, so be it. If there is an increased return from building more hotels in the tourism industry, so be it.

But this incongruence between the enterprises’ vision and the national vision is becoming more pronounced.

For example, the MHRA study established that for the current and projected hotel bed stock to be economically viable, we need five million tourists per annum, which is crazy when you think about it. Imagine the impact on the infrastructure. So, we could have one year with five million tourists, but the following year, the figure will go down to one, because many will not return. They will be disappointed and will say that Malta is not a country worth visiting and there are better destinations. This is why planning and vision are essential. And these are things which have been raised numerous times at the Malta Council for Economic and Social Development (MCESD).

MX: How would you describe the mood at the MCESD table?

JF: I would say Malta has a very solid structure for social dialogue.  We have healthy industrial relations. Even the MEA’s relationship with the unions is very positive, and the MCESD, since it was founded, has functioned reasonably well. The MCESD does not have executive powers.  It can only make suggestions to the government.

There have been numerous suggestions and debates in the past, but not all the proposals have been taken up, and this just creates a sense of frustration at times, because there could be burning issues.

MX: Do you believe construction plays such a major role in the economy, as some have been arguing during the past decade?

JF: First of all, there are extremist lobbies that are out to eliminate construction. Construction is and will remain an important sector of the economy. However, I think the main issue is the fact that land is scarce and is getting scarcer. Secondly, between the 70s and 90s, most construction activity was geared towards providing people with homes, but today it is not the case anymore. We are not building homes. We are building blocks of flats for various purposes, among them, speculative. 

A lot of the construction activity we have today is geared towards having either a second property or the fact that for a number of years, the interest rates were very low, and people found that you might get a better return if you put your money in savings, in property, rather than having them in banks, earning a minimal rate of return, if any. 

Therefore, we have a lot of building stock, which is not required, and that is dangerous, because eventually it could lead to a fall in property prices. And the main victims of property prices would be those families who have mortgages on property they purchased at a relatively high price and the value of the equity of that property will be reduced, and they will still have to pay the loans.

MX: Have we become too dependent on construction then?

JF: Yes, currently, I think it’s reaching a… not a crisis level… but there is too much emphasis on construction and concurrent population growth to fill up the buildings we are building. I think that is where our economic model needs a critical transformation.

MX: Last year, just before the budget, the government introduced the Stabbiltà scheme. Has it had the impact the government wished for?

JF: I very much doubt it. I am also critical of the way it was introduced, because I think the major stakeholders, the social partners were not involved at all.  The government approached individual retailers and struck a deal with the major ones. I think it would have been better had the government approached the social partners and we would have made our own suggestions, especially those specialised in that area.

Then again, if inflation is on the decline, it is on the decline because even internationally inflation is going down. Our problem was mainly that inflation was high in real estate and food.

MX: What impact did the increase in COLA have on employers?

JF: Malta is one of very few economies that has such a mechanism, which means wages increase automatically according to the rate of inflation. When this leads to an increase in wages of €30 per week, which is quite high, it generates further inflation in itself.

MX: And you have been asking for this to change….

JF: Ideally, in principle, wages should be a measure of productivity. Therefore, at national level, we can only increase wages if we are more productive, which relates to what you mentioned earlier about the transformation of the economy towards higher value-added activities. As the minister said last week, if we keep depending on low value-added sectors, then we cannot expect wages to rise.

MX: The Corporate Times reported an increase of 26.9% in public sector employment over the past 11 years. Are you concerned?

JF: Very much so. And I think the MEA has been pronouncing itself on this matter for a while, even under the previous administration.

MX: But do you acknowledge the fact that during the past decade, public sector employees have decreased in proportion to the full-time workforce... from 26.4% to 18.3%? 

JF: Yes, but not necessarily.  First of all, there are thousands of outsourced employees in the government sector, and that has to be taken into account. The increase in the labour force that you mentioned is mostly due to foreign workers. So, although the labour force is expanding, the expansion is mostly due to foreign employees, which means that the percentage of Maltese workers in the public sector has increased, and that is what we should look at. That has generated a shortage of Maltese employees.  And I want to make it very clear... the majority of Maltese employers prefer to employ Maltese employees.

So, it is not true that in general, employers seek to reduce wages and to pay low wages by engaging third-country nationals.  The cost of employment, the fact that you have a very high turnover among 60-year-olds, the cost of training, and there are other costs which need to be factored in, which is why I repeat many employers prefer Maltese employees to foreign employees.

I believe there is a need to rationalise the Maltese labour force. And by rationalising, I mean that where necessary, we also need to have job destruction.

MX: Job destruction? What’s that?

JF: Job destruction means that you create new jobs with higher value added at the expense of some jobs we don’t need anymore. And people have to move from these areas to new, emerging sectors of the economy. This rationalisation could, to a certain extent, take place in the private sector. For example, take the banks. We don’t see as many cashiers at the banks as we used to. Why? Because the process is being automated.

Even at supermarkets, we have automation – the self-checkout – so that will reduce the demand for cashiers at the supermarket. This is the way we need to go because it’s not just our land which is limited but even our human resources. And in the public sector, it’s even worse with all the stories about the jobs for votes, phantom jobs and general inefficiences.

MX: The European Commission has called on the government to stop subsidising energy tariffs. It appears that the government and the opposition are in agreement that subsidies are here to stay. Do you agree?

JF: One of the good things the government did was to try to cushion the impact on private business to keep the economy afloat. And I think in the past, governments have been quite successful in doing this, because even if one looks back at the financial crisis of 2008 when there was the Libyan crisis, when there was the pandemic, the government managed to cushion the impact of this crisis and kept people in employment. And one of the measures was to subsidise energy, even because energy prices spiralled upwards.

Now we are at a stage where energy prices are down and the European Union is asking us to stop the subsidies.

I wouldn’t go as far to say, or to commit myself as a government to say, well, “they are here to stay.” Are they there to stay for two years, four years, 20 years, 50 years? One cannot really commit oneself to saying as much. From the point of view of private industry, it’s better if they stay, but as a country, if we want to have a sustainable fiscal situation, one cannot really make such commitments. And unfortunately, because of the political situation, both parties would agree on certain measures, not because they are good in themselves, but because they stand to lose support if they take the required position.

MX: How can the government address public deficit and debt?  Should the government reduce its expenditure? And in which areas?

JF: We have been talking about the over-employment in the public sector. That is one area where the government can reduce expenditure. We have always advocated for a leaner public sector which is better paid. But you cannot have so many people in the public sector and expect better conditions of employment as well because that will cripple the finances. Also, I think other areas where expenditure can be rationalised is getting better money on our infrastructural expenses. 

Malta has the highest per capita expenditure on education. But do we have the results? I think the results are quite disappointing actually because we are thinking in terms of quantity of graduates and of people who graduate from MCAST, but we are not thinking sufficiently towards quality and maintaining the critical standards for our economy.

MX: What we’ve been discussing for the past half hour, frankly all boils down to the good governance of the country. What’s your take on that?

JF: I think that is where we have the biggest deficit. We have a very serious and worsening governance deficit. The fact that you read newspapers and come across a new scandal every day is simply not sustainable. It is damaging our reputation as an investment destination and Malta does have quite a bit to offer. But sadly, our reputation is getting worse by the minute. 

The Vitals-Steward scandal... imagine… I myself could not believe it in the beginning. €400 million of public funds which just disappeared. Just think about it.  It’s not just a matter of corruption. Even if there was no corruption, let us assume that everybody is squeaky clean and there was no corruption involved. But let us say that there was gross incompetence over a number of years, which of course leads one to suspect what was behind it. But that is a case in point. 

Looks at the social benefits scandal. What message does that give to the working population? You wake up every morning and go to work. And in the private sector, unless you give a productive day, you might lose your job. There has to be demand for the services you offer for the company to stay afloat, because you can become redundant as well.

But on the other hand, you hear about many individuals enjoying life because they are getting social security funds without working.  How does that affect the work ethic? How does that affect the values of our young generation?  It is no wonder we have a young generation that it is disenchanted, indifferent, and seeking to work to seek a better life abroad even because of the deteriorating natural environment. 

So, what can we do to send a message even to our young people... “listen, this country is yours.  Don’t give it up. There’s a lot to do here. You can have a good quality of life here. You can succeed on merit”.

Do we really have that situation in Malta right now? Can we honestly say that people succeed on merit?

The interview has been edited for brevity and clarity.