Competitiveness - luring the genie out of the bottle

The issue of the latest World Bank report ranks 189 economies on a number of economic benchmarks including a study of ease of doing business. This shows Malta reaching the 103rd place exactly behind Costa Rica (down from 100 in 2013) when assessing the ease of doing business.

The report talks about our gross national income per capita reaching $19,760, which it rates as a high-income category. Another important benchmark is the ease for new firms to register for electricity which is ranked quite low at 163 (out of 189) and here it lists the procedures how to carry out such an application.

The process starts when the client’s engineer sends a letter to Enemalta to inform about the requirements of the new connection and a reply is expected to take   35 calendar days. Secondly it takes Enemalta 14 days to inspect the site with the client. Another 3 months pass for the client to receive and sign the quote and for Enemalta to carry out the external connection against a fee commensurate with the size of the installation.

It is then the turn of MEPA to inspect the premises to deliver the compliance certificate that, baring any complications, usually takes another 28 days. Finally after 11 days, the client pays €900 on a formal application to ARMS and Enemalta’s engineers come to install the meter and do the final connection. This is quite amazing considering that the whole process ranks Malta at almost half way down the bottom at 115 (last year 113).

Equally labourious is obtaining credit for SME’s which the World ranks us at 180 (last year 177). But it is not all doom and gloom and the time it takes to pay taxes registers a high ranking of 27. This is defined as the time it takes to prepare, file and pay (or withhold) the corporate income tax, the value added tax and social security contributions (in hours per year). Equally beneficial is the time it takes to do trading cross-border, which ranks 34 meaning the time necessary to comply with all procedures required to trade goods.

Overall one can conclude that the World Bank ranking makes interesting reading and gives a subtle warning that we face challenges looming ahead but also mentions considerable opportunities. Whilst the closer integration of the world economy has magnified the impact of the Euro crisis, countries that reform their structures stand a better chance at speeding up the recovery, as demand from the countries that first return to growth will lift exports from, and thus production in, their trading partners.

In its annual report the World Bank has issued a clear warning to those who harp on about how well the island did in the wake of the global recession, and declares that the economy is enjoying a cyclical upswing, but the questions if it is sustainable unless urgent reforms are carried out (typically pensions reform, welfare/health restructuring and improved public transport systems). The report continues to placate us that as a small and very open economy, Malta is adjusting well to the challenges posed by globalization, since adequate progress is being made in diversifying the economy into higher value-added activities, including aircraft maintenance, pharmaceuticals, financial and accounting services, ICT and more.

It goes without saying that competition from others reminds us to never compromise on our eternal drive to upgrade and promote synergies between the various economic clusters. Any hesitancy in this task would augment the risks stemming from potentially unfavourable changes in the frail international recovery. Although comparisons can be odious and sometimes misleading, this week Chris Cardona, the minister responsible for economy, pointed out the difference between the 2.6% increase achieved under his tutelage in GDP growth in 2013 and the “dismal” 0.6% increase in 2012 registered under the PN administration.

At this juncture it is pertinent to recall that the Governor of the Central Bank of Malta cautions us to monitor wage increases making sure these reflect productivity developments. Competitiveness is also suffering from a low participation (42%) of a vast pool of females (most with tertiary level qualifications) and one hopes that a partial remedy will be more family-friendly measures for part-time work/free child care centres and flexible working practices.

So while Cardona harkens us to be jubilant on our successes, we cannot rest on our laurels. Malta definitely needs to sharpen its tools to become more competitive noting that its latest ranking was at a low of 47th place in the world index. Textbook economics tell us that a robust competitiveness policy must encourage dynamism and transition into an open market place within the global context. Thus if our national policy is not formulated in this way, it could hinder and undermine the motivation that is needed for exporting firms to succeed in both the EU and the world market place.

Nonetheless, the EU is offering its members generous help to put their economy back on its feet and one of the programmes is the European Regional Development Fund (ERDF). This funding scheme is aimed at strengthening economic and social cohesion in the European Union by correcting imbalances between its regions focusing its intervention on diversifying economic structures, creating sustainable jobs, fostering innovation and competition and increasing economic and social cross-border activities. In this manner, the EU is assisting Malta to speed up the process of penetrating new markets and providing ad hoc networking opportunities to improve levels of competitiveness and innovation.

This may seem too utopian to be true and yet very few firms are aware of this facility to help them penetrate overseas niches, albeit riddled with red tape, which to some extent is not so easy now due to distressed markets. Still, the EDRF program does attempt to build a deeper understanding of the fundamentals of global leadership and competitiveness using various tools and case studies and aid packages. Naturally it is a long journey to be tackled astutely, while fully aware of the formidable task to co-ordinate various aspects of the complex relationship between service providers in varied industries. 

PKF shall be strategically using empirical information to assist clients in seeking ways to improve their performance by minimizing costs, reducing risk, fostering collaboration, increasing transparency and even sharpening their focus to improve their competitive position, no matter what industry they are in. Leveraging the opportunities from such cross-border opportunities will lead to a higher level of competitiveness. Thus, the competitiveness of a firm depends not only on its own strength, but also on the support it receives from the external environment in which it operates.

Clearly, this support varies markedly from industry to industry and from country to country. It goes without saying that a national competitiveness policy must be in force to encourage dynamism and transition into an open, yet distressed market place within the global context. If a robust policy is not formulated, it could hinder and undermine the motivation that is needed for our nascent manufacturing sector to survive the storm. That is why, in order to benefit fully from commercial advantages and trade opportunities, we must be fully competitive. In this context, one has to keep in mind an important factor that contributes towards accomplishing trade facilitation.

 Such trade facilitation is driven by Malta Enterprise, while Finance Malta co-ordinates via all overseas consulates and embassies. Trade facilitation measures fall into four categories: port efficiency; customs procedures and Freeport requirements; improved regulatory environment; reduced bureaucracy and wider e-business usage. On its own, trade facilitation is no panacea but it is desirable. On a practical level, one can define it as a host of measures to make the flow of internal commerce faster, cheaper.

This can be further assisted by a reform in streamlining the administration of ports and customs clearance with the scope to reduce trade transaction costs significantly. It is true that taking into consideration the turbulence suffered by other Eurozone countries, Malta has so far weathered the global recession relatively well. Output has dropped but it is less than the euro area average and unemployment rose only modestly, also reflecting PN’s policy in the past for continued support targeting specific industries.

At the same time, borrowing continued to rise and this on its own helped maintain a mild stimulus. As can be expected, following trends in changing technology, the need to move to a human resource-efficient economy and the continuing rapid development of the ICT-based entities will better equip us to penetrate niches in the global markets. All this is a do or die scenario. Consequently during such turbulent times it is a relief that EU is offering valuable assistance to encourage innovative business ideas. If Malta rides the wave and moves swiftly to adapt itself to emerging trends, we will be in a position to capitalise on first-mover advantages.

Naturally, we need to ensure our firms have easy access to finance, world-class innovation, science and research through the university graduates coupled with a superior digital infrastructure. It is a sad fact that banks are becoming more risk averse even though their liquidity ratios and charges continue to increase but as noted in a recent IMF report, this may be caused by their exposure on lending to mega developments, thereby accumulating some non-performing loans. To conclude, one must be vigilant to face 2014 with a renewed vigour and a stronger determination to surmount future challenges.