Within the EU, Malta is the most export-oriented country, with about 65 per cent its final sales being purchased by non-residents, and the remaining 35 per cent by residents. The islands are also highly dependent on imports, with about 55 per cent of final expenditure going on imported goods and services. The remaining 45 per cent of final expenditure goes on value added generated locally − the gross domestic product (GDP).
Even though Malta imports more than it adds, the GDP per capita of the islands is relatively high (ranking 12th among the EU countries). Interestingly, but not surprisingly, the two most trade-open countries in the EU are Luxembourg and Malta, the two smallest states in the Union.
Due to its high degree of trade openness, Malta is vulnerable to adverse external shocks. This stark reality was evidenced in 2020 and 2021, when due to a drop in exports, notably tourism, GDP in real terms declined by about eight per cent in 2020.
Another small state that is highly exposed to adverse external shocks is Singapore. It is even more trade-open than Malta. In 2020, Singapore also experienced a relatively high decline in its GDP. Overall, however, Singapore is a highly successful country economically in spite of its high degree of economic vulnerability. In my work, I referred to this seeming contradiction as “the Singapore paradox” to explain the reality that small vulnerable states can succeed economically, if they adopt policies that enable them to withstand the negative effects of external shocks.
I have authored many studies on such vulnerabilities and created an index that measures a country’s exposure to adverse external shocks, which I termed the ‘Vulnerability Index’. I also tried to measure policy responses, by creating the so-called ‘Resilience Index’, composed of four components related to governance. By combing the vulnerability and the resilience indices, I created the ‘V&R Framework’ which enabled me to group countries into four categories, depending on their degree of inherent economic vulnerability and their quality of governance.
A number of small states fall into the category of countries with a high degree of vulnerability, which are relatively well governed and, therefore, likely to be able to withstand the vulnerability disadvantage. Most small states are highly exposed to adverse external shocks, lack natural resources and face economies of scale constraints. Despite these disadvantages, many such states do well economically, and I attributed this reality to good governance. Iceland, Luxembourg, Estonia, Mauritius and Barbados, among others, belong to this category. This is also the category where Malta has placed to date.
A second category of countries include large, developed ones that are also relatively well governed but not highly vulnerable.
The third category relates to a number of large developing countries that are not highly inherently vulnerable but are not so well governed.
The fourth category includes small states that are very vulnerable, and to make matters worse, are also weakly governed – a worst-case situation. This is the situation Malta wants to avoid.
The question is whether Malta’s governance can continue to place it in the list of economically successful small states.
In the social sphere, Malta ranks highly in global indicators, although its education rankings are below what is expected when compared to other social indicators. In the economic sphere, Malta performs well in terms of its GDP growth rate. However, I consider Malta’s economic model as unsustainable, being highly reliant on two risky sectors, namely tourism and construction.
These two sectors are associated with environmental degradation and social discomfort but, more importantly, they exacerbate the exposure of the Maltese economy to risk. A notable positive feature of Malta’s economy is that many productive units introduced before 2013 are still going strong. Regarding environmental governance, we rank poorly by European standards and we experience the impacts on a day-to-day basis.
The weakest link in Malta’s governance [is] environmental protection, a major pillar of sustainable development
In terms of political governance, Malta’s ranking is relatively good globally − no doubt this is helped by the fact that we are members of the EU and because we have retained a democratic system. However, the hazard light is blinking here too. Malta’s overall governance has deteriorated and slipped down the global rankings in recent years, particularly due to corruption and state capture.
So what needs to be done, one may ask? A proper answer to this question requires more than one article… here I focus, very briefly, on just four areas that require improvement, namely public sector reform, economic diversification, education and environmental protection.
As already explained, political governance in Malta has deteriorated in recent years. A different governance model is obviously needed to reverse the trend. First and foremost, we need a cleaner government, and a more efficient public administration. The public sector in Malta is
excessively politicised, with government ministers unduly intervening in decision making within the civil service. One consequence of this situation is short-term politically motivated changes, lack of transparency, and unfair discrimination in the provision of certain services.
Another downside of such a situation is that the public sector often crowds out the private sector, by, among other things, creating artificial labour shortages as a result of bloated government employment. All this negatively affects the competitiveness of private enterprise. Competitiveness is essentially an enterprise issue and it is the individual undertaking at the micro level that needs to find ways to compete effectively, but the public sector can create artificial obstructions.
In the case of Malta, for example, infrastructural services are often inadequate and sometimes resemble those found in less developed countries.
An economic diversification exercise needs to be properly planned and executed, so that Malta does not remain reliant on highly risky and environmentally degrading activities associated with construction and tourism. In addition, given Malta’s small size, matters relating to its carrying capacity should be given major importance when considering investment in these two sectors. In the case of construction, there is also the problem that this industry remains poorly regulated.
New forms of productive activities need to be introduced, taking advantage of developments in information and communications technology. In this regard, the Nationalist Party manifesto merits a good mark for assigning importance to the need of taking advantage of ICT innovation, including virtual and augmented reality, as well as robotics.
The economies of scale constraint faced by Malta as a small state can to an extent be overcome by devising ways of creating high local value-added per person through what is known as ‘vertical specialisation’.
Maltese firms, in such a scenario, would specialise in the high-end stage of manufacturing, using modern technology. The labour-intensive stages of production would, in such a situation, be imported from countries − a form of international outsourcing. In this way, competitiveness in the Maltese manufacturing sector would be stepped up, without relying on low wage rates.
Education should not be directed exclusively at promoting economic growth, but it is decidedly a major requisite for improvement in human resources. In Malta, the education system needs drastic improvements to upgrade such resources. To start with, the high rate of early school leavers is resulting in a large number of people with low educational levels. Vocational education is deficient, and in a country where the resource that matters most is the human one, a top-class vocational educational system is required, thereby strengthening synergies between education and jobs.
In higher education, more importance should be assigned to innovation and research in all branches of learning, particularly in the sciences. The private sector could also play a role in this regard and there should be incentive to undertake or support research and development with the aim of modernising industrial production in Malta.
The weakest link in Malta’s governance continues to be environmental protection, which is a major pillar of sustainable development. This aspect brings us back to the argument that Malta should reduce its reliance on construction and tourism.
There are many aspects of environmental governance that need to be improved, including those relating to waste, biodiversity, fresh water, air quality and land use. It is now becoming increasingly understood that economic growth that neglects the environment could downgrade, rather than improve, the quality of life of the inhabitants.