Introducing the Financial Services Laws Amendments Bill in Parliament last week, the Minister for Finance, the Economy and Investment quoted the Global Competitiveness Report, published by the World Economic Forum, which highlighted Malta’s strengths in the financial services sector.

The Competitiveness Index was published last month and provides extensive data on 139 economies with an overall ranking position for each country. The global competitiveness index is based on 12 pillars of competitiveness, which are institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation.

The Maltese economy moved into 50th position worldwide, up from 52nd last year. Malta also featured strongly on the positive impact of rules on foreign direct investment (seventh); the quality of the educational system (20th) and country credit rating (28th). The rankings also confirm that the country is a very safe place to do business in.

Thus, while Malta fares well in terms of financial services, the labour market efficiency index is surely one of the pillars which dragged down the ranking of the local economy. This fact is made sufficiently clear by the pre-budget document for 2011, presented earlier this year as a discussion document preceding the budget which will be presented next week.

The pre-budget document highlights this issue by detailing the increases registered in the average wage per employee between 2000 and 2009, which was a necessary condition for the country to converge to the GDP per capita level of the EU27. The increases achieved in average wages were still lower than those in countries deemed as the island’s main competitors, which is considered a positive fact in terms of competitiveness. Absurdly, however, a gradual decline in relative productivity was registered during the same period which progressively reduced the competitive advantage.

In simple terms, while an effort was made during the past 10 years to increase wages to reflect the average of other European countries, competitiveness was being undermined by effectively failing to link wage increases to productivity. This stark reality, which decreased the economical advantage which the country had to attract foreign direct investment, should come as no surprise. The governor of the Central Bank of Malta has been advocating a performance-linked wage increase for the past few years as his yearly economical assessments clearly showed that productivity was not increasing on par with wage increase.

The inclusion of the need to improve productivity in the pre-budget document has put the issue forward for discussion but not necessarily provided the necessary thrust to effectively improve the situation. The discussion document also suggests investment in higher value added activities to justify wage increases and the need for increased productivity levels in low-growth sectors and an increase in wages in high-growth sectors.

Hardly any meaningful discussion has taken place on the urgent need to drastically improve productivity to match the increase in wages registered during the past decade. Yet, improving competitiveness remains a crucial issue for the Maltese economy and safeguarding it should be foremost on the national agenda.