Worse than a Recesion

The Malta Independent - Friday Wisdom

The Prime Minister, during his monthly press briefing, made issue out of a claim made by colleague economist Prof. Edward Scicluna that the country has been going through the longest recession in post-war history and that the government was ill-served by those that advised entering ERM II mechanism, in preparation for the eventual adoption of the euro, at a fixed parity rate at the level existent as at end April 2005.

The Prime Minister rebutted that the country is not in a recession and that time is proving the wisdom of the ERM II decision as foreign reserves have stopped falling, signifying broad confidence in the chosen exchange regime.

Both points deserve further analysis that quite often escapes the media, short as it is of probing economic minds that can challenge irrelevant assertions made by self-serving politicians.

A recession technically results when three consecutive quarters of economic contraction are registered. So the Prime Minister can technically argue that it is not true that we are in a recession. But technicalities apart our economic performance is in substance worse than a technical recession.

For five years we have had GDP figures alternating between small contraction to small growth so that we are in real terms at the same real level of GDP as we were in the year 2000.

Source: NSO

This is worse than a recession. It is death by attrition. At least a true and proper recession would bring us to our senses and hopefully force on us a concrete resolve to address our problems in order to get back on a sustainable growth path. That is the function of economic cycles.

Unfortunately we have no cycles. We have a flat line. We have politicians who take pride at our not being in a technical recession rather than worry that we are standing still while all around us are pacing, running or sprinting forward. We have politicians obsessed by the absolutes and care little about more important figures of relative performance.

Consider also the nonchalance in the reply to criticism about the fixed parity choice of our ERM decision. We are right and critics are wrong because foreign reserves have stopped falling. How simplistically arrogant can one be?

The choice of an exchange regime cannot be conditioned solely by the need to protect foreign reserves from dwindling. The exchange rate regime has to be a component in the recipe for economic growth and stability. Stability at recessionary or economic stagnation levels is not something to be aspired for.

One aspires for stability when one is growing at or close to one’s potential for such growth. When one is growing well below one’s capacity, turbulence is better than stability as turbulence reshuffles the cards to attempt to maximise the potential. Our monetary authorities have duped the government that stability is desirable for its own sake rather than as a means to achieve growth.

When two or three years down the road it will result that the restructuring has failed to materialise, that growth remains anemic, that public deficit is still well above the three per cent of GDP, then the government and monetary authorities will either have to swallow their pride or risk locking us irrevocably into a fixed exchange regime at an uncompetitive level that acts as a barrier rather than a stimulant to economic growth, which should be the ultimate goal for which all other economic policies should be subordinated.

Our lethargy and inflexibility is forcing us to lose out to more agile and versatile competitors in a globalised world. As a contemporary example of missed opportunities we have the rise in the price of oil. Presently we are being oppressed not only by the rise in the price of oil which reached record nominal levels of 62 dollars, but also by the rise in the value of the dollar which gained 12 per cent against the euro since the beginning of 2005.

Difficult as such situation can be it also presents opportunities. It sets a perfect landscape for re-energising the public transport system by making it uneconomic for people to use private transport and attractive to shift to public transport. It would save traffic congestion and alleviate the strain on our environment. The rising price of oil should be a lease of life for our public transport system rather than its dead knell.

Economic viability of our public transport system must come from turnover growth not price increases. Quite the contrary this is time to lay an additional charge on prices of fuel at the pump to give rebates to those who opt for public transport. This could have a lasting effect in reduction of our energy bill and produce a leap in our quality of life that saves rather than costs money.