The Malta Independent 28 January 2023, Saturday
View E-Paper

Inflation and Malta’s political economy

Michael Briguglio Thursday, 1 December 2022, 07:51 Last update: about 3 months ago

Across the Eurozone and other economic blocs around the world, it seems that inflation is here to stay for the foreseeable future. This is hardly surprising, given global crises such as those related to Climate Change, the war in Ukraine and post-Covid recovery. 

The latest data published by Eurostat calculates the euro area annual inflation to be at 10.6% in October 2022, up from 9.9% in September, and from 4.1% a year earlier. European Union annual inflation was 11.5% in October 2022, up from 10.9% in September and from 4.4% a year earlier. The highest contribution to the inflation rate within the Eurozone was energy, followed by food, alcohol and tobacco; services; and non-energy industrial goods respectively.

It is interesting to note that Malta has one of the lowest annual rates of inflation, at 7.4%, with only France (7.1%) and Spain (7.3%) having a lower inflation rate. The highest annual rates, on the other hand, pertain to Estonia (22.5%), Lithuania (22.1%) and Hungary (21.9%).

Contrary to the Eurozone trend, Malta’s highest inflation rates occur in the food and non-alcoholic beverages sector, and not in the energy sector. The main reason for this is Government’s decision to subsidize energy consumption. Whilst this offers a cushion for consumers, it also raises questions related to matters such as equity (rich and poor are benefitting), waste, financial sustainability and environmental concerns. In particular, it is not clear how long the Government can keep sustaining such expenditure.

Being a small-island state, Malta is highly dependent on imports, including those of energy, goods and services. Hence, in the absence of Government energy subsidies, Malta’s rate of inflation would have been much higher than that actually reported, however, there may be factors that  influence price increases. One of these may have to do with the policy decision to build Malta’s economic growth on the importation of workers, and hence to population growth. Granted that different social classes and groups have different patterns of consumption, the growth in Malta’s population – by around 20% in a decade – has resulted in a global increase in demand in absolute terms, in various forms of economic activity.    However, the importation of foreign workers may at the same time be putting downward pressure on wages, so such a trend has two opposing effects.

In sectors such as housing, which, in turn has a snowball effect on other economic sectors, this has probably influenced the increase in prices of sales and rent. Those who own properties, who may range from big businesses to families who capitalize on their homes, this is financially lucrative. At the same time, however, those who need to rent or buy property are facing impossible prices, that is, unless they opt to share the costs with other people who may share the respective dwelling with them. Of course, this is not at option for many people with their own families.

Another area related to this field is profitability. Government has so far resisted to increase wages, but has resorted to other forms of assistance including the said energy subsidies and cost of living increases. Government’s justification for this is that if wages increase too much, they may hinder investment, thus resulting in a flight of capital. But here one needs to ask whether the rate of profit in various sectors of Malta’s economy is actually increasing or decreasing.

If Malta’s labour market is growing courtesy of the importation of foreign workers, this may therefore at once put downward pressure on wages whilst increasing global demand for goods, services and housing in the country in absolute terms. In the meantime, we keep developing and building as if there is no tomorrow. How sustainable is this? Are we looking into possibilities of a more diverse and sustainable economy?

 

Dr Michael Briguglio is a sociologist and senior lecturer at the University of Malta

www.michaelbriguglio.com

  • don't miss