NEWS | Wednesday, 14 May 2008

Economists differ on Social Pact

FOI’s proposal “preposterous” – Edward Scicluna

Charlot Zahra

Senior economists approached by Business Today had different opinions on whether a social pact would be effective to improve the country’s competitiveness, as suggested by Central Bank Governor Michael C Bonello last month at a business breakfast.
Economist Edward Scicluna, a former chairman of the MCESD, told this newspaper that a social pact was “desirable in any kind of economic situation. It is most desirable to have a formal agreement at the national level whereby the employers and the workers’ representatives agree on the way forward.
“In particular to agree on how they can help in increasing productivity and competitiveness in the first place and how to distribute the rewards afterwards. That essentially is what a social pact is all about.
“In particularly difficult times the need for such a social pact becomes more acute. So any hint or nudge coming from any quarter is most understandable,” Scicluna explained.
“However, having said that, we are here talking of relationships between difficult partners: unions, employers and the Government. Just as with, say, married partners.
“It is of no use saying ‘Married partners should express their love to one another in a tangible manner’. The answer varies according to the characters, their personality, disposition and circumstances at the time. It’s the same with our social partners.
Scicluna said he agreed with Finance Minister Tonio Fenech that one should tread carefully in the light of what has happened in the recent past.
“Honestly I would rather see the two big unions making positive approaches to one another first, putting their federation on a sound footing.
“Only then should they approach the employers directly and, in a non-theatrical manner, sit down and draw out an agreement. From my experience I do not find the MCESD setting congenial to such an agreement. The dining-room of one of these protagonists would be more suitable.
As for the FOI’s suggestion of getting the opposition party within the MCESD, Scicluna stated: “I just hope that it was not serious. It is most preposterous. The place of our representatives is in the House of Representatives. They have enough structures in there to bring them closer to one another.”

“The presence of politicians from both sides of the house or their representatives on the boards of our leading national institutions has not borne any fruits.
“Just look at the Broadcasting Authority, the Electoral Commission and MEPA. As for civil society itself, we need to give it some breathing space so that it can express itself. Politicians, no matter how well meaning, please hands off,” Scicluna said.
Veteran economist Karmenu Farrugia was more positive about the proposal to restart discussions on a social pact. “The proposal should not have waited for a speech occasion from the Governor of the Central Bank: the Prime Minister himself should have done so inside a few days from choosing his cabinet.
“A social pact (I prefer to call it a ‘social contract’) is a must, however long it takes to reach agreement. Especially in circumstances when the Government has the slightest of parliamentary majority.
“That is, if stability is still recognised as desirable, indeed even vital, in the light of economic hurdles, emanating from outside Malta, which the country will soon be endeavouring to surmount and which threaten the very maintenance of our current living standard.
“The task will naturally fall in the laps of the current chairman of MCESD: a very hard task requiring stamina and determination, with a sense of balance among conflicting interests. There should be nothing else on MCESD’s agenda until agreement is reached on the pact,” Farrugia told Business Today.
On his part, senior economist Gordon Cordina said that a social pact was “a means to an end and not an end in itself.
“The final objective as stressed by the Governor is to improve the economy’s competitiveness in the face of a deteriorating external demand, higher input prices and an intensification of competition from within the EU and from outside.
“This calls for specific measures which may entail social costs in the short run, such as diverting Government expenditure away from unproductive consumption towards education, innovation and business support; introducing more flexibility in working hours; reforming pay systems towards performance-based mechanisms; and introducing better regulation initiatives, to mention but a few.
“Is a social pact needed to undertake these measures? The answer would be yes if each of the social partners wants to take ownership of every one of these issues through a holistic approach to the country’s economic challenges and have a strong say into the way in which a package of measures can be implemented over a period of years.
“The answer would be no if social partners are ready to leave the onus of policy formulation and implementation fully to the Government and are happy to merely continue occupying their traditional sectoral roles,” Cordina said.
He explained that international experience has shown that in general, useful measures with potential short term costs were implemented more easily and effectively within the context of a social pact than in situations where government went ahead on its own with the risk that specific sectors of the economy or society would later undermine its efforts.
“The formulation of such pacts perhaps came more natural in situations where social partners had an established tradition of negotiation at a sectorial level.
“In Malta, this hardly exists given that collective bargaining is undertaken at the enterprise level and that for issues concerning the overall economy, social partners in Malta tend to deal directly with Government rather than undertake a debate between themselves.
“Within this mindset, it would be unlikely that a social pact can be successfully concluded in Malta. Therefore, I would interpret the words of the Governor as a call to each and every social partner to focus less on their restricted sectoral issues and take a wider view of the country’s economic needs in their attitudes and engagement within the policy-making process in Malta,” Cordina told Business Today.
On his part, former banker Alfred Mifsud was quite telegraphic in his response. “It is never a bad time to attempt to obtain a sensible consensus on a social pact to take account of current realities and challenges. We just have to do it!” he told Business Today.
Finally, economist and former Labour Finance Minister Lino Spiteri said that a new social pact was “always useful to an economy very largely exposed to the vagaries of the international economy.
“It should be seen as a mechanism which the social partners could deploy to counter and if possible benefit from such vagaries. It should not be seen as a ploy to rein in wages, but as means whereby the partners can agree to act by consensus to achieve and maintain competitiveness, which is key to mobilising local and foreign direct investment,” he told Business Today.
Spiteri explained that the world economy had moved into what could be described as “another long phase of turbulence which demands sustained concentration by the social partners on how to try to grapple with dramatic price pressures and a shrinking export market.
“This mechanism might be seen to duplicate in part the objectives of the MCSED. It would be created from within the Council, which could act as its guardian. But the pact, provided it is kept under ongoing review, should permit more clearly defined focus,” the former Finance Minister told Business Today.

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