ANALYSIS: Which sectors are really behind Malta’s economic growth?

It has become a common narrative of Malta’s Opposition and some commentators that Malta’s recent economic progress was mainly due to three sectors: construction, financial services, and online gaming. The first sector, according to this narrative, is afforded lenient regulation, as developers finance political parties, and makes profits by charging exorbitant prices while paying paltry wages. The other two sectors are also very lightly regulated, or so it is said, and their growth depends on this laxity combined with low rates of tax to lure foreign money.

TheJournal.mt has referred official Eurostat and Central Bank statistics to economic experts to see whether this narrative holds water.

A recent Central Bank of Malta study provides a detailed analysis of the evolution of the Maltese economy in recent decades. According to this analysis, seen by our experts, construction, financial services and online gaming have actually decreased in importance since 2013.

Construction increasingly dominates newspaper columns. Yet its economic importance has dwindled from 4.4% between 2007 to 2013, to under 4% between 2014 and 2020. Financial services has dropped nearly one percentage point, while online gaming commands half a percentage point less than it did before, now accounting for less than a tenth of activity.

Which sectors have grown?

Information & communication, which includes computer programming, has doubled its share, from 4% to 8%, now equalling the share of the financial services sector.

Professional services and, to a lesser extent, administrative services have registered a similar expansion in their economic importance. This should not come as a surprise as since 2013, our education sector has been churning thousands of graduates in these areas. Maltese professionals remain very competitively priced compared to their European counterparts and this is leading many European service firms to relocate here or to subcontract work previously carried out in expensive European capitals.

The pandemic, if anything, has increased this trend as firms are understanding that having professional workers in an office makes little sense. With the rise of remote working, the potential for European firms to access the pool of well-trained and competitively priced Maltese professionals has increased.

The rise of the new triad of the Maltese economy – information & communication, professional services, administrative services – was not at the expense of construction, financial services, and online gaming.

Public sector losing importance

Another fact which should come as a surprise to Opposition spokespersons is that the main sector to lose importance since 2013 was indeed the public sector. The Central Bank study indicates that compared to 2007-2013 this sector is now 3% points less. This picture is completely different from the one continuously harped by opposition spokespersons about rising public sector employment and uncontrolled government spending. The data, show that in relative terms the public sector continued to decline in importance. In fact, in terms of employment growth, the public sector accounted for a third of all employment growth between 2007 and 2013, but just one sixth of all employment growth between 2014 and 2020.

It is always surprising how different facts can be, from generally held opinions.

When one looks at average annual GDP growth, the acceleration post-2013 was definitely not caused by construction, financial services and online gaming. These contributed just 0.6% of the average 5.3% annual growth observed between 2014 and 2020. Between 2007 and 2013, they had generated 0.9% of the average 3.6% annual growth.

By contrast, the new digital and highly skilled services sectors accounted for 3% of the post-2013 economic growth, nearly three times as much as pre-2013. Their rise has not just increased the Maltese economy’s diversification. More importantly, it has improved greatly our economic prospects. In an era of greater digital transformation, these new sectors are a guarantee of prosperity. 

It is important that when drafting economic measures, policymakers pay close attention to the real evolution of our economy. Sometimes it is very easy to fixate on sectors that are always in the limelight of the media and fail to notice new rising sectors.

Yet prosperity depends on picking growth areas and nurturing them, which seems to be what the post-2013 administration has been so good at.

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