OPENING SPEECH BY THE MINISTER FOR ECONOMIC SERVICES JOSEF BONNICI AT THE ANNUAL CONFERENCE OF THE FEDERATION OF INDUSTRY, AT THE NEW DOLMEN HOTEL, QAWRA - WEDNESDAY, 14 FEBRUARY, 2001

The theme of today's conference – ‘Is the Economy Delivering?' – may be approached from more than one angle. What first comes to mind is the straightforward interpretation: is the economy performing at satisfactory levels? Are the indicators pointing in the right direction? I shall come to these sorts of questions momentarily, when I present my reading of the current and prospective economic picture.

First, however, I want to dwell on a parallel interpretation of the same question. This recognizes that ultimately we are the economy. Actually, a considerable part of the entire economy is represented in this very room. This conference is organized by the Federation of Industry. Various speakers and guests come from the trade unions and Government. We, along with a number of other constituents, make up the human part of the economy.

The economy performs as well as it is allowed to, and as well as it is prompted to, by the structure and institutions that set the rules of economic interaction. Management and workers respond to the incentives and stimuli that are brought to bear upon them.

The economy responds to the policy measures that emerge from the interaction of the social partners. Such interaction occurs at fora like this one, and more formally at the soon to be reconstituted Malta Council for Economic and Social Development. Ultimate policy measures and incentives emerge from the political process.

The message from the Federation's president that accompanied the invitation to this conference bemoans the lack of emphasis in the current debate on the mechanisms of wealth creation and economic growth. Mr Zammit Tabona writes, "Creation of wealth is taken for granted." There is the mistaken impression afoot that "wealth creation takes care of itself", as if all that needs to be deliberated is the distribution of such wealth.

I cannot agree more. Each of us has to ask the question: Is our contribution to the economic process the one that unleashes maximum growth? In particular, I would apply the president's thought to the formulation of the proper role of Government in the economy. It is not that the Government should manage the creation of wealth, but rather the Government has to put in place the correct structure and institutions for growth. By the same token, the organisations that represent business interests and workers have to ensure that the positions they take promote the best long-term interests of their constituents.

In this context there can be no doubt that accession into the European Union, including the process leading to such accession, brings about enormous benefits to industry and indeed to the broader economy. Being part of the large internal EU market will present radical opportunities for our industry. It is no less true that EU membership will help the pursuit of non-EU markets by our exporters. For example, currently our sales in various North African markets are burdened with tariff restrictions. With Malta in the EU, our exports to these countries will be covered by their more favorable trade agreements with the EU.

In the current pre-accession period, we have an ongoing process of economic liberalisation. It is worth stressing that such liberalisation is not just necessary and beneficial. It is also inevitable whether we are in or out of the EU. The benefits come in the form of enhanced competitiveness, and the additional incentive that such liberalisation provides for improvements in product quality and marketing. Moreover, the public will not accept any return to the rigidities of the old system and the shackles it placed on economic progress.

Closer to home, my Ministry is undergoing an important re-organisation. The Ministry for Economic Services is being restructured into divisional clusters that will afford more effective coordination and operational effectiveness.

Of particular relevance in the context of today's occasion is the formation of a Business Promotion Division within the Ministry. This will incorporate the Malta Development Corporation (MDC), the Malta External Trade Company (METCO), the Institute for the Promotion of Small Enterprise (IPSE) and the Malta Investment Management Company (MIMCOL).

You all may recall the arguments in the 1999 White Paper Prosperity in Change on the division of responsibilities between the four organisations. The need has been long perceived for a coordinating point for initiatives that cut across the various entities.

I am pleased to announce the launching of a new board, the Malta Enterprise Board, which will lead the Business Promotion Division. It is made up of representatives of the four organisations. I chair the Board in my capacity as Minister for Economic Services.

This new Board is to coordinate activity, cut unnecessary overlap, and exploit synergy between the four entities. More importantly, it will develop a joint strategy in the pursuit of national economic growth. For that purpose, measures to promote national competitiveness will be put into effect by all the component organisations, and these will also implement a coordinated marketing effort for Malta, Inc.

The structure of incentives and protection that is now being dismantled brought about the divide between exporting industry, largely foreign owned and managed, and import-substituting industry. The law governing industrial incentives has now been revised into the Business Promotion Act. Incentives are no longer restricted to exporters. Instead they are fine-tuned to promote investment and growth in value added. The Act will also usher in changes in the management of factory space, the provision of loans, and the promotion of small business interests.

As I mentioned, the new law does away with export-based incentives. In reality, however, the export focus of our industry is not likely to diminish. In fact it is more likely to increase. This is because, as they restructure, locally oriented firms will probably find more growth potential in foreign markets. We have already observed various instances of such a switch from the protected domestic markets to export markets, and we expect such restructuring to gather speed in the coming months.

In sum, our overriding objectives are to protect the interests of our exporters by making Malta part of the large internal EU market and to promote the restructuring of our more domestically oriented producers. At the end of the day, the litmus tests of our success will lie primarily in two indicators: employment growth and productivity growth. At this point, success by the first criterion is amply demonstrated by persistent and lasting reduction in unemployment, and continuing growth in the labour force and in private sector employment. The same is true of the second (productivity growth), where capital investment serves as a leading indicator of later productivity gains. The latest figures for capital expenditures in manufacturing as monitored by the Department of Industry are very encouraging. Capital expenditure more than doubled from 25 million liri in the first nine months of 1999 to almost 59 million liri during the same period last year.

That this is not a temporary blip is demonstrated by the following observation. In the years 1999 and 2000 combined, manufacturing investment jumped by almost 150 per cent over the previous two-years period. In turn, those previous two years (1997 and 1998) had seen manufacturing investment drop by over 40 per cent. Sceptics have suggested that the bulk of such investment occurred in a single enterprise. But even setting aside that our most successful company, investment in the remaining manufacturing firms rose by 58 per cent in the last two years combined, and this was after a 14 per cent drop in the previous two-year period.

Over a longer span, key indicators show that the Maltese economy performed well by any standard over the last decade. Corrected for inflation, the average annual income of each Maltese person is more than 1,000 liri higher today than it was 10 years ago. In other words, it increased by over 43 per cent.

However the uneven performance during the 1990s is instructive. Real GDP grew rapidly over the first part of the decade, reaching over 6 per cent in 1995. It slowed down after that, reverting to growth rates last seen in the stagnation of the mid-80s. After the change in administration two years ago, economic growth began to recover, rising to 4 per cent in the last two years.

Last year, economic expansion was driven by a vigorous manufacturing industry, which invested more, produced more and exported more. As I have already suggested, sustained economic growth is being translated into new jobs and unemployment is now down to 4.5 per cent. At the same time inflation remains subdued at 2.4 per cent. Stronger growth and more efficient revenue collection have lowered the budget deficit to 6 per cent of GDP, ahead of original projections. In 2001 the economy is expected to expand more rapidly as a result of faster growth in both exports and in domestic demand.

The earlier slowdown and then the recovery of the last two years are largely explained by policy changes, primarily differences that relate to price shocks and to the pursuit of EU accession. To come back to the original question, the economy is delivering, and will continue to do so as long as we cooperate in the delivery of the policy decisions that would unleash our resources.