News | Wednesday, 11 February 2009

A question of confidence

By a special correspondent

Twenty years ago we saw the demise of Soviet Communism. It can be argued that we are now going through the death throes of liberal capitalism. Capitalism was successful mainly because it was based on self interest. Personal greed proved to be a much stronger motivation than the altruistic principles underlying socialist theories. Mavericks, such as George Soros, warned that this free for all would lead to no good, but then Soros was the tenth richest individual on Earth and he could afford to be holier than thou.
Current economic theory is based on the principle of growth. It is not difficult to realise that unrestricted growth is unsustainable. The environmental effects are evident. Global natural resources are limited. Once we want, say, more oil than we can produce, the price rises. Speculative trading pushes the price even higher and we all remember oil at US$147 per barrel. The same price rise was seen with all other commodities and even to agricultural products. Supply and demand market rules apply and in a global, strongly inter-linked, free market economy such effects are inevitable. Some claim, probably with some justification, that the economic jolt created by unaffordable energy caused unstable economic activities such as the sub-primes in the US to crash. The massive deficit created by the Bush administration had already weakened the US economy and the US went into recession. With the world’s biggest market going into decline, a global domino effect resulted. Luckily the Bush days are over and Obama seems to be willing to take corrective action, including redefining the limits of intervention into the economy.
The rest of the World is also reacting. The EU has so far failed to take collective action but many member governments are propping up their banks and trying to contain and if possible reverse job loss. Even Communist China is investing hundreds of billions to keep as much as possible of its industry going.
In Malta, our banks were spared from the catastrophic losses their foreign counterparts suffered. Our Banking Act and the safeguards it imposes to protect depositors saved us. This is in fact a residue of the intervention-prone Socialist era and EU or Eurozone membership have nothing to do with our good fortune – a look at Spain or the UK should be convincing enough.
We have already seen adverse effects on our industry. Exports require markets. If markets decline, our exports decline. Factories close down, restructure, down size or reduce working hours. Employee income declines and, in the case of redundancies, social assistance expenditure soars. Tourism also depends on the spending power of foreign markets. We are already seeing a massive decline in the number of tourists and on the per capita spend of those that do visit us. Some speakers say that our financial services sector might blossom in the present environment – unless international regulations put spokes in the wheels of an activity that ultimately depends on reducing tax liability.
Our balance of payments has been declining for years. It is true that now with the Euro we are not as exposed but the basic principle remains that we cannot consume more than we produce. We have already borrowed massively against tomorrow’s revenues and Government is reluctant to aggravate Government indebtedness. In the worst case, if GDP drops then our debt as a percentage of GDP increases.
With more redundancies, four day weeks and less tourism, we can expect lower local demand. Local business and service providers will inevitably suffer. In this atmosphere, banks will be less willing to lend a helping hand. But the banks have a quandary. Much of the loans they give out to local business are secured by property. Property prices are declining and if there were to be mass repossessions of security on non performing loans, the property market would become even more flooded with even lower priced property – possibly lower than the values secured. Banks cannot support lame ducks but they cannot afford to let too many businesses go to the dogs. And the banks are already facing a dangerous situation with laid off workers who inevitably default on home or other loans.
Other governments are pumping money into their economy. In contrast, we get unjustifiable power rate increases, requests to care for post-op relatives at home because the state health service cannot take them after the hundreds of millions spent and 60 Km/h speed limits and speed cameras on roads that elsewhere in Europe would qualify for a 90 if not 110 Km/h limit. But then traffic fines are an easy way to augment the national coffers. We get platitudes and incorrect information on economic realities. We are told that Government will create multiple jobs for every redundancy but the results do not show it. Government cannot afford to be alarmist but Malta cannot afford a Government who opts for a state of denial.
Pre-electoral surveys have consistently shown higher public confidence in Dr Gonzi when compared to Dr Sant. Incumbency effects notwithstanding, higher confidence carried the day for PN. In retrospect, many can be forgiven for feeling betrayed. The claim by PL’s Dr Muscat that in 2007 and 2008 we were net contributors to the EU becomes very credible in the present low confidence environment.
Let us look at reality. Government has no money – in fact it has huge debt. The Maltese economy depends strongly on the local private sector. There is appreciable, collective private wealth but even when times were good, Government failed to refine the ways to get this money to fuel the economy. Most people simply built more houses or opened more restaurants and boutiques. When a rare new issue appears on the stock exchange it gets gobbled up, irrespective of its merits. Today we need private sector investment like never before. In the present atmosphere, who is going to invest in new ventures especially of the job-generating type our economy needs? This is where confidence comes in. Government needs to regain public confidence and to make attractive incentives for local job-generating investment. Government needs to stop treating manufacturing industry like a leper. Government needs to realise that Government induced costs cannot burden tourism any further. The powers that be need to appreciate that our skills base is a huge resource and not one to be put on early retirement.
Optimists maintain that every cloud has a silver lining. Perhaps the present crisis will get our cabinet to wear their thinking caps, to forget partisan interests and to work collectively for the country. Perhaps it is easier to maintain a mixture of arrogance, paternalism and apathy. Perhaps the collective powers that be truly believe we owe them and not vice versa. However there is enough goodwill and enough brains on both sides of the house to enable us to maximise the utility of available resource that will not only enable Malta to weather the present crisis but to emerge far stronger when the current crisis blows over. The people put them there to get the job done. Stop applying fine raising speed limits and get on with the real job.



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11 February 2009

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