There is one thing almost everyone agrees on when discussing Malta's economy: productivity has become one of Malta's biggest economic challenges

The International Monetary Fund has warned about it. The Central Bank of Malta has highlighted it. The Malta Fiscal Advisory Council has analysed it. Business organisations have raised concerns. Economists have joined the discussion. Their message is consistent. If productivity continues to disappoint, Malta's future wage growth, competitiveness and living standards will eventually suffer.

They are right to be concerned.

But there is another question that deserves equal attention.

Are we diagnosing the problem correctly?

The distinction sounds technical. It is actually intuitive. The answer matters because the policies we choose depend on how we explain the problem in the first place.

Imagine a patient who walks into a doctor's clinic with a high fever. The thermometer confirms that something is wrong. But it does not tell the doctor whether the cause is influenza, pneumonia or appendicitis. Prescribing treatment before establishing the underlying cause would be poor medicine.

Labour productivity plays much the same role in economics. Yet it is often treated as if it were the diagnosis. In reality, it is the symptom.

Labour productivity measures the amount of output produced per hour worked. While it provides a useful indicator of economic performance, on its own it cannot explain the underlying forces that shape productivity outcomes.

Yet much of Malta's recent productivity debate has moved directly from observing weaker labour productivity to proposing solutions such as greater innovation, wider digitalisation, stronger workforce skills and better management practices. These are all sensible objectives. But they assume, implicitly or otherwise, that we already understand what lies behind the slowdown.

That assumption deserves closer scrutiny.

Economists have long recognised that labour productivity is only the visible outcome of deeper forces operating within an economy. Workers become more productive for two broad reasons. Either they have more productive capital available-better machinery, equipment, software, automation and technology-or labour and capital are combined more efficiently through innovation, better skills, organisation and management. Economists refer to the former driver as capital deepening and the latter as Total Factor Productivity.

Consider two football teams.

One improves because it signs better players, upgrades its training facilities and invests in sports science. Let's call it Team Capital Deepening. The other improves because the same players become tactically sharper under a better coach. That's Team TFP.

Both teams perform better. But for entirely different reasons.

Team Capital Deepening improved because it acquired better resources.

Team TFP improved because it used its existing resources more effectively.

No serious football manager would confuse the two. Different problems require different solutions.

The same applies to productivity.

When Malta's recent productivity performance is examined through this broader lens, a rather different picture begins to emerge.

Labour productivity has indeed slowed. On that there is little room for disagreement. Official statistics show that real output per hour worked has been growing much more slowly than during the years preceding the global financial crisis.

The more interesting question is why.

The answer is not where many people might expect. The evidence suggests that the principal change did not occur because businesses suddenly became dramatically less efficient. Instead, it points to a steady weakening in productive capital available per worker.

According to Central Bank of Malta estimates, during 2000-2007 productive capital deepening made a positive contribution of around 0.4 percentage points each year to labour productivity growth. That contribution declined to around 0.3 percentage points during 2008-2016 before turning negative during 2017-2023.

In simple terms, productive capital failed to keep pace with employment.

At first sight, this seems surprising. Malta invested heavily over the past decade. Construction activity reached unprecedented levels and overall investment remained comparatively robust.

But not all investment is created equal.

Building more apartments does not necessarily give workers better equipment and machinery. Expanding residential property does not automatically increase the amount of productive capital available to businesses. The issue is therefore not simply how much an economy invests, but what it invests in.

This is where the debate becomes more interesting.

Different statistical approaches naturally produce slightly different estimates of economic efficiency. Yet the broad picture is remarkably consistent. They suggest that firms continued to improve the way they combined labour and capital, reflecting factors such as innovation, better skills, improved organisation and technological progress. That's Team TFP. The performance of Team Capital Deepening, on the other hand, experienced a pronounced deterioration. Put simply, productive business capital failed to keep pace with the growth in employment, leaving less productive capital available per worker. If employment grows faster than productive capital, productivity growth becomes more difficult to sustain.

In other words, one engine of productivity continued to run while the other gradually lost power.

That changes the policy conversation.

There is broad agreement that innovation, digitalisation, management capability and workforce upskilling remain essential. They strengthen the economy's ability to use labour and capital more efficiently and should continue to feature prominently in Malta's long-term strategy.

The evidence presented here, however, suggests that these measures primarily strengthen Team TFP; the engine that continued to perform comparatively well. Yet the problem appears to lie elsewhere: Team Capital Deepening.

If productive capital deepening has become the principal binding constraint, then those measures alone cannot fully address the problem.

The next stage of the debate should therefore begin with a different question: Why did productive capital fail to keep pace with Malta's exceptionally rapid labour force expansion?

Answering that question opens up a broader policy agenda.

It suggests looking more closely at whether businesses are investing sufficiently in machinery, automation, digital technologies and advanced productive equipment. It raises questions about whether the composition of investment has shifted too far towards assets that contribute relatively little to firms' productive capacity. It points to the importance of infrastructure that supports productive private investment rather than simply accommodating growth. It also invites a closer examination of whether Malta's labour market, sectoral structure and investment incentives are encouraging firms to substitute labour for capital rather than combining both more effectively.

These are not alternatives to innovation or workforce development.

They complement them.

Good productivity policy is not about choosing between capital deepening and efficiency. It is about recognising that both Team Capital Deepening and Team TFP are essential and ensuring that policy addresses whichever constraint is proving most binding.

Ultimately, that is why diagnosis matters.

Ivan Ebejer is an economist and independent management consultant specialising in strategic decision-making.

The arguments presented in this article are based on a recently completed analytical assessment by the author of Malta's productivity performance using official data from the Central Bank of Malta, Eurostat, AMECO and the Penn World Table. The full analytical paper can be accessed here.