This has produced a significant acceleration, by some Lm7 million or 10 per cent of the budget deficit, in the rate of increase in pension expenditures. Pension reform clearly cannot be delayed any longer. Population ageing also represents a broader threat to the sustainability of living standards and to social cohesion because the burden of supporting a growing number of dependent persons will, at some point, become unbearable for the productive sectors of the economy. This burden consists not only of pension and other welfare payments, but also of services provided in kind, most notably by the public health system. This is another reason why reducing government recurrent commitments should be a priority objective. A better understanding of the magnitude of these challenges can be obtained by synthesising their effects in terms of the growth rate necessary for the economy to deal with them effectively. For example, in order just to compensate for the increase in the dependency ratio associated with population ageing, the economy would have to grow by around 1 per cent per annum over the next twenty years. At this rate of growth, which is more or less what Malta averaged over the past five years, there would not be any improvement in per capita GDP, that is in living standards. As for hopes of raising the activity rate by ten percentage points to around 70 per cent over twenty years, the economy would have to grow by an average annual rate of at least 3 per cent.
In the five years to 2004, the annual growth rate averaged only 1.2 per cent in real terms, well below that of many of our EU partners; and while this year’s growth rate up to September, at 1.7 per cent, may be encouraging, it is too early to know whether the implied acceleration will be sustained. And yet the need to achieve a faster pace of economic growth has probably never been as urgent as at the present time. Growth is not only necessary in order to satisfy society’s legitimate aspirations for higher living standards. Beyond that, an expansion in the economy’s supply capacity and an enhanced degree of international competitiveness are essential to overcome the daunting challenges the country is currently facing. A threefold challenge: globalization and its implications The first challenge derives from the pervasive process of globalization, which, powered by rapid advances in technology and trade liberalization, has given rise to an unprecedented mobility of resources between countries in pursuit of the best cost-quality combinations. Suffice it to say that over the past two decades exports and foreign direct investment have been growing twice and three times faster than global output, respectively. Globalization is undoubtedly creating numerous profitable business opportunities. At the same time, however, it represents a potential threat for open economies like Malta’s because of the concurrent intensification of competition.