Last Updated on Thursday, 25 July, 2024 at 10:56 am by Andre Camilleri
There has been ample correspondence in the media about the need for Malta to change its economic model and introduce new avenues for growth.
This is anticipated given the regular deficits and increasing national debt, yet the resulting GDP growth has baffled all and sundry, placing us among the top performers in Europe.
Malta’s economic model is being adjusted to attract foreign investment that takes up less land and requires fewer workers to generate economic growth. Minister Silvio Schembri said the island’s economic model does not need to be completely changed. Notice the warning by the finance minister who is anticipating that the country’s population will increase to 800,000 by 2040, yet he never admits that the present economic model, built on cheap labour, can be unsustainable.
Famous 18th century economist Adam Smith came out with the unique concept of “invisible hand” and its efficaciousness in guiding growth. His theory describes how individuals pursuing their self-interest in a free market economy inadvertently contribute to the overall wealth and well-being of society.
Smith argued that when individuals and firms seek to maximise their own profits and utility, they are guided by market forces to produce goods and services that are valued by consumers. Through the mechanism of supply and demand, prices adjust to reflect the preferences and needs of consumers, leading to efficient allocation of resources and overall economic growth.
On the contrary, famous 20th century economist John Maynard Keynes advocated for active government intervention, particularly through fiscal policy (government spending and taxation) and monetary policy (control of the money supply and interest rates), to stabilise the economy and achieve full employment. He challenged the idea by Smith, that free markets always lead to full employment and stable economic outcomes, particularly during periods of economic downturns or recessions. He argued that in such situations, market forces alone may not be sufficient to restore economic equilibrium.
Keynes advocated for active government intervention to stabilise the economy and explore new niches. Keynes’ advocacy for government intervention represents two different approaches to economic policy, and they have been applied in various ways throughout history, including during the stellar administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom.
While Reagan and Thatcher implemented deregulation, tax cuts and privatisation initiatives that aligned with free market principles, Malta has currently shied away from such policies. The current model focuses more on domestic expenditure and sporadic attempts (less on export growth) to control inflation as a brave attempt by a hushed up Stabbilta scheme signed with major food stores and importers to reduce prices on selected products.
Another significant economic policy is the importation of low-skilled workers from East Asia, who today account to one in every five residents. Such a policy has the disadvantage of providing a solid base of foreign workers, who like the food dispatchers protesting their meagre wages, justifiably feel discriminated against due to poor working conditions. This is vaguely how one can quantify the economic model that has been in vigour during the past decade. The question arises – has globalisation been fully exploited by Malta’s current economic model? To answer this question, first we must point out the complexities and challenges posed by geopolitical tensions and trade restrictions, which do hinder the free flow of goods and services across the Mediterranean (and beyond). These restrictions can indeed create barriers to implementing the famous Ricardo’s theory of comparative advantage in its ideal form. Here’s how these factors in Malta can be impacted by the application of the globalisation forces.
Ideally, this allows countries and firms to adapt to market changes more quickly by reallocating resources and adjusting their specialisation patterns. Returning to the present, we are confronted with regional conflicts and political issues, such as those between Israel and the Arab states, the US elections, the Russia-Ukraine situation and tensions between China and Taiwan. Such adverse factors can impact trade relations and hinder the realization of comparative advantage pontificated by David Ricardo. Malta may be prioritising partisan objectives over economic efficiency, resulting in most government agencies being run by political loyalists who govern as if they own the country. They secure their tenure due to their blind allegiance to Castille.
Can we base our hypothesis that in such situations, we are encouraged to change the present economic model to one which focuses more on exports and less on domestic expenditure, low-wage cohorts and low returns from bucket and spade tourism. The current model alone will not be sufficient to restore economic equilibrium or help us enter new export markets, such as the lucrative AI sector.
Some advocate for a serious discussion on how to fine tune our economic model, pursue high-tech education altruistically and maximise untapped export potential.
George M. Mangion is a senior partner at PKF Malta
