Are we going Dutch? Charles Theuma – Times of Malta

The next government that will take the reign of our small country in the coming months has a herculean task ahead to cure a sick nation.

All the economic indicators spiced by the numerous polls that aim to monitor the pulse of society are baffling many. Can the nation, riddled with major, headline-catching scandals of corrupt practices between the big business cartels and the political parties in the past decade, be so immune to such a moral tragedy?

I believe the Maltese are suffering from an economic illness, known as the Dutch disease. Economists have studied the long-term harm to economies following the discovery of large natural resources. This phenomenon took its name following the effects of the Netherlands economy after the discovery of huge deposits of gas in the North Sea.

Studies show that the long-term negative effects on an economy emanate from a strengthening of the currency following a large inflow of foreign currency from the sale of an abundant natural resource, especially during a time of a surge in commodity prices. This negative economic experience was also recorded to result from foreign aid and remittance that is not towards an investment that generates wealth over the long term.

New research has shown that the disease also arises from the inequality in the distribution of resource rent. What this means, in laymans terms, is that a particular sector of the economy is earning proceeds that exceed what is economically or socially necessary and acceptable. As the sector mushrooms disproportionately, there is increased demand and opportunities for workers to leave other sectors to partake from the gravy train.

Thus, production in sectors such as the primary and secondary sectors decline, not necessarily because of their cost structure but because they do not give priority to the economic well-being of these important sectors in the short run.

All the above have been bearing on the Maltese economy over the past decade. The international trading company status provides online casinos with an indefinite low tax regime. It is not the short-term tax holiday with an agreed expiry date that the state is allowed to provide to attract foreign direct investment to establish on our shores. An ITC established in Malta that trades exclusively outside our miniscule market has the benefit of annual and perpetual tax rebates bringing down the annual corporate tax bill to ridiculous levels.

The people are surely not unhappy if the polls are to be taken seriously- Charles Theuma

The iGaming sector (the harmless label given to an addictive, socially damaging activity) has overgrown the Maltese labour market and, with its open cheque mentality, has kicked off an inflow of mostly European workers with fancy remuneration packages at every level of the organisation.

The Maltese throng the mostly lower layers of these multi-million companies, employees that preferred to leave the mundane behind opening vacancies in the hospitality, health, retail, construction and education sectors, filled by thousands of third-country nationals. This has triggered a building boom exasperated through a sudden uncalled for relaxation of urban planning and lowering of sales taxation. The result is a double digit inflation rate on rentals and the price for housing that is now beyond reach of a Maltese graduate, just out of university.

The millions of euros coming from the European structure and social funds, plus further remittance of millions through the Individual Investor Programme and the good tidings of the all-year-round tourism enjoyed prior to the COVID-19 pandemic cliff edge fall, meant a seriously overheating economy. But who cares?

The people are surely not unhappy if the polls are to be taken seriously. The fact that Malta has the highest number of school leavers with minimal qualifications and our education system is repeatedly shamed through the PISA OECD education benchmark, and still enjoys full employment for many years running, means that everyone willing to work is employed.

Research shows the Dutch disease generates political uncertainty, with an incumbent government offering public service jobs, subsidies and other forms of economic transfers geared towards political clout and survival. Resolving an ailing nation needs a deep transformation of the state-society relationship and not just sound macroeconomic strategies.

The nations representatives need to either take the painful route towards a safer, albeit less glamourous future that is based on fundamental economic principles that build superior competences that garner global market share in the various value chains the nation had managed to enter, or ignore the clear warning of the FATF greylisting and continue to resist the need to restructure.

Tightening the financial services system to minimise money laundering opportunities will result in an attrition of the tax avoidance sector and all that benefits from it.

On the other hand, the Maltese may opt to continue to juggle the appeasement of the European community and our damning label as a tax avoidance haven against the necessity to cure ourselves from this ingrained Dutch disease, weaning the nation off its drunkenness and seriously focusing on developing a diversified sustainable economy, one that is built on internationally recognised and respected competences that guarantee longevity at a slightly lower, yet, decent standard of living for all.

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Are we going Dutch? Charles Theuma - Times of Malta