The secrets behind Labour’s transformation of Malta’s economy

With the general election round the corner, at the end of the Labour Party’s second legislature, it is only natural that one should look back and assess whether the Labour Governments of the last 10 years have delivered on their promise of a strong economy. And my, how they have. It is a performance second to none.

Rather than delving right away into the specifics of the economic record of the past decade, I just want to talk about the drivers of economic growth in general. No country can grow unless the policy-making people at the helm understand these drivers. They are crucial to planning investment strategies, fending off recessions, and working out a country’s debt sustainability, among other things.

If one knows how to raise long-term growth rates, it becomes far easier to tackle debt problems, address poverty, and improve the quality of life for everyone in the country. So, it is not surprising that every year thousands of papers are published in economic journals and online, many using sophisticated models to explain past, and predict future, GDP performance of countries everywhere.

Labour’s performance on the economy

is second to none.

One would think that, armed with so much learning, their powerful models, and reams of data, economists would know when economic growth will stall, anticipate when it will recover, whether it will accelerate, and what would happen to poverty rates. You’d be wrong. In fact, the myriad consultants and institutions purporting to understand the root causes of fast and slow growth resemble those stock-pickers who offer a sure-fire return, but who are regularly outperformed by someone selecting a portfolio by throwing darts at a board. Anyone who says he knows the secret to growth is lying.

It’s just a coincidence then, you might now conclude. Wrong again. Let me set out what some might call the ‘best-kept secrets of economy reality’.

1. Austerity does not lead to growth

The first secret is probably the only that has caught public attention over the past few years, and that is that austerity does not lead to growth, but rather the opposite. Austerity only leads to economic contraction, as all historical evidence shows. We know that we are starting to win the argument: even the International Monetary Fund has published research that shows that austerity does not work.

2. Public spending is vital

The second may not be so well known. It has to do with what we might call Wagner’s law (not the composer Richard’s but that of Adolph the economist). This states that all economic growth has been coupled with an expansion of public spending above the level of GDP growth, as confirmed by facts over the past 140 years. This is because public spending is vital to providing for the needs of the private sector. One only has to think of the infrastructure, a healthy and educated workforce, and greater consumer demand.

3. The public sector is more efficient

The third secret is absolutely the most surprising. Repeated studies, usually carried out by people who were convinced they would find the opposite, consistently show that the private sector is no more cost-efficient than the public one (and often more costly). Quite often, the public sector is much more effective in achieving better outcomes.

4. Spending on social security is crucial

The fourth one is that spending on social security makes for a more equal society, redistributing wealth from the top to the bottom. What may be more of a surprise is that spending on public services (particularly housing and health, as well as education) is even more effective in reducing inequality. The reason for this is two-fold: these services help to close the gap in the quality of life between the richest and the poorest and, secondly, public-sector employment pays better, boosting consumer spending amongst the lowest paid.

5. Economic growth creates more revenue

So far so good. “But we can’t afford it!” you will hear some people say. “Where does the money come from?” The answer is from growth itself – the fifth secret. Economic growth generates more revenue for the State’s coffers, even if one does not impose greater taxes on corporate profits, high incomes, wealth and property. The IMF has estimated that one could safely introduce such taxes up to 11% of the GDP without hampering growth. Think of what 11% of the GDP could do for our public services.

malta economy gdp

It is obvious that the arguments for austerity are erroneous. In terms of the intellectual debate, the debate is already being won. Which brings me to Malta. Many years from now, when tempers have cooled down and a sober assessment of what happened between 2013-2017 can be done by economic historians, I am sure that they will conclude that Malta was lucky that it had a Prime Minister who, despite any warts he had, fervently believed in growth, rather than austerity.

Let’s look at the record now. Compare Malta’s annual rate of growth in its GDP to that of the EU27 and five countries selected at random. During the period 2005-2012 the EU’s growth rate and that of many other countries stagnated, if not declined. In Malta it was not so bad, through it was a staid 2.9%. Come 2013, and off we go. The EU managed to get a more decent 2.1%, and other countries followed suit with some better respectable results. Malta achieved 7.3% ─ more than triple the EU’s rate.
I feel no hesitation in not bringing in 2020 into the comparison, because that was a one-off major event for which nobody was prepared, and which upended all economies. In any case, we are already seeing that Malta is recovering more strongly from the economic impact of the Covid19 pandemic than most other countries.

I will not pepper the readers with many other statistics, because most of them tell the same story. But it would be remiss not to refer to what happened to Gross Capital Formation. Here, the comparison is even more revealing. During the period 2005-2012, the EU27 registered a lackadaisical result with a 2.02% annual growth and negative growth in many other countries, including Malta. In the subsequent seven years, whereas the EU27 doubled the annual growth rate to 4.4%, Malta outshone everybody with a 14.4% growth in gross capital formation.  There’s nothing like investment to boost economic growth.

Investment contributes to higher domestic expenditure; enlarges the production base (installed capital), increasing production capacity; modernises production processes, improving cost effectiveness; reduces the labour needs per unit of output, thus potentially producing higher productivity and lower employment; allows for the production of new and improved products, increasing value added in production; and incorporates innovations and quality standards, bridging the gap with more advanced countries and helping exports and an active participation in international trade.

What now? We cannot rest on our laurels.

The PL’s economic vision for the next five to ten years is ambitious and, once implemented, will contribute to another spurt in economic growth.

I would say that the PL is more than justified in saying that, in this case, “Past Performance is a Guarantee of Future Results”.

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