Democratic drag

The Malta Independent on Sunday

The breakfast meeting to discuss the Budget for 2006, organised by The Malta Business Weekly and Hotel Phoenicia Meridien, delivered a clear message to the government.

It is time to look problems in the eye and acknowledge that our economy is growing sub-optimally, far too slowly and in a dangerously unbalanced way. Economist Gordon Cordina concluded that we need consistent real growth of four per cent p.a. to catch up with the EU average within a generation. Our recent growth rate of one per cent will get us nowhere and at this rate, former communist countries now EU members will soon overtake us, as they continue to register economic growth and attract investment in ratios beyond our wildest dreams.

Entrepreneur Joe Grioli put his finger on the problem in a more direct manner when he gave real life examples of lack of political leadership and determination to do what really needs to be done to move forward. He made a clear case that mere recital of good intentions and attacking problems superficially will simply not deliver. Repeated claims that we are on the right track sound quite hollow. The question is whether we are moving fast enough along such track.

In his address Grioli made a comparison with the performance of Singapore. He observed that the Singapore brand is a symbol of efficient government for foreign investors, a landmark international port, a prominent financial centre and an efficient spot on the ITC network. Malta on the other hand has no recognisable brand among international investors. In trying to be everything to everyone we finish being indistinguishable among the ever-increasing crowd of countries pitching for investment to win in the globalisation game.

As soon as Grioli finished his presentation the floor was given to the Parliamentary Secretary for Finance in the Office of the Prime Minister, Tonio Fenech, who in trying to parry Grioli’s criticism said one of the most shocking things ever to slip through the lips of a local politician.

He opined that comparisons and benchmarking with Singapore were unrealistic and erroneous as Singapore was not an effective democracy. Consequently, its government could manage the economy in an effective way, which is not realistic to expect in a real democracy given the government’s sensitivity to the need of not distancing itself too much from the electorate in order to retain its seat of power.

So, according to the main economic spokesman for the government, democracy is a drag on economic performance. This is not so different from saying that communist regimes are better economic managers than the market economy of the free world, or that Cuba should have a more efficient economy than the United States.

Late last September I had the opportunity to attend an international conference where one of the speakers was Mart Laar the first Prime Minister of a free Estonia following its 1992 detachment from the former Soviet Union. Mr Laar, was for some time also President of Estonia and in spite of his young age, at 45, he retired from politics and now earns a living on the conference speakers circuit relating his experience of successful conversion from a command to a market economy.

Mr Laar explained that in 1992 Estonia, the supermarket shelves were basically bare except for Russian vodka, inflation was running at 1000 per cent unemployment was heading towards 30 per cent, food was rationed and international trade was 92 per cent with Russia. Estonia in 2005, thanks to the switch from communism to a real democracy with market driven economic policies, is now registering stable real growth of six per cent pa, inflation is at two per cent, unemployment is low, the budget is balanced and the over-dependence for foreign trade on Russia is no longer.

Certainly our Parliamentary Secretary’s assertion that democracy has to be a drag on economic growth is not borne out by the experience of Estonia and, for that matter, by the experience of all countries that have come out of communism. Even the hybrid experiment being run by China, where central political communist structures are co-existing with a market economy in certain parts of the territory, is showing that what actually makes the difference between a shoddy and a brilliant economic performance is the extent to which the market is allowed to allocate resources while keeping a minimum social net to give a decent standard of living to those who cannot participate in the market because of their health, age or other particular circumstances.

What is causing a drag on our economic performance is certainly not democracy. It is our acceptance of long-standing rigidities we should have shed more than a decade ago.

Why should we in 2005 continue to pedal a COLA system of automatic wage increase across the board when all those we are competing with have abandoned this system? How can we continue to detach wage costs from productivity gains and still pretend to be shocked when factories close down and workers lose their jobs that are not being replaced by new factory openings. Maybe one could argue that the COLA is an intrinsic part of our social services structure. I quite disagree with this, as if anything COLA increases to the minimum wage should form such function with wage setting beyond the minimum wage allowed to the market function through negotiation at micro level between employers and employees, in most cases through their respective unions. But even if one were to hypothetically accept the argument for COLA retention, it is fair to ask which is the more important social service: COLA increases for those in employment or jobs for those who have none? Nothing changes the fact that the biggest social service is a productive job. Nothing is more traumatic and socially tragic than losing one’s job with little or no prospect of finding another within a reasonable time.

Let’s take another example mentioned by Grioli in his address. Rather than dismantling monopolies and letting the market deliver efficiency and productivity, we have kept the institutional system of quotas for taxi licences. Such quota licences change hands for astronomical sums, which means that taxi drivers will have to overcharge, and cheat, to get an economic return on their investment. I don’t know whether it was a joke or not, but Grioli even related a case where cruise liner passengers who on disembarking found no bus or coach transport, decided to walk to Valletta rather than take a expensive taxi ride. However, when asking for directions they were pointed towards Marsa by irate taxi drivers who had been refused the opportunity to sell their services. Some welcome!

Democracy is no drag on the economy. A fatigued leadership without determination to make space for the markets to deliver their efficiencies certainly is.