Time and again, the point has been overlooked that the Maltese economy needs redirection. It has become too tied to a growth model which is basically fuelled by consumption. There is nothing bad about the latter: people do not exist simply to work. But if the space left for savings and investment becomes too restricted, people’s sources of income, as well as the engines of growth for the economy as a whole, come to rest on increasingly fragile supports.

That this has been happening over the years was – and still is – camouflaged by a number of political and social developments that have distorted the issues. There was the move towards so-called liberalisation and privatisation. We had the programmes to align Malta’s economic decision-making with that of the EU. Along with the projects for the implementation of EU investment funds, their effect was to shift the debate away from what should also have been among our economic priorities. The latter were determined almost uniquely by the need to make sure that EU rules were adopted in time and that available EU funds were absorbed as quickly as possible.

Meanwhile, the emergence of sectors like financial services and remote gaming compensated financially for the growing inbalance towards consumption at the expense of investment. Of course, in human affairs, sectors come, grow and then go as part of the way by which economies develop. If remote gaming or financial services somehow fade out of the scene eventually, it is not unrealistic or too optimistic to believe that other economic activities, hitherto undreamt of, could emerge to replace them. The point here however is that gaming and financial services happen to be two sectors, which, by their very nature, did little to change the ongoing bias towards more consumption and less investment.

Government spending and the black economy

Meanwhile, the ever-growing government spending continued to compound the problem even when it was channelled through private sub-contractors as part of the liberalisation/privatisation drive. Though subsidies to the utilities and the drydocks were wound down or eliminated, the resulting slack did not go to investment but fuelled further consumption. It did not help matters that the bulk of government capital spending during the nineties decade went on the Tal-Qroqq hospital, much of which as is now well known, was badly implemented.

There is another factor which has helped to screen the effects of our over-reliance on consumption to roll things over – the black economy. By some estimates it runs close to 30 per cent of all the economic activity going on around us. Even if that is an over-estimate, other “more realistic” assessments still put us on the top side of the EU’s black economy league. Which means that when we consider official statistics about economic output and performance we are probably playing with shadows.

The prevalence of the black economy might be an important reason for a curious development. Inflation in Malta seems to be out of synch with that of other EU members. When prices in the latter dip, ours seem to surge, and vice versa. My hunch is that this phenomenon serves to inhibit further the investment propensity of some, at least, of our economic units.

However, the real impact of the black economy on decision-making is very rarely discussed. There must be some reason why – and it is just as puzzling that, though repeatedly promised, there has been little to no analysis of the reasons why inflation in Malta has been so “erratic”. A hilarious exception was the Prime Minister’s recent musings on how the hotel index could be sparking off the current price hike recorded by EU statistics.

The discontinuity of 1987

Actually, we are still following the path set out in 1987, which then – within limits – represented a straight discontinuity with what had happened previously. Policies that introduced import liberalization, the opening of the economy to the private sector and eventually privatization of state assets in a “free” market setting were launched in line with similar developments in Europe and elsewhere. Such measures should have made the local economy more open. Yet, curiously, for a long time, they had the opposite effect. The openness of the Maltese economy to the outside world shrunk – at least as measured by the ratio of imports/exports of goods and services to Gross Domestic Product.

Two things happened for sure. Private sector initiative, unleashed on the local market through liberalisation and government contracts and no longer through import substitution, concentrated on milking the spending power of the local economy. This had been dammed by policies meant, rightly or wrongly, to stimulate investment in new productive facilities during the seventies and eighties. As a result, there now was less interest in export oriented ventures, especially since new local market opportunities emerged – as in cable television, mobile phones, entertainment plus intermediation in the launching of major government infrastructural contracts.

Overspending and loose controls on the latter projects have been endemic right through, breeding a culture public and private that is still easy on waste, in the belief that it too can create a feel-good factor that is economically beneficial. Meanwhile, privatisation of government ventures, from public works to banks, airport, posts and so on, heightened this phenomenon of riding on the wash of internal consumption. For instance, “competition” within the banking sector following the privatisation of Mid-Med Bank helped to greatly boost spending on credit by households.

The building and real estate businesses were of course leading players in the unfolding scenario. It may be argued that, for a while, sales to foreign citizens of construction units were strong enough to make a mark on investment performance and render the economy a lot more open. Perhaps.

A flagging model

Now, the problem is that for a while, the growth model based tacitly or explicitly on consumption has been flagging – and this independently of the current recessionary conditions internationally. Unless the economy moves forward to invest more in initiatives that would upgrade and expand our productive systems in the public and private sectors, the likelihood is that we shall continue to lose our competitiveness. In recent years, by and large, the tendency has been to remain competitive by squeezing profit margins or real wages – as in the tourism sector. Which is one reason why the promised convergence of living standards towards those of the better-off EU member states has not materialised.

So what are the margins for jacking up investment? In reality, they are quite tight. An ideal scenario would be one in which growth surges forward, no matter how it is generated, allowing the investment envelope to increase without reducing the consumption that people are accustomed to look forward to. That is unlikely because for the medium term, our export markets are not expected to boom.

New private sector investment in export oriented greenfield projects has become increasingly difficult to secure, as the SmartCity and aeroplane maintenance initiatives have demonstrated. To be fair, enticing direct investment projects to Malta has always been a daunting task. Unfortunately, it was made tougher in recent years by the government’s ham-fisted approach towards locally based entrepreneurs. Indeed, for a while it could happen that new investment will continue to originate mostly from service sectors, which are quite footloose and have relatively limited trickle down effects.

The crunch will be even tighter on the public side, where trying to increase investment commitments by reducing recurrent expenditures will create serious political problems for any government. Yet there is a crying need for such investment to be implemented according to a proper medium-term plan – not least in the educational and environmental sectors.

Improving the efficiency of government operations might shave off some liquidity towards capital commitment. However, it is unlikely that this would suffice in a scenario where growth remains moderate to low – at least if, as has happened up to now, political and administrative sacred cows are kept sacred.

Moreover, the government will be under strict pressure to operate according to eurozone rules regarding budgetary annual deficits and the reduction of the national debt. The room for manoeuvre is extremely limited. Eurozone rules do not discriminate between capital and recurrent government spending. So the temptation will remain for the public sector to skimp on investment in order to maintain consumption.

Some will argue that this might not be a bad thing, given the dismal outcomes and waste of government investment of recent years (the Tal-Qroqq hospital, road construction, public transport, SmartCity, the new parliament building and so on). But that is a myopic view. It should be possible to improve the quality and management of infrastructural investment. When such investment proceeds along the right lines, it not only boosts the public sector’s contribution to economic growth (which is essential), but it also enhances confidence in the future within the private sector, thereby stimulating new investment there.

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Surely, there is not enough discussion of the dilemmas that must be resolved if our economy is to be in the right shape when export markets will have recovered. We risk coming out of this recession with a productive apparatus that is less than optimal, compared to what our competitors will have achieved.

Revising the growth model in place since 1987 by which consumption led right across the board has become a matter of urgency. Unfortunately, the need to focus on this challenge will be obscured by the other need to respect fully the newly forged eurozone rules on budgetary discipline. Coupled to the other restraint by which we have no control over the exchange rate set for the euro, we will need determination, intelligence and stamina to create the right climate for the emergence of the investment we sorely need.