National reform programme 2008-2010 Malta - European Commission

These developments are expected to result in a fall in aggregate demand, both as a result of
lower demand for exports as well as a slowdown in private consumption growth due to higher
domestic inflation.
Government’s main macroeconomic policy objectives are to achieve sustainable economic
growth and ensure real convergence with EU average income levels; and to generate a high
level of employment and secure a relatively low unemployment rate. Malta’s per capita GDP
stood at around 77 per cent of the EU27 average in 2007. Convergence to the average EU
per capita income within a reasonable timeframe requires that Malta’s economic growth rate
increases above the recent levels and remain at such elevated growth rates for a sustained
period of time. It is estimated that an average annual real growth rate of approximately 4.2%
is required in order to reach the EU average per capita income by 2020. This level of growth
appears to be in excess of most conventional estimates of Malta’s potential growth
suggesting the need to address supply-side issues in order to achieve real convergence with
EU average income levels within a reasonable time frame. This implies consistent increases
in the employed population as well as enhanced labour productivity over a prolonged period
of time. Thus Government will continue to implement supply-side policies earmarked to
improve participation in the labour force, improve the functioning of the market, encourage
investment, including foreign direct investment, and support the transformation of the
economy to high value added activities.
Demographic developments, specifically the ageing of the Maltese population, are expected
to have a notable impact on the labour supply in the coming years and consequently also on
the rate of potential economic growth. In this context, Government will be considering the role
of policies earmarked to increase participation in the labour market as well as measures
aimed to improve the fertility rate and migration policies. Government is particularly focusing
on measures targeting female and older workers, whilst also implementing measures aimed
to improve the incentive to work. Imported labour can provide an important contribution to
meet the growing demand in certain sectors and to ensure that any labour shortages do not
lead to undue wage pressures. Experiences in other countries in the EU show that migration
can provide a significant means to support the growth process, particularly in the context of
constraints on the growth of the labour supply due to demographic developments.
Globalisation and the inherent increasing international competition, especially from low-cost
countries, which it brings about is posing significant challenges to specific sectors of the
Maltese economy, particularly in traditional manufacturing activities. The tourism industry
also faces intense international competitive pressures from competing destinations, not only
in the Mediterranean region but also from cheaper long-haul tourist locations. In this context,
Government attaches high priority to policies which aim to enhance competitiveness so as to
ensure sustainable economic growth. Furthermore, Government will continue to promote the
development of high value added growth sectors, so as to ensure that wages can improve
and converge to average EU levels. Such diversification of the economy would also reduce
the country’s vulnerability to external shocks and reduce the volatility of the growth path.
As a Euro Area Member State, Malta can no longer make independent use of monetary or
exchange rate policies. Economic theory suggests that in such a scenario, negative external
shocks need to be absorbed by an increase in productivity and / or a decrease in prices and
wages, or the migration of labour across industries (if shock is sector specific) or across
countries (if shock is country specific). In the absence of such flexibility in the labour and
product market, a persistent rise in the unemployment level is the likely outcome. Flexibility in
the economy is thus crucial to facilitate national adjustment capacity when faced with
economic shocks. Such flexibility is important in order to respond to changes in cyclical
economic conditions, as well as longer term trends, including globalisation and technological
changes. Thus, Government will continue to implement structural reforms aimed to instil
further flexibility in the labour and product markets.
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