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.