Sunday, 28 December 2003

Blair Bounces Back

The Malta Independent on Sunday

This time last year I had described Tony Blair, the British Prime Minister, as one of the major losers on the international scene of 2002, completely outshone by French President Jacques Chirac who dictated matters on the EU and international stage.

Specifically I had stated:

The international personality who ought to consider 2002 as a personal disaster is
UK Prime Minister Tony Blair. Humiliated by Chirac who edged him out of the tandem with German Chancellor Schroeder, Blair has been made to appear as the US lap-dog rather than the strategic link to co-ordinate the policies of the US and the EU. While Chirac has brought Schroeder to make huge concessions as Schroeder was still reeling from the fatigue of a bruising re-election campaign, coping with a rebuff from the US for German non-participation in the pressure of Iraq, and economic woes on the home front risking a recession or outright deflation in Germany, Blair lost the strategic support which he had taken for granted from left wing colleague Schroeder.

“On the domestic front Blair is seeing his re-election shine wearing off as the shield of protection of his PR machine is getting predictable and ineffective. Blair is also under pressure from the man next door at No. 11 Downing Street – Chancellor Gordon Brown. Brown is winning more support for his cool approach to Blair’s determination to take sterling into the euro as interest rates and the economic tempo of the
and euro areas continue to diverge rather than converge for an eventual docking in.”
What a difference a year makes! Blair can look back with satisfaction that during 2003 his risky bets paid off handsomely and he can look forward with confidence to the electoral test that awaits him in 2005/2006.

It did not look like that for the most part of the year but the dividends came in December permitting Blair to have the last laugh on his critics.

On the international front Blair went against the current of the Franco/German tandem by supporting the
US invasion of Iraq. While for most months following the successful military invasion, the UK Prime Minister seemed to be losing credibility through the unsuccessful search for WMDs upon which he had justified the war, December changed fortunes with a double whammy.

The capture of Saddam Hussein alive and capable of being put through the wheels of justice to answer for his atrocities against humanity has made the invasion of Iraq justified in public opinion independently of the existence or otherwise of WMDs. It has turned the cards on Chirac who is now seen a Chamberlain advocating appeasement to certified mass murderers.
Libya’s unilateral declaration of abandonment of WMDs and nuclear programmes, and its willingness to open itself up for inspections checks on good behaviour by the international community, came hot on the heels of the Saddam capture after months of secret diplomatic negotiations between UK and Libya. Blair could face the world stage waving the effectiveness of the carrot for countries like Libya who are determined to put the past behind them and use their natural wealth for the economic development of their own country and abandon all hopes of imposing a new world order through the endorsement of terrorism and abuse of human rights, and the stick for rulers like Hussein who remains defiant, possibly through miscalculation, that appeasers like Chirac will guarantee his survival by blocking UN sponsored military action.

Blair has scored successes on the EU front where Chirac and Schroder messed things up quite considerably. The failure of the
Brussels summit to agree on a new EU Constitution can be pinned mostly back on Chirac for the way he had handled and dangerously compromised at the Nice summit in favour of France but at the expense of Community benefit. To remain at par with Germany he had conceded to Spain and Poland an overweight in voting rights which both are now defending as they based their home support for the enlargement on the acquisitions made at Nice.

But more than that Blair shone on the EU stage not just by default of
France and Germany but also in his own right. He graduated from the perception of being a lap-dog of President Bush to a person who has considerable influence in shaping US foreign policy. He persuaded Bush to accelerate the transfer of internal self-rule to Iraqi citizens before writing up the country’s

Constitution and also persuaded the
US to accept, with reservations, the creation of a separate EU military unit. France and Germany had to retreat from going their own way realising that an EU military unit without Britain would be meaningless and in the process gave the opportunity to Blair to shape this unit in a way which makes it a collaborator and not a competitor of Nato.

Even on the economic front Britain can boast of a performance much superior to that of the continental titans who were forced into the humiliation of breaking the euro growth and stability pact whose discipline they had themselves designed to protect the system from traditional fiscal abusers such as Belgium and Italy. The breaking of the rules in a high handed manner by
France and Germany just before the Brussels summit set a very dim prospect for making the necessary compromises on the EU constitution.

Blair’s achievements gain significance when considered against the back-drop of substantial internal party dissent against his liberal policies that offend the traditional values of left wing party luminaries. But Blair could brush aside internal dissent by proving that it is only his policies that permitted Labour to regain the mainstream of British politics and send the Conservatives into disarray, forcing them to continue changing leaders with monotonous regularity.

What a contrast to Maltese Labour who seem well resigned and apparently enjoying its overlong stay in opposition, confirming the same leader who somehow fails to deliver even when the odds are well stacked in his favour. May 2004 force Maltese Labour to shake off its lethargy and reach out for a touch of Blair.

Friday, 19 December 2003

Wishful Thinking

The Malta Independent 

This being my last contribution for the year I thought it appropriate to spice my best wishes for a peaceful Christmas and a prosperous New Year with some economic wishful thinking.

Now that we have run out of all other easy solutions and with government`s back economically against the wall, we are hearing much talk of the inevitability of consensus driven painful measures through the promotion as some new discovery of a vintage idea termed as social pact.` Reality is that government can only be successful in economic management if such social pact is a permanent fixture in our economic firmament and if it is used effectively to drive the message that government can only set a fair and positive backdrop for economic growth. The real drivers of such growth have to be the social partners through their joint collaboration.

So whilst the Irish celebrate the first successful decade of the social pact we are still trying to understand what it is all about and we have everyone repeating the catch-phrase without concretising on what deliverables we should expect from such an objective.

As some wishful thinking is not out of season in the run-up to the Christmas festivities I thought of concretising the Social Pact into ten clear deliverables to see if those paying lip-service to this abstract notion really have the courage to translate it into an effective and lasting economic cure. 

  1. Rebalancing in the rights and obligations of workers across the whole economic spectrum facilitating the mobility from public to private sector employment.
  2. Funding a massive training and re-training mechanism to render our employees multi-skilled and employable as technology continues to kill old jobs and create new ones.
  3. No new taxes/tariff deal from the government to ensure that we stop the addiction to tax and spend policies
  4. A deal whereby additional revenues from better tax enforcement are allocated specifically as to 50% for reduction of the tax burden to the lower and middle sector of society, especially those in employment who never needed any tax enforcement mechanism to pay their tax dues, and 50% to fund re-training schemes.
  5. A freeze on public employment recruitment and on public sector payroll costs ensuring that benefits are mostly given in re-training opportunities and in subsidising/promoting transition of excess public sector personnel to productive jobs.
  6. A freeze on all public sector operating expenditure
  7. Rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level in order to protect non-unionised employees who normally operate at or near minimum wage levels.
  8. No new debt until we get the debt level down to 60% of the GDP. Any capital expenditure has to be financed by one off revenues (privatisation, sinking fund and similar arrangement) to avoid recourse to new debt issues, other than roll-over of maturing debt.
  9. Keep social benefits at their current real level and forget all possibility of giving tax incentives for private pensions before government finance comes in good shape to make this affordable.
  10. If all this is agreed make a one-off adjustment to our rate of exchange to re-establish our international competitiveness and prepare for joining the EURO at a rate which is sustainable and which attracts FDI and promotes economic growth.
If we can build a Malta Consensus (plagiarising the Washington Consensus from John Williamson) around these 10 deliverables than may be we can pass from platitudes and wishful thinking to the formation of a concrete action plan where all parties acknowledge that solutions cannot be painless, that expecting all else but themselves to carry the pain is unworkable, and that a fair sharing of the burden of the adjustment pain will make the sustainable pain acceptable as a fair price to pay to get to the light at the end of the tunnel.

I wish all readers a merry wishful thinking Christmas but more importantly a full year of effective consensus driven solutions.  

Sunday, 14 December 2003

True Solutions

The Malta Independent on Sunday 

I was not in the least surprised that almost 60% of those surveyed in a poll carried out on behalf of The Sunday Times said they were 'badly affected' by the Budget for 2004, and that a high 71.3% do not think that its measures will solve the deficit problem.

  I was even less surprised that when asked which party they would vote for if a general election were to be held tomorrow, 43% said they would vote "for nobody", while 25% said they would vote for the Malta Labour Party, 23.3% for the Nationalist Party, 3.3% for Alternattiva Demokratika, and 5.3% gave no answer.

The only logical conclusion is that we are becoming a nation of realists and that the nation has been forced to choose a government by default of the opposition and not as a positive choice.

It is indeed frustrating that the government presents us with long-standing structural economic problems and pretends they are new developments which have forced a new spring to change into a harsh winter. It is even more frustrating that the government continues to insist that the solution to these problems is to simply talk positively about them whilst continuing the tax and spend policy typical of the Wilson Labour UK governments of the sixties when in fact we require a growth budget in the Bush style of the new millennium.

And the frustration gets compounded when the Opposition suggests that to raise awareness to the problems and to refuse the solutions being offered by government the best approach is to organise popular demonstrations of dissent.

As the Times survey shows there is no need to raise public awareness either to these problems or to the futility of the solutions proposed in government`s budget. What the public needs in order to warm the hearts of the extraordinary large segment which seems to be writing off Maltese politics in general, is to proof with practical means that the opposition could be an alternative government that can offer positive, though not painless, solutions to our problems.

We have been talking far too much about our problems whilst taking little or no effective cure measures. We can and should of course make the point that the government is by and large responsible for getting us into this financial and economic mess, mostly through buying our votes with fictitious feel good measures which were based on debt rather than growth. But this will not in any way help to offer any solutions as to how we should get out of the deep water and swim gradually to safer and higher grounds.

Let`s look at things objectively. We have two major problems. We are suffering from lack of economic growth and we are suffering huge and unsustainable imbalances in public finance which translates itself into public debt growth as a percentage of the GDP which is galloping forward. On these facts there should be no dispute. There is no room for shady or creative interpretations to colour reality with wishful thinking.

To offer solutions one must understand the causes.` Pseudo solutions which do not address the causes are simply a waste of resources which would make the eventual real solution that much harder as we do not have access to endless resources.

The absence of economic growth is because our economy is no longer competitive globally. This is showing in low or no growth in our exports and tourism earnings, the lack of FDI and the failure to create new job opportunities.` Central Bank`s own studies of the real rate of exchange show that we have been dragged down by an overvalued real exchange rate in the region between 6% and 12% since 1999 (Central Bank of Malta Quarter September 2003 page 33 Chart 4.3).` Past growth has been based on consumption and debt and as both are hitting unsustainable levels their retraction is causing economic sclerosis.

Government finance structural deficit is the result of over-spending, certainly not of shortfall in revenue flows.` On the contrary the government deserves credit for rendering the revenue collection mechanism more efficient and whilst there is still room for tax enforcement and compliance, resultant increased revenues should go to reduce the burden on other taxpayers who have never had any room to deviate from tax compliance.

True solutions must therefore be based on a tripod solution. The first leg is growth. This has to have priority, as without growth there can be no re-structuring. Re-structuring implies the replacements of old uncompetitive economic units by new bubbly start-ups that offer opportunities for productive jobs built on current economic realities. Killing old units without succeeding to promote new ones is not re-structuring. It is pure and simply contraction.

The second leg has to be expenditure control of the public sector. Not necessary expenditure reduction but expenditure control ensuring we do not continue to pay for inefficiencies but invest in infrastructure and productive investments and in re-training to make unproductive labour mobile and affordable. If we accept given positions as immutable that we lose the game before actually starting to play. Why all the priority to address the Drydocks problem and allow much bigger, even though may be less evident, problems in the public sector to go on unaddressed.

The last leg is, as earlier indicated tax enforcement.  A pact that no new taxes will be introduced and that the efficiency in tax collection will be applied to offer relief to the over-taxed lower and middle layer of society.

A solution without a tripod approach will get us nowhere. The government is not offering it.` No amount of street protests by the opposition will get us an inch nearer to a real solution. May be we expect a miraculous touch that EU membership will force us to do what we need to do. This will obviously not happen and if we continue as we are doing, people will lose their only hope left for real re-structuring.

The simple truth is that we will re-structure only if we really want to.` My impression is that our politicians do not really care and therefore small wonder that the electorate is reacting by not caring about our politicians.

Friday, 12 December 2003

Euro Diet

The Malta Independent 
The diet to join common currency is not to everyone’s taste, wrote Tony Barber in this week’s Malta supplement in the Financial Times. This is most definitely so given that we have been duped into thinking that we can continue living beyond our means purely by amassing debt rather than investing for growth.

One person who seems to be developing an early taste for this diet is the Governor of the Central Bank, Mr Michael Bonello. He was quoted by Barber as advocating urgent fiscal consolidation so as to make it to the Euro by the earliest possible date in 2007. He stated that late adoption of the euro would imply that the enjoyment of the relative benefits would be postponed and that the country could lose competitiveness if other new member-states successfully adopt the euro at an earlier date.

This type of reasoning worries me. It seems that Mr Bonello would have us reduce the budget deficit from 6% to 3% over a three year 2004-2006 period and in the process work out a miracle to reduce the debt level from the current level of nearly 70% of the GDP to 60%. With the economy expected to stay with real growth of just 1%, with inflation near historic lows and with the public budget in deficit though on a hopefully reducing level, there would remain only two ways how a reduction of relative debt to GDP to the tune of 10% can be achieved over a short period of 3years.

This could come about through a devaluation of the local currency in view of the fact that the large majority of the public debt is internal, denominated in Maltese Lira, whereas the major determinants of the GDP are our net earnings on exports of goods and services. However, with the rate of exchange policy adjustments semi-officially ruled out as a possible source for a solution to our economic ills, the only remaining source of adjustment would be mass-privatisation to provide one-off revenue flows for debt reduction.

Nothing of this sort was provided for in the three year financial framework presented with the budget. This provides for privatisation revenues of Lm135 million over three year which would reduce, though not eliminate, the need to take on new debt, but will certainly not contribute to the reduction of debt.

Which leads me to conclude that the issue of our joining the Euro at an early date is subject to loose talk and wishful thinking.

Why should we hurry to join a monetary union the rules for which seem to be changing to fit the needs of the big countries while being applied with rigour to the not so big countries such as
Portugal? And who is going to decide the level at which we will fuse the Maltese Lira into the Euro?

If it is the Central Bank than my worries compound. Because the Central Bank regularly publishes research which shows that
Malta has been forced to live with an over-valued real exchange rate in the region of 8-10% for the last five years. They kept the USD content in the Maltese Lira basket at on overweight 21% when the average rate was USD2.25 for one lira and then reduced it to 10% in August 2002 just when the USD was about to collapse from the then level of USD 2.34 to the current level of USD 2.83. This has deprived us the possibility to cleanse the Malta Lira rate of exchange from its full dollar-induced overvaluation.

The risk of joining the Euro too early is to my mind far more serious than of joining too late. If we put the economy through a sausage machine to meet the technical triggers of the Euro we would be missing the wood for the trees. Existing and much stronger Euro members are doing their damn best to extricate themselves of the fiscal straight jacket which would deprive them from cultivating the nascent economic growth, still too fragile to withstand fiscal repression.

The ultimate objective has to be that we have to get our economy efficient and globally competitive and this cannot be done by blindly following the Euro rules just to make it in there at the earliest possible date. The Euro diet is needed to make us competitive and not just to make us qualify for euro membership. And this can only come from efficient allocation of resources and from growth stimulation of which there are pretty few indicators. Indeed the Central bank should itself put deed to its words and set the example by making the organisation more efficient.

It is almost unbelievable that during 2002, when bank regulation was migrating from the Central Bank to the MFSA and when exchange control was being dismantled the Central Bank needed to employ seven trainees economic officers, ten clerks and a part-time gardener taking its workforce to the equivalent of 310 full time employees. The Central Bank of
Cyprus, that is also responsible for the entire regulation of a financial sector much larger than ours, employed only 287. The Central Bank of Luxembourg with one of the largest financial centres in Europe employed 208.

The Central Bank should start setting some example about the sort of diet we require to help us join the Euro in good shape rather than force us to join the Euro to take on the discipline which would stifle growth and employment.


Friday, 5 December 2003

Time to Go

The Malta Independent 

This was the title of an editorial of the Financial Times last Wednesday when it was commenting on recent boardroom shake ups in two major benchmark US corporations.

Boeing accepted the resignation of its Chief Executive Philip Condit, which followed that of the finance director Mike Sears the previous week, to give the company a chance of a fresh start following ethics digressions in competing for military contracts of the Pentagon.  Boeing had as a result been stripped of multi-billion dollar contracts it had been awarded by the US government.

Disney this week marked the departure of two board directors, Stanley Gold and Roy Disney (the last Disney on the Board), who in a letter of resignation complained bitterly of the fossilisation which the leadership of Michael Eisner has brought to the organisation. They even accused Eisner of stifling discussion on the Board.

I dare say that Eisner`s criticism is justified in that the company that invented the cartoon film has lost all the edge on the product and needs to rely on smaller animation film-maker Pixar to supply it with such successes as Toy Story, Bug`s Life and the latest showpiece Finding Nemo.

The final comment of the FT editorial is indeed telling and worth quoting: 'There are lessons for those who believe the unity of the board is the key to business success. Unity has to be the outcome of vigorous discussion, not the suppression of dissent. However much directors might feel like supporting one another, sometimes the top person has to go. And if the reluctance of the board to act imperils the company, directors might, very rarely, have to expose its failure with well-publicised resignations'

Following the performance of the two main Party leaders this week in criticising the budget and the replica to such criticism, I could only conclude that the `Time to go` appeal is very much applicable to Malta`s political scene.

The Prime Minister still believes that we can continue to solve the accumulating problems by simply talking positively about them. It is clear that to make a success inside the EU we need different leadership skills from those the Prime Minister has used to get us there. The Leader of the Opposition, rather than position Labour as an alternative government with bubbling solutions to the problems that government can`t solve, has re-proposed taking people to the streets in protest demonstrations. Government incompetence is now so glaring, its fatigue so tangible, that any Leader of the Opposition without Dr Sant`s problem of credibility, could instantly become the people`s majority choice. But credibility is much like virginity, once lost it cannot be recovered.

The `time to go` concept should cascade further down. Certainly there is ample case for a new hand at the Ministry of Finance. Presenting 10 budgets in 11 years would exhaust even the most capable. Exhaustion acts as a barrier to devising new solutions to problems which incumbents have difficulty to acknowledge and much greater difficulty to admit fault to.

The President of the Republic has also had his ample turn in Maltese political life and nothing short of an outright negation of any intention to pursue any other political appointments can preserve the dignity of the highest post of office.

The Archbishop has already offered his resignation.  A new hand at the Church also needs to re-generate the Church to take it back to its evangelical roots ensuring that it remains the social conscience of the nation rather than seeking cosy relationships with the establishment.

If our leaders really mean well to the country and want to give us a prospect of a better future they should organise their gentlemanly exit during 2004 to make space for a new breed of leaders who can really take us forward to making a success inside the EU.

One of the main qualities of leadership is in knowing when it is time to go for the larger benefit of the organisation at the expense of unavoidable personal recrimination. The inner strength to surpass the natural inclination to hold on. Leaders are also judged by history through their judicious choice of the time to go. If only our leaders will acknowledge that the time has come for them to serve us better by going rather than by staying.