Thinking global, acting now

Economic Services Minister Josef Bonnici addresses last week’s Malta External Trade Corporation conference – Think global - act how? Prof. Bonnici reviews the radical changes in the manufacturing sector over the years, while outlining the Business Promotion Act and METCO’s initiatives in the sphere

Export markets have been the key to our national economic progress, and they are set to take on an even more important role across a wider spectrum of manufacturing business.

Statistical measurements presented in the Industrial Policy Document show that export-oriented companies tend to invest more heavily in plant and equipment. They are more productive and offer higher pay to their workers. All this comes as no surprise. The search for success in wide-open export markets provides the motivation for management and workers to pursue productivity growth and innovation.

The manufacturing landscape has gone through deep changes in the last several decades. Prior to Independence in 1964, manufacturing activity was very limited, at a time when a significant proportion of employment was concentrated with the military services. The run-down of the British military base led to a heightened need for alternative employment opportunities. Two sectors were identified to lead economic growth, namely export-oriented manufacturing industry and tourism. Malta was starting from almost ground zero as far as today’s two main pillars of the economy were concerned.

In the early 1980s, there was a sharp contraction in economic activity, largely due to a strong exchange rate policy along with significant acceleration in inflation and wage growth. The period 1982 to 1987 saw the pursuit of import substitution, marked by severe restrictions on foreign goods that competed with the local product. This was in spite of the general recognition that the local market is too small to support a viable manufacturing sector, not to mention the undesirability of shutting such an important part of the economy from the benefits of competition. It is a fair comment that today Malta is still suffering from the remnants of this import substitution policy, with the final stage of its dismantling being the levy removal programme currently under way.

After 1987, Malta adopted a more liberal trade policy, discarding the pursuit of import substitution. There was also a remarkable transformation in the manufacturing product mix with a resulting upgrade in skill levels, and value added. Manufacturers transformed and revitalised themselves, adjusting to rising labour costs and to changes in global demand. Electronics, engineering products, pharmaceuticals, hospital equipment and many others have spearheaded employment and export growth. Across manufacturing, there is today a much higher value added as a result of enhanced skills, better capital equipment, and improved management systems.

In a number of traditional manufacturing sectors, certain businesses have depended heavily on our small domestic market, and this is particularly true of smaller enterprises. This situation is being transformed as more businesses find the key to success not in the protection of trade restrictions but instead in the capacity to excel in more open markets, whether abroad or at home.

Many small enterprises have survived over the years sheltered by import restrictions, first in the form of quantitative restrictions, and then import levies. Their fragmented structure increased unit costs, and also diminished their ability to acquire the minimum amount of financial and human resources necessary to thrive in today’s increasingly competitive environment. Restricted to relatively small production lines, these businesses have tended to invest less intensively in machinery and in product development, and have been presented with less opportunity to develop marketing, management and labour skills. The exploitation of monopolistic advantage in a small and protected market is not a winning strategy for consumers and for the country. Restricting imports to prop up profits and wages is counter-productive. It is only in increased openness that the business community can find the stimuli for product enhancements and marketing improvements.

Faced with these realities, more and more firms recognise the need to diversify into export markets, and to seek growth beyond our shores. These large foreign markets provide the key for the firm’s ability to achieve the lower-cost, high-levels of production and the enhanced value added that is reflected in higher profits and higher wages. Rising to the challenges of open markets, export oriented firms tend to allocate more resources toward capital expansion, necessary for growth in productivity and wages. In addition, a more consolidated industrial structure will alleviate the lack of expertise in a number of critical corporate functions, notably market research, new product development, production expertise, and development of adequate distribution channels.

Productivity growth is the only sustainable source of economic progress. Manufacturing stands out as a leader in productivity growth, and is projected to remain so, in line with the new industrial incentives programme. Malta must strengthen and build upon the capacity of the manufacturing sector to regenerate itself and consolidate its position of leadership in the economy.

Through METCO, Government seeks to integrate Maltese business into the global economy. Activities like today’s raise awareness of the opportunities offered by thinking global. METCO also works to introduce Maltese companies to foreign markets. Through its e-government project, Government encourages businesses to adopt electronic commerce, an important ingredient in the global strategy. IPSE initiatives help companies to identify and exploit their competitive advantage.

The Business Promotion Act is also intended to spur research and development, providing for such expenditure to be financed at subsidised interest rates, offering loan guarantees and reduced tax rates on reinvested profits and grants. Such expenditures also qualify for investment tax credits. In addition, the amended Income Tax Act allows for 120 per cent of any expenditure on scientific research to be deducted from total income, in the calculation of income tax due.

With all this support, certain companies still find obstacles in penetrating certain markets, due for example to both tariff and non tariff barriers that economic blocs often import. In this regard, one must note that only EU membership will completely eliminate these restraints and give full access to EU market. With a population of 378 million, set to increase after the next enlargement, the EU presents vast new opportunities to our exporters.