Issue link: https://maltatoday.uberflip.com/i/981272
BUSINESS | SUNDAY • 13 MAY 2018 maltatoday B6 How has Malta adjusted to global trends and demands to attract new sectors? Malta has historically need- ed to re-invent itself as it moved towards higher value- added economic activities and placed itself on the in- ternational economy. Post- independence, Malta found its niche in textile manu- facturing, progressed into launching itself as a tourist destination, and in the 1980s embarked on offshore finan- cial services. In the 1990s, Malta moved the offshore regime onshore, laying the ground to our successful de- velopment of international financial services. More re- cently, iGaming became Mal- ta's new success story, and was lauded for its exceptional performance in the IMF blog. In parallel to these main sec- tors, Malta also launched it- self 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 internation- al 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 manufac- turing perceived a competi- tive 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 sub- sequently its labour force, has grown. In itself, this fac- tor calls for the need to cre- ate more job opportunities. Economic diversification into specialised sectors po- sitions 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 in- creases value-added high-end jobs to replace or comple- ment lower level activities. And why do we want to in- crease value-added employ- ment? Economists believe that as countries develop, it is im- portant 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 prof- its are boosted. Employees earning better salaries can afford more luxurious hous- ing and afford to have a more extravagant lifestyle. Firms earning more profits can re- invest and distribute returns to their shareholders. This also results in an increase in tax revenue, which enables government to finance in- frastructure, environmental projects, social programmes, and improved health and educational services, among other things. Is the benefit limited to new- ly-emerging sectors? No. The economy is a net- work of inter-linked and inter-related sectors and ac- tivities. 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 hous- ing, prompting growth in the construction industries. It also created new demands in en- tertainment, catering, leisure activities, and related sec- tors. The increase in resident families reversed the trend of Malta's previous ageing pop- ulation, 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 cre- ated a new demand in our re- tail sector, boosting volumes for the wholesale and retail trades and driving new invest- ment in retail outlets. Economists talk about di- rect, 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 ef- fect has a positive impact on the community at large, for example. A high-earing em- ployee in a financial institu- tion spends part of his/her income locally, thus putting that money directly back into the economy. Is it time to reinvent our- selves? I perceive newly developing triggers that offer opportuni- ties for Malta to develop new segments of economic activ- ity. Internationally, there is growing resistance to large corporations that utilise fis- cal structures in order to optimise their affairs. Mul- tinationals that used blatant fiscal structures to relocate profits were put under pres- sure in the British media, when it was claimed that leading global brands un- fairly paid less tax than the ordinary man in the street. Several initiatives globally are pushing the concept that international investment should be justified by demon- strable substance in overseas operations. Concurrently with these developments, boundaries between industries are blur- ring. Technology is taking up an increasingly important role in medicine, as it is doing in financial services. Cryp- tocurrencies came to the fore with extraordinary growth in 2017, albeit the first quarter of 2018 saw con- siderable scaling back and consolidation in this sector. More interestingly, it is the technology underlying cryptocurrencies that could transform how the economy works. Simplistically, block- chain 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 Scot- land, UBS, Credit Suisse, BBVA, and Barclays, are stud- ying this adoption in their systems. Blockchain also of- fers more accurate tracking of customer repayment histo- ries both internationally and across banks, thus reducing credit risk. For example, Ev- erledger, a permanent ledger for diamond certification, sees the new opportunities as a mark of authenticity pro- viding transparency for all parties involved, a clear at- tempt to prevent diamond fraud. Blockchain itself is also the technological base underly- ing smart contracts. Smart contracts help you exchange money, property, shares, or any item of value in a trans- parent, 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 identifica- tion of persons or organisa- tions 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 op- portunities, launch a strategy to benefit from it, and give confidence in a regulated en- vironment. Concerted efforts to attract the Fintech operators (the companies focusing on the technology) and those using the technology to deliver fi- nancial services promise to bring a new wave of foreign investment into our econo- my, transform the way finan- cial services operate, intro- duce new thinking and new practices into our banking environment, and create new jobs and income opportuni- ties for our residents. With an industry compris- ing technology and services, we can have a sector that combines concept, sub- stance, and profit centres. We should be thinking boldly in formulating our vision for tomorrow. Mark Bamber is an experi- enced economist, with a long track record in management and consultancy leadership roles in Malta and overseas. Nexia BT's advisory arm of- fers a wide range of services including strategy and man- agement consultancy; eco- nomics advisory; and corpo- rate services. Disrupting financial services in the economic context Mark Bamber, Advisory Partner, Nexia BT gives an overview of the economic cycles Malta has gone through over the past decades and discusses how one can maximise on the current positive wave to explore new sectors to promote further growth