2020 has been a watershed year for most global economies. However much we yearn for the return of normality, it is unlikely that any economy will be able to resume functioning any time soon in a business-as-usual mode. What is more likely is that we will have to get used to re-engineering some of our economic models.
The year started with a sense of confidence in the general direction of economic growth globally. The debates in economic circles centred on the impact that artificial intelligence, robotics, big data and information technology would have on future jobs.
Even when we first heard about the eruption of a new virus in China, many thought it would be no worse than SARS, which had a limited impact on most economies. This outlook quickly changed as the signs became more ominous.
Governments prohibited international travel, supply chains were disrupted in most industries, retail activity froze and tourism quickly ground to a standstill as lockdowns in various forms were imposed to limit the spread of COVID-19.
The deep scarring that COVID has inflicted on the global economy can be measured by the drop in oil prices and exploration that followed the fall in demand.
The bestselling author Moises Naim rightly comments: “This crisis generates situations in which what we thought was permanent – institutions, ideologies, political and economic arrangements, business models, habits – ended up being transient. And what we thought was temporary became permanent.”
Efficiency, the Holy Grail of most businesses, gave way to resilience. The rosy notion of just-in-time inventory management is going to give way to an emphasis on the ability to withstand shocks.
Businesses welcomed the immediate action taken by governments to support industries like airlines and save as many jobs as possible, even imploring for more taxpayer money to speed up economic recovery.
Unlike what happened in the 2008 economic crisis, governments were indeed quick to react. The EU launched a massive Recovery Fund and approved a record budget to help European enterprises restructure and stimulate economic growth. The European Central Bank once again used monetary policy and bought distressed sovereign debt to ensure financial stability would not be put at risk in the Union.
Malta’s heavy economic dependence on the tourism industry meant that this year’s economic growth would be far worse than predicted. Since public finances were in good shape at the beginning of the year, the government could afford to launch job-saving schemes that were generally well-received by the business community.
Fortunately, 2020 has ended with some significant signs of optimism for the future. The approval of various vaccines that promise to control the spread of COVID gives some hope that the economic engine will soon start working smoothly again, even if at reduced power.
Substantial challenges remain as there are still many uncertainties about how the pandemic will evolve. Moreover, governments will have to address the issue of globalisation, as large sectors of society are becoming increasingly sceptical about its benefit in their lives.
Private businesses will want to find ways of paying back the state aid doled out to them, in order to prevent government interference in managing their enterprises. Inevitably, tax architecture will have to be re-engineered to put public finances back in good shape.
This, in fact, is one of the indirect repercussions that the COVID economic crisis will have on Malta. The time has come for the country to address the sustainability of an economic model that is too heavily dependent on benign tax regimes that are resented by other, more powerful EU countries.