The Malta Independent 21 April 2019, Sunday

Innovation key for Malta to continue sustaining economic growth – Gordon Cordina

Julian Bonnici Sunday, 21 October 2018, 09:15 Last update: about 7 months ago

The Budget is arguably the most important subject of every parliamentary season. With Budget 2019 to be presented tomorrow, Julian Bonnici asks economist Dr GORDON CORDINA to provide some perspective on the current economic realities and what he believes are some key proposals that must be included in the Budget

With the Budget tomorrow, I think it is fair to say that the rental market appears to be firmly on the agenda. With a White Paper recently launched on the subject, is it safe to regulate the market or should we leave the free market alone and allow it to correct itself?

I think it is important to properly segment the real estate market, the rental market in particular because as an economy we should expect different kinds of results and services from the different elements which compose the entire rental market. We need to stop talking about a generic property market as if it were one class. This means that we need a rental segment which serves relatively high-income earners who typically live in Malta for a limited period of time and are thus more likely to rent than buy. We also need another segment directed to affordable real estate, and which has a social nature. Perhaps the overall idea that home-ownership is the best possible form of management in the real estate market, given that rent reflects the flexibility of current individuals, means that we do not necessarily need to continue following the old mantra.


Should the government control prices? In my opinion, this should only be a last resort, a sort of atom bomb kind of solution that should only be used when everything else fails, when people are out on the streets; that is when one should intervene. There are many other reasonable solutions to undertake ranging from the provision of social housing at social rates, to rent to buy long-term mortgage schemes. The provision of subsidies on rental values should be properly benchmarked according to location and size. We need reference values so at least individuals can know that they are paying market prices as we did in the past. These are things that help the market work rather than price controls which will destroy the market.


There is a perception that the rental market is mostly tied to wages, with the market mostly catering for the financial services and gaming sectors. However, the average wage is increasing – is this mostly due to these sectors?

It is very true that rent rates in specific pockets have workers whose wages have increased substantially; it is also true that those increases have tended to spill over into other areas of the economy. Those who are most affected are vulnerable people who are paying rent that are not subject to regulations. This is where, in my opinion, we have an element of hidden poverty, with people just scraping by on rental values that are not realistic, without realising that if these people were to pay proper realistic market rental rates they would be in poverty. Is it a real estate problem? Or a social policy problem? It reflects a wider poverty issue that cannot be solved by sampling or controlling the real estate market. You do not go on overkill to address one end and kill the other side.

On wages, it would be best to take the median wage, the middle, not the average to determine it. Of course, ideally, you have an economy where GDP growth is matched by a growth in wages. GDP is fundamental distributed into wages and profits and ideally, in the end, you have better growth in wages rather than profits, as it would reflect a country having better-skilled workers. At the moment, the EU average is 70 per cent wages – 30 per cent profits, whereas in Malta it is more like 60 per cent – 40 per cent, because our labour skills have to catch up. In the long-term, it will reach that number but in the short term, we are actually seeing a shift towards a more profit-focused GDP, which is something that needs to be addressed. What we are experiencing now is what I would call growing pains; hopefully, our economy will recover its equilibrium in a few years’ time as higher skilled workers replace lower-skilled ones.


The country has undoubtedly experienced significant economic growth over the past few years, however, critics, mostly within the Opposition, have flagged concerns that the economy is growing unsustainably. Would you agree?

We need to distinguish between short-term two/three-year growth, which is very easy to stimulate with a government spending money, waiting for the people to consume it, and allowing GDP figures to grow, but at the end of the day, it would only fuel foreign economies and not create local jobs. This approach creates a fiscal deficit that credit agencies will quickly discover.

Medium-run to long-run growth will depend on the creation of jobs. The question is: Is GDP fuelling jobs or the other way round? Hopefully, it is the second. In the past, we have seen our economy having to reinvent itself every five to 10 years as it could cause a recession. Ten years ago, in spite of the global recession, we managed to continue growing because of things like the introduction of low-cost airline. As you can see, it has had an enormous effect on tourism, growing by 60 per cent in the last six years, which is a phenomenal figure. It is a great stimulus to our economy that is essential to sustain the growth required to develop the necessary infrastructure. Ultimately, growth may be short-lived but you must have the foresight to diversify your economy and product. We have introduced new niches in tourism, and we are looking into new sectors. The importance is being innovative and having the right risk/growth perspective to succeed.

There has been a large influx of foreign workers in the last five years, roughly 45,000. The Prime Minister has said that the country will eventually require another 70,000 to sustain economic growth. Given the country’s obvious size limitations, are we in danger of creating a bubble in the property market for example?

I would tend to dispel this idea of a property bubble, as it would only exist if there was something whose price was merely being sustained by the expectation that the price is going to continue growing. Prices have increased because there are real physical people who are living in such places. In a bubble, either you have a fiscal deficit inflating the economy, or you have irresponsible banks fuelling credit as we saw with the sub-prime mortgage crisis in the USA, or you have people who are buying in the hope that prices will go up. Without those warning signs, I do not think we can speak of a bubble in Malta, but we can speak of risks. What if there is a sudden downturn in tourism? What if we lose our competitiveness and are no longer attractive to businesses? Those are the risks of a small jurisdiction that have to be managed, which is why it is important to continue to offer the right quality product, be it in tourism, gaming, or financial services, by showing we are a credible regulatory jurisdiction, even if it is at the cost of going somewhat slower, as it would sustain long-term viability.


In an interview with MCESD Chairman John Bencini (above), he flagged the introduction of a basic living income as a measure that could address relative poverty. Do you agree?

I would look at this idea of a basic living income as providing benchmarks for people in different social situations as to what they would need to have a decent life. In my opinion, all stakeholders, be they government, social partners, NGOs, or employers need to work together to provide this kind of support. There is no one solution to poverty; you need a united front as you will leave gaps. These benchmarks have to be realistic and reflect real life considerations, but managing uncertainty and providing nets that help people get by. It is a complex problem because as a society we fundamentally require the rich to get richer to use the country’s newly generated wealth to create support mechanisms for those who really need them.

Are there any particular measures that should be included in the Budget?

When an economy is doing well, with a government that is registering a surplus, with general inflows of capital, and that includes human capital, from abroad, I would prioritise investment in capital which will help us become stronger in five to six years’ time. The rate might not be as strong as it is today, but we need to ensure that Malta is competitive beyond competitive tax rates.

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