Economic model: separating the wheat from the chaff

Malta’s economic history is characterised by complete regular overhauls made in light of changing circumstances. Past successes provide an excellent springboard for the next phase of the country’s economic development.

In recent months, there has been a lot of debate about Malta’s economic model. Unfortunately, to a large degree, the discussion was quite misguided and superficial.

For instance, several commentators argued that Malta’s economic growth was the result of a rise in population, due to the importation of cheap foreign labour. However, Eurostat data indicate clearly that Malta’s GDP per capita adjusted to reflect differences in price levels across countries has improved greatly over time. In fact, while between 2002 and 2012 Malta’s GDP per capita (that is the sum of all economic value added divided by every person in the country) grew from being less than 81% of the EU average to under 87%, in the following decade it exceeded 102%. This meant that, from being about 14% less economically prosperous than the EU average, in a decade Malta became 2% more prosperous that the average.

The only countries to do better than Malta, relatively speaking, during this period were Ireland, Lithuania, and Romania. Moreover, many Mediterranean economies faltered over these last two decades, with countries such as Cyprus, Italy, and France losing steam, as can be seen in the table below. Malta’s GDP per capita now exceeds that in these three countries when, back in 2012, it had been much below. Similarly, even though the Netherlands remains much more prosperous than Malta, its relative position has deteriorated, with its per capita economic growth falling below that of the Maltese economy.     

GDP per capita in purchasing power parities as % of the EU average

Source: Eurostat

Malta now has a GDP per capita, adjusted for price differences, of nearly €36,000. Back in 2012 it was just less than €22,500. This improvement of about 60% in a decade is very strong and clearly indicates that the increase in economic growth had a lot to do with improved efficiency and a rise in the level of value-added activities.

Just to give one example: the information technology sector last year had a real value-added of €1.4 billion, up from less than €0.4 billion in 2012. From constituting less than 6% of our economy in 2012, it now comprises nearly 9%. By contrast, the much-maligned construction sector, which some pundits claim is driving most of economic growth, has remained stuck at around 4% of all value-added over this decade. This sector’s total value added used to be relatively like that of the information technology sector, but nowadays in absolute terms information technology generates three times more economic activity than construction.

The professional, scientific, and technical activities sector has also boomed, rising from 6% of total value-added in 2012 to 9% last year. Aviation services now constitute about 2% of total value-added. The gaming sector rose from 7% of all activity to 10% over a decade. By contrast, the public administration sector has reduced its share by 3 percentage points.

All this indicates that the economic growth that has occurred during the last decade has been quite broad-based, but with a focus on relatively high value-added activities. Malta has managed to converge to the European GDP average, partly through improved productivity but also through a substantial improvement in its labour participation rates. Whereas back in 2012 Malta was unable to employ most of its women, nowadays female employment rates have grown sharply.

The next phase of economic development

That said, the next phase of economic development will require significant changes. First, it is highly unlikely that there remains much potential to further improve employment rates. There are only four countries with a higher employment rate than that of Malta, and the best performer is the Netherlands with a rate that is just 2 percentage points higher. This means that, going forward, the main driver of economic growth will need to be improved productivity. So, employment policy will need to move its focus from creating the right incentives for people to be in employment, to instead create the right incentives for people to improve their skills.

Secondly, the country has set itself very ambitious climate targets. For these to be achieved, there will need to be a wholesale transformation of the way a lot of sectors work. One clear area is the need to electrify transport. But beyond that, the energy generation sector will need to shift more to renewables and incentives will need to increase so that firms and households become energy producers. Industries such as construction will need to completely revolutionise the way they operate, in terms of materials used and technologies adopted. Besides changing the way new properties are built, there will also be a need to modify the existing housing stock to make it more energy efficient. So, over the next decades, the main areas of growth will necessarily become green, and demand for green skills will skyrocket.

Thirdly, the economy will become ever more digital. The emphasis on digital technologies will spread even in areas where up to now technological change has tended to lag. This will change the nature of employment, with the demand shifting more to creative skills and lessen the demand for administrative and clerical jobs. Like the green transformation, the digitalisation of the Maltese economy will involve all sectors and will create new important sectors, which will require very highly skilled workers.

Malta’s economic model has performed very well but, given the new set of challenges our country faces, it will need to continue to change substantially. This is nothing new. Malta’s economic history is characterised by complete regular overhauls made in light of changing circumstances. It is this dynamism that has made Malta’s economy a success story over the years. This success provides an excellent springboard for the next phase of Malta’s economic development.

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