The bee in the Governor’s bonnet

In his annual address at an Institute of Financial Services the Governor of the Central Bank has once again expressed his concern about the loss of competitiveness of the Maltese economy. He also again attributed this to the increasing unit labour costs.

He argued that between 2000 and 2008 nominal unit labour costs increased by 23 percent while productivity growth only averaged 15 percent. Is the Governor justified in being annoyed at this statistics which seems to have become the proverbial bee in his bonnet?

Productivity, and therefore competitiveness, is the result of a number of factors of which unit labour costs are only one, albeit important, element. Other factors that affect productivity levels are investment and workers’ competence as evidenced by their levels of training and achievement.

The average wage in Malta is currently around 44 percent of the EU average. In the period reviewed by the Governor labour costs in other richer euro zone countries like Cyprus and Luxembourg increased by an average of 26 percent – significantly higher than in Malta. So, one can hardly argue that the wage increases in Malta in the last eight years were excessive.  The truth is that the reasons for our loss of competitiveness should be sought elsewhere.

It is a fact, for instance, that in the last eight years Malta registered the smallest loss in competitiveness relative to all other euro area countries, while only Germany and Austria actually gained in the competitiveness league. In his speech the Governor did hint to the strength of the euro is one of the reasons why countries in the eurozone suffered a loss of competitiveness.

Since Malta has a very high share of trade with non-euro area countries the appreciation of the euro has impacted us more than it did other countries ion the eurozone with the exception of Ireland, Italy and Slovakia which have a similar dependence on non-euro denominated exports of goods and services.

The Governor very diplomatically failed to elaborate deeply enough on this issue. He just wants workers to expect lower pay rises to compensate for other structural weaknesses in elements that affect our trade with other countries. Significant to underline that he is reported as saying: ‘The magnitude of the task (to improve competitiveness) is compounded by the fact that a high proportion of Malta’s exports go to non-eurozone countries whose currencies have tended to depreciate against the euro.’

The increase in labour costs during 2008 needs even more scrutiny lest we interpret the statistics in a misleading way. The country’s wage bill in that year was inflated by € 40 million payments as part of the early retirement scheme of shipyard workers. This is a full 30 percent of the total wage increases in that year. Unless this element is eliminated from statistics for 2008 we will have a much distorted picture of wage inflation for that year.

The real forces behind our deteriorating competitiveness have to be sought elsewhere. As rightly pointed out by the Governor productive investment, for instance, amounted to 23 percent  of GDP in 2000, but fell to just 16 percent in 2008. This is more than clear evidence that one of the reasons for our fall in competitiveness is insufficient investment, especially in equipment and machinery. In fact most of our investment in the last few years went in the construction of buildings – an activity that has now slowed down significantly leaving this important sector of our economy rather stagnant.

Our endemically high inflation rate when compared to that of the eurozone is another factor that is affecting our competitiveness. What the Governor has euphemistically labelled as ‘market imperfections’ still persists because of a lack of political will to give teeth to our regulatory bodies to stamp out monopolistic and dominant position abuse in our small market.

The 2009 Malta Attractiveness Survey by Ernst and Young has once again identified the cost of bureaucracy as one of the major roadblocks that is preventing more investment from reaching us. Corruption, mismanagement of public resources, and the high cost of government are no doubt undermining our economic efficiency.

Finally, despite the large amounts of money we are spending on education, the results leave much to be desired. The IMF Report published last June clearly recommends   more effective investment in education. In this crucial sector it is results that count and that will help us to win in the competitiveness race.

The bee of labour costs may be buzzing loudly in the Governor’s bonnet, but the real causes of our loss of competitiveness have also to be sought in the inefficient way that our country is being managed by the Nationalist administration

Dr Charles Mangion

Shadow Minister Finance PL

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