The Malta Independent 18 July 2024, Thursday
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The 1980s’ bulk-buying system and public sector employment

Stephen Calleja Sunday, 7 July 2024, 09:00 Last update: about 10 days ago

In this second part of the interview, ALFRED SANT, who served as president of the Malta Labour Party between 1984 and 1988, speaks about the bulk-buying system that was adopted by the government at the time and employment issues Questions by Stephen Calleja

As an economist, at the time were you in agreement with the policies that had been adopted by the Labour government, such as bulk-buying and the idea to promote products made in Malta while restrictions were imposed on items of higher quality that could be brought from abroad?

One has to see matters in context. At the time the drive was to fully promote the emerging industrial sector, in order to create jobs and make up for the vacuum left by the removal of the British military base. There were three approaches by which to achieve this.

First, by attracting foreign direct investment, private ideally, but state as well where possible. This was quite successful, but by itself was not enough. The second was by the Maltese state itself investing in productive ventures; for a number of reasons (and I had done my DBA thesis on the issue), this was a disaster. The third approach was to incentivise local businessmen who had specialised in importation and construction to set up industrial units. They could start from the local market (which would be given strict protection against imports in an initial phase) and having reached some kind of take off, would then be able to export. A clutch of business people were prepared to work on this: top of the list Albert Mizzi, but just as much entrepreneurs like Sonny Borg from Bortex, Joe Cassar from Marsovin, Maurice Mizzi from Mizzi Motors, Valhmor Borg from Valhmor Borg Export Import, the Guillaumiers from the Guillaumier Group, the Edible Oil shareholders led by Chris Calascione and Bart Attard and his Pantalesco group.

Import substitution is a well-known tool in the initial phases of industrial development and has been attempted the world over. (The first hesitant steps towards economic diversification taken in the early 1950s by the Borg Olivier coalition administrations actually relied on giving local monopolices to newly-established producers.) So I never was against import substitution, properly managed. The caveat for Malta of course was/is that the internal market is so tiny. Could any kind of scale economies be achieved on its basis?

Similarly with bulk-buying. The importation of foodstuffs and other cargo to Malta was done in sub-optimal fashion because it was channelled via various importers, who had traditionally secured their slice of the local market and so had all the incentive to retain it through market fixing arrangements that did not need to be contractually laid down but were assumed to be there by all relevant players, as in a secure oligopolistic situation. This exacerbated the already high cost of imports to Malta due to the small volumes involved, which meant that transportation and other delivery costs per unit were already high.

Through bulk-buying, by securing the import of goods on the basis of a national volume, for which importing agencies would bid as in an auction, it was reckoned that significant savings could be made at a time of ballooning inflation worldwide. The approach of course upended inherited ways of doing business in the Maltese economy.

However, the merits of the procedure had come into prominence in the early 1970s, when the oil producing states embargoed their oil exports. At the time, the oil majors declined to guarantee their supples to Malta, as deliveries to their agents on the island were too small to economically justify such a commitment. It was only by intervening and putting all oil import requirements into a national envelope that the government could get some leverage internationally to secure the necessary supplies. (The EU... at a continental level... has been making the same argument these past years for health and other strategic items)

So yes, as a start, I thought that both import substitution and bulk-buying could fly as policies if suitably managed within well cleared limits and eventually as interim measures. I contrasted this with the alternatives presented by the PN Opposition and private sector bodies like the Chamber of Commerce or a federation of business organisations at the time (1984) labelled COPE, which made the case for different approaches.

In my reading, most of these “alternatives” were either platitudinous and vague to the point of being meaningless, or amounted to a reversion to the old outdated policies of the Borg Olivier administration prior to 1971. They just declined to think outside the box, and ignored the huge structural changes that had taken place in Malta since then, as well as more importantly perhaps, the enormous transformations in the world economic situation caused by the deep stagflation of the 1970s-1980s, to which the island needed to adapt.

The problems with the import substitution and bulk-buying strategies were not that they were mistaken as valid concepts but that they were hamfistedly announced and clumsily launched by politicians against the resistances that were surely bound to emerge; that sometimes they were bizarrely and rigidly applied by public servants who had no clue about market operations and that in their ongoing implementation, bureaucracy and political meddling soon became paramount.

Moreover, their efficacy was overestimated, in part for political reasons. Eventually as was to be expected, they became extremely vulnerable to large scale corruption, the acme of all this being the introduction of colour TVs in Malta, when for years, imports of colour TV sets were prohibited to allow for a big demand to build up. On its basis, a local colour TV factory would be set up and as it took off, it would then be able to tap foreign markets and sell its sets to them. It ended up as a big, scandalous, clientelistic rip-off.

In this scenario, frankly my approach was to keep away from where some projects were likely to stink, but to defend the overall concept, within limits that accepted how Malta’s size would affect projects and which rolled back hands-on control by politicians or the civil service.

 

In a struggling economy, unemployment was also high so much so that in the weeks preceding the 1987 election, thousands had been employed in the public sector. Were you on the same page?

It’s much more complex than that. In the early 1980s economic prospects worldwide were bleak, affecting in a big way Malta’s export markets for goods and not least for services (tourism). Unemployment, plus inflation, started to climb significantly. The problems this caused for the island came on top of the internal political struggle that had developed. To counter them, Prime Minister Mintoff’s strategy was to buckle down, economise, consolidate one’s assets and make sure one was in a position to weather even rainier days. The bulk-buying and import substitution strategies fed “nicely” into this approach.

Devaluation was ruled out, not unreasonably. To beat the inflation that was still active, price controls were to be maintained, actually reinforced. Labour intensive investment was to be preferred, especially in import substitution ventures. Technological upscaling, not least in the computer facilities that were then coming on the market, were renounced since they would reduce the demand for labour. Public infrastructural investment was restrained, on the lines of the late 1970s, when shortages had been allowed to develop in the electricity and water supply provision, always to satisfy the claims of prudence in the deployment of public financial resources. The government budget had to be kept not just in balance, but in surplus in order to accumulate capital that would serve as a buffer if matters got worse. (In my view, driving this policy, there still was the fear that if Malta really was placed with its back against the wall, financially and economically, it would revert to being a military base in order to survive.)

It all amounted to what we now call a policy of austerity, like the EU promoted in the years 2008-2012, downscaled to the Maltese context of the time. Unfortunately, it became political dogma within the Labour administration and party. Lino Spiteri, who was sceptical and now following the 1981 election had been appointed finance minister, was soon hobbled, and within two years was switched to the trade ministry. There was no consolation in the fact that the PN Opposition as well as the private sector caucus had (in my view, not theirs) no real, sensible alternative.

In January 1983, I asked Anton Cassar, then head of publications at the GWU’s newspapers where for years I had been writing weekly columns under the pen name, Tumas Borg, to publish under my name two articles which made proposals for a bolder government financial commitment in the economy. Essentially this would be directed towards the creation by the state of job creating, infrastructural works assorted with the possibility of devaluation of the Maltese lira. I told Anton that if he turned the articles down, I would send them to The Times but he did publish them.

Soon I was told that they had been strongly disliked in Castille. Indeed the only success in breaking through the austerity iron curtain was achieved by Minister of Tourism Joe Grima who forced through a scheme of currency support for UK tour operators bringing to Malta a certain volume of tourists. That helped a lot to counter a downslide in tourism that had persisted for too long.

With the change of Prime Minister to KMB, the hope was that austerity would be lifted. From the way he spoke in private, I was convinced the new prime minister was in favour of a more proactive approach, if only to ease the political pressures of the rising unemployment on MLP representatives. However, this turned out to be one of the areas where despite his having resigned, Mintoff’s say-so remained in force. Right through 1985, there was next to no change. Then a big boost in public investment was announced in the budget for 1986.

Which brings us to the specifics of your question. Possibly still distracted by the ongoing tug of war with the PN Opposition over constitutional change and the issues over the Church schools and Church property, the take-off on the 1986 budget was extremely slow. At last, the signal to really press forward was given in Dr Mifsud Bonnici’s May Day 1986 speech. A number of important infrastructural projects that had been in preparation for quite a while (airport, water and electricity supply, roads...) were finally given their real go-ahead.

By any measure, it was too late. Not only was an election round the corner but there was little time for projects to be properly launched. What should have been a targeted investment programme soon degenerated into an ugly scramble to get people employed in government jobs (mostly financed through recurrent, not capital, votes) as ministers and others did their best to secure their voting base. They reasoned that this was not the first time that governing parties had behaved in this way in pre-election periods, which was hardly a consolation.

Opposition Leader Fenech Adami seemed to be endorsing their perspective. During the 1987 election campaign, he publicly promised all those who were being newly-employed with the government that a Nationalist administration would not sack them.

Part 1: The 1981 election and the transition from Mintoff to KMB

Next week: Alfred Sant on the Church schools clash, education and the constitutional amendments to avoid repetition of the 1981 election result

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