In this interview Mark Bamber | Partner | Advisory Services gives an overview of the economic cycles Malta has gone through over the past decades and discusses how we can maximise on the current positive wave to explore new sectors to promote further growth.
How has Malta adjusted to global trends and demands to attract new sectors?
Malta has historically needed to re-invent itself as it moved towards higher value-added economic activities and placed itself on the international economy. Post-independence, Malta found its niche in textile manufacturing, progressed into launching itself as a tourist destination, and in the 1980s embarked on offshore financial services. In the 1990s, Malta moved the offshore regime onshore, laying the ground to our successful development of international financial services. More recently, igaming became Malta’s new success story, and was lauded for its exceptional performance in the IMF blog. In parallel to these main sectors, Malta also launched itself as a base for the generic pharma industry, aircraft maintenance, maritime and recently, for life sciences.
What causes the need for economic diversification?
Moving towards the launch of a new economic activity is dictated either by changes in global circumstances or by emerging opportunities. For example, as South-East Asia started to target international investment in the 1970s as a low-cost location, many textile manufacturing plants in Europe simply relocated there in search of cheaper labour costs. On the other hand, as the Bolar provision was introduced in Maltese legislation, pharma manufacturing perceived a competitive advantage in Malta and came to the island.
Why is diversification a vital part of economic growth?
Over the last few decades, Malta’s population, and subsequently its labour force, has grown. In itself, this factor calls for the need to create more job opportunities. Economic diversification into specialised sectors positions the country as one which offers a value-added service resulting in high-end jobs. Likewise, the creation of specialist positions in the financial services industry increases value-added high-end jobs to replace or complement lower level activities.
And why do we want to increase value-added employment?
Economists believe that as countries develop, it is important to move higher in value-added terms to raise the standard of living, and to meet increasing demands for environmental, social and related commitments. Such activities generally mean that both salaries and profits are boosted. Employees earning better salaries can afford more luxurious housing and afford to have a more extravagant lifestyle. Firms earning more profits can reinvest and distribute returns to their shareholders. It also results in an increase in tax revenue, which enables government to finance infrastructure, environmental projects, social programmes, and improved health and educational services, among other things.
Is the benefit limited to newly-emerging sectors?
No. The economy is a network of inter-linked and inter-related sectors and activities. For example, as the financial services sector and the igaming industry grew in Malta, the benefits were felt by more traditional sectors of the economy. The influx of foreign workers generated an additional demand for housing, prompting growth in the construction industries. It also created new demands in entertainment, catering, leisure activities, and related sectors. The increase in resident families reversed the trend of Malta’s previous ageing population, and brought a new cohort of children who filled out the shrinking classrooms of our schools. Despite the growth of internet shopping, the growth in population created a new demand in our retail sector, boosting volumes for the wholesale and retail trades and driving new investment in retail outlets.
Economists talk about direct, indirect and multiplier impacts. The direct impact of a new investment is the value-added, income and investment created by the business. Indirect impact is the economic benefit to the immediate suppliers of the business. The multiplier effect has a positive impact to the community at large – eg. A high-earing employee in a financial institution spends part of his/her income locally, thus putting that money directly back into the economy.
Is it time to reinvent ourselves?
I perceive newly developing triggers that offer opportunities for Malta to develop new segments of economic activity. Internationally, there is growing resistance to large corporations that utilise fiscal structures in order to optimise their affairs. Multinationals that used blatant fiscal structures to relocate profits were put under pressure in the British media, when it was claimed that leading global brands unfairly paid less tax than the ordinary man in the street. Several initiatives globally are pushing the concept that international investment should be justified by demonstrable substance in overseas operations.
Concurrently with these developments, boundaries between industries are blurring. Technology is taking up an increasingly important role in medicine, as it is doing in financial services. Cryptocurrencies came to the fore with extraordinary growth in 2017, albeit the first quarter of 2018 saw considerable scaling back and consolidation in this sector.
More interestingly, it is the technology underlying cryptocurrencies that could transform how the economy works. Simplistically, blockchain is a shared, trusted, public ledger that everyone can inspect, but which no single person can control.
What specifically, are the changes it can bring about?
It can have a transformative impact on financial services. For example, blockchain can be very significant in the way that banks transfer money internationally. At least nine banks, including Goldman Sachs, Royal Bank of Scotland, UBS, Credit Suisse, BBVA, and Barclays, are studying this adoption in their systems. Blockchain also offers more accurate tracking of customer repayment histories both internationally and across banks, thus reducing credit risk. For example, Everledger, a permanent ledger for diamond certification, sees the new opportunities as a mark of authenticity providing transparency for all parties involved, a clear attempt to prevent diamond fraud.
Blockchain itself is also the technological base underlying smart contracts. Smart contracts help you exchange money, property, shares, or any item of value in a transparent, conflict-free way while avoiding the services of a middleman. In banking, blockchain can unlock value by automating processes and reducing compliance risk. For example, a shared KYC ledger would enable the sharing of encrypted updates of client details to all banks in real time. Such a ledger would enable the identification of persons or organisations attempting to create fraudulent identities, such that criminal activity can be identified more easily and can be targeted directly.
Malta is a trail blazer in this segment, as it is one of the first countries to embrace the technology, study its opportunities, launch a strategy to benefit from it, and give confidence in a regulated environment. Concerted efforts to attract the Fintech operators (the companies focusing on the technology) and those using the technology to deliver financial services promise to bring a new wave of foreign investment into our economy, transform the way financial services operate, introduce new thinking and new practices into our banking environment, and create new jobs and income opportunities for our residents. With an industry comprising technology and services, we can have a sector that combines concept, substance, and profit centres. We should be thinking boldly in formulating our vision for tomorrow.
Mark is an experienced economist, with a long track record in management and consultancy leadership roles in Malta and overseas. Nexia BT’s advisory arm offers a wide range of services including strategy and management consultancy; economics advisory; and corporate services.