The Sustainability Of Our Economy

Jo Caruana - 16th July 2017

Malta’s economy has grown at an unprecedented rate in recent years, but is this sustainable into the future? Economist Gordon Cordina talks through his assessment, predictions and suggested strategies for the years to come.

For economist Gordon Cordina, from e-Cubed Consultants, analysing the ups and downs of the economy is part and parcel of his daily routine. Overall, he says Malta’s current performance is very positive – but that’s not to say there shouldn’t be improvements, and possible pitfalls along the way.

“We observe wide chasms between different sectors in our economy,” he says. “For instance, the avant-garde gaming industry has grown to provide 13 per cent of Malta’s GDP – and this is dependent on around 6,000 jobs in a few hundred firms. The more mainstay consumer and tourism services sector generates 20 per cent of the GDP, but generates over seven times more jobs, within almost 12,000 firms. High productivity in gaming is restricted to a relatively small productive base, and the industry may be subject to downside risks, as well as potential great opportunities. The low productivity over the much wider productive base in consumer and tourism activities is, in itself, a cause for concern, compounded by concerns on the extent to which the country can carry a larger population and tourism base. The challenge is to diversify high productivity business to enhance their internal resilience and reinforce their linkages with other economic sectors to ensure broad-based growth.”

And there’s another potential risk to consider in this area – namely our economy’s reliance on a few key firms. “We estimate that around one-third of our island’s economic activity is generated by fewer than 200 firms, spread across a number of sectors,” continues Dr Cordina. “This has particular weight when you consider that EU programmes give a great deal of support to small and micro firms, but not so much to the large ones, on which a small economy like ours is, perhaps paradoxically, so heavily dependent. It is also important to help large firms in small economies like ours, as over 30,000 jobs rely on them.”

That said, Dr Cordina believes there has been a reasonable balance between the growth of ‘new’ economies and ‘traditional’ ones. Gaming, tourism, the public sector and professional services all grew in 2016, while manufacturing has been in decline, except for a few pockets of innovative outfits – typically micro and small-type firms. “Balance between traditional and new is vital because, while important, high-growth ‘new economy’ sectors are typically characterised by high volatility,” Dr Cordina explains. “Traditional economic activities enjoy more stable growth, even in cases when that growth was relatively high.” Of course, the key question is whether all of this growth will be sustainable in the years to come, or whether change is likely to be afoot.

It is important to address the many risk factors that our economy faces as we move forward, and to bear them in mind. Dr Cordina identifies a number of points, including growth in trading partner countries and globalisation factors, as well as international tax and reputational risks that could, mainly, affect the financial and gaming services. “We also need to consider other risk factors,” he says. “Such as uncertainties surrounding Brexit, our excessive dependence on individual sectors and firms, and the restructuring of strategic activities including air and land transport. Plus, there’s the public sector wage bill and spending to consider, as well as pressures related to our ageing population from a poverty and a health perspective. In the absence of a more focused approach towards the efficiency and effectiveness of public spending, our fiscal surplus may not be able to withstand a slowdown in economic growth.”

Finally, with all of the above in mind, Dr Cordina identifies the strategies we should be focusing on for the future of our economy, starting with a concerted effort towards the development of the ‘global lifestyle hub concept’ for Malta over the medium term. “Malta needs to become the regional place of choice for people from all over the globe to work, learn, relax, heal and develop culture and art… This will build upon our distinctiveness as a people and Malta’s unique heritage and geography. We also need to address economic strategies for diversification within and away from our overweight sectors, maximising opportunities from Brexit and diversifying away from excessive dependence on tax competitiveness.”

“From a practical perspective, it’s important that we have a strategy for the maximisation of our human capital value – with better use of EU funding for learning and continuous training, and the reaping of opportunities for the availability of human labour. Lastly, I would stress the need for renewed focus on housing as a determinant of poverty and on more cost-effective solutions for poverty reduction, as well as continued focus on investment in the energy sector to help us sustain our competitiveness and reduce poverty,” Dr Cordina concludes.

This article originally appeared in the latest edition of The Commercial Courier. Read the full article here.

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