A Confluence of Problems

20^th June 2008

The Malta Independent - Friday Wisdom

The government’s decision to go for general elections in the first quarter is looking more enlightened by the confluence of problems that is taking place in this second quarter of 2008.

Many of these problems are international and beyond our control. Substantial gloom is gathering around the world economy as it is threatened by an unusual cocktail of economic slowdown, rising inflation and a very fragile international financial system.

We have slipped so rapidly from a goldilocks scenario (steady economic growth, contained unemployment and low inflation) to a scenario of stagflation where inflation generated by astronomical increase in energy and commodity prices is co-existing with slow growth verging on recession, forcing central banks to adopt a tightening monetary posture. While addressing inflation tighter monetary conditions and increased interest rates could clearly push the international economy in clear recession territory.

Being part of the global economy we cannot be excluded from carrying our share of the risks and exposure to these problems. Higher energy and commodity prices will inevitably have to cascade down to high retail prices of consumption products basic to everyday life and fairly inelastic, at least in the short term, to price movements. These will translate into higher fuel prices at the pump, higher utility rates, increased prices in such staples as our daily bread, and increased input costs of raw material for our building and manufacturing industry.

Beyond the immediate impact of higher costs on consumers and economic operators the confluence of these problems and the emerging recession scenario could inevitably lead to reduced external demand for our exports of goods and services. Will tourists continue to fly to Malta when faced with increased air-fares or would they prefer to take their holidays closer to home? Would the strengthening of the euro against the US dollar and the pound sterling render us too expensive compared to competitors whose costs are dollar based or sterling based?

These are not problems which are purely the domain of economists and bankers. They affect the daily life of most of us even of those who find economics too boring to contemplate. It raises questions on the sustainability of such important economic outfits as ST Microelectronics which has been providing employment for quite a few thousands of our most productive employees since the early eighties. The process of globalisation inevitably forces outfits like ST to cut costs in order to stay competitive in the face of stagnant demand and falling sales prices (at least in EUR terms) and it is only a matter of time that they will have to migrate manufacturing operations, in one shot or through an extended process, to other lower cost dollar based locations while keeping only the brain intensive processes or research and design in higher cost locations.

It raises the question whether continental European tourists would find it more economic to take their holidays closer to home or indeed fly to UK or USA, where the strength of the EUR could render the price of such holidays more attractive than holidays in EUR based countries.

It raises the question whether the building industry experiencing increased costs of raw material can survive in the face of falling demand for property and flat or falling prices. It brings into question the sustainability of tax systems like 12 per cent withholding tax at source on sale of property when sales will in effect start being made at prices which do not leave a commensurate margin of profits which justify such withholding rates.

It raises the question whether the population will have to cut back on its quality of life (reflecting itself in such discretionary spending as foreign holidays and dining out) when faced with stiffly higher energy prices and utility bills and uncertainty on the future earnings from their jobs, business or investments.

Added to this dangerous cocktail of international economic problems we have our own home-grown ones resulting from years of neglect or badly executed restructuring solutions to problems which have been dogging us for far too long. The most obvious is the re-emerging Shipyards problems which we are told needs yet another re-structuring and that this time the solution will have to involve both yet another down-sizing and privatisation in whole or in parts of the Shipyards operation.

At a time when the demand for ship repair services is quite high and efficient operators are normally price setters provided they can deliver timely quality services, there is no doubt that past restructuring exercises (of which we have had quite a few since the Shipyards operational losses started taking shape way back in 1985) have failed to deliver the bacon.

The unions and government/management can continue to blame each other till hell freezes over and as always the truth is somewhere in the middle. Nobody is totally at fault and no side is totally blameless. The truth however it is that the taxpayer is footing all the cost of these expensive restructurings and for goodness sake we must show the same dignity to all workers wherever they are employed.

We cannot tolerate a situation where employees who become redundant through the globalisation process after giving long years of productive and efficient service to private sector employers to be left totally exposed to the generosity or otherwise of their employers against whom the Unions hold pretty few levers with which to negotiate, whilst other employees who have long been bleeding the taxpayers with one round of subsidies after another, are yet again treated with privileges which their colleagues in the private sector cannot enjoy.

Whatever funds the taxpayer will have to foot to ease the transition of employees involved into new productive employment should be spread equitably among all affected employees, and should be directed mostly towards re-training and up-grading of skills to ensure continued employability rather than to facilitate early retirement leading to further stress on our productive capacity and social payments structures.

It is at times like these that the effectiveness of the MCESD needs to be proven.