How Malta’s government is on the road to ruin

Malta’s economy has long changed into a service economy. This change has long-term problems associated with our wellbeing. I fear the government has not prepared for this.

Definitions

A service economy is an economy where services make up a larger share than goods. In simple terms, if a country produces more services than it manufactures goods, then it has a service economy.

Malta’s economic strategy over the past 40 years or so focused on creating such a service economy. There was a time when we could boast about our inexpensive workforce to be able to manufacture goods in Malta. We knew this economic advantage was going to be transitory. We did little to remain competitive from a manufacturing point of view.

Malta’s educational strategy over the past 30-40 years also focused on services. Ever since the 1990s, people urged children to study subjects which work well in a service economy. I remember the mid-90s when aspiring to be an ‘accountant’ or to work in ‘IT’ was an investment in the future.

Income inequality is fine if you’re at the top.

This was a good idea. Malta does not have natural resources. Focusing on human capital was an obvious choice.

Today’s financial services industries take advantage of the past investment in those fields. As a result, we wouldn’t be where we are today if it were not for this sort of thing.

There’s nothing wrong with that.

Is there?

Services and goods

Not yet but the authors of Capitalism without capital: The rise of the intangible economy argue that it will.

Take a simple example: if I make a table and sell it, I need time and resources to make another one. I will need machinery and a workshop. If I can no longer sell tables, I can at least liquidate my investment in materials and equipment.

If I sell a service, I don’t need time and resources to make another one. The service is there. I can, in a way, make 100% profit every time I sell the same service again. If things go wrong, I have nothing to liquidate and would lose everything, but I also have plenty of profit. This doesn’t seem bad to me. What’s wrong with making money?

Infinite growth

Producing services means that a company can grow and dominate the market faster than ever. Think of Uber or AirBnB. They’re giants and became this large in the last decade or so. Uber is the largest taxi service in the world but doesn’t own cars. AirBnB is the largest hotel night seller in the world and doesn’t own property.

It is because of this people working in these large companies make more money, on average, than other people in their industry. Good luck to them, I say, because companies should reward valuable resources.

Let’s compare two people who in the 1990s took different career paths. One ended up in a service-oriented job and has a great salary, but which is average for her industry. The other is in a goods-oriented job and has an average salary for her industry.

There is a big income gap between these two people. The person working in services earns more. Even if the two have a similar education and background, the person in services earns more than the person in goods.

What’s wrong with making money?

In Malta, which has a service economy, the salaries in service industries become the norm which pushes prices up. The price of property increases. The price of imported goods go up. The price of standard everyday items like clothes and food go up.

The service-oriented people don’t mind; they have the income to match.

The goods-oriented people get left behind.

Income inequality is fine if you’re at the top. If you’re left behind, it can be awful.

Back to Malta then. How bad is the situation?

IV

Malta’s statistics speak for themselves. I referred to the National Statistics Office and took a look at the GDP figures for the third quarter of 2017. Services made up EUR 2 219.54 million. Goods made up EUR 243.15 million The service economy is nine times bigger than the goods economy. It was 5 times bigger in 2011. For comparison, in the first quarter of 2011 goods amounted to EUR 239.93 million. The goods part of our economy is stable. Meanwhile services have exploded as the graph here shows.

If my points above are correct, we should see a corresponding change in income too. I looked at the figures from the NSO’s Labour Force survey. I compared the figures for the third quarter of 2017 with the third quarter of 2014. (This is the earliest available information on the NSO website.) In Q3 2017, the average person working in services made 27.9% more than someone working in goods. In Q3 2014, the average person working in services made 7.5% more than someone working in goods. That’s one huge leap over a three-year period. In June, we learnt that 70 000 people are living in a state of financial poverty, even if they’re gainfully employed. The figures above back this statement up. As I said before, income inequality is not a problem if you’re on top. It’s only a problem if you’re on the wrong side of inequality.

I would have to work much harder than the guy next door to make ends meet. We may have had a similar education and we may both be smart. But I work in a goods-oriented environment and he works in services. This is not fair.

The situation has the potential to get worse and worse before it gets better.

The average person working in services makes 27.9% more than someone working in goods.

Where is Malta’s current industrial strategy?

Malta’s strategy

I’ve written about our smart city strategy (or lack thereof) which would be part of a holistic industrial strategy. We need to have a large manufacturing base to be able to balance out the economy and make sure that, on average, people can live a good life no matter what their choice of employment is.

Successive governments have turned a blind eye to how our society will develop. This problem didn’t materialise overnight. It’s been 40 years in the making. They advocated policies which made sense at the time but which were not examined too closely.

Now we’re approaching a cliff edge. Every economy needs a manufacturing base because someone has to make the products it uses. If the people making things cannot earn a living because of the people sitting at desks, this part of the economy will collapse. Income inequality fuels many problems: crime, drug addiction, infant mortality, obesity, democracy. As the rich get richer and the poor get poorer, the middle-class will disappear making elections unfair and stoking civil unrest. Now is the time to course-correct and prepare the path for the next generations. Or should we ignore them and let them fail too?

Share this with your local MP because you want your kids to have a good future.  

References

1. Service economy; Wikipedia; (Retrieved 2018-08-09)
2. Gross Domestic Product statistics; National Statistics Office
3. Labour Force Survey 2014-2017; National Statistics Office
4. Malta’s poverty problem like that in ‘Spain or Portugal at their worst’ – Delia; Philip Leone Ganado; The Sunday Times of Malta; 2018-06-03
5. Why inequality is the most important economic challenge facing the next president; Steven Pressman; The Conversation; 2016-10-17 
6. Capitalism mark 2 will widen inequality; Daniel Finkelstein; The Times; 2017-11-29

All references were valid and correct when this article was published. Changes to referenced websites or web pages may render some references invalid. If this is the case, please leave a comment below.