Friday, 30 September 2005

Of MITTS and myths

The Malta Independent - Friday Wisdom

In my professional work as management consultant I consider myself as an agent of change.

A consultant’s job is to add a fresh unbiased external view to a corporate problem, propose solutions free from the legacy limitations most internal management willingly or sub-consciously subject themselves to, remove the barriers to change that could stifle the proposed solutions no matter how well thought out, aid management to deliver the solutions with effectiveness, efficiency and determination and make himself/ herself redundant so that the company can enjoy the benefits of change in a period of relative stability and consolidation after the metamorphosis of change that consultants often bring to the organisation.

One of the organisations I brought substantial changes to is MITTS, the former MSU. Soon after labour government of 1996 was voted in office the Prime Minister asked me, in my capacity as a management consultant, to undertake an urgent study of the organisation and issue a report detailing its strengths and weaknesses and making recommendations how the company could go forward.

MSU was a hot topic in the election campaign of 1996 with Labour accusing the incumbent government of hubris and waste in the way MSU was managed. The Opposition appointed chairman of the Public Accounts Committee had resigned his position in protest for reluctance by the then chairman of MSU to give full and detailed account of salaries paid by the company on the pretext of this being sensitive commercial information. Little did it bother the then chairman of MSU that in fact the company had a monopoly over government’s IT services, was not subject to any commercial competitive pressures and in fact was a commercial company only in name as the company operated as if it were a government department but without the bureaucratic control of public spending.

It is sufficient to say that the funds which the company considered as revenue in its published accounts were voted directly to it under a specific budgetary vote under the Office of the Prime Minister’s budgetary allocations and that this revenue was claimed irrespective of what the company actually delivered in return. In fact the commercial accounts published by the company at the time could not reflect a true commercial profit as there was the paradox that the less the company delivered the less variable expenses it incurred and with revenue taken in irrespective of performance the less the company delivered the higher the profit it registered. By the same yardstick the Drydocks would have been a money spinner!

The change I brought about at MSU was not simply its new name MITTS (Malta Information technology and Training Services) but more importantly in adopting a strict focus on IT proficiency with its management consultancy division migrating back to the central government.

The management consultancy was renamed Management Efficiency Unit (MEU) and was integrated within the OPM where it is still effectively churning out very professional consultancy report on how government might bring about the necessary restructuring change to the economy if it really had the will power and the political courage to do so rather than simply hide behind such reports to appear to be trying to do something without actually biting the bullet which though necessary is unpleasant in electoral popularity terms.

MITTS on the other hand was made to sign full commercial agreements with government users detailing what it is meant to deliver on what terms and at what price and the budgetary allocations from central government budget were made to the departments concerned who then had to spend the funds in terms of public sector financial regulations.

The changes I proposed were broadly accepted and they endured nine years so far. I had successfully preserved all that was worth saving and drained away the dirty water without endangering the baby. MITTS was freed from the illusion that it could reform the public service by throwing computers, consultants report and other expensive systems at central government and instead turned itself into a competent, efficient and reliable IT service provider for the public sector. The problem is that the change that was started was not continued. MITTS is today still stalled where I left it n 1998. This leads me to the myths of what it might have been.

After chewing the 1996 structural changes I was asked to serve as a director on the Board and was working on the next step change following a period of stability. My dream was to have the company privatised through an employees buy-out of a majority stake through a purposely created structure (commercial company, co-operative or foundation). After all as an IT company the best asset of MITTS is the brain power of its employees and I can vouch that at least at the time, the organisation hosted the best and the brainiest. The challenge was to energise these human resources and liberalise their creativity to lead them to model a tiny silicon valley in our midst.

Whilst signing a long term agreement to continue servicing government on existent systems where government depended on MITTS for continuity, I had envisioned liberalising supply of new systems with part of MITTS migrating to government to ensure it can control quality and inter-operability whilst MITTS operated in a free market to supply government but preferably finding international niches to market its expertise. With Y2K two years down the road I was certain that demand for their services from international orders would have established the company on a recognised international platform.

One could easily write off these visions as myths. But the problem with this country and its stagnation is that we have stopped dreaming, we have stifled creativity with bureaucracy and built systems to ensure that finger pointing for failure will be suffered by the system not by individuals.

We have messed up quite a few privatisations. Sins of commission are easier to prove. Since of omissions, as in case of non-privatisation of MITTS, are harder to pin down and anyone who dares could easily be written off as a dreamer or myth writer. But this does not render sins of omission any less serious.

Wednesday, 21 September 2005

Reinventing Our Tourism

The Malta Independent

  Just examine the following two facts.` Firstly we have what it takes to make a success in tourism and it should remain our major economic pillar generating growth capturing 50% of our entire GDP.` Secondly we have not been going anywhere with tourism for the last 10 years being jammed in terms of number of visitors, bed nights and earnings in spite of huge investment in hotel configuration made by the private sector.

So what are we doing wrong` It is quintessentially important to get a correct answer to this question before making big strategic decisions both regarding re-branding which the MTA is in the course of doing and before deciding on the terms being demanded by the low-cost airlines in order to generate the volume growth we are missing.

What we have been doing wrong is that we have been trying to be everything to everybody rather than accept who we really are and then research and access the markets that can be expected to buy into what we are and what we can offer.` The latest fad of the golf course is yet just another example of our determination to deform ourselves to ensure we have something to offer to everybody lest we miss out on anything.` End result is that we are missing on most.

I have been saying it with increasing conviction that our most promising role in tourism is to position ourselves as the ideal location for a short break, three, may be four day holiday. Our marketing message should be `nowhere else in the world can you see what you see in Malta in three days`.

This marketing strategy builds on the three advantages which nature and history have endowed us with. It builds on our geographical location in the centre of the Mediterranean not more than three hours flight away from most European cities ` so near and yet so different.` It builds on our small size which enables tourists to make the most from a short break visit. And it builds on our rich and varied history left behind over the millennia by the various civilisations that found it in their interest to occupy these Islands.

Would such a strategy fit with international trends in tourism` Obviously it would be much more difficult to go against the grain than it would be if the strategy can have a tailwind from international tourism fashion trends.` There is no doubt that the strategy I propose is moving along the grain.` Many people would choose more exotic locations for their long main holiday.` So much to see in the world it hardly makes sense to be trapped for some 2 weeks on a densely populated island without any hinterland to go to. But apart from their main holiday people are taking a series of shorter breaks.` Working life has become to stressful to wait 12 months between one holiday and another.

And it is here where we have a comparative advantage. If we succeed in this market we can have all year round tourism with visitors here on short breaks and whom it should be fairly easy to impress. Our pre-historic temples, our harbours and the unique architecture of Valletta and the three cities, the mystic feeling of Mdina and the heart-warming scenery of Gozo are ingredients rich enough to make a short break holiday more memorable than any other location within a 3 hour flight radius from most European cities.

This strategy can only succeed however if there is the necessary flight infrastructure. Firstly there must be regular direct flights from a wide array of regional airports.` Modern travellers tend to avoid major city airports for regional flights as they are inconvenient, expensive and over-crowded.` Regional airports are often closer to home, cheaper to go through and cheaper to fly from.

Secondly the flight infrastructure must include low cost no frills flight content in the overall package.` The shorter the holiday the higher the relative content of the travelling cost and therefore the more important to provide low cost no frills airline services.

One should not` runaway with the idea that no frills airline are being sought only by low-class tourists. The business model is changing. The internet is giving the consumer the power and facility to compare prices with relative ease and in a flash following a few mouse clicks.` Nobody likes to spend more if the same or sometimes better service is available for less.

The internet is changing customer`s behaviour and those companies that don`t adjust their business model to take account of it are heading for extinction. It is no longer the case that Malta tourism is dependent on Air Malta.` That was thirty years ago, twenty years ago may be ten years, but now it`s different. Air Malta does not have what it takes to operate a wide array of regular services from regional airports and its cost structures do not permit it to make an economic return by competing in the no frills sector. What unfortunately Air Malta seems to be doing is cutting the frills without cutting the price.

Which is why it would be a grave mistake to disregard Ryanair`s appeal for MIA to offer competitive handling charges to operators producing volume business as Ryanair infrastructure fits hand in glove with the re-invented profile for tourism which I envision.

This ought not be a commercial decision which is left entirely in the hands of a privatised MIA that operates Malta`s only airport.` This brings into question the strategic wisdom of government passing such strategic monopolies to private investors who cannot be expected to defend macro-economic interest at the expense of their bottom line.

A Long-Term Base for Inventive Investors

Financial Times

Sir, Andrew Jack's article ("Malta employs patent quirk to cash in on copycat drugs", September 19) is substantially correct and shows how smallness can be turned into an advantage by exploiting uncared for corners in an otherwise fiercely competitive world. But history needs to be respected.

It is less than 500 years (rather than the 1,000 indicated by Mr Jack) since the Knights Hospitaller established, grudgingly, their base in Malta in 1530 after being kicked out of Jerusalem first and Rhodes later. They stayed until 1798 and thankfully left a legacy of architecture that is a gem on both sides of the Valletta harbour and in Valletta itself.

When the Knights came here they thought it was a temporary home until something better could be found but in the end they stayed 268 years by which time their military function had lost its purpose. Maybe investors who choose Malta to exploit the patent quirk available for a short-time window will in due course, like the Knights, find other reasons to stay much longer.

Sunday, 18 September 2005

Lessons from Japan

The Malta Independent of Sunday

The only thing that Malta and Japan probably have in common is the colour of their national flags. Contrasts, however, abound – especially in recent political experience.

In 1998 a Labour government lost a vote in parliament on a relatively innocuous Cottonera project when one of its MPs voted with the opposition. Prime Minister Sant considered this a vote of no confidence and called a premature snap election, confident that the electorate would return him to power with an increased majority. The result was just the opposite and Labour was returned to opposition, seeing a majority of 8,000 votes in 1996 changed to a minority by as much as 12,000 votes in less than two years.

This summer, the Japanese Prime had a similar experience. Members of his own LDP party voted against the privatisation of the Japanese postal system that Prime Minister Koizumi, considered essential for executing the economic reform programme he was elected to deliver. He called their bluff. He dissolved the lower house of parliament and called an election, which was held last weekend, to seek a refreshed mandate from the electorate to unblock the parliamentary barriers that his colleagues had forced upon him. In the process Koizumi, dismissed the dissenters from the LDP to ensure that they are not re-elected within his new parliamentary majority.

Koizumi was re-elected with a strong majority and now has a clear mandate to continue with his economic reform programme, including the gradual privatisation of the postal system.

Is it that Japanese leaders are better than ours at convincing voters of the need to endorse reform programmes or is it that the Maltese electorate prefers to escape reality and much-needed reform, and opts to continue living on borrowed time and borrowed money, prejudicing the future of coming generations?

Your guess is as good as mine but then the behaviour of the respective political leaders could be indicative.

Koizumi made it clear that if he was not returned with a stronger mandate he would resign and pack his political bags. Even with the stronger mandate he obtained, he nevertheless made it clear in the post-election victory messages that he still plans to resign next year, as he feels that he has taken the country as far as he can and he will make room for a new energy to take the country forward.

Not only did Dr Sant not resign, following the loss of his audacious and unnecessary move in 1998, but he kept his top post with the MLP in spite of the disgraceful results Labour achieved in the 2003 referendum/general election, which basically annihilated all that Labour had fought for under Sant’s leadership since 1992. Thirteen years into his job, Sant sticks to his post, prejudicing Labour’s otherwise clear chances for the next election by insisting on selling Labour’s refreshed policy contents in old, discredited wrappers.

Prime Minister Gonzi is not a Koizumi either. Koizumi gave one and all a lesson of what leadership is all about. He showed how inspired leaders can turn with success to their electorate with clear programmes of what they want to do and why, and obtain a specific mandate to execute. No ambiguity about what they want. No hiding behind laborious and often useless public consultation processes. People elect leaders to lead, not to coordinate.

The Gonzi government seems to understand that its mission is to launch discussion documents about what needs to be done and hope that the public will express something nearing consensus, thus easing government’s way to execute such proposals.

Take the latest of such reports issued by the Management Efficiency Unit – National Reform Programme (NRP) team, acting on a brief received from a Cabinet sub-committee ominously referred to as CCC (Cabinet Committee for Competitiveness). In investment circles, CCC is the lowest grade given to bonds with a serious risk of default by their issuers.

The content of such a report is immaterial for the purpose of my argument. What matters is that the authors of such a report who, in most of the narrative, speak with governmental authority (“The government wants…”, “The government is committed...”, “The government intends...”, The government plans…” – the government this and the government that), make it clear that their report

“is intended as a public consultation document and that Government will only commit itself to any of the proposals put forward following a thorough examination of the feedback received through the consultation period and an evaluation of their financial implications. The opinions expressed in the NRP do not represent the views, past, present or future, of the Government but are those formulated by the NRP coordination team within the Management Efficiency Unit after a first phase of wide-ranging consultations”

This is coordination not leadership. People are busy with their lives and elect their leaders to lead and then present themselves for endorsement or kicking out every so often, as provided for in the Constitution. How can government continue to live in the clouds and hope to secure a guilt-sharing consensus to do what needs to be done? Government is clearly distancing itself from the NRP document lest it should become an electoral liability. How can it expect others to embrace something from which government is itself keeping its distance?

If government is doing so when we are still in parliamentary mid-term, what confidence can we have that it will thoroughly deliver the hard but necessary measures when elections get nearer and consensus proves elusive, as was the case with the innocuous measure of abolishing leave in lieu of public holidays that fall at the weekend?

The government also seems totally confused as to why we are doing all this. In defining the way forward in the introduction to the Report, it is declared that:

All feedback received will be analysed and factored in the prioritisation and selection of the final NRP measures which should form part of the final draft. The final draft is then subject to CCC and Cabinet approval prior to a debate in parliament. Only then can the final NRP be submitted to the European Commission.

So is the objective of all this effort just to send a report to the EU Commission? I should think that the objective is to execute the reform programme yesterday rather than tomorrow. But no, the objective is to send the NRP report to the EU, in the misguided thinking that problems can be solved by the composition and submission of nicely worded reports.

This reminds me of the experience I had when I was, for all too brief a time, chairman of Mid-Med Bank. An organisation employing 1,800 people had a dangerous culture of division between the people at head office and those on the ground, in branches and in the operating centres. The people at head office had the habit of solving problems by issuing directives through a circular that people in the branches were expected to execute unquestioningly.

For people at head office, the problem was solved the moment the circular was written and dished out. In reality, the problem probably started there. Operators in branches were cheesed off by the ambiguity or impracticalities of the solutions prescribed by head office people who could not appreciate the realities at ground zero. Solutions are rarely solved by writing reports. They are solved by inspirational leadership, creating a positive team-building “can do” culture through continuous and informal interaction.

If government thinks that problems can be solved by report writers, it should go on holiday to
Japan, hand-in-hand with the leader of the opposition.

Friday, 16 September 2005

A World of a Difference

The Malta Independent - Friday Wisdom

Every weekday lunchtime I devour a sandwich while keeping at my professional work. As audio wallpaper I generally switch on CNBC Europe that at the time would be tuned to CNBC USA business breakfast programme.

Quite often the anchorperson disparagingly refers to the Europeans as ‘the socialists’. “Let’s see how the markets of the socialists are doing” he intones in a quite offensive tone while giving the readings of the European main share indices which at the time would be in their mid-day session before the American capital markets open up for business some two hours later.

Maybe it is a coincidence but I noticed that post-Katrina such disparaging remarks on the European social model have become scarce or disappeared outright. With good reason!

The unfortunate events which have caused so much damage and deprivation in the Gulf of Mexico, US States of Louisiana, Mississippi and Alabama have brought out the fault line in the American liberal (liberal in the European sense not in the inverse US sense) model where the state offers very limited protection to those in need who are expected to fend for themselves.

Probably the horrible lack of a minimum acceptable degree of social protection in the American economic system is best reflected in the fact that three weeks after Katrina the state still has not quantified with any reasonable degree of accuracy the number of people missing, suspected death. The individuality and loneliness of the under-privileged in the
US render them unaccountable even in case of calamities, let alone in their ordinary life.

The federal government is now attempting to hide its guilt for the inadequate investment to protect against such calamities as well as its failure to respond effectively to their consequences, by hurriedly raining upon them federal funds meant to finance the restoration of normality in the quickest possible time. Apart from the old maxim that prevention is better than cure how can a civil system that has practically collapsed be expected to manage effectively in such a short space of time such massive funding without exposing itself to fraud and misallocation of resources?

The Katrina experience brings out the argument whether the American free market system with very limited social protection is superior to the European social economy model. Are the European socialists better or worse than the American liberals?

There is no doubt that the American system permits its economy to compete more effectively in a globalised world. Its superior flexibility in cutting costs through hire and fire employment rules and the operation of contribution-defined health schemes and pension system rather the European state sponsored benefit defined equivalents, has given America the momentum of an economic growth rate twice that of the European average with a relatively low level of unemployment.

Per contra, the inflexibility of the cost structures resulting from the European social model has condemned
Europe to slow growth and relatively large unemployment but without the extreme social disparities that exist in the US. It is often said that an unemployed person in Europe has a better quality of life than an unskilled worker in the US.

This argument is extremely relevant this week when two events of major importance are happening, one on each side of the

The general elections in
Germany are in a way a choice between the two systems. Would the German electorate, plagued with permanently high unemployment and low growth, give a clear mandate to Angela Merkel for the German Conservatives to dismantle the German social model and render the economy more flexible and globally competitive while closing the door to Turkey’s membership of the EU as Germany adopts a dangerously introspective stance?

Or would it condition the mandate to Merkel by forcing her to seek a grand coalition with Schroeder’s SPD, thus forcing her to tone down the liberalisation plans? Or would the 30 per cent undecided in the end make up their mind that for all its rigidities, the European social model is worth preserving following the Katrina eye-opener and the consequences that would befall
Europe if it closes the door on Turkey’s EU membership?

This is indeed the challenge that is facing the European left-wing political leaders. How can they keep their economies competitive in a globalised world and deliver in terms of the
Lisbon agenda while at the same time protecting the underlying fundamentals of the social model which unavoidably raises their cost structures creating a disadvantage when competing with more liberal countries that have no social model to protect?

This is the third way spearheaded by Bill Clinton and Tony Blair in the 1990s but which faded away as Bill Clinton’s second term presidency was distracted by sexual improprieties.

The third way that somehow works in
Sweden and to a lesser extent in UK, but has difficulty in delivering the goods anywhere else. Can the German election result force the two major and opposing parties to compromise by giving new life to the third way?

US President Clinton is developing a post-White House career that political scholars call unique in American history. While most modern ex-presidents have kept a low profile or returned to the public eye slowly, Clinton has leapfrogged the globe on humanitarian missions such as helping tsunami victims in Indonesia and supporting his foundation’s efforts to combat HIV in Africa and India. He is extremely active in raising private material aid and funding for the Katrina victims and his foundation is this weekend holding a unique Clinton Global Initiative in New York City as most world leaders congregate there to celebrate 60 years of the UN.
Clinton claims he will promote an action-oriented approach to eradication of poverty, promotion of reconciliation, management of climate change and enhancing of governance. An ambitious tall order for someone who claims that through his foundation in ‘just three days, we can begin to make a world of a difference’. I interpret this as an atonement for the much more effective work he could have done in the second term of his presidency if he was not distracted by the Lewinsky affair which probably was the most important single reason why the world has had to suffer the consequences of the George W. Bush double presidency, Iraq, global warming and all.
Clinton’s Global Initiative is the embodiment of the thought that the world needs a strong but more humble America, which perhaps is the positive by-product that emerges from such painful experience of Katrina.

This weekend we can have an idea whether
Europe will be moving from its social model to the US liberal model or whether the US and Europe will be forced to underpin globalisation through the third way.

Friday, 9 September 2005

On Fire

The Malta Independent - Friday Wisdom

So many things seem to be on fire.

Let me start with the local equity market. The Malta Stock Exchange Index is up 27 per cent for the year and this follows a gain of 44 per cent in 2004 and 14 per cent in 2003. From a low base at the end of 2002 the MSE index is up a whopping 108 per cent in two years and eight months.

Some individual equities have performed better and some worse, but the general conclusion is obvious. The market is red hot and touching it with new money could burn unless one happens to be a momentum investor. Momentum investors, in contrast with value investors who search fundamental value in equity prices and invest for the long term, stay on their toes to get out in time – market liquidity permitting.

Adriano and
Brazil are on fire, annihilating opponents who would be a headache to any other team. The Malta national football team went on fire last Wednesday playing Croatia in a World Cup qualifier. Croatia needed a straight win to keep their qualifying ambitions alive but against our young lads they could only draw. On the other hand, Ericsson seems on the way to being fired as England lost the qualifier match against Northern Ireland who, in a friendly at Ta’ Qali last month, were lucky to get away with a draw against Malta.
America is on fire following the Katrina debacle. It is dawning on public opinion in the US that for all the billions “invested” to enhance homeland security their country remains as exposed as ever. If emergency services could not be marshalled to respond effectively to a hurricane whose threat came with a few days’ advance warning, what confidence can US citizens have that their country can respond effectively firstly to prevent and secondly to address a terrorism debacle that does not come with any advance warning?

The Katrina experience is also setting fire to the modern economic syndrome that smaller government is a better government. The theory goes that if the government reduces its expenditure it could lower taxation thus spurring private investment, which makes the economy grow faster. Some supply-side theorists further argue that economic growth will increase the tax base that more than compensates for the revenue lost through lower tax rates.

People are now rightly questioning whether these numerical arguments are in fact losing sight of the fact that smaller government could involve making dangerous economies with matters of life or death for the citizens even though the outcome would become visible only with a substantial time lag.

The majority of the damage suffered in
New Orleans was not the direct result of hurricane Katrina but more the result of a lack of investment in and proper maintenance of the levées that were meant to afford flood protection for a city built below sea level. If smaller government means neglecting such matters, then the New Orleans experience puts a huge question mark on it.

The issue in the
US is not really that of promoting a smaller government because, in effect, the US federal budget deficit was running at a record high – although this year pre-Katrina figures were pointing to a positive turnaround. Post Katrina this is now doubtful, as the US federal budget will probably be called to foot a bill as high as one hundred billion dollars (and growing) by first estimates. The Katrina experience is more related to expenditure and resources deflected from homeland security to fighting an incredibly expensive war in Iraq that is costing way, way above any estimates that could have been made when the Iraq venture was first conceptualised.

What else is on fire? The price of oil is on fire. Even though it retreated from its all-time nominal high of $71 per barrel following the disruption caused by Katrina, the outlook for the oil price is still pointing north. When demand increases soon for heating oil in the northern hemisphere at the same time that countries will be forced to re-build the strategic reserves they released to cushion the Katrina disruption, there is a risk that the oil price could re-test record levels in the short term.

On a long-term basis, development in
Asia, China in particular, will continue to underpin growth in demand for energy resources at a rate greater than they can be supplied. On an even longer-term perspective, the resources of oil and gas are not infinite and unless renewable energy resources can be developed, energy supply bottleneck could be envisaged in the coming decades.

Renewable energy sources can only be commercially justified by a permanently high price for oil and one can understand then why the price of oil is likely to remain on fire for the foreseeable future. Nobody seems to believe that oil can ever go back to the 20 something dollars per barrel that was factored in most economic projections up to 12 months ago.

The only thing that does not seem to be on fire is our economy and its management. While we continue with an unimpressive economic performance, with little or no growth in tourism and manufacturing, we plod along with the publication of documents and public consultation processes. The latest is the National Reform Programme
Malta’s Strategy for Growth and Jobs for the period 2005-2008. This 74-pager again pretends that we can solve our economic problems by nicely worded reports defining praiseworthy objectives on which there is total consensus. What we need is effective leadership in implementation and achievement rather than competent report writers.

Let’s take a simple example. Nobody can disagree with the objective to make the economy more competitive. To achieve that, one of the major variables is wage flexibility. This is acknowledged in the report and, in fact, Policy Initiative and Measures on Page 12 of the report says: “M05.1 Ensure that current and future employment legislation is consistent with a flexible and dynamic labour market.”

Is it not time to pass from the vague generics to specifics which question in plain and simple language whether we can maintain the legislated COLA system which adds wage costs unrelated to productivity? Can we remain competitive if we do not change? Are we prepared to change? Can change be brought about by public consultation, or by dynamic and inspired leadership capable of persuading that the long-term gain will far outweigh the short term pain?

Why is it that everything around us is on fire except where we need it most – a burning sense of urgency in our economic reform programmes where we need change managers rather than yet another report written in the vague theoretical style of university professors.

Sunday, 4 September 2005

Worst Behaviour

The Malta Independent of Sunday

How can they give beautiful names like Ivan or Katrina to such destructive monstrous hurricanes?

How is it possible that the sole super power left, which has no qualms playing super-cop around the globe and pretending to have the capacity to establish democracy in desert kingdoms and caliphates that probably cannot even spell the word let alone appreciate it and embrace it, is so incapable of protecting its own against a relatively small natural calamity?

Compared to the Asian tsunami hurricane Katrina is small change. But whereas the tsunami ravage was a one shot resulting from an act of God, which destroyed hundreds of thousand of lives but produced relatively small material damage (because the poor Asian countries had little material to damage), Katrina’s aftermath is contrastingly different. The storm itself was pretty mild on the Asian tsunami scale, and there is absolutely no comparison as regards loss of life. However, in terms of material damage and economic disruption the costs will be astronomically higher than the tsunami damages purely because it hit an area where there is concentration of economic activity and huge industrial plants, busy ports and a nerve centre for the distribution of energy and commodities.

The tragedy is that much of this damage is not quite the result of the hurricane itself but the result of human abuse of Mother Nature. Abuse in building cities below sea level. Abuse in finding the billions required to fight unnecessary foreign wars on false pretexts but not finding the few millions necessary to maintain the damns or levees to keep cities, dangerously built below sea level, safe and protected.

Only time will tell why the emergency services have proven so gaspingly ineffective that journalists were forced to sympathise with looters, who were described as being forced to steal because it was a matter of survival given the failure of the emergency services to respond effectively. How can the richest and most technologically advanced nation in the world be capable of landing men on the moon, building a manned base lab in space, sending spacecraft to the farthest corner of our solar system, keeping satellite watch on every corner of the world, responding to 9/11 attacks by bringing back its financial systems up and running in less than a week and then prove so ineffective in airlifting emergency supplies to so many thousands of New Orleans citizens who were ordered to leave their water-logged homes without any supplies or belongings?

How can it be that America could let its citizens suffer such degradation and deprivation in such an hour of need, which in its experience is comparable to the suffering of the children of Beslam a year earlier though hopefully the ending will be less tragic?

Closer to home, how can the EU leave its tiniest member State to fend on its own as it tries to grapple with the problem of illegal immigration? Is it not clear to one and all that the problem this year has taken on a totally different dimension now?

It is no longer a case of the odd boatload of immigrants landing on our shores by mistake on their way to Sicily and the European mainland. It has now become an organised system of immigrants coming purposely to Malta to join the friends or relatives who had arrived earlier.

Can’t the EU be made to realize that a small country like us doesn’t have the skills and resources to cope with this problem without putting the life of such illegal immigrants at risk by abandoning them to their own destiny on the high seas?

For the EU as a whole this is a small problem. Illegal immigration from the Balkans, mostly Albania and the former Yugoslav Republic and from former communist countries is now history. Illegal immigration from former UK colonies into Britain and francophone colonies into France has also largely diminished as many such colonies have improved domestic economic conditions.

So if our geography is condemning us to become the first port of call for the last remaining source of illegal immigration, the African continent, why should we be left to fend for ourselves? Where is the European solidarity we were promised?

The developed world, and Europe in particular, has an obligation to promote development in Africa to reduce and eventually eliminate the flow of illegal immigration. But until his happens Europe must help Malta and Sicily to tackle this problem with a sense of solidarity. Otherwise, Sicily and Malta will be constrained to continue dumping responsibility for the occasional mishaps on one another and will continue to play at passing the parcel to each other, that is, the responsibility for housing the immigrants. This is not a Sicilian problem or a Maltese one. It is a EU problem, or if you will, a European problem that even involves countries outside the EU. It is the lack of real aid to Africa that has brought about this unbearable situation which has disproportionately burdened the central Mediterranean islands.

As a minimum, the EU should invest in a proper detention centre in Malta, resourced as an EU-wide project both in terms of funding as well as in terms of equipment and skilled human resources, and setting up efficient systems to distinguish between genuine asylum seekers who could be absorbed inside the EU and abusive economic immigrants who should be returned to their country of origin.

Like the poor souls stranded with just the clothes they are wearing in the New Orleans Super-dome and Convention Centre, which is bringing the worst out of humans who feel threatened and abandoned, we should not be abandoned by the EU to face the problem of illegal immigration single-handedly. If they do that they can hardly be surprised if it brings out our worst side, as happened to Minister Tonio Borg when he said that if we are not helped we could be forced to renege on our international agreements.

Rather than be chastised for saying it I think it should be said more forcefully until someone listens.

Friday, 2 September 2005

Do We Have a Housing Bubble

The Malta Independent - Friday Wisdom

This question is often asked in relation to the sharp increase in property prices experienced over the last few years. An authoritative answer thereto is well nigh impossible, as experience shows that it is difficult to identify a bubble in real time. In fact, even if an asset price bubble exists there is no assurance that this bubble will keep inflating to the point of bursting and unless it bursts, its prior existence cannot be proven by subsequent events. Only a bubble that bursts can be proven a posteriori.

The responsibility for avoiding the creation of dangerous asset price bubbles lies primarily with the monetary authorities, in our case the Monetary Policy Council of the Central Bank of
Malta, with ultimate responsibility on the Governor. The objective of monetary policy is not only to achieve price stability at the retail/consumer level but also to have an orderly market at the asset price level, particularly regarding immoveable prices (read “house prices”) and financial capital assets prices (read “quoted equity prices”).

One could be forgiven for forming the impression that monetary authorities are much more focussed on retail price stability and only give attention to the asset price inflation when it is often too late to prevent it. This is not restricted to domestic experience. The US Federal Reserve chairman Alan Greenspan, its factotum for the last 18 years and now nearing the end of his tenure, has in the past maintained that central banks should not use monetary policy to spike a bubble, but only to cushion its aftermath effects. This, however, says little about the obligation of central banks to use monetary policy to avoid the formation of the bubble in the first place or to deflate the forming bubble before it enters the bursting risk area.

In recent years, the Bank of England and the Federal Reserve of Australia have used monetary policy instruments (read “rising interest rates”) to calm down property prices, even though the consumption economy could have performed better with, and probably deserved, lower interest rates. Pitching the interest rate level at a fine balance, so that it is low enough to promote economic growth and high enough to promote savings and orderly asset market price development, is immensely tricky. Interest rates decisions are based on past and current experience, but the effects are felt after a substantial time lag. By the time the effects could hit the economy the scenario which had originally justified the interest rate decision could be quite different, requiring a different approach.

In the local context, we are experiencing quite a novel market reality which makes the interest rate decisions of the monetary authorities particularly complex and hazardous. The economy is growing well below its potential, a situation that normally calls for a reduction in domestic interest rates. However, in the international markets nobody is really talking about reducing interest rates and the
US is on a seemingly unstoppable course of raising short-term interest rates. Going against the grain could expose us to capital flight eroding our foreign reserves at a time we need them to lend credibility to the plan to join the Euro at current ERM II rate.

The near zero savings ratio and the unhealthy increases in equity and property prices would, on the other hand, suggest the need for an increase in interest rates which would act as a further brake on the real productive economy.

There is a new phenomenon working out in the economy. In spite of slow growth in productivity and earnings, people have maintained their consumption by reducing their savings and, in many cases, by incurring consumer debt. Low interest rates and increasing wealth through higher values commanded by residential property (plus the availability of second mortgages and equity release loans to translate this increase in value into ready liquidity) is leading to consumption levels which would otherwise by unsustainable by current earnings and productivity.

The government recently requested the MFSA to conduct an exercise to establish whether more flexible home-loan facilities with little or no up-front contribution by the borrower and a repayment programme spread over 40 years is leading to an undue stimulation of property prices.

This is an odd request – both in it being made and in the way it has been addressed. MFSA are regulators for individual institutions, but the direct responsibility for monetary policy and financial stability rests with the Central Bank. If any organisation should be conducting such an exercise it should be the Central Bank and, given its autonomy, it should need no prompting from the government to do it. Indeed, such an exercise should be a continuing one – with the data being regularly fed to the Monetary Policy Council thus enabling it to take it into consideration with other economic data in arriving at decisions related to the implementation of monetary policy.

Is the government losing confidence in the ability of the Central Bank to contain asset price inflation? Could not the very fact that government felt the need to make its odd request to the MFSA increase instability in a hot market leading to a disorderly price adjustment process?

It is in everybody’s interest that order is restored in the property market without destabilising one of the few sectors contributing to economic growth. The object-ive should be to cool down the upward price spiral without imposing high interest rates and without causing the property market to crash under the weight of over-development.

Reducing flexibility in the home mortgage package is the wrong place to start to restore order. Provided that borrowers ability to repay over the working life is established, more generous mortgage terms do not worry me. Interest only loans and consumption loans based on second mortgages or equity release scare me much more. Killing off demand could be counter-productive to the aim of restoring price stability in the property market. Dangerous build-up on unused housing stock could become a dangerous powder keg which could prove explosive when domestic interest rates eventually have to respond to international pressure or domestic retail inflation.

Given the substantial development pipeline, probably the best way to begin preventing the bursting of the property bubble is for government to direct Mepa to take a brief moratorium in the approval of fresh condominium development.