"Malta Needs To Find The Right Balance Between Diversification And Specialisation"

25th November 2017

In the first of our series of interviews ahead of 2018, Equinox CEO Bernard Mallia shares his thoughts on the key factors dominating business and EU affairs in Malta in the year ahead.

What is your economic outlook for Malta in 2018?

The economic outlook for Malta for 2018 looks positive in that there is a lot of unrealised economic growth potential and scope for further expansion of business activities for the coming year. At the same time, on a more cautionary note, it needs to be said that economic growth is not automatic, and that this positive outlook is not without downside risks, especially in the light of recent happenings, particularly the international damage to Malta’s reputation, how footloose the industries that we have come to depend on most are and how badly these industries require to be domiciled in a reputable jurisdiction.

In a context where bigger jurisdictions like the US, the UK and Italy – more specifically, the Lega party in Italy – are flirting with tax cuts and where the European Commission is reportedly planning moves to curtail EU member state governments’ veto powers on tax using a clause in the 2009 Lisbon Treaty allowing decision-making by qualified majority in sectors where unanimity is normally the rule, it is evident that Malta needs to be more proactive than it is at the moment. Indeed, much more needs to be done to ensure that while things are going well, as a country, we manage to implement the necessary reforms and to gain the efficiencies necessary to strengthen Malta’s selling points other than its favourable taxation regime, as these are likely to become more important competitive advantage drivers as time goes by.

Economic success has a habit of concealing infirmities in things that failure would have otherwise brought to light. Examples of avenues where such efficiency gains are needed abound. Perhaps the biggest challenges at the moment, however, are to be found in the education sector, arguably Malta’s biggest bottleneck at this juncture, the real estate sector, transportation, law enforcement, environmental conservation, the judiciary (particularly the time it takes for court cases to be settled), and the Civil Service broadly and generally, where the need for a radical and rigorous revamp, as well as the dismantling of unnecessary bureaucratic red tape, becomes increasingly evident with every passing year.

It is good for the country to talk loftily and to set out high aspirations, but as a country – now more than ever before – we need to walk the talk to ensure not only that the positive economic outlook for Malta actually comes to fruition, but also that it is at the highest levels that it can possibly be.

While there is an expectation for the financial services and the remote gambling sectors to continue leading the pack in 2018, it is still too early to assess with accuracy the true extent of the damage that recent events have had on the services sector.

Malta is becoming an investment hub for businesses and expats alike – how can this sector continue to grow, in a sustainable way?

Growth and sustainability are no easy bedfellows. In order for growth to be sustainable it needs to take place without actually jeopardising future growth or quality of life prospects. When economic growth occurs at the speed at which it is occurring at the moment and the framework in which it occurs is not fully equipped to deal with it, bottleneck problems tend to develop and if nothing is done about them they usually end up stifling future economic growth, quality of life levels or both.

If Malta is to continue writing its economic success story without becoming a victim of its own success, it requires a major rethink of how it is dealing with the bottlenecks that economic growth has given rise to and it must do so fast, while ensuring that the international reputation it has always enjoyed is not tarnished any further and is eventually restored.

What new industries should Malta be looking into developing and attracting?

There are several industries that Malta could try to develop next. In looking at this, it must be said that, as a matter of principle, a country of the size of Malta needs to strike the right balance between diversification and specialisation. Too much diversification will dampen the economies of scope of an industry that a country the size of Malta might try to attract, whereas too much specialisation in a restricted area can be extremely risky if the area fails to materialise or anything changes within that area to make the industry obsolete. 

If one had to try and identify three potential winning horses for the next decade, they would be geoengineering research, which requires a strong regulatory framework to take off and which could make Malta a world leader in an area that is likely to increase in importance as time goes by; software and content development, an industry in which Malta has managed to make inroads in the past and recently with blockchain (where it seems that we are already moving in the right direction), but where so much more can be done with the right vision and provision of infrastructure and incentives in the areas of virtual reality, augmented reality and artificial intelligence; and life sciences research, where the infrastructure is already in place but is not yet being fully capitalised on and politically championed.

After several years of planning and coordination, Valletta is finally ready to take up the mantle of European Capital of Culture. How do you think this will affect Malta's economy?

Next year Valletta will be taking on the European Capital of Culture title. The urban regeneration impacts that this has given rise to are already evident. In the city core a good percentage of the buildings have undergone restoration efforts that help give the capital city a much-needed reinvigorated look. In the periphery, dilapidated buildings still sit alongside newly-refurbished ones but the market will eventually take care of these too whenever it is allowed to function properly.

What is certain is that recreational activities in the area will take a boost and this will be a boon to the hotel, retail and restaurant industries in the area. On the other hand, other businesses located in Valletta might find their logistical efforts and those of their employees to suffer an impairment, something that they have already got used to whenever there is a summit or some State activity where road closures and parking problems are the order of the day and alternative transport methods are underdeveloped or altogether non-existent.

Whether the effects of Valletta’s European Capital of Culture will last beyond 2018 is very much up to the Valletta 2018 stakeholders to determine. Everyone has a role to play in making the effects of Valletta 2018 last longer than 2018 itself and it is up to these stakeholders, from Government all the way down to the smallest of restaurants and shops to make a lasting impression that promotes repeat business. Being on the radar is only part of the success formula. The other part of it is to be on the radar for the right reasons.

Do you think Malta will be able to maintain its reputation as a safe and stable country in the midst of the Mediterranean's turmoil?

A lot of reputational damage has been done already at both local and international levels as a result of recent events. This seems to be a feature of every democracy where bickering big parties put the partisan interests of their political tribe before the country’s.

Luckily, our Island’s political squabbles take place at a time where similar squabbles are happening in the USA between Democrats and Republicans on pretty much everything, in the UK between the Labour and the Conservative parties, with sporadic forays from UKIP and the greens, particularly revolving around Brexit, and more generally across continental Europe from Catalonia all the way to Turkey.

While we are by no means alone in suffering the effects of political squabbling, what is particularly unfortunate is that ours has centred on public trust in institutions. It is well-known that sophisticated industries like financial services and remote gambling are highly reliant on public trust in regulatory frameworks that govern the operational areas, and undermining these institutions goes a very long way in undermining the very industries that rely on trust in such institutions. This is especially the case when it is common knowledge that several of our competitors are always waiting for the right opportunity to discredit us because it is in their interest to do so. The cases of the UK media naming Malta as a tax haven and a money laundering jurisdiction and the Italian media branding Malta as a mafia-riddled ‘Isola del Tesoro’, for instance, are very clearly cases of the pot calling the kettle black, but Malta has given them a golden opportunity that only a fool would have missed grabbing.

Such squabbles also make it easier for supranational institutions to increase pressure on getting through initiatives that could be detrimental to Malta such as the common consolidated tax base which might be pushed more vehemently, incrementally and through indirect avenues rather than holistically at one go.

Despite the negative impact in the short run, however, Malta might still come out of this stronger if as a result of this turmoil, the required constitutional, legislative and organisational design changes are effected and are subsequently impartially enforced. If this is to be done right, these would need to make the various arms of the civil service, regulatory authorities and other parastatal entities efficient and truly autonomous. This means that politicians should not have a say in how these institutions and authorities are run, not even with a two-thirds parliamentary majority as some people seem to be suggesting. A reform in this ambit also needs to recognise that these institutions are not social policy instruments that are there to guarantee effortless clientelistic employment or partisan favour-granting machines, but to offer a high level of service to the private sector and more generally to the society that finances them with its tax money, and to foster an environment where business can take place in an orderly and regulated manner in a way that contributes to socially-constructive employment and without the interference of political whim.

An abbreviated version of this interview originally appeared in the latest edition of Business Agenda


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