Friday, 28 January 2005

Protest the Cause not the Cure

The Malta Independent 

Labour is organising a national protest next Sunday. It has not only the right to do so but the obligation.

Those who argue that such protests serve no purpose and should not be held, probably prefer a dictatorial regime even if dressed as a pseudo democracy. Those who maintain that such protests scare investment probably forget that investments thrives in a democratic environment and that the right to protest, peacefully and within the limits of legality, is the essence of free expression which is the bulwark of democracy.

Certainly government cannot expect to be applauded for being forced by its own past excesses to roll back our standard of living. Certainly no one pretends that the electorate should not even scream with pain when fiscal measures hurt.

Arguments that Labour and the GWU should not protest because a quarter of a century ago they had agreed to a total leave and public holiday entitlement of 26 days per annum which is still 10 days less than what is being proposed even after reduction` in public holidays entitlement as announced at last budget, are out of order.

Twenty five years ago my standard of living was far lower than what it is today. I used to travel by bus to save on car expenses whereas today`s youth expect a car on their 18th birthday as if it is a God given right. Comparing to situations so far back in time is illogical. Politicians should be careful that what they promise they give and what they give is and remains affordable. What is given is difficult to take back and comparisons to pre-war conditions are useless except for historical purposes.

However when protesting one has to be clear what one is protesting about and what is the ultimate objective of the protest.

It is best to take an analogy from the medical field. Take a patient who is suffering from a smoking induced lung malady. Overtly or covertly he has a right to protest over his own weakness in assuming such an unworthy vice. He has a right to protest against the friends who induced him into the habit, against the tobacco companies who promoted smoking temptations, and against the authorities for not doing enough (in the past) to discourage smoking.` But certainly the patient has no right to protest against the doctor who is prescribing painful medicine in an effort to save the patient`s life.` It is right to protest the causes as much as it is wrong to protest the cures.

So Labour`s protest should not be so much against the measures being proposed per se, whether these are what the government initiated, what the Unions have secretly counter-offered or some other package that may be agreed. Adopting the cure even if painful, is inevitable unless one wants to risk greater damage.

However there is so much to protest about the causes that landed us in such economic mess; a mess that is forcing us to roll back many of the measure so frivolously` given in the past for cheap political gain and which ultimately have transformed themselves into massive deficits and debt that is threatening the stability of our financial structures.

Let`s protest against so much money given in useless subsidies rather than in effective restructuring of our shipyards.` Let`s protest about sale at hugely discounted prices of our national assets.` Let`s protest against the monstrous waste of money in building San Raffaele / Tal-Qroqq / Mater Dei Hospital so much out budget and out of time. Let`s protest about so much money wasted on useless road infrastructure which still left us with a fourth world country road network.

Let`s protest against government giving wrong signals to the economy in its role as the largest employer by leaving the public sector so much excessively staffed and for permitting economic pay packages that do not reflect the excessive security of tenure enjoyed in the public sector thus promoting a market driven force for pressure to be made on vulnerable politicians to create artificially public sector jobs for the boys.

Let`s protest the money no problem culture that has been cultivated by PN administration that has eroded our belief in basic facts of life that nobody owes us a living, that we have to earn our daily bread, and that it is impossible to continue sustaining standards of living through borrowing beyond what we can afford, purely to keep up with the Joneses.

Obviously there is the very valid argument as to why is it that the working class has to bear the major brunt for correcting such excesses. No matter how unfair, it is yet another fact of life that as in the past the country has yet again to be redeemed by the working class.

If the redemption costs are loaded on the entrepreneurial class we would be scaring away the investment so necessary to lead us back to the path of strong and sustainable economic growth. If the redemption costs are loaded on the uneconomically active ( pensioners, social cases, unemployed etc) we would ripping apart the social fabric on which our society is built.

So not much else is left to carry the burden of restructuring but the working class which ultimately is the largest component of our society that has elected our governments and, as the saying goes, gave us the governments we deserve. Hopefully the next time round the pain of the cure will make the working class choose the seriousness of the long term rather than the surface gloss of the short term.

Sunday, 23 January 2005

The Fenech Adami Legacy

The Malta Independent on Sunday 

Now that that Dr Fenech Adami is well ingrained in his Presidency and his image as Prime Minister is being faded out even by formalisation of his first name from the colloquial version by which he was politically commonly referred to, it is time to draw some initial conclusions on the legacy of his 17 year span as Prime Minister, interrupted only by the two year Labour government interval of 1996-1998.

Fenech Adami did not leave a clean slate for his successor. The first year of Prime Minister Gonzi has done nothing if not reveal the great magnitude of problems, generally economic but with unavoidable social and environmental connotations, that Fenech Adami left behind.` In fact the general perception is that Fenech Adami did not do Gonzi any favours in exiting at the time he did.` It would have been far more appropriate and logical if Fenech Adami exhausted the major part of his 2003 electoral mandate and brought in Gonzi in the latter half of the legislature. By doing so Fenech Adami would have honoured the mandate he demanded and obtained from the people rather than ride roughshod over the principle of delegatus no potest delegare. And he would not have burdened Gonzi with the political guilt of tough measures that have to be taken to rectify years on years of economic neglect that has eroded our work ethos and our international competitiveness.

Take the issue of reduction in public holidays. Whichever way you look at it the issue is not whether you remove the days in lieu for public holidays that fall on the weekend. The issue here is how we are going to work more without additional compensation in order to bring down the cost of one productive unit in order to make us more internationally competitive.

Now the reason why we need to take such measures is that in the heady days of the first Fenech Adami legislature he gained political mileage and weakened our culture of work by impressing us that money is really so much not a problem, that we could increase our public holidays by 5 days and our vacation leave by another 5 days in graduated steps one day a year between 1987 and 1992. 10 extra days of holidays were added without even blinking an eye-lid.` No MCESD discussions, no social pact, no second thoughts about easy pre-electoral promises.` The economy suffered no immediate damage and many started to believe that really money is no problem. But reality is that the economic adverse effect of such measures was cushioned by the beneficial effect of trade liberalisation and a leap jump in consumption financed by accumulating frightful amount of debt that changed a debt-free country into one that exceeds all limits of debt prudence.

Our international competitiveness was however effected so much `that early in the second Fenech Adami leglisature we had to swallow a 10% devaluation of the currency. This restored competitiveness and we had good growth in the following two years. However as the devaluation was not accompanied by other measures that could sustain its one-off boost to international competitiveness, its positive effects were completely exhausted by 1994. The growth registered in 1995 and 1996 is illusionary. Most of the growth was only in the measured economy rather than in the real economy as the changes in indirect fiscal system through the introduction of VAT brought to the surface various economic activities that were previously performed in the black economy.

Along the way problems continued being financed rather than solved.` Industrial peace and fake prosperity was expensively bought from exchequer funds which were translating into a huge build up of debt.

Since 1997 we have been living with a structural public fiscal deficit that seems more obstinate than solid rock and appears insensitive to the annual rises in fiscal revenues through better enforcement, better collection systems and an endless list of new tax measures under various forms and guises, sometimes increased licences, sometimes traffic fines and some other as eco contributions.

The Fenech Adami economic legacy is economic problems of crisis proportions and a national state of denial that the problem is real and that it can only be solved by painful rollback of the money no problem culture and the re-discovery of the ethos to work, the urge for efficiency and productivity even at grass roots levels to honour the tine-honoured call of having a Repubblika mibnija fuq ix-xoghol.

I am sure that many readers are by now protesting that the Fenech Adami legacy should be measured by criteria beyond the economic stables and credit should be given for the openness he brought in our society in dismantling the state command approach of his predecessor and guiding the country to EU membership.

Whilst no doubt Fenech Adami deserves credit for liberalising the economy from state commands, liberalising broadcasting from complete state control and delegating operational decisions to local council levels, one cannot but weigh such achievements against the huge economic costs brought in instigating an excessively consumerist society with highly diluted values for solidarity which are generally reserved for the occasional conscience washing Strina type of activities rather than being ingrained `in our society.

As to entry into the EU, I continue to see this as a means to an end rather than an end in itself. I have always maintained that Malta can succeed both inside as much as outside the EU. The EU would not on its own present us with any automatic assurance of our economic success and that the ingredients of success are more dependant on the quality of own leadership to instil economic discipline and re-cultivate the work culture and efficiency ethos rather than on the form of our relationship with the EU.

It is therefore not coincidental that people are now realising that the EU does not constitute the new spring that we were promised and that at best the EU could force on us the discipline which our weak leadership is unable to instil on ourselves. ` So we are definitely not getting anywhere near our maximum potential from` EU membership as we still have leaders who have difficulty in selling us the mere withdrawal of two days of public holidays which is a totally insufficient measure to address our economic crisis.` How may I ask do our leaders hope to apply the full rigour of the true medicine which is necessary to render our country competitive in order to make maximum benefit of EU membership and to ensure that we can enter the euro in a healthy state rather than enter such mechanism purely to lose yet another tool which we can use to engineer an economic recovery`

We will soon enough find out that the excesses of the Fenech Adami legacy are much harder to correct than the excesses of the Mintoff legacy.

Friday, 21 January 2005

What Crisis

The Malta Independent - Friday Wisdom

Conventional wisdom has it that it is very difficult to identify a financial bubble in real time and that it is only with the benefit of hindsight, learning from the effects of the burst bubble, that the existence of the bubble can be proven.

Take the technology bubble of 1999/2000. When technology share prices were sky-rocketing, feeding on themselves to reach dizzy highs, even level-headed people like US Fed chairman Alan Greenspan who, in 1996 when prices were much lower had warned of irrational exuberance, got carried away by the enthusiasm and started justifying the new asset price levels on the basis of the leap in productivity brought about by the application of new technology. With hindsight it is clear that it would have been far more prudent if the Fed had started tightening monetary policy much sooner to avoid asset prices getting so much ahead of themselves.

Greenspan defends his record by arguing, quite feebly in my opinion, that by the time one recognises the existence of the bubble, there is little that can be done to gently deflate the situation and one should focus on nursing the wounds and pain of the burst bubble rather than try to prevent the bubble from bursting. His record of bringing down Fed Funds USD interest rates from 6.5 per cent in January 2001 to one per cent by June 2003 is his explanation of how to nurse the bubble aftermath. The determination currently being shown to take back the USD interest rates to a high neutral rate at a fast pace is, in Greenspan’s view, a confirmation of the success of containing the damage to the US economy caused by the bursting of the technology bubble.

The Bank of England seems to have learnt the lesson well and during last year tightened monetary policy by several step increases in
UK interest rates to prevent the development of a property bubble. The fact that these measures have moderated property price rises without causing a collapse of the property market seems to argue against Greenspan’s thesis that it is difficult, if not impossible, to avoid the development of a financial bubble if timely measures are taken.

Bringing the argument to the domestic scene, how is it that asset prices of real estate and quoted equities continue to gallop forward at a time when the economy is navigating somewhere between crisis and stagnation? Is the Central Bank of
Malta, in conducting its monetary policy, giving too much importance to the state of the productive economy and ignoring the galloping rise in asset prices that has occurred these last two to three years? More to the point, do we have a property price bubble or a share price bubble?

In real time it is difficult to tell, although experienced hands would tell you that there are many indicators which indicate the existence of such a bubble. But a bubble need not burst if the membrane that captures the pressurised air is sufficiently robust and flexible, if measures are taken not to continue adding to the pressure and if there is no single event which acts as a pin prick to the bubble.

In general, I think that the bubble in property and equity prices could be managed without disastrous effects, as the membrane of our savings resources is still strong and flexible.

However, not to risk its unpleasant rupture the stance of monetary policy has to be changed to take into account the undue rise in asset prices. Moderate, measured interest rate hikes should start being taken to gradually reduce the pressure building inside the bubble.

Control of the one-event that could prick the bubble is difficult, as one cannot quite foresee what such a one-event could be.

However certain recent experience on the local equity market should raise an eyebrow, if not both, and moral suasion and good PR should be used to ensure that we prevent the development of a one-event which could prick the bubble. The gradual rise, on very thin trading, of one particular low cap equity in the last few trading sessions of 2004, comfortably raising year-end valuations, only to be undone by equally thin trading in the first few sessions of 2005, smells like bed and breakfast accommodation for accounting window-dressing purposes. This cannot be healthy for the market.

Equally discomforting is the meteoric rise in equity prices of companies being prepared for privatisation, in particular Bank of Valletta. Bank of Valletta’s shares price is now trading at almost double the price earnings ratio of its sector average on international markets. Unless Bank of Valletta can persuade interested bidders that it can double its profits within a short time span, the government is going to find it difficult to find genuine interested bidders.

And if there are serious bidders at the current price level, I would seriously question whether the quality of their judgement merits their being trusted with a bank which has a huge influence on the workings of the economy or whether there could be hidden asset-stripping motives to justify the payment of the inflated price.

And, extending the argument, how is one to know if we have an economic crisis? The Prime Minister keeps speaking with both sides of his mouth in pleading with the social partners to subscribe to a social pact which restores national competitiveness and then denying that we have anything resembling an economic crisis.

Unlike a financial bubble, it is much more possible to identify an economic crisis in real time. If the economy has not grown at all these last four years, if productive investment is scarce, if debt is growing much faster than the economy, if employment opportunities are scarce and many graduates are having to accept jobs much below their status, then it looks like a crisis, it smells like a crisis, it behaves like a crisis – obviously it is a crisis.

The financial resources of the private sector and low interest rates on bank deposits make it easier for the crisis to be financed rather than solved but as a by-product it produces asset price inflation, which is also pretty evident.

The Prime Minister should accept that our ability to finance the crisis and delay the process transforming it into a full-blown collapse, does not mean that we are solving the crisis. We are merely wasting resources to delay the explosion but not to avoid it. If we cannot even accept this, we cannot even start to hope for a true solution.

Friday, 14 January 2005

Gaming and Gambling Away Our Values

The Malta Independent 

We heard quite a few speeches by political and spiritual leaders over the Christmas period stressing the need for society to protect, indeed recover, its values. Excessive consumerism was forcing society to dilute its basic family, social and environmental values ` so the argument ran.`

Subtly hidden in these messages, especially those emanating from our spiritual leaders, is a veiled warning against even the mere thought of bringing the divorce argument on the national agenda, so that we continue to be in the sole company of the Philippines to boast of our `high values` for not having the divorce concept on our statute book, except to acknowledge those given by foreign courts.

A learned friend of mine has shared with me his speculative views that when Fenech Adami says he was forced to accept the Presidency against his wishes, the main pressure came from the Church, knowing that Fenech Adami as President will never sign divorce law into effect even if it were to pass the parliamentary hurdle.

It is poor reflection of our standards that we continue to measure our basic values by the absence of divorce even for those whose marriage has irretrievably broken down, have not lived in marriage for several years, have no minor children from the marriage and who want the opportunity to have their stable relationship formed outside marriage acknowledged by society.

Surveys conducted indicate that there is a strong and growing minority in favour of the introduction of divorce on suitably qualified terms, and that among the under 35`s there is actually a majority in favour.` Politicians will eventually have to throw their false values to the winds and face the reality of voting numbers as the ranks of pro-divorce swell up as one wave of new adults replaces others other adults exiting this world with strongly held views against the principle of divorce.

Much as it is unfair that the rights of individuals and minorities should not be subject to the views of the majority, politicians views on the introduction or otherwise of divorce will no doubt continue to be influenced by the net gain or loss of votes which doing nothing will have as against taking new initiatives to bring Malta into the world, from a divorce point of view.

What however irks me tremendously is the double standards used regarding moral values when it comes to matters that the Church strangely accepts idly, even though they go against the true basic values of our society. Let`s take gaming and gambling. Frankly I find difficulty in finding differences of substance between them as they both drain money from consumers` pocket based on the fragility of the human attraction to get rich quick aspirations.

It seems to bother no one that the talk of the town in the first 2 weeks on the year has been the super-size prize of the Super Five mid-week lottery and that many consumers have been forced to shift spending from normal consumption to gaming or gambling.

It seems that no one has bothered to warn against not only the erosion of family and social values resulting from undue exposure to gaming and gambling temptations, but also on the economic consequences of reduced consumption and /or dis-saving that increased spending on gaming and gambling will unavoidably bring.

And to add insult to injury we were informed this week that government will be taking steps to reduce the entry age limit to casinos from the current 25 years to 18 years in order to come in line with European practice or regulations.

Is this the way we want to imbue values in our younger generation, by exposing them not only to irresistible weekly gaming offerings but also to encourage them to start visiting Casinos as soon as they turn eighteen`

I am all in favour of Christmas speeches expressing concern about the erosion of our true values. However these are mere rhetoric if immediately after Christmas, we start taking measures which in the most effective manner attack the moral values of our youth when they are still in their fragile character formation stage between the ages of 18 and 25.

And I detest this false society who apparently measures protection of social values only through the continued prohibition of divorce to the growing thousands who really need it and deserve it.

Sunday, 9 January 2005

Wishes for 2005

The Malta Independent of Sunday

I wish that:

1. Elections in Iraq and Palestine bring stability in these countries and open fresh prospects for tangible and lasting solution to the Arab-Israeli conflict.

2. Disasters like those experienced on Boxing Day in South East Asia will not happen again.

3. George Bush dedicates his next Presidency to conflict resolution so that he can be remembered as the President who in his first term shook conflicts out of their never never status and in his second term he worked for peace and stability.

4. Prime Minister Gonzi realises that his margin for error in solving the economic disaster he took over is very narrow; that any temptation to sweep problems under the carpet by opting for the line of least resistance in the negotiations for the public sector collective agreement is damagingly life threatening for the rest of the economy and for the external competitiveness of the country.

5. The Leader of the Opposition serves better his Party and his country by sacrificing his pride and accepts that his non electability is damaging the democratic process forcing on the country a leadership sclerosis and fossilisation of ideas.

6. The UHM and the other Unions that supported EU membership accept the discipline that such membership together with the commitment to join the Euro single currency brings, and desist from approaching negotiations with government as employer as if government can print or borrow money with impunity.

7. The social partners agree that a social contract cannot be reached unless reciprocal concessions are made and that Unions should be amenable to extension of working time without additional compensation provided a commitment is made by Employers, government included, to spend more money on training and re-training of employees.

8. Government realises the failure of its policies in adding further layers of taxation year in year out, and that solution of the macro economic and fiscal deficit problems can only be addressed with lasting effect if we regain international competitiveness and attract investment to stimulate growth.

9. Central Bank shakes off its lethargy and accepts its responsibility for keeping interest rates too low, accommodating government far more than is prudent in financing the fiscal deficit rather than seeking true solution for its reduction. Consequently the Central Bank has to accept responsibility for tolerating a level of inflation superior to that of our trading partners which in the context of a fixed exchange rate peg regime, has caused the country substantial loss of international competitiveness. It has to be accepted that re-alignment of the nominal exchange rate of the currency can and should form part of the restructuring package.

10. Unions should accept the short-sightedness of early retirement schemes in solving over-manning problems and that it is far more equitable and beneficial to apply any funds to train and re-train employees to enhance their employability rather than pay them for doing nothing.

11. In the country starts a serious and objective discussion of the social implications of persisting with our divorce-free (but separation-abundant) mentality or the introduction of divorce under stringent conditions.

12. The Church resolves its leadership issue so as to give new energy to an organisation that is losing its relevance in society.

13. Government accepts to conduct a thorough and independent investigation on why the Mater Dei Hospital is being completed so much out of time, out of budget and probably out of spec for maintaining a free health service.

14. Following a serious discussion on the sustainability of our pension system, health service and tertiary education financing system, decisions actually start being taken to avoid the otherwise unavoidabality of the collapse of these systems on which our social welfare programme depends.

15. Society fosters a culture change of looking at government as an enabler rather than a giver. Thus all able-bodied should look at government to provide free education and health to facilitate their fruitful participation in the economy rather than to pass an easy life outside it.

16. The Opposition regains the confidence of the majority of the electorate and brings in a leadership that fits its newly adopted policies regarding the EU. Experience shows that selling cola in lemonade bottles will not score with the consumer. Similarly selling pro-EU policies through anti-EU leadership will just not work forcing on us yet more fossilised PN administrations.

17. Public sector employees accept that they are paid to give the public a service which cannot be given under the current terms of their employment. On the other hand one has to make exceptions and give credit to public sector employees in health and law and order, who work in round the clock shifts under all weather conditions.

18. Fresh blood is given a chance wherever possible in society. Let the Azzopardi’s and Bondi’s make some space for new talent, let newspaper editors and media news editors give more space to their young journalist to show the worth of their university degree through objective reporting rather than mere dancing to their piper’s tune.

Why is it that for all my generally positive outlook to life, my level of confidence in seeing at least half of these wishes materialise, is less than fifty?

Friday, 7 January 2005

Responsibly Negotiating Public Sector Pay

The Malta Independent 

How can one explain that whilst the US economy is growing at a fast pace of nearly 4% p.a.,` producing new jobs at an average rate of 175000 per month, and whilst its unemployment rate is stable at 5.4%, the US dollar has reached a record low against most currencies, in particular against the Euro`

Per contra how does one explain that whilst Euro area's largest economy, Germany, is only expected to grow between 0.8% to 1.8% in 2005, and whilst its unemployment is still increasing and this week it hit a six year high of 4.48 million equivalent to 10.8%,` the Euro hit a record high of 1.3666 US dollars on December 30th,2004

Is not the external value of a currency somehow correlated to the strength of economy of the country it represents`

The simple answer is that of course it is.` But the correlation is not simple and direct.` The correlation has more to do with the prospects for the future rather than just the current state of the economy. So the judgment of the foreign exchange markets in pushing the US dollar to record lows against the Euro is that the US economy will have to slow down to take account of the huge fiscal deficit and the monstrous imbalances in its foreign trade account, or the US currency will have to drop substantially to deflect consumption to domestic produce rather than imports.

On the other hand the markets, whilst taking full cognisance of the pitiful state of the German economy, notes that things can hardly get worse and that the tough measures taken by Chancellor Gerhard Schroeder, at great sacrifice to his personal popularity, are bound to make the German economy more flexible and better able to generate higher rate of sustainable growth.

The exchange rate relationship between the US dollar and the Euro will in due time re-establish itself more favourably for European exports as the US will have to increase the rate of interest it pays to continue financing its deficits whilst the Euro area will be given a spur to growth on the basis of low interest rates that are expected to endure throughout 2005.

This is relevant to our domestic economy not simply because we are committed to join the Euro single currency, the monetary policy of which is strongly influenced by the state of health of the German economy, but also because we must note the sufferings that, a once mighty economy like Germany, is going through in order to regain international competitiveness at a time when it no longer has control over the external value of its currency.

Just as an example new measures cutting benefits for the long-term unemployed took effect in Germany on Jan. 1st where those without a job, including people previously registered as social welfare recipients rather than as jobless, will also face increased pressure to accept job offers or risk losing benefits.

Whilst domestically, government and unions representing public sector employees negotiate a new collective agreement for the period 2005- 2007, they ought to bear in mind the sufferings that co-workers in the private sector, fully exposed to the discipline of globalisation pressures, will have to endure if the country continues to lose its competitiveness.

One of the reasons why we are in the macro- economic mess we are, is that in past rounds of collective agreements for the public sector, politicians bought themselves electoral favours with our tax money. They were too generous in discharging the role of government as the largest employer in the economy. Free from competitive pressures that discipline private employers, politicians have served the nation badly in modelling themselves as false heroes whilst prejudicing public finances and chipping away at our national competitiveness. They played inverse Robin Hood, taxing the poor to be generous with the well to do, especially the high echelons of the public service.

Nowhere is this more evident than in the gross irresponsibility of the collective agreement signed soon after the 1998 elections as an expensive gesture financed by our tax money to say thank you to the public sector unions for helping the PN to win over the MLP who was holding tight to negotiate something much more prudent in the interest of the national economy.

In the interest of fairness government should hold tight in insisting on the wage freeze for public sector employment whilst applying the money which would have gone into increments to finance retraining programmes for surplus public sector employees to ease their way to productive employment in the private sector.

Ministers should stop paying political games with the nation's economy and for once understand that the discipline of the EU and the Euro which the majority in its wisdom embraced, means that government has to send the right signal to the labour markets by putting priority on the recovery of national competitiveness, without which the employees in the private sector will not only lose their increments, but their jobs.

In fairness sake, the unions sitting at the table negotiating with government must not forget the interest of their other members in the private sector who will bear the brunt of any undue generosity, out of tune with the general macro-economic morass, in the public sector collective agreement.