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Opinion | Sunday, 02 May 2010

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Underpinning industry’s competitiveness

Few business analysts would disagree that the most formidable challenge facing the Maltese economy as we slowly move out of recession is our ability to sharpen our competitiveness that is so crucial to viable job creation. Competitiveness is a catch-all concept that includes various elements of which wage inflation is just one.
The Central Bank governor’s repeated insistence on the importance of controlling inflation in general, and wage inflation in particular, is understandable and laudable. But it risks deflecting attention from other equally important issues that can affect our competitiveness.
One of the most dangerous trends that have developed in the last few years, and that is threatening our future economic prospects, is the generally higher inflation registered in Malta when compared to the eurozone average. Unfortunately, the government has so far not come up with a credible strategy to address this issue.
They either lack the courage to ruffle the feathers of those who are using their position of dominance in the local market to line their pockets, or else they still believe that laissez-faire and a regulation vacuum can resolve the hardships that are threatening the quality of life of so many of our families.
They promised to reform the pitkali food market mechanism to ensure that we would no longer see so much profiteering in the sale of local agricultural products. So far little or nothing seems to have been done.
What they have certainly done is increase the tariffs of water and electricity on the pretext of the rise in the international price of oil. The reality, of course, is that they are asking the Maltese taxpayers to foot the bill of Enemalta’s and the government’s mismanagement, as evidenced by the Auditor General’s report on the Delimara power plant contract.
Wage inflation in Malta is certainly not the most serious threat to our competitiveness, even if we have to be careful to manage this issue with determination. In 2009 wages in Malta amounted to 40% of the EU average. At the same time prices in Malta were around 80% of the EU average and productivity stood at almost 89% of the EU average. So, Maltese workers have still a lot of catching up to do to match the wages earned by other EU workers – much more than they need to do to reach the EU’s productivity level.
What worries me about these figures is the implication that we are still depending too much on our low labour costs to attract investment. Even if wages in Malta are only about a third of what they are in Germany, our exporting industries are still struggling, unlike their counterparts in Germany. When one adds to this the poor performance in our educational sector, the concern about out falling competitiveness will quickly shift away from the escalation in unit labour costs, to the failure to improve labour productivity through more effective training and investment.
In fact, one important reason behind our declining competitiveness is the falling ratio of investment to GDP. Investment in Malta fell from 23% of GDP in 2000 to just 14% in 2009. In the EU during the same period the drop in investment was less dramatic, falling from 20.6% in 2000 to 19.2% of GDP in 2009.
A closer analysis of this figure reveals even more worrying elements. Most of the private sector’s investment in the last ten years went mainly to the acquisition of residential real estate. There is nothing intrinsically wrong with this, except that other sectors like manufacturing and service industries do not seem to be attracting sufficient investment.
In the public sector the government continues to hide the ugly symptoms of poor fiscal management by cutting out necessary public investment. They do this in order to keep the fiscal deficit from growing even further. Between 2004 and 2009 investment spending by government fell by 30% despite the Minister of Finance wishful thinking, expressed in every budget speech, of boosting public investment.
Before making COLA, the inflation-linked wage adjustment mechanism, the scapegoat of our declining competitiveness, we need to be more objective and identify other elements that are making us less attractive in the eyes of investors. Only then can we come up with a credible strategy to attract new investment through which we can provide the jobs that our young people need.

Charles Mangion is shadow finance minister


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