Competitiveness strategies for small states

Finance Minister John Dalli speaks at a Commonwealth seminar on ‘Competitiveness Strategies for Small States’ held last weekend in Malta

It is indeed a pleasure for me to address this forum on competitiveness of small states. I would like to thank the Commonwealth Secretariat for choosing a Maltese institute to offer these courses. I would also like to commend the initiative taken by the Economics Department at the University of Malta and the Islands and Small States Institute.
Competitiveness has become the linchpin of economic policy as tumbling tariff barriers and e-commerce are opening all markets to competition. This transforms domestic operators into global players as on the one hand they have to keep their local turf but on the other hand they have the freedom to venture into other markets which have up till now been closed to them. Changing products to suit market needs, and changing processes to improve quality and reduce costs is the way to keep competitiveness of tradable goods on international markets, which is vital for a sustainable industrial base.
Malta has come a long way from import substitution in the 1980’s to liberalisation. The smallness of our economy could not sustain import substitution as the variety of resources required for all a nation’s needs are unavailable in a small economy. In addition, an economic strategy which basis increased economic growth on internal consumption is not viable in small economies.
The only way in which small economies can sustain increased standards of living is through increased international trade. Malta has recognised this and decided to open up its markets in order to maximise gains from trade. As from May 2004 companies located in Malta will have unlimited access to the World largest market and other markets with which the EU has special trade agreements.
The liberalisation process leads to restructuring of domestically oriented firms. We have helped and are still helping these companies to improve their marketing, production methods and human resources. We have also put in place regulators for our telecommunications, postal, energy and water sectors in order to separate this function from the service providers themselves. We are still striving in order to mitigate inefficiencies in all our economic sectors as inefficiency in any sector of the economy is automatically reversed in other sectors thereby hindering their international competitiveness.
Malta’s smallness is also coupled with its lack of natural resources. Our only resource is our human capital. We are investing heavily in the educational infrastructure through free education and support to students embarking on these studies. However, the level of education of our labour force is still below the European average.
In fact, while in the EU 21.8 per cent of the labour force has completed tertiary education, in Malta only 8.8 per cent have this level of education. As regards secondary level education while in the EU 42.9 per cent of the labour force has this level of education in Malta only 9.5 per cent have this level of education. While 8.5 per cent of those aged between 25 and 64 years in the EU are participating in education or training, in Malta this figure stands at only 4.4 per cent.
Early school leavers between 18 and 24 constitute 18.8 per cent in the EU while they constitute 53.2 per cent in Malta. These figures compel us to further sustain our efforts to encourage not only youngsters but also older persons to embark on further training.
Increased prosperity of a nation must be sustained not only by increased training which allows employment in higher paying jobs but also increased innovation. Malta is offering tax incentives for companies embarking on research and development and investing in IT. We have also set up the Kordin Business Incubation Centre and the Technology Venture Fund in order to help in the setting up and financing of highly innovative projects.
Through EU membership our companies will also be able to fully participate in EU research initiatives. Unfortunately research by the National Statistics Office indicates that most companies in Malta still consider innovation as irrelevant for them. Again this compels us to increase effort to enhance the research capability of our nation.
Our commitments to decrease the Government’s administrative burden on local enterprises will also help in further enhancing the competitiveness of our economic base. We have decided to merge our industry support structure so as to be better equipped to serve our industrial base. Thus a company will have to interface with just one institution for all its needs whether being research, international marketing or factory space. This institution will help align support services as, for example, education and financial institutions, with the needs of local enterprises.
The competitiveness of local enterprises will be further enhanced when Malta joins the Euro zone. Since our major trading partner is the EU adopting the Euro will mean eliminating all foreign currency transaction costs as pricing will be more transparent since hedging costs due to exchange rate volatility will disappear. Of, course the adoption of the Euro will also mean that we will have to reach the Maastricht Criteria on inflation, and Government deficit and borrowing. These are achievable goals which we intend to pursue in order to allow our local operators to be able to gain the advantages of a single currency.
As Malta’s GDP is still 55 per cent of the EU average, during Malta’s EU membership negotiations an agreement was reached through which state aid is given to local operators which is equivalent to the additional handicaps which operators in a small island state like Malta have to face. Our incentives are aimed at particularly high value added sectors as our limited resources do not allow us to have a successful fully diversified industrial base.
What I have mentioned up to now are Government lead initiatives. However, our social partners have a very important role to play in order to drive forward initiatives to increase competitiveness which requires national consensus. Welfare state sustainability needs to be addressed. The excessive transport costs at our ports also needs priority handling. Wage increases must be tied effectively with productivity increases. Wage increases must not result in cost increases. This is vital if really believe in pursing policies to enhance the continued competitiveness of local operators.
These issues cannot be addressed by Government alone but all relevant stakeholders must be involved in a collective effort for our national interest.