Now that the dust from the recent general election is settling, it is time to get down to some real economic thinking.  It is all well to point to Malta's continuing above-EU-average GDP growth till at least 2027.  But can our triple rate be sustained into the future?  It is doubtful unless there are some major changes to the economic system.   

The immediate challenges we are facing are manifold.  They include major investments are needed in both physical and institutional infrastructure.  The first is easy; one just spends several hundred million in capital expenditure and, hopefully without too much corruption, you will have it in a few years.  The second is the hard one.  Our creaking, inefficient, and opaque institutions need major overhauls the likes of which we have never done. 

But park those for the moment. What I want to write about today is another huge challenge: that of changing our economic model from one based on low productivity to one based on high value-added.  Vision 2050 promises that, but for the vision not to turn out to be a mirage, some timely policy interventions or breakthroughs need to happen.

Why?  Looking at what has happened to productivity over the last 15 years, I find that real labour productivity per person has risen by an average annual rate of 0.78% in the EU, 4.1% in Ireland, and 1.4% in Malta.  Productivity per hour has risen somewhat more in all three, but the comparative figures are similar.  What is striking, however, is that there was a significant change in the period 2018-2025 versus the previous five years.  While average EU productivity deteriorated slightly in the last five years versus the previous five years, it dropped by almost a quarter in Ireland. but by more than three-quarters in Malta.

Surprised?  You shouldn't be.  The more manpower we have imported, the less productive they have been.  Thousands of third country nationals are doing very low productivity jobs previously performed by Maltese workers, who have now moved up the occupational scale.   As a result, while our productivity was just below the EU level in 2011 and Ireland's was just 1.5% better, by 2025 Malta's was 16.7% better but Ireland's was over 66% higher. 

Currently, Malta lacks allocative efficiency   ̶   a measure of how well an economy's resources are distributed to its most productive uses.  This underlines the severe need to boost productivity and stimulate investment.  Instead, the recent electoral manifestos of the two big parties competed on who will boost recurrent expenditure most, leaving capital expenditure as the economy's orphan.

In recent years, productivity growth   ̶   output increases that are not attributable to growth in inputs such as labour and capital   ̶   has markedly decelerated, accounting for more than half of the decline in global growth. In order for us to move to a higher-value-added economy and reduce population pressures, we need to start achieving an improvement in productivity of at least 4.5% per annum instead of the current 0.44% per annum.

Structural reforms of regulatory barriers, labour market rigidity, and access to financing are key to achieving a productivity dividend.  Growth will mostly be driven by two main factors: within-firm improvements and economy-wide allocative efficiency.  

Within-firm productivity gains are the result of better technology, improved management practices, and innovative processes.  By adopting state-of-the-art technologies and attracting top talent, companies can significantly enhance their productivity.   Investments in cutting-edge research and development can support new products or improve existing ones, thereby expanding a firm's market share and increasing its competitiveness.  

The second major factor driving productivity growth is, as I said, economy-wide allocative efficiency.  When an economy's resources flow to the most innovative and efficient companies, rather than to laggards, the former enterprises can grow and drive economic progress.  In this way. the best businesses prosper, while less efficient ones exit the market. 

Unfortunately, misallocation of capital and labour across the economy has increased. This misallocation of resources is undoubtedly dragging down productivity growth. As I indicated, this primarily involves too much capital and labour flowing into low-productivity, high-volume sectors   ̶   mostly real estate, and traditional low-quality tourism   ̶   while human capital and investment lag in high-value, and innovative industries.

The growing population and tourist visitor volume have exerted immense pressure on Malta's natural and physical resources. Traffic congestion, over-extraction of groundwater, and high municipal waste generation, combined with waste recycling problems, all point to an inefficient use of public goods and environmental capital.  This has also been highlighted by the EU's country report and other international institutions.

The International Monetary Fund has done various country studies on this problem and has found that, on average, two-thirds of the observed misallocation of resources is attributable to persistent structural issues. In one study, it has estimated the impact of structural reforms on medium-term growth, taking in policies boosting labour force participation, a migration boost to the labour supply, structural reforms, policies improving the allocation of talent, and AI adoption. The combined impact could be as high as 2.5%

The measures include the reduction of barriers to market entry, increasing competition, deregulating certain sectors of the economy, easier access to funding, reducing labour market rigidities, reducing corruption, increasing effective transparency and governance, and institutional reforms. Such reforms can create a more dynamic and productive economic landscape. 

Some technologies, such as artificial intelligence, biotechnology, and green technologies, can potentially lift productivity and boost economic growth. Artificial Intelligence can optimize supply chains, reduce operational costs, and improve customer service, all of which contribute to higher productivity.  In health care, patient care can be made more efficient and effective through AI-driven diagnostics and personalized medicine.   Similarly, in manufacturing, AI-powered automation increases production speeds and reduces errors, leading to significant cost savings and productivity gains. 

It is not that the economic actors do not know what needs to be done.  Countless reports, strategies, and recommendations by government entities, business organisations and international bodies have been drawn up.  The problems are lack of will, piece-meal and selective approaches, insufficiently coherent and holistic policies, and excruciatingly slow implementation.

The economist J.P. Fabri, writing in Malta Today last February, pointed to another consequence of low productivity; this is that of low wage growth in spite of economic expansion, record employment, and persistent labour shortages.  He attributed this to an economic structure that prioritises labour absorption over capability-building, volume over value, and speed over depth.  In an economy that expands by adding people rather than by increasing output per worker, wages stagnate even when unemployment is low. 

As Fabri said, the real test of the Government's Vision 2050 will be whether Malta aligns its education system to new imperatives.  He contrasted current incremental education reform with challenging structural economic pressures.  A systemic realignment requires major improvements in early school leaving, better lifelong learning participation, and stronger vocational education.

Other economists have also mentioned the role of subsidies in the economy.  While subsidies had a significant role in attenuating sharp increases in energy, food and transport, their continuation and embedment in economic policy are problematic.  They warp   economics by altering natural market signals, placing a what one might call "a thumb on the scale," shifting the allocation of resources, and often leading to unintended side effects like overproduction, inflated prices, and economic inefficiency.

If productivity levels continue to fall, we will be at risk of creating a vicious cycle known as the "low productivity trap" or "low-skills equilibrium trap," which hampers further economic growth.  Low skills are associated with weaker development and leads to less resilience to economic shocks. The Organisation for Economic Cooperation and Development blames this trap for reinforcing a circular relationship between low skills, low productivity, and low wage growth.

One aspect of this trap highlighted by various economists and labour market experts is its 'low road' approach, meaning that companies and whole sectors of the economy build their competitive advantage on price, low-wage, and low-skill jobs.  What this means, in effect, is that they concentrate on improving labour efficiency ('working harder') as opposed to 'working smarter.'

A major drawback of the current situation is that, whereas employers would normally try to train and retrain workers in an effort to upskill their potential, this is simply not the case at the moment.  Employers have no incentive to spend time and money on this when their workers are here for one-two years and then leave Malta.  The problem is self-perpetuating.

The challenge is clear.  Silvan Mifsud, a Director for Advisory Services at the consulting firm EMCS, wrote in the Malta Business Weekly a few weeks ago that, "If we do not reverse our present labour productivity trajectory and instead push through costly labour reform, we (will) end up creating much more problems than the ones we are trying to address."  

What we absolutely must have is much more investment in knowledge-based capital (KBC).  This refers to computerised information (software and databases); innovative property (patents, copyrights, designs, trademarks); and economic competencies (including brand equity, firm-specific human capital, networks joining people and institutions, and organisational know-how that increases enterprise efficiency).

Studies suggest that firms' organisational know-how can increase the value of computer assets by a factor of ten. Across Europe, investment in KBC accounts for 20 to 25% of average labour productivity growth.  The six top performing countries in the EU (Sweden, Belgium, and Finland, among them) have R&D intensity equivalent to 3.0-3.6% of GDP; ten others (the Netherlands, Czech Republic, and Slovenia among them) have intensities ranging between 1.5-2.2%); most of the others are low-performing (Malta has just 0.5%).

Instead of talking about vital matters like this, out recent electoral campaign raced to the bottom with a plethora of proposals whose impact on productivity and sustainable growth will be miniscule, if not outright negative.  The management expert Peter Drucker once said, "Efficiency is doing things right; effectiveness is doing the right things."  Our mindset and focus should be on making much-improved productivity the foundational engine of our economic prosperity. 

Frans Camilleri is an economist. He studied at Oxford and University of East Anglia, is a former corporate head at Air Malta, and has served on various public and private boards.