MediaToday
News | Wednesday, 28 January 2009

Economists react to possibility of ST shut-down

Charlot Zahra

A panel of economists interviewed by Business Today agreed to some degree that if the Maltese operation of STMicroelectronics had to close down, there would significant impacts on the Maltese economy.
Veteran economist Karm Farrugia was the most vivid, describing the possible closure of ST in Malta as “worse than the Shipyards saga”, and insisted that “all the economy will suffer. ST is too big to be sectionalised”.
Senior economist and Labour EP candidate Edward Scicluna said that “for every job lost at ST, it is estimated we lose the equivalent of a job and a half in other sectors elsewhere in Malta”.
On his part, economist Lawrence Zammit told Business Today that ST Microelectronics, being a significant manufacturing player in country, relied on “a range of services that support any exporting manufacturing firm, such as transport services. Such services will be those most affected,” he added.
At the same time, they disagreed on whether the Government should bail out ST Microelectronics, with Karm Farrugia and Edward Scicluna in favour, and Lawrence Zammit expressing his doubts on such options.
They also were in disaccord on whether the introduction of the euro had any negative impact on the operations of ST in Malta, which trades in US Dollars,
While Karm Farrugia and Lawrence Zammit discounted the possibility, with Farrugia even describing it as “nonsense”, Scicluna agreed, saying that the pegging of Maltese currency to the euro affected Malta’s labour costs.

Karm Farrugia
Veteran economist Karm Farrugia told Business Today that the possible closure of ST Microelectronics’ plant in Malta would affect the economy “very badly, even worse than the Shipyards’ saga”.
“And this when we are on the brink of a recession,” Farrugia exclaimed.
Asked to elaborate on those sectors of the Maltese economy that would be most affected as a result of such possibility, Farrugia insisted that “all the economy will suffer. ST is too big to be sectionalised.”
He explained that on the macro level, the closure of ST would affect unemployment, balance of trade and payments, the nation’s stock of specialised skills much more needed now than ever, as well as public finances.
Farrugia added that on the micro level, the company’s departure from Malta would affect ancillary firms, subcontractors such as transporters, even air traffic: what is known as the “multiplier effect”.
Asked to quantify the total impact on the country’s GDP if STMicroelectronics closed down, Farrugia told Business Today: “My own personal econometric model of our economy does not go that far to evaluate the impact on the GDP, but as a guess I would say around 1.5 to 2 per cent”.
Farrugia said that the Maltese Government should help out ST to remain in Malta “in any way possible to ensure it doesn’t close down for at least two years,” without offending the EU’s competition policy through unacceptable state aid.
He described as “nonsense” those who said that the introduction of the euro had been detrimental for the company’s operations in Malta, which trades in US Dollars.
“Our joining the eurozone as such has not increased our unit production costs. If ST trades in US Dollars it has a reason, but this has nothing to do with the relative strength of the euro,” Farrugia insisted.
“In any case, at the moment and over the last weeks it has been the US Dollar which gained over the euro, not the opposite. The more reason to continue with the US Dollar,” he said.

Lawrence Zammit
On his part, economist Lawrence Zammit, said that the issue of STMicroelectronics needed “to move out of the realm of speculation and into the realm of concreteness. In this respect, one needs to wait for confirmations from the company itself”.
Zammit explained that if STMicroelectronics’ Malta plant was to close down, the Maltese economy would be affected significantly.
“STMicroelectronics, being a significant manufacturing player in this country, relies on a range of services that support any exporting manufacturing firm, such as transport services. Such services will be those most affected,” he told Business Today.
Questioned about the impact on associated sectors of the Maltese economy that depend on ST if the company was to shut down its doors, Zammit did not venture into a substantive answer.
“Unless one has a good grasp of the real value added of ST Microelectronics to the Maltese economy, one cannot really answer your question,” he replied.
On the issue of how the Maltese Government should help out ST to remain in Malta, Zammit warned that bailing out ST could create a precedent for other companies to follow suit.
“I believe that the tax incentive package and the training benefits that the Maltese government offers are very good,” he said. “One needs to understand why, if at all, ST may be considering Malta as uncompetitive.”
“One needs to understand that if there is one bail out of one company, there would need to be bail out of other companies. So in this respect, government needs to tread carefully,” Zammit insisted.
Likewise, Zammit disagreed with suggestions that the introduction of the euro had been detrimental for the company’s operations in Malta, which operates in US Dollars.
“I think the current international crisis has taught us that if Malta had not joined the Euro zone, our economy would have been in tatters,” Zammit explained. “I do not believe that the issue of STMicroelectronics is the value of the dollar.
“This is why I state again that we need to become more concrete in terms of both the real value added of ST to the whole economy and the real causes of the possible difficulties of the Maltese operation of ST, assuming that such difficulties really exist,” Zammit contended.

Edward Scicluna
Finally, senior economist and Labour candidate for the EP elections Edward Scicluna said that the potential closure of ST Microelectronics’ plant in Malta would affect the Maltese economy both directly as well as indirectly.
The direct impacts on the economy are made up of the jobs lost and their respective incomes, Scicluna explained.
“The indirect impacts are due to purchases which the industry makes from other industries in Malta. These again translate into further loss of jobs and incomes,” he told Business Today.
Scicluna explained that roughly, “for every job lost in ST it is estimated we lose the equivalent of a job and a half in other sectors elsewhere in Malta”.
As for the contribution to GDP, he explained that the final impact was double the direct impact.
“A further impact, over and above these direct and indirect impacts, is the induced effect due to the loss of household consumption in Malta due to these overall lost wages,” Scicluna told Business Today.
Asked to elaborate on those sectors of the Maltese economy that would be most affected as a result of the closure of STMicroelectronics in Malta, Scicluna warned that “all the sectors selling to ST are affected. These include construction, renting of equipment and machinery, financial services, agriculture and others too many too name.”
On the issue of the impact on associated sectors of the Maltese economy that depend on ST if the company was to shut down its doors, Scicluna insisted that “the worse impact is that once a firm closes its doors there is no hope of ever seeing it open again once the recession is over.
“The effect is final,” he told Business Today.
Asked to quantify the total impact on the country’s GDP if ST Microelectronics closed down in Malta, Scicluna explained that the proportionate GDP impact was “much less than that for exports in view that their product has substantial import content.
However if you were to multiply the number of workers by the average gross salary in the firm and multiply again by four you would have an idea of the direct impact. “With the above coefficients you may then arrive at the final GDP effect,” Scicluna told Business Today.
Scicluna said that “everything has a price” when asked how the Maltese Government should help out ST to remain in Malta. “We should weigh the price of helping ST and the price we pay if it were to close,” he insisted.
Unlike other economists surveyed by BT, Scicluna said that he “definitely” agreed with those who say that the introduction of the euro had been detrimental for the company’s operations in Malta, which operates in US Dollars.
However once a decision is taken it is no use looking back. “We should have realised that once we are locked to a currency such as the euro, our real unit labour costs matter very much. We cannot take them lightly,” Scicluna told Business Today.
Labour costs should be treated with caution and do something about them once we see that they are out of synch. “Politics should be kept out of it. It is a pity that instead, we played with people’s political emotions and made fun of serious economic arguments meant to improve our competitiveness,” Scicluna concluded.

czahra@mediatoday.com.mt

 

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28 January 2009
ISSUE NO. 567

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