Opinion • February 8 2004

Outspoken on gain through pain

Karmenu Farrugia wonders whether selling off more shares in the Bank of Valletta is a good idea and insists there should be a wage-freeze for the public sector

To be described as outspoken by my editor I really must be so, despite my scepticism. It has been mainly through his style of editorship that English Sunday readers have finally learned what being frank, direct and bold of speech, yet apolitical, could be like.
Once facts and figures are established without contention, the act of interpreting them dispassionately and shorn of any mental inhibition about trying to please or annoy the political masters, should be as easy as calling a spade by its own name. Outspokenness, it is called. Admired by some, condemned by others; sadly often at some personal cost through vindictiveness.
Sticking to policies, rather than personalities, should avoid hurting people’s feelings unnecessarily, even those belonging to thick-skinned politicians. And we have so many of them around!
Such a rigorous exercise is more difficult when delivering an impromptu speech than when reading it out. I experienced it last week. During an EU-sponsored seminar for foreign journalists, I had to read a paper on the role of Malta’s private sector. Two days later it was followed by a freegoing chat on our economic climate during a seminar for representatives of the social partners. Without any doubt, I felt more at home with the latter, especially because, instead of being bombarded by inquisitive foreigners on pre-studied published statistics, I enjoyed listening to so many interesting interventions from most participants, not necessarily in line with my own thinking.
What was it then that earned me the compliment (presumably) of being outspoken? Well, I started off by dubbing the opening quotation above, from an interviewed MUBE president, as ‘perverse Keynsianism.’ How else would one describe such a truism which, however, betrayed the danger in possessing a little learning (not knowledge, I must emphasise) about such a complex subject like economics? Keynes’ consumption factor works in direct proportion to the closeness of an economy. Not in one like ours! Does spending on imports ‘boost’ the economy? Aren’t taxes also money ‘spent’? What about overspending and its resultant inflationary effects? Haven’t we experienced recent years when our inflation was higher than the European average? When the impact of imported inflation has progressively decreased? Shouldn’t one distinguish between spending on consumables and on capital projects?
To be fair to the MUBE president, he did follow up his conclusion by admitting that "economists may argue otherwise." Thank heavens that many of them do not come from the banking sector when in a position to advise the government. That was what my supervisor at LSE once openly said (maybe a little in jest, since he himself had been a director of a bank in South Africa) during a debate on Britain’s ballooning IMF debt during the early ‘60s. He was at that time the British Chancellor’s chief adviser.
But here in this country we have the top man in our commercial banking sector telling us coolly that we have a lot going for us and that our quality of life is hard to beat. His glasses are, of course, tinted with the bright colour of his bank’s bottom line figures and the millions of Malta liri which, though available for local productive investment, are stubbornly withheld in the name of prudent banking practice, about which we supposedly knew very little in Mid-Med times, and Barclays’ and the National Bank of Malta and its successor, Bank of Valletta.
I pointed out at the seminar how our past culture of sensible housekeeping, even in poverty, had so drastically changed from a reasonable frugality to wanton prodigality: the main cause of today’s economic woes. In less than a decade, during which personal disposable incomes increased overall by 50 percent, personal loans (mainly from banks) soared by 250 percent. Put differently, whereas such loans used to amount to around 20 percent of the disposable income, they are now the equivalent of nearly 50 percent. And only partially explained through house-purchase loans, which would have been a different matter altogether.
Is it a wonder then that the banking sector is always the last casualty in any economic collapse anywhere? Worse, itself having previously contributed to the tragedy due to insistence on safeguarding only their shareholders’ equity, with little regard to the fate of the economy they effectively control. Perhaps this is the price tiny Malta is paying for fully liberalising and soon to fully privatise banking . Which makes one think twice about selling off what is left in Bank of Valletta rather than transforming it into a much-needed investment bank.
The Minister of Finance was quoted that same day of the seminar as attributing the "slump" to an inevitable phase in the "natural cycle" of global markets. When supply exceeded demand, the result was a slump. Thus argued the Minister in Parliament. And right he was, no doubt. He should, however, have proceeded to explain how essential it was for an administration to adopt anti-cyclical intervention policies to counteract the ‘natural’ boom-and-bust syndrome, the curse of any finance minister. So ably tackled in Britain since Labour came to government seven years ago, after decades of failure.
In contrast, on a change of administration seventeen years ago, Malta shifted from a niggardly mode obsessed with balancing the national budget even at the expense of desperately-needed infrastructural projects, to a profligacy mode which, behaving as if there was always a continuous slump, manifested itself in a long series of uncontrolled and accelerating fiscal deficits which transformed our national debt from under 20 percent to nigh 70 percent of the GDP. All in a span of 17 years, to remind you.
Year after year we preached that the answer lay in economic growth, the denominator in the fraction. Let the numerator (deficit) continue growing (higher consumption all round) but make sure the denominator (the economy) grows even faster. Alas, the latter did not oblige. The growth that occurred was mainly the result of over-consumption, not productivity. At times the economy even threatened us with contracting instead of expanding. The tragedy is that we still persist in attributing this to exogenous (external) factors outside our control, ignoring the internal ones within our control if only we have the courage to dispense the unpleasant medicine which alone can heal the economic patient.
Economists are expected to do the prescribing bit. In private, if need be, since currying favour appears to be our accepted way of life here. But are they? The few times they do, it’s all incontrovertible textual theory. Hardly ever practical suggestions. Fresh in my mind is last year’s national conference on competitiveness development and productivity benchmarks, outlining the ten ‘golden rules,’ eg stable macroeconomy, legislative environment, infrastructural services, education, innovation…..I am out of breath! But not a single down-to-earth recommendation, germane to the economy’s current state of affairs. In situations like this, I am glad to practise as an accountant. After graduation, accountants generally throw the theory out of the window and get down to hard brass tacks. Why can’t economists here do the same?
I suggested, interalia, that the time had come for a wage freeze, lasting at least three years, to be imposed on every corner of the public sector forthwith, emphasising that wages there had been allowed by far to exceed national productivity achievement levels by any conceivable measurement or benchmark, and, consequently, by dragging along with them the corresponding wage levels in the private sector, have driven the nation’s overall unit cost of operation beyond the acceptance of most new investors, particularly foreign ones, even those operating in high-added-value industries with turnover exceeding Lm 50,000 per employee, so poignantly underlined recently by the Finance Minister.
In attracting foreign investors it is simply not enough to relate our unit costs to those prevailing in their homeland, but in competing countries, especially in the EU. Like the Dutch couple who landed in Malta during our coldest and wettest day last month. Reacting to my concern, the woman joyfully exclaimed "Believe me, it is much colder at home," but the man retorted "yeah, but there were other warmer places we could have chosen for our short holiday."
The economy needs a rest to retrench and hasten its restructuring process. In a previous column, I suggested a whole basketful of measures that could be discussed before the set June deadline for the desperately-needed social pact. Top priority and before anything else: a wage freeze in the public sector. For the economy to gain, it has first to go through a period of pain. I can see no other way. The government’s task is to ensure the pain is borne by those who feel it least. Often those who shout loudest.

Karmenu Farrugia is an economist and an accountant