The interdependency of competition

Economic Services Minister Josef Bonnici addressed of the Malta-Commonwealth Third Country Training Programme: Training Workshop on Competitiveness Strategies for Small Nations on Monday. Prof. Bonnici dwells on the topics of competition and government efficiency

A country’s competitiveness determines the ability of its economic operators to prosper and create wealth. Various factors have a bearing on the capacity of businesses to excel. Managerial efficiency is a crucial attribute for enterprise competitiveness, as is the adaptability of management as well as labour resources to a changing competitive environment. Another is the access of enterprise to finance. A developed and internationally integrated financial sector within a country supports its international competitiveness. Privatisation in the financial system has made an important contribution in this direction. Very importantly, there is the need for investment in the skills and training of the workforce as well as in physical capital.

Within a country, firms operate within a fiscal, political, cultural and educational context and these dimensions have a crucial role in determining competitiveness. Government must be flexible enough to adapt economic policy to a changing international environment. Government also has the role of providing a policy-making structure and macroeconomic conditions that are stable and predictable. It is when government supplies efficient administrative structures, institutions and policies that a nation can compete effectively in the world’s markets. The competitiveness of a nation and the competitiveness of its firms are interdependent.

A fundamental step toward ensuring productivity growth and competitiveness in Malta was the passage of the Business Promotion Act. Previously, industrial policy promoted exports in general without giving due regard to productivity and income growth. Earlier industrial policy up to the mid eighties, sheltered domestically oriented activity through protection against imports.

Protection provides dubious short-term benefits. There is always a direct cost to consumers, and in the long run protection does not invigorate industry. Instead it weakens enterprise by stifling the incentives for product development, investment and innovation. At its best, protection is a zero sum game, and in the longer run it chokes off growth, particularly in a tiny domestic market like ours. The longer that parts of the economy remain insulated from change, the harder it is to catch up with the rest of the world, which is itself not static but actually evolving rapidly. In other words, the world is constantly changing and one either rises to the challenge or falls behind. Historical research on Malta’s manufacturing sector has shown that the greater the export orientation of firms, the greater the tendency to invest and the greater the incomes generated. These are the traits that policy makers should seek to replicate across the economy.

Malta’s new industrial incentive structure promotes productivity growth and competitiveness across all industry. It directly rewards growth in value added and productivity, and focuses additional incentives on industrial sectors that show the greatest promise for success in the international market place. At the same time, domestically-oriented activity is being weaned off the protective shelter through programmes that facilitate restructuring and enterprise growth.

The Institute for the Promotion of Small Enterprise (IPSE) offers programmes that promote both restructuring and innovation. For example, its Business Incubation Centre, provides a complete range of business facilities -- including premises at subsidised rent and even access to seed capital -- to start-up enterprises in a number of sectors. These sectors include information technologies, mechanical and electrical design, renewable energy resources and biotechnology.

The government is committed to the elimination of trade barriers on imported products. By January 2002, levies on imported industrial products had been decreased by 50%. In the case of agro-industrial products, the government is fully conscious of the natural constraints on Maltese agriculture, and levy removal will occur in tandem with a programme to restructure the key segments of this sector. The government recognises that there is great potential for efficiency increases, and it is committed not just to sustain the farming and agro-business sectors but also to help them develop.

More broadly, the government is in the process of applying EU rules on competition and state aid. Unfortunately there are those who consider this project solely as an administrative and economic burden resulting from EU membership, rather than a necessary investment. Yet there is really no alternative. To simply retain indefinite protection would be to perpetuate current structural constraints and to condemn many of our industries to low productivity levels and poor income growth.

There is no question that EU membership is the foundation for the achievement of the higher level of competitiveness to which we aspire. EU membership will anchor Malta firmly in the European community of nations and will send a signal to potential investors of the stability and maturity of Malta’s policy structures. EU membership would also mean the injection of structural funds. As we adopt the policy standards of a developed economy, EU funds will also provide crucial assistance. EU membership will remove restrictive rules of origin on Maltese exports and will enable Malta to tap into the EU’s network of trade agreements with other countries. In this respect, membership is superior to a free trade arrangement, which would leave us with the task of negotiating separate agreements with all other countries from a position of relative weakness. If Malta were to stay out of the EU, the imminent membership of the Central and Eastern European countries would lead to an additional competitive disadvantage.

As a small, island nation, Malta is vulnerable to greater economic volatility. Membership of the EU and participation in EU structures will serve to reduce this vulnerability.

Innovation and R&D

Government has taken major steps for the direct support of investment in innovation and research and development. A nation that wants to be able to promote high wages and profits must produce higher value added products. Ultimately, continued prosperity depends on innovation, because it is innovation that allows the creation and production of unique and advanced products whose novelty commands higher prices.

The Business Promotion Act provides three forms of incentives for R&D. First, companies whose business is research and development make up one of the "identified" sectors that qualify for reduced income tax rates and investment tax credits. These companies may be engaged in the design or development of products or they may be engaged in design and development of production processes or methods.

Across industry, expenditure of a capital nature incurred in the acquisition or development of technology or know-how, whether this is patented or not, can be financed through loans at subsidised interest rates. It is assisted by loan guarantees and grants, and the company can benefit from a reduced rate of tax on reinvested profits.

The Income Tax Act was also amended to allow 120% of any expenditure on scientific research carried out in Malta to be deducted from total income for the calculation of the income tax due.

Government efficiency

Over the last 14 years, the government’s role in the economy has shifted progressively from one of direct participation to that of regulator. This transformation will continue, while the concept of regulation will itself evolve. The objective should be less the direct regulation of economic actors and more the indirect regulation of the business environment in which these actors operate. State intervention in business activity will be further reduced, aside from those measures that instil or safeguard a competitive environment for private enterprise.

Mechanisms must be in place for the continual assessment of the efficiency with which the machinery of the state operates. In this respect, an example was the establishment of the Small Business and Crafts Directorate within the Ministry for Economic Services. This directorate is designed to help small businesses and the self-employed get better service from the many government departments and public enterprises that they come into contact with. The directorate proposes amendments to regulations that affect business practice, leading to the simplification of legislation and procedures, to make them more "business-friendly". The directorate solicits feedback on any inefficiency that is encountered by small businesses in their dealings with the government.

The implementation of e-Government is another step towards greater efficiency in government administration. Through e-Government citizens will benefit from convenient electronic services. Providers will include the public as well as the private sector, and the e-Government strategy is designed to promote electronic commerce within the business community as well.

Infrastructure

A well-developed infrastructure supports economic activity. Over the last fifteen years in particular, government has made a considerable investment in the country’s physical infrastructure. This has included energy generation, water treatment and production, harbour facilities, the airport and telecommunications. These facilities are now often taken for granted but it must be emphasised that they represent essential elements for the efficient operation of the industrial sector.

In conclusion, the government’s mission is to create an environment that not only encourages competition at the local level but also puts our businesses in a position where they can compete at the global level.

All policy measures have to be inspired by full faith in the capacity of Maltese industry to be a successful global player. Liberalisation and enhanced competition lead to greater efficiency that not only increases the benefit to consumers but also provides a stimulus for growth in the business community.