SPEECH BY THE HON EDDIE FENECH ADAMI, PRIME MINISTER AT THE ANNUAL CONFERENCE OF THE FEDERATION OF INDUSTRY ENTITLED "THE MALTESE ECONOMY ? IS IT DELIVERING?" AT THE NEW DOLMEN HOTEL, QAWRA.

The Maltese economy - is it delivering? Let me begin with a straightforward answer. Yes, the Maltese economy has delivered and is still delivering, but it can clearly do better.

The Maltese economy performed well during the past decade by any standard. In real terms, output and income grew by an annual average of close to five percent, so that real income per head rose by forty percent over this period. Even after taking inflation into account, the average annual income of each Maltese person is almost five hundred Maltese Liri higher today than it was ten years ago. This is real, tangible progress that has translated into a higher standard of living for the Maltese people.

Nor can this expansion be said to have taken place at the expense of continued social development. Successive governments have ensured that Malta enjoys well-developed mechanisms to turn economic growth into improvements in our quality of life. In 1998, Malta placed twenty-seventh on the United Nation's Human Development Index, which compares nations on the basis of GDP, longevity and literacy indicators. Malta ranks above Portugal and ahead of all the EU pre-accession countries bar Cyprus. Last year, the World Health Organisation ranked Maltese health care among the top ten in the world.

These standards will be maintained. This year, Government spending on social security benefits alone will account for around a quarter of total Government expenditure, while health and education will take up another fifth between them.

This is indeed an enviable record, but can it be replicated on an ongoing basis in the future? The evidence suggests that if we want to continue to build on our past economic and social achievements, the economy will have to deliver more. It can do so, for the long-run potential real growth rate for the Maltese economy is estimated to lie between 4.5% and 5%. The gap between that potential, and the actual growth rates we have seen in the second half of the 1990s partly reflects an element of political uncertainty, notably over fiscal and foreign policy.

In particular, uncertainty over EU accession has a negative impact on international investors' perceptions of Malta. In its latest report, the well-known credit rating agency Fitch, states that Malta's credit ratings are supported by the prospect of EU membership. According to the agency, Malta "could flourish in the EU". The agency warns that outside the EU, Malta would lose the stimulus that is opening up a relatively closed and monopolistic economy, that the islands' attraction to investors would be dimmed, and the outlook would become more risky.

But the deeper cause for this gap lies in the relatively inefficient use of scarce resources. Malta needs to become more efficient. The world beyond our shores has changed beyond recognition during the past decade. Globalisation cannot be slowed down, far less reversed. It can, however, be harnessed to provide a better standard of living for all. My Government sees membership of the European Union as a rational response to the increasing pressures of globalisation, while at the same time safeguarding social justice in the European tradition.

The strategic direction in Europe has changed. Following the fall of the Berlin Wall, Malta is competing with the newly free countries of Central and Eastern Europe. These countries have embarked on ambitious market-oriented reform programmes designed to attain economic convergence with the Member States of the European Union. If these countries join the Union before us, they will have full access to the European market, plus the added benefit of EU structural funds. They are closer to the heart of Europe and they will benefit from the enhanced political clout brought through membership in the world's largest political and economic grouping. They will become even more attractive investment locations than they already are today.

If this were to happen, Malta's competitive position in its major export market would be seriously compromised. Shorn of credibility, it will become harder to attract foreign direct investment, and with it the transfer of technology and skills, which can keep our labour force aligned with international standards. Outside the European Union, the disadvantages stemming from Malta's peripheral location would be reinforced. Our struggle to survive will be much harder and convergence with European living standards will take longer to achieve.

Irrespective of EU membership, it is widely acknowledged that safeguarding our competitiveness is essential. Malta can only survive if it can sell in the global marketplace. But to compete successfully, productivity must rise and quality standards must improve.

We all have to realise that improved productivity is crucial. Apart from the pressures of globalisation, the changing nature of our society makes this imperative. With an ageing population, it is clear that protecting the achievements of our welfare system will depend on increasing the productive capabilities of a relatively smaller workforce.

Organisations representing both workers and employers have to realise that the long-term interest of their members lies in ensuring that Malta becomes an even more attractive and profitable investment location. This means that wage increases must reflect productivity gains, and profit margins have to be whittled down to internationally competitive levels. We must avoid the temptation of fully indexing wages to past inflation, thereby ignoring productivity and inflation in our competitor countries.

This would only lock the economy into a wage-price inflationary spiral that would drive down competitiveness and eventually push workers out of their jobs.

On their part, employers have to realise that the process of trade liberalisation is irreversible. Malta is committed to open its markets as a member of the World Trade Organisation. It is committed to open them as part of the EU accession process. It will have to open them as part of any free trade arrangement. Economic theory and practice point incontrovertibly to the superior benefits of free trade over protectionism. The days when profits were a guaranteed mark-up over costs are clearly over.

In short, each and every economically active person must work hard for, and earn, any hoped-for improvement in his or her standard of living.

But focusing solely on material improvements in living standards ignores other important objectives that my Government has set. Economic progress should not be achieved at the expense of workers' and consumers' health, or by damaging the environment that future generations will inherit. In this context, the European Union provides a model of best practice in areas such as workers' health and safety, product standards and environmental safeguards. As part of the accession process, we are already aligning our standards with these international norms. Though it may be costly in the short term, this will have a positive impact on our health and on the environment we all enjoy.

Introducing the highest standards in production will ensure that the world's more sophisticated consumers will readily accept our exports, allowing us to exploit market niches. This will provide a platform for further investment and growth.

Improvements in productivity will depend on the performance of each individual firm, on the quality of management and labour, and on the relationship between all the parties involved. In this process, the Government has a limited, though important, role to play.

Broad economic policy must be oriented towards achieving macro-economic stability, understood in terms of low unemployment, stable prices and a sustainable balance of payments. This will enable the private sector to plan future consumption and investment spending in a stable overall environment, and to lay the foundations for sustainable growth.

To this end, fiscal policy must continue to focus on bringing the budget deficit down. Otherwise, the public debt will continue to grow, implying either increased debt-servicing costs and higher taxes, or deeper spending cuts in the future. My Government has embarked on a responsible and measured programme to reduce the budget deficit over five years. I am pleased that we are making progress towards our target of a deficit-to-GDP ratio of around three percent in three years' time.

Apart from restoring health to public finances, deficit reduction will allow the Government to cut taxes in the medium term, in the process freeing up resources to be used by the private sector. Furthermore, a smaller deficit will be compatible with lower interest rates, thus reducing public debt-servicing costs and stimulating private investment and consumption. This is the beneficial circle we should all aspire to achieve.

In our small, open economy, the exchange rate peg is the linchpin of macroeconomic strategy. It ensures that imported inflation remains contained and limits the potential of domestic inflation by imposing discipline on wage and price setters. The Central Bank is committed to pursuing a monetary policy oriented towards maintaining a stable exchange rate.

With fiscal and monetary policy oriented towards achieving macroeconomic stability, the necessary conditions for vigorous economic growth are in place. However, these measures are not sufficient in isolation. Higher growth rates will only come about if Malta uses all available resources ? land, labour, and capital - in the most productive way.

We must be clear about what the Government can and cannot do in this sphere. It cannot plan the allocation of scarce resources. The collapse of the planned economies of the former Soviet bloc, as well as our own experience with controls and scarcity in the 1980s, have made that clear enough. Within the context of due respect for social justice and human rights, the market provides the best institutional framework for allocating goods and services efficiently.

But the Government can provide a robust legal and regulatory framework within which markets can work transparently and without distortions, such as those caused by monopolistic practices. This is what my Government endeavours to achieve. In sector after sector, our policy has been to ease restrictions on economic activity and to open up markets to competition from domestic sources and from abroad. At the same time, we have developed a strong institutional framework to curb monopoly abuses, uphold consumers' rights and ensure that operators in key sectors, such as finance, conform to the highest prudential regulations.

The liberalisation of markets has been the driving force behind the real improvements in economic performance witnessed during the past decade. If proof were needed, the recent experience in telecommunications has shown once again that freeing up markets leads to better quality service at lower costs. The drop in costs implies real savings for all Maltese households and firms. And it has given the lie to those who predicted job losses.

But much remains to be done. In many markets, price signals remain distorted by monopolistic practices and controls, often backed, unfortunately, by self-centred lobbies interested in perpetuating the status quo. Private and public monopolies, as well as outdated work practices in crucial areas such as transport, and the ports in particular, impose an unnecessary cost burden and undermine the competitiveness of these crucial areas.

To stimulate a more efficient allocation of resources, my Government has embarked on a far-reaching privatisation programme. This should channel significant foreign direct investment, with the attendant know-how, into key areas of economic activity. Privatised firms will contribute directly to more rapid growth, and by lowering the costs of key inputs, could stimulate a second round of expansion in the private sector.

As the social indicators I have referred to already attest, the Government provides ? and will continue to provide - a comprehensive social safety net that provides good living standards for the more vulnerable members of society. The provision of such a social safety net reflects our basic values and aspirations. It also has a crucial benefit that has often been ignored by those who advocate the unfettered rule of the market mechanism: it binds society together so that all members feel that they have a stake and a share in its success. However, any social safety net must be tailored to match the resources available, which are inevitably finite. Therefore, we are working to curb abuse and fraud to make sure that help goes to those who really need it.

My Government has invested, and will continue to invest, in key areas that do not lend themselves to private initiative, either because of their scale or because they are in the nature of public goods. Health and education are cases in point. Investment in health and education allows each person to develop his or her potential to the fullest. In so doing, it also helps to produce a labour force that is productive, technically competent, flexible and open to new ideas and working methods.

The Government recognises that the rapid spread of new technologies requires further investment in our workers. In response, we are investing heavily in introducing access to IT resources in schools. The budget allocation for the Employment and Training Corporation has been increased, partly to fund more training in IT, to ensure that the unemployed are not frozen out of the job market. A new national college specialising in science and technology is in the process of being set up to improve the skills base of Maltese workers.

My Government supports the private sector through specialised public entities. Parliament has just amended the Industrial Development Act to provide a broader framework to channel state aid to private enterprise. IPSE and METCO continue to assist small enterprises and promote Maltese exports, while the Malta Tourism Authority has embarked on a medium-term strategy to improve the quality of the local tourism product.

Public sector companies such as Air Malta and Sea Malta still provide crucial transport links to manufacturing and tourism, while Enemalta has so far sheltered local industry from the burden of the higher energy prices of international markets.

Ladies and Gentlemen,

My Government is firmly commited to ensuring that the Maltese economy, which has performed so well in the past, continues to deliver.

We have a clear strategy, which is based on four fundamentals:

- Firstly, orienting fiscal and monetary policies to achieve macro-economic stability.

- Secondly, stimulating cost-cutting competition and productivity gains by freeing up markets and privatising state-owned enterprises.

- Thirdly, maintaining a social safety net to further promote human development, social cohesion and a more flexible, productive labour force.

- And finally, a clear, credible foreign policy strategy which will send an unequivocal, positive message to investors, both local and foreign, secure our major export markets, and provide development funding.

But no Government can deliver all of this alone. The strategy that I have just outlined can only produce results if the social partners embrace the challenge and respond appropriately in the long-term interests of their members and the country as a whole. Malta cannot succeed without the contribution of each worker and employer acting in concert through his or her elected representatives, in a process of social dialogue. I expect the newly named Malta Council for Economic and Social Development to provide a congenial forum for such a dialogue. Also in this regard, the Federation of Industry and all the other social partners have a crucial role to play to ensure that our economy continues to deliver.