Structural Reforms

 Lawrence Zammit's article on The Times of Malta

At the European Council of last month, the heads of government of the 28 EU member states agreed that the implementation of structural reforms was necessary in order to enhance economic growth. The final communiqué had stated that “the recovery remains fragile and uneven and efforts to implement growth-enhancing structural reforms must continue and be enhanced in order to strengthen Europe's capacity to grow and create more and better jobs”.

I have already referred to such reforms in previous contributions. However I would like to return to them and consider them in greater detail. The structural reforms that the EU leaders referred to were: reducing the tax wedge on labour; reforming product and services markets and public administrations; improving the business and RDI environment; facilitating access to finance; enhancing the functioning of network industries; reforming the education systems.

It is worth noting that these issues do not only refer to countries that have suffered greatly from the international economic recession, but also to countries like ours who have been successful in managing the challenges posed by the recession.

I will start with the last one mentioned – the reform of the education system. Businesses across the EU claim that there is mismatch between the skills that they require as employers and the skills of persons joining the labour market. This gives rise to the question as to the extent that the education system is servicing effectively the labour market.

I believe that we need to appreciate that any education system will always react with a time lag. It is difficult for any education system to anticipate developments in the business sector. However there are certain fundamental skills, such as decision making, knowledge of languages, self organization and others, with which young people need to be equipped, irrespective of technological developments.

I would go one step further. It is becoming pressing to teach young people today not only the various subjects, but more importantly, how to learn. Only such a skill would encourage them to think of learning as a lifelong process. A reform of the education system would need to take account of this requirement.

Another critical issue is facilitating access to finance. Since the days of the credit crunch in late 2008, credit for businesses has not been easy to come by. We have not really felt this in Malta; however this element is seen as one of the causes why the recession has been so protracted. The European Central Bank is now taking measures to facilitate this access. In Malta we have had incentives for SME’s that enabled them to gain access to credit at reduced rates of interest.

I believe governments should consider another alternative. One source of corporate finance is actually retained earnings. Governments could possibly give tax incentives to companies who retain their earnings as a source for their working capital. It would disincentives firms from siphoning off their earnings and neutralize the negative stance taken by banks around the EU.

The issue of reforming product markets and administrations has been on the EU agenda for several years. One of the benefits of the EU was meant to be the free movement of goods and services. However, in spite of the creation of the single market, there are still several situations in a number of countries where market rigidities exist.

The reform of public administrations may need to start with a reform of the EU bureaucracy itself. There may not be enough recognition of the fact that certain red tape in individual countries is a result of the red tape imposed by the European Commission.

Reducing the tax wedge on labour is an enormous challenge. Governments need to realize that, although it is very easy to tax labour as it is a very efficient and certain way of collecting revenues, such taxation serves as a disincentive to investments since it pushes up labour costs. On the other hand to be able to reduce the tax wedge on labour, governments would need to find other sources of revenue. The end result that needs to be achieved is a reduction of the tax revenues as a percentage of national income.

The last two issues can be grouped together – better networking between industries and a better business environment. Better networking between industries would be expected to bring about economies of scale. This would strengthen SME’s and economic growth would be distributed across the whole economy.

To have a better business environment requires two elements. First, business regulations need to be simplified. Second, there needs to be the necessary infrastructure to support research, development and innovation. Too much entrepreneurial effort is being wasted to overcome the challenges posed by the lack of adequate support by public administrations across the EU.

We need to recognize that the implementation of these structural reforms is severely hampered by sectoral interests; which for incumbent politicians means votes. So I would expect that the path to the implementation of these reforms will be very tortuous. As such bold action is required by individual governments.

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