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Recall Mintoffianomics

Ronald Reagan and Margaret Thatcher are remembered for their own brand of economics, Thatcherism and Reaganomics. But what about Dom Mintoff’s own particular economic creed and style which too had indelibly left their mark on his government’s administration?
Although not an economist by profession, and never taking over the Ministry of Finance, nobody doubted that Mintoff as Prime Minister between 1971 and 1984 was not fully in control of the country’s economic destiny. As a young intellectual he was well-read in political philosophy including Karl Marx but he was definitely not a Marxist. He had a socialist heart who wanted to lift the working class out of its pre-war misery by reducing the power of the effective ruling elites, including the professionals and the Church, but he was an astute capitalist when it comes to doing business. Although he derided consultants and frowned upon studies which led to nowhere, he had a select group of close friends, mostly foreign, on whom he relied for key advice. In Oxford I learnt that two of my lecturers, British Labour economists Tom Balogh and Paul Streeten, were being relied upon by Mintoff for his seven-year economic plan. Later in the early 1980s I also learnt by accident that the renowned Italian Central Bank Governor and Confindustria President Guido Carli used to be invited occasionally by Mintoff at his own house to discuss economic matters. As the author of a Federation of Industry study, in 1983, on the value of the Maltese lira and which was highly critical of the harmful effects of Malta’s overvalued exchange rate on the Malta’s external sector, I was quite delighted to be informed that during one of Guido de Marco’s visits to Mintoff during the political crises at the time he found him with Carli sitting in the garden discussing my study. Subsequently Mintoff requested me to build an econometric model to study the impact the US dollar and oil prices had on the economy. But that is a story on its own. Mintoff as an architect believed that the Maltese economy was to be considered as a project which had to be micro-managed. The project’s various phases could not be attempted without a very detailed plan. Thus he considered his well prepared 1973-79 development plan as his bible. He believed that the economy like a big edifice needed a strong foundation. This foundation included the country’s infrastructure, ports, airports, roads, communications, airline, energy and water supply. But this economic foundation like good concrete needed equally solid ingredients, namely the political and social ones which nourished it and sustained it. All these were meticulously planned during the pre-1973 years. I do not know how familiar Mintoff was with Rostow’s stages of economic development. However, his actions on hindsight show that he considered the 1973-79 as Rostow’s ‘take-off stage’. Once airborne, the economy would have reached viability, independence and self-reliance and thus could fly anywhere; thus the use of the controversial phrase at the end of the development plan that “beyond the 1980 beckons the future”. For Mintoff by then “the project” would have been accomplished. In a lot of respects Mintoff was a supply-side economist. His macro-economics was no different from Germany’s own unique economic policy especially practised over the last decade. He sought growth by increasing the economy’s potential, its productive capabilities and shunned Keynesian economics which sought short-term economic expansion through deficit-financing. During his stewardship with one or two exceptions all financial years were completed with a government budgetary surplus. Even during the early 1980s the economy was externally shaken by the international recession and loss of competitiveness he did not resort to public spending and deficit financing but turned to import substitution policies to reduce the negative employment impact. In spite of setting a relatively generous welfare state, with significant expenditures on social benefits, including education, health, pensions and housing, his public expenditure was constantly controlled to take a constant bite of the country’s GDP, his country’s cake. In spite of the rundown of the British base which continued until 1979, public consumption between 1972 and 1982 was kept practically constant. The same could be said for employment in government departments which kept the same 20 per cent ratio of the labour force. This was of course achieved by a very high economic growth rate which was unprecedented at about eight per cent average rate per annum during the seven-year plan period. His inherent allergy to debt and inflation was well known. He feared debt as the plague. Borrowing was used exclusively for investment projects and such borrowing was to be resorted only on the most favourable conditions. Thus his resort to getting favourable external financing (referred to as begging by his critics) from friendly countries, including China, Italy, Qatar, Kuwait and Libya. While his aberration to paying market rates on loans above a self-inflicted benchmark of three per cent, even to prestigious institutions such as the World Bank, made him reluctant to become a member for this very reason. He managed to reduce and keep the national debt to less than 10 pe rcent and its debt servicing to just 0.5 per cent of the GDP. Compare these figures to today with debt standing at 75 per cent and debt servicing at three per cent. The same could be said for inflation. Of course at that time there were no free private markets and competition policy had no meaning. Post-war controls were an easy tool for government to control its own public utilities’ prices and those of the private sector to booth. This would have led to inefficient investment decision-making had the corporations been truly independent. They were not. By adhering to the development plan’s investments schedule the government saw that this did not happen. Public monopolies were considered to do no harm since they were public. It was one common public purse, like one’s family. We know that this is not correct just as much as today’s hike in utility tariffs are shrugged off since taxes and tariffs go to the same public coffers. Critical price signals are completely ignored. After the golden years of the 1970s when exports and tourism broke all records and were beyond the government’s own expectations, came the economic storm of the early 1980s and which threatened Malta with significant loss of income and employment. The response to successfully regaining Malta’s price competitiveness was not the exchange rate route but again the standard German response of price deflation, a freeze on public sector recruitment coupled by a country-wide wage and price freeze. This even succeeded in turning the inflation rate to negative for a few months. At that time these measures were considered drastic and even shocking and were criticised constantly by the opposition. Mintoff’s economic management was sometimes laughed at even by some members of his own camp who thought that his economic measures were old-fashioned and eccentric. They might have been, but by today’s experiences including the eurozone economic governance rules we must admit otherwise. Just recently, German Chancellor Angela Merkel was applauded by her compatriots for wearing an evening dress she was seen in four years earlier. The sacrifices being asked from the people of Greece, Ireland, Portugal, Spain and Italy and the consumer goods they are forced to forgo, make the absence of foreign-made toothpaste, colour televisions and Cadbury chocolate in Malta during the early 1980s seem mild by today’s standards. Malta again is anxious about getting EU financial aid (not begging for it of course) during the next financial budgetary cycle, and Mintoff’s principle not to incur deficits and debts will now be enshrined in our constitution as the Golden Rule, not out of respect for departed Dom, but because the EU has asked us to, on the grounds of good economic governance. It seems that the wheel has come full circle.

 

 

 

 

 

 

– timesofmalta : Saturday, August 25, 2012


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