No country has unlimited land, labour, capital and entrepreneurship. So their economic goals need to be tailored to take account of the limitations of these resources. To achieve sustainable economic growth, national economic planning needs to involve the management of limited resources.
Tiny Malta faces some of the most severe challenges to economic growth because its land and human resources are both in short supply and both are being pushed to the limit.
In the last two decades, two of the major factors behind Malta’s robust growth were the large-scale exploitation of land and the mass importation of labour, whether low-cost workers mainly from outside the EU or high-quality employees mainly from within. But with available resources shrinking and becoming more expensive, the country faces a bad scenario that policymakers may be overlooking.
Times of Malta earlier this week reported Eurostat figures which show that, between 2000 and 2021, construction activity in Malta shot up by an astronomical 330 per cent, outdoing Estonia, which tripled its construction output. Malta’s was the highest rate of growth in Europe, where the average was a decline of two per cent.
The backdrop to this phenomenon needs to be updated by noting that, now, one in five people living in Malta is foreign-born and that Malta has the highest population density in the EU.
It is dangerous to underestimate the consequences of overdevelopment. The rapid increase in population has driven the construction industry to impressive growth, while there seems to be no end to rising property prices. However, the reputable magazine The Economist recently argued that high property prices could damage the economy.
Rising property prices can discourage productive lending, leading to misallocation of capital. For instance, local banks are today more interested in increasing their mortgage portfolio than lending to business ventures. During the pandemic, were it not for generous government guarantees securing bank lending, many companies would have found it impossible to receive bank support.
Rising property prices encourage entrepreneurs and retail investors to focus on property development rather than invest more in, for instance, research and development and higher-end economic activities. This is a wasteful misallocation of capital and protraction of a slowdown in productivity growth.
The current reliance of the construction industry on the ever rising property prices should remind us of the interconnectedness and interdependence between the economy and a number of other fields, such as healthcare and ecology. Demographics mainly drove the unrestrained growth in residential land use in the last two decades. Thousands of expatriate workers compete for scarce family-friendly housing while low-paid workers often live in substandard accommodation, creating social ghettos in parts of the country.
Overdevelopment has also created a vicious circle: more traffic promotes fuel consumption and increases noise and exhaust emissions, which results in more traffic congestion and the need to build more roads.
It has also encouraged greater use of materials for the upkeep of the evergrowing numbers of buildings and infrastructure elements.
It makes much better economic sense to do everything possible to conserve, upgrade and care for existing structures rather than pull down buildings to replace them with ugly ones.
The country’s economic well-being will be much better served by a business model that gives more importance to reforming the educational system and promoting a better use of limited resources, especially land.
Curbing urban sprawl is a complex issue that affects different actors, sectors and social groups. The need to redefine our economic and social priorities has never been more urgent.