George M. Mangion | Wednesday, 25 March 2009

Jobs for free

A lot has been written of late about the need for Malta‘s economic fortunes to improve. Leading economists lament that there must be a solution to this delicate economic dilemma amidst the current recession that is hitting the world. Jobs are the first that feel the drop in economic growth.
Ireland, which like us entered recession in the last two quarters of 2008, suffered a major economic blow in January when Dell announced the closure of its assembly operation in Limerick with the loss of 1,900 jobs to a plant in Poland. Dell, which set up operations in Ireland in 1990 and employed 4,500 at its height, has been one of the jewels in the crown of the so-called Celtic Tiger economy. Other examples of job cuts abound around the world but Ireland seems to have been hit hardest in Europe. One reads how the prediction by the Engineering Employers Federation that some 140,000 jobs will be lost this year as the recession quickens into depression at an alarming rate, underlines the very grave situation developing in the manufacturing world. So one may ask how have Malta‘s employment prospects been affected so far. The government is blissful that over 7,000 new jobs were created last year. So not everything is doom and gloom .Suffice to mention that in 2007 being the run-up year prior to a general election saw the best ever rise in GDP. One cannot forget the glory days in the early 1990s when the economy benefited from positive strides. Yet these were followed by years when the national deficit reached a peak in 2003 and looked as if it running amok like a runaway train. Malta’s economic performance up to 2003 has been a laggard with unacceptable levels of growth not adequate to sustain a high salary level enjoyed by other European countries such as Ireland. This was partly as a result of some delays in the structural reforms that were mandatory for us to pass the euro criteria. Some cosmetic changes have been made over a prolonged period but a comprehensive plan of how the economy could flourish was hardly ever attempted until the last minute surge was conceived to meet the Maastricht criteria to qualify for entry as a euro applicant in 2008.
Our belt tightening in the run-up to the entry to the eurozone has borne rich pickings and this was awarded by registering a record 3.8 per cent rise in GDP. What contributed to this success? Surely the answer is a combination of budget cuts and tightening of tax collection schemes together with the rationalisation of certain subsidies which were curtailed or completely dropped. The 20 per cent increase in vat rate worked magic with helping reduce the deficit. Certainly the pressure from Brussels to meet the strict criteria of the Growth and Stability pact has proved beneficial since our politicians has made the entry to the euro as their holy grail. Another successful tool in the armoury of the government to streamline our finances and create more jobs was monetarism. This is essentially an extension of classical theory which was developed in the 1960s and 1970s and was used extensively by Margaret Thatcher to solve the entangled economic phenomenon of her period. In brief, the main objective was the creation of sustainable employment in both full time and part time category and the restructuring of our economy from one predominantly based on manufacturing and mass tourism to one focused on a high value-added services.
Definitely the reform leading up to 2007 has heavily focused in making sure that supply is improved as this creates its own demand. The attractiveness of this theory to create more stable jobs and release more resources into productive sectors resulted in indigenous inflation started creeping upwards but employment is also edging up. An undesirable lack of equilibrium was created by a relatively high inflation compared to other eurozone countries coupled with the marginal improvement in jobs openings in new enterprises such as pharmaceuticals and gaming. Again there is a large scale project in the horizon called Smart City which promises substantial job opportunities. Smart City residential project translates in new jobs in technical areas such as telecommunications and ICT technologies. This is always the terse answer to Jeremiahs who doubt whether sufficient job openings will materialise now more so due to a slowdown in exports pursuant to an unprecedented global financial mayhem. But the Chamber of Commerce is emphasising the need of a government financed stimulus. This is expected to boost demand which in turn will lead to an increase in expenditure to buy those goods and services (demand).
In a perfect equilibrium there will not be any shortage of demand and there will always be jobs for all workers. In the long term, if there was any unemployment it would simply be temporary as the pattern of demand shifts. Of course the creation of demand for jobs by initiating public sector pipe-dreams is an old hat. We all heard it before in the mid–seventies when millions were poured into building the Great China Dock and expanding shipbuilding capabilities.
Granted that such massive capital injections in the economy had a temporary respite to create new jobs but the timing was impaired due to a phasing down of global demand for ship repairs. The dockyards have cost us dearly over the past forty years and a good size of our national debt can be attributed to annual subsidies to finance wages and cover the recurrent losses. Other capital projects in the past have also been criticised that they went over budget and took too long to start operating. But jobs have always been a priority for the government. Nothing bothers a politician more than his or her ability to place an unemployed constituent into a decent and sustainable job. We can easily name other hare-brained projects intended to create permanent employment. These were expensive sprees such as the ill–fated launch of seven Avro jets that still haunt us and remind us of the deficit that was created to wipe-off Air Malta ‘s debts. To be fair, this does not mean that employment was not created in the short term but of course it where it touched new initiatives with the private sector this was not always sustainable.
With hindsight we can blame excessive red tape, political interference while some government projects lacked commercial viability. Regrettably the projects/authorities are invariably run by political appointees posing as business magnates. This does not mean that the tax payers have not learnt lessons from past adventures. Perhaps the solution has turned a full circle. This is more opportune when one recalls Prime Minister Lawrence Gonzi commenting that we may have reached a plateau in the employment sector, with the number of new jobs balancing the number of dismissals. As reported in an English newspaper he said in parliament that the global economic situation was affecting us but the local economy was proving to be resilient and was moving forward. Redundancies and new jobs were balancing each other. Was this thanks to the energetic attitude demonstrated by our finance minister who has applied direct government intervention thus saving thousands of jobs in motor engineering export sector?
In the engineering world, to lose one’s job is awkward because of the specialist skills acquired by workers which limit their placement. Ordinary workers otherwise made idle struggle to find answers to the problems of the mortgage, the cost of living in feeding and clothing a family.
Of course direct government intervention via tax credits, training grants and other forms of assistance will save the baby and the bath water. Such companies were the fruit of years of international promotion and the wielding of tax concessions that seen Malta Development Corporation succeed to attract such investors. Once closed down, with all the plant and machinery sold at auction, or to dealers, the cost of restarting such operation is prohibitive.
In the present climate, in any case, to get financial support from local banks would be dubious given the climate of risk averseness that is haunting banks in general. But jobs come first and one is reminded of the famous Dire Straits song “money for nothing; chicks for free”. Regrettably jobs do not come free.

George Mangion
Partner at PKF – an audit and business advisory firm



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25 March 2009

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