A call to practicality
Last week the Minister of Finance, Edward Scicluna, was reported saying that economic booms “contained the seeds of their own destruction”. Within the same context he said that none of Malta’s economic sectors should be allowed to overheat and reach overcapacity. One can attribute all sorts of conspiracy theories to these words. However, I would disagree with anyone doing so.
The words of Edward Scicluna need to be interpreted as an expression of the need to not take anything for granted in our economy, of the need to analyse the performance of our economy with sobriety, and of the need to be prudent but optimistic.
It must be remembered that there were a couple of occasions, in what may now be seen as the distant past (late 1960s and late 1970s), when certain sectors of the economy had overheated with some nasty consequences for the rest of the country. Unaffordable house prices for first-time buyers and government-induced inflation were two symptoms of those times.
We also need to put our economic performance of the past years within an international context. Our economy experienced very good growth rates, in spite of the performance of the international economy. Within an international economic environment, some analysts are claiming that we would need to get accustomed to low inflation and low growth rates. In such a scenario, can our economy sustain an annual growth rate of five per cent over a number of years?
If we want to ensure that our economic boom does not contain the seeds of its own destruction, then we need to start working on developing new sectors that will deliver future growth
The words of Scicluna were echoed by Alfred Sant in an interview in last Sunday’s edition of this newspaper. He spoke about the need to sustain the manufacturing sector. He stated that the Maltese economy is increasingly becoming dependent on the services sector.
This helps to put the focus on what we should be doing as a country. Another point to remember is the resilience of our economy. We have not had the spectacular growth rates that countries like Ireland and Singapore have had. On the other hand, neither did we have the sort of downturn that such countries had when things turned sour. Over the years we have had growth at a pace that could be sustained. In fact, up to a certain extent, the growth rate of six per cent experienced last year was more of an exception than the norm.
So what should we do in this context? When I used to teach economics, one of the key messages I tried to give students was that two of the functions of government in an economy are to initiate and manage economic change and to stabilise the economy.
The analogy I used to give was that of a farmer having an orchard with fruit trees. The farmer has four tasks to do: care for the trees that are giving fruit and make sure that they continue doing so for as long a time as possible; sow trees that would give the same type of fruit as at present; sow trees that give a different type of fruit than at present; and chop down any trees that are no longer giving fruit.
The government of any country has a similar task. It needs to nurture those sectors in the economy that are doing well such that they continue to be the drivers of growth; it needs to develop sectors ancillary to those that are doing well; it needs to promote the development of new sectors; and it needs to wind down those sectors that can no longer enjoy a competitive advantage.
We have done this successfully over the years, otherwise we would not have moved from the clothing sector to the engineering sector and then the pharmaceutical sector in manufacturing. Similarly, we would not have developed aviation maintenance activities and financial and corporate services in the way that we have done.
Using the analogy of the farmer and his orchard, have we gotten to the stage where we need to look at new fruit to grow, such that when certain activities stop growing, we have something to replace them with?
This is where we need to be prudent but optimistic and to analyse our economic performance with sobriety. We should all be proud of our economic performance because we have all contributed to it. However, we should not take it for granted that it will be like this for ever. If we want to ensure that our economic boom does not contain the seeds of its own destruction, then we need to start working on developing new sectors that will deliver future growth.