January 4, 2021
The Great Reset
There is no doubt that 2020 can be described by most as annus horribilis. As we have just started the new year, the positive news surrounding the vaccine and the commencement of vaccination programmes in the coming months signals a semblance to a return of normality. Most economic projections and sentiment indices hinge on the success of vaccination.
Economic recovery will not be automatic and although most projections are talking of a rebound, I believe that this will be gradual as there are many factors at play. However, one thing is certain in terms of national economic performance, the pause in economic activity has definitely scarred economic conditions and resources. Economic weaknesses that were already beginning to evidence themselves pre-COVID will manifest themselves even more once the activity recommences. Also, on an international level, countries had the opportunity to implement reforms and make adjustments to their economic offering in order to make their country more productive, competitive and attractive for the new world order. These are three important economic concepts that not only shed light on the current state of the economy, but even more important yardsticks for the future of the economy, its prospects for growth and wealth creation.
Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments. Nobel laurate Paul Krugman states that “productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” If one had to analyse Malta’s productivity over the past decade has improved, though less than European averages, over most sectors however there are some sectors that warrant some attention. These include the remote gaming, real estate and financial services which have declined in terms of productivity on account of faster employment growth. The public sector too faced a worsening productivity. Going forward, productivity enhancing issues must be a focus of any recovery programme. These include a focus of training, reskilling, upskilling as well as investments in technology and innovation. Unfortunately, productivity developments are seldom mentioned in economic and policy discourse. Too much focus is given on the headline figures of GDP and employment; however, it is the dynamics between these two figures that can shed more light on the true developments of an economy. The developments in productivity are also highly linked to a country’s competitiveness.
The World Economic Forum, which has been measuring competitiveness among countries since 1979, defines it as “the set of institutions, policies and factors that determine the level of productivity of a country.” In measuring competitiveness, the World Economic Forum breaks down countries’ competitiveness into 12 distinct areas, or pillars, which are grouped into three sub-indexes. These are “basic requirements” which comprise institutions, infrastructure, macroeconomic environment and health and primary education. Next are the “efficiency enhancers” sub-index. Essentially, it’s focusing on markets – whether it is the functioning of goods, labour or financial markets – but also considers higher education and training, and technological readiness, which measures how well economies are prepared for the transition into more advanced, knowledge-based economies. The last pillar, innovation and sophistication, consists of two pillars: business sophistication and innovation. These are more complex areas of competitiveness that require an economy to be able to draw on world-class businesses and research establishments, as well as an innovative, supportive government. Over the last edition of the Index, Malta placed 38th out of 141 countries but has seen a decline in its scoring across most of the pillars. The institutional and innovation ecosystem pillars are the ones which Malta needs to focus on. The latter requires a complete rethink and focus on how we can increase our innovation capability. We need to prepare Malta for a research-driven economy ad this requires an investment in our educational system to ensure that there is a stream of STEM students, lower early school leavers, higher percentages of students graduating from tertiary education as well as a sustained investment in research facilities and the enabling environment.
Competitiveness is also a key determinant of a country’s attractiveness. For a small island state like Malta, investment attractiveness is critical for us as we remain largely dependent on the flow of foreign investment to use Malta as a hub for their activities. Investment attractiveness is usually measured by looking at various elements of the enabling environment that attracts investment to a country and therefore looks at the infrastructure, the reputation, the institutional environment, the tax and non-tax incentives and also the regulatory environment. The EY Attractiveness Index has become the main benchmark to assess Malta’s investment attractiveness by foreign investors. The downward trend has continued this year with a number of challenges being highlighted. In fact, the priorities for Malta that were identified are reputation & brand, education & skills and the institutional set-up including enforcement. Corporate tax remains a key element in attracting business together with Malta’s strong telecommunications infrastructure.
2021 is a year of great expectations. It is the year that hopefully the world and the global economy starts its recovery from the aftermath of COVID. From an economic point of view, the global competition between countries will intensify in order to ensure that their economies can rebound quickly and support enterprises and employment. The world is definitely going to be different and economic dynamics will change too. This great reset is going to be critical for countries to prosper in the longer-term and it is precisely for this reason that economic concepts such as productivity, competitiveness and attractiveness are going to be critical for countries. It is true that Malta has displayed strong economic performance over the past few years however we must now ensure that the fundamentals are in place to sustain a strong rebound and sustainable performance. The challenges are known. Various reforms have already been implemented and. Number of investment programmes have been launched. There is no doubt that this is a good start however more ambition is needed to build Malta’s research and innovation ecosystem. To this end, the setting up of a dedicated ministry to research and innovation signals the political commitment to this important ecosystem. More changes need to be implemented to improve Malta’s governance and institutional set-up whilst a reputation-building exercise and remediation plan needs to be implemented. On the productivity side, one hopes that all social partners can come together to focus on improving Malta’s productivity through a revised social pact. Together, the country needs to come together to transform its sectors through technology, upskilling and productivity. This will ensure that Malta remains competitive and attractive and will continue future-proofing the economy and its prosperity.