A country’s competitiveness determines the ability of its economic operators to prosper and create wealth. Various factors have a bearing on the capacity of businesses to excel. Managerial efficiency is a crucial attribute for enterprise competitiveness, as is the adaptability of management as well as labour resources to a changing competitive environment. Access of enterprise
to finance is another important factor.
A developed and internationally integrated financial sector within a country supports its international competitiveness. Privatisation in the financial system has made an important contribution in this direction and the need for investment in the skills and training of the workforce is also very important together with physical capital.
In every country, firms operate within a fiscal, political, cultural and educational context and these dimensions have a crucial role in determining competitiveness. The government must be flexible enough to adapt economic policy to a changing international environment. The government also has the role of providing a policy-making structure and macroeconomic conditions that are stable and predictable. It is when the government supplies efficient administrative structures, institutions and policies that a nation can compete effectively in the world’s markets. The competitiveness of a nation and the competitiveness of its firms are interdependent.
A fundamental step toward ensuring productivity growth and competitiveness in Malta was the passage of the Business Promotion Act and the setting up of Malta Enterprise. Previously, industrial policy promoted exports in general without giving due regard to productivity and income growth. Earlier industrial policy up to the mid-1980s sheltered domestically oriented activity through protection against imports.
Protection provides dubious short-term benefits. There is always a direct cost to consumers, and in the long run protection does not invigorate industry. Instead it weakens enterprise by stifling the incentives for product development, investment and innovation. Many argue that protection is a zero sum game, and that in the longer run it chokes off growth, particularly in a tiny domestic market like ours.
The longer those parts of the economy remain insulated from change, the harder it is to catch up with the rest of the world, which is itself not static but actually evolving rapidly. In other words, the world is constantly changing and one either rises to the challenge or falls behind. Historical research on Malta’s manufacturing sector has shown that the greater the export orientation of firms, the greater was their tendency to invest and incomes generated were greater. These are the traits that policy makers should seek to replicate across the economy.
Malta’s new industrial incentive structure promotes productivity, growth and competitiveness across all industry. It directly rewards growth in added value and productivity, and focuses additional incentives on industrial sectors that show the greatest promise for success in the international market place. At the same time, domestically-oriented activity is being weaned off the protective shelter through programmes that facilitate restructuring and enterprise growth.
More broadly, government has applied EU rules on competition and state aid. Unfortunately there are those who consider this project solely as an administrative and economic burden resulting from EU membership, rather than a necessary investment. Yet there is really no alternative. Retaining indefinite protection would simply perpetuate current structural constraints, condemning many of our industries to low productivity levels and poor income growth.
There is no question that EU membership has laid the foundation for the achievement of the higher level of competitiveness to which we aspire. EU membership has anchored Malta firmly in the European community of nations and will send a signal to potential investors of the stability and maturity of Malta’s policy structures. EU membership has also meant the injection of structural funds. As we adopt the policy standards of a developed economy, EU funds will also provide crucial assistance. EU membership has removed restrictive rules of origin on Maltese exports and will enable Malta to tap into the EU’s network of trade agreements with other countries.
As a small island nation, Malta is vulnerable to greater economic volatility. Membership in the EU and participation in EU structures has served to reduce this vulnerability.
The government has taken major steps for the direct support of investment in innovation and research and development. A nation that wants to be able to promote high wages and profits must produce higher value added products. Ultimately, continued prosperity depends on innovation, because it is innovation that allows the creation and production of unique and advanced products whose novelty commands higher prices.
The Business Promotion Act provides three forms of incentives for research and development. First, companies whose business is research and development make up one of the ‘identified’ sectors that qualify for reduced income tax rates and investment tax credits. These companies may be engaged in the design or development of products or they may be engaged in design and development of production processes or methods.
Across industry, expenditure of a capital nature incurred in the acquisition or development of technology or know-how, whether this is patented or not, can be financed through loans at subsidised interest rates. It is assisted by loan guarantees and grants, and the company can benefit from a reduced rate of tax on reinvested profits.
The private sector is becoming increasingly aware of the benefits of further investment in research and development. The government has therefore increased the tax exemption on expenses linked to research from 150 per cent to 200 per cent.
Over the last 14 years, the government’s role in the economy has shifted progressively from one of direct participation to that of regulator. This transformation will continue, while the concept of regulation will itself evolve. The objective should be to lessen the direct regulation of economic actors and increase the indirect regulation of the business environment in which these actors operate. State intervention in business activity will be further reduced, aside from those measures that instill or safeguard a competitive environment for private enterprise.
Mechanisms must be in place for the continual assessment of the efficiency with which the machinery of the state operates. In this respect, the establishment of the Small Business and Crafts Directorate within the Ministry for Competitiveness and Communications, is a good example. This directorate is designed to assist small businesses and the self-employed attain a better service from the government departments and public enterprises that they come in contact with. The directorate proposes amendments to regulations that affect business practice, leading to the simplification of legislation and procedures, to achieve a ‘business-friendly’ approval.
The implementation of e-government is another step towards greater efficiency within government administration. Providers will include the public in general as well as interested parties within the private sector, while at the same time promoting electronic commerce within the business community as well.
Undoubtedly, a well-developed infrastructure supports economic activity. Over the past fifteen years my government has considerably invested in our physical infrastructure. Energy generation and distribution, water treatment and production, maritime developments, wide connecting sea and air routes and telecommunications, simply to mention a few, represent essential elements for the efficient operation of the industrial sector. My government is still determined to provide the right environment for competitive industrial operations, meeting high quality standards and demands. Such an environment is vital not only to encourage competition but also at leveling domestic business operations to compete globally
All policy measures have to be inspired through our human resources potential and the successful track record of the Maltese industry as a global player. Liberalisation and enhanced competition lead to greater efficiency, thereby increasing not only consumer benefits but also providing a stimulus for growth within the business community.
Censu Galea is Competitiveness and Communications Minister