Last week, I participated in an interview with a competing newspaper. Most questions addressed the pressing issues that must be tackled at the national level. The PL in government generated wealth and distributed a significant portion to the population. Utility bill subsidies are currently applied universally, without differentiation between higher and lower earners, and must be retained.
The country has experienced robust economic growth, and the current fiscal position allows broad redistribution of income and subsidies. However, the adoption of laissez-faire economics in some sectors, at times, exerted considerable pressure on infrastructure and affected the quality of life and social behaviour within local communities.
The political and economic context
The PL in government prioritised liberal and progressive policies, both politically and economically. Between 2013 and 2019, Malta experienced significant economic growth, with increased earnings and a general sense of optimism regarding wealth creation, particularly in contrast to the stagnation of previous administrations. Such an approach allowed the PL in government to swiftly implement civil liberties until a Black Swan event occurred. In 2020, the global pandemic fundamentally altered public perceptions of daily life and even the way people think and behave. Extended periods of lockdown led to a renewed appreciation for time and outdoor spaces, and perhaps boats, too. Increased income contributed to higher demand for boats and mooring buoys. Ironically, mooring buoys was one of the issues encountered when campaigning on the ground.
Certainly, the pragmatic approach adopted by Dr Robert Abela during the pandemic was instrumental in mitigating the negative impacts on livelihoods and well-being. During the pandemic, road traffic evaporated, economic activity declined, and many third-country nationals returned to their home countries due to a lack of employment opportunities. Despite these challenges, individuals continued to receive salaries, including those in the private sector. The retail sector benefited from government funding to maintain operations, fostering a degree of dependence on state support and increasing fiscal strain during a period of economic contraction. The PL in government implemented unique measures to safeguard lives and livelihoods.
The consequences of a laissez-faire approach in certain sectors
To facilitate rapid recovery, the government invested in healthcare, financed vaccine procurement, administered vaccinations, and prioritised economic revitalisation, particularly in the wholesale and retail sectors. Subsequently, the Maltese government adopted a laissez-faire market approach, characterised by retailer reinvestment, the importation of workers through temping agencies with limited or no regulation, and an assertive tourism promotion campaign. This strategy yielded positive economic outcomes, with tourism rebounding and Malta recovering more rapidly than many other countries. However, the accelerated pace of economic activity and the substantial influx of foreign workers made it challenging for the population to assimilate, especially compared with the relative calm of the pandemic period.
Surely, the continued emphasis on retail-related sectors, including accommodation, led to positive market responses, with increased investment in properties for short-term rental. Digital platforms and low-cost airlines further enabled this business model. However, this approach introduced some disturbances. Laissez-faire tendencies and inadequate regulation permitted certain operators to disrupt residents’ quality of life. It is essential to differentiate between facilitating market operations and addressing market failures. When evidence indicates that economic operators are negatively impacting the broader community, regulatory intervention must be robust. And by regulatory robustness, I do not mean sounding the alarm in a panic clampdown.
Well, profit generation should not come at the expense of collective well-being. Sustainable growth requires policy tools that support expansion in sectors such as food and accommodation without adversely affecting residents or distorting the market. It is inappropriate to disturb residential areas with commercial activities, and property ownership does not confer the right to disrupt others. Consistent application of these principles across Malta is necessary to prevent unfair competition, where powerful entities exploit the system while smaller operators are disadvantaged.
Accelerating growth in higher-productivity sectors
The next phase should prioritise quality growth, as the marginal benefits of increased activity in low-productivity sectors are increasingly counterbalanced by social and infrastructure pressures. Public support for growth has diminished due to the associated strain and the declining marginal utility derived from these sectors. The core issue lies not in economic growth itself, but in where growth is derived. When asked about policy design, I advised prioritising sectors such as finance, insurance, gaming, information and communications technology (ICT), family offices, regulated crypto funds, payment institutions, and advanced automated manufacturing. Emphasis should be placed on professional and knowledge-intensive services, supported by a robust promotional campaign for these sectors, particularly finance, with ambition comparable to that of the Malta Tourism Authority.
Certainly, rapid growth should be pursued in high-value sectors. In contrast, expansion in lower-productivity sectors should proceed at a more measured pace, thereby increasing the share of gross value added generated by high-value activities. Upon reviewing the Fiscal Council’s statements, I found the narrative surrounding productivity to be unclear, not in terms of technical details, but in the broader approach to productivity enhancement. Although productivity is quantifiable, its calculation and interpretation remain subject to debate. While supporting wage fairness also in view of the pay-transparency directive, it is reasonable to contend that the economic structure must be adjusted so that productivity gains are not achieved solely by increasing employment in low-productivity sectors. The transition period I am referring to must be a strategic shift toward more productive sectors and a reduced reliance on importing labour into Malta.
A sustainable economic way forward
An economy comprises both human and capital resources, and there is a current need to strengthen technological and natural capital. In the local context, there is limited scope to expand natural capital. What we need to do is preserve what we have, unless land reclamation for natural reserves is pursued while mitigating acute physical climate risks. The gap between economic growth and productivity has been partially bridged by increased employment, though this occurred before the widespread adoption of artificial intelligence. This is what the Fiscal Council failed to mention. The ICT sector is expanding rapidly and requires further acceleration to sustain momentum. While public discourse has centred on public-sector borrowing and yield curves, the primary focus should now be on output and employment metrics. Addressing productivity requires examining the relative costs of labour and capital, as well as the impact of artificial intelligence. The objective should be to maximise technological efficiency.
Labour costs can sometimes be offset by increasing employment, but it is essential to balance wage growth with investment in and effective utilisation of technology. Continued reliance on imported labour is unsustainable, as it places mounting pressure on infrastructure. The solution lies in prioritising high-productivity sectors, curbing the expansion of low-productivity activities, and initiating a gradual transition. This twin-effect approach may yield dual benefits. Artificial intelligence could enhance output and efficiency in certain sectors, while employment gradually shifts toward higher-value activities. The impact of artificial intelligence is indirectly highlighted in the PwC report on sectoral productivity, which identifies ICT as an outlier demonstrating rapid growth, higher gross value added (GVA), and improved productivity relative to other high-productivity sectors. Efforts should be directed toward increasing GVA in these sectors and their growth.
Crucially, reducing employment should not be viewed as the primary objective. Instead, the focus should be on increasing output and value added per worker through enhanced skills, technological advancement, and targeted investment. Artificial intelligence is only one component of this strategy, and its deployment can be challenging outside of automated systems and robotics in the wholesale and retail sectors. Advancements in high-quality manufacturing also have the potential to improve productivity significantly.
Economic management should be approached from this perspective rather than framing economic growth itself as problematic.
