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Network News • 13-11-2022

When vices lead to nation prosperity

Author: George Mangion - Senior Partner PKF Malta
Published on Sunday Independent: 13th November 2022

The Fable of the Bees by Bernard Mandeville, published 1723, is a good pointer to elucidate the well-being paradox that Malta has just experienced. Mandeville was an Anglo-Dutch philosopher, political economist and satirist.

The Fable's overall influence on the fields of ethics and economics is, perhaps, one of the greatest and most provocative of all early-18th century works. In his General Theory, the famous economist Keynes, cited Mandeville as a source for his position in emphasising the positive effects of aggregate demand. This stood in opposition to classical economics who believed that production (aggregate supply) as the motor of economic growth. Reading another chapter styled The Grumbling Hive; Mandeville describes a bee community that thrives until the bees decide to live by honesty and virtue. As they abandon their desire for personal gain, the economy of their hive collapses and they go on to live simple "virtuous" lives in a hollow tree. Mandeville's theory, which boldly predicts that vices create social benefits, caused a scandal.

Mandeville implied that people were hypocrites for espousing rigorous ideas about virtue and vice while they failed to act according to those beliefs in their private lives. He observed that those preaching against vice had no qualms about benefitting from it in the form of their society's overall wealth, which Mandeville saw as the cumulative result of individual vices such as owning luxury yachts, backhandling and avarice, which in the long run lawsuits for remediation benefitted lawyers and the justice system.

Another paradox states that an increase in autonomous savings and thrift leads to a decrease in aggregate demand and thus a decrease in output, which will, in turn lower effective total savings. The riddle can be explained that total saving may fall because of individuals' attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.

This theory has found detractors saying that exercising thrift may be good for an individual by enabling individuals to save for a "rainy day", and yet not be good for the economy as a whole. Naturally, this can be explained by analysing the place, and impact, of increased savings in an economy. If a population decides to save more money at all income levels, then total revenues for companies will decline. Such drop in demand causes a contraction of output, giving employers and employees lower income. So how can we apply Mandeville theories about economic success reached during the extraordinary l-Aqwa Zmien during which time greed and avarice in certain sectors turned a decade of deficits to an unprecedented national surplus.

All the while, the Opposition was baying for justice and pleaded in Parliament against the selling of three hospitals to Vitals HealthCare and a secret pact signed with the Azeri for Electrogas (the selection board in both tenders was headed by a partner from Nexia BT). While the oil price tumbled, yet this could not benefit the nation since the Electrogas deal had a fixed price for electricity spanning 18 years. Millions were lost following the bankruptcy of the Vitals Group. This private-public-partnership was paid €240m in four years pursuant to a 30-year contract to rehabilitate and run three major hospitals.

No such embellishments were done, while the Opposition has taken three ministers to court to account for the millions being squandered. The coup de grace was four Panama companies commissioned in 2014 from Nexia BT (the managing partner enjoyed patronage from the Justice Ministry). This was a potent scoop posted in a blog by a journalist slain in 2017.

Caruana Galizia revealed two of these Panama structures belong to the chief of staff and Dr Konrad Mizzi, then Health minister. There is no doubt the several occurrences, such as the intimate relationship by Castille to a top businessman (currently under arrest), implicated to be the mastermind of the assassination plot to murder a journalist. This and other suspicions of greed culminated in a flood of civil society protests that led to the voluntary resignation of Joseph Muscat as prime minister. May I apologise for this long introduction which in my opinion needs to be read in the light of Malta running an economy, which prior to the onset of the pandemic, was the envy of all EU states. A multi-million euro property market has been built over the past nine years and Malta has never seen such grandiose projects in the pipeline.

Instances occurred when public land worth millions was granted at fire-sale prices to encourage promotion of upmarket tourism or to build a new university owned by an obscure Jordan building contractor. Such affluence came delicately shrouded as a vice (refer to Mandeville theory) including the erection of soulless concrete structures that sent the average rents payable sky-high. In fact, thanks to Muscat's administration, the economy has turned the tables with a feel-good-factor that saw the nation throwing caution to the wind. Let us celebrate our fortune while migrants clean our streets and serve us in shops, hotels and restaurants. An artificial sense of promiscuous living made us blind that the party will never stop - but it did.

A recent Deloitte study, financed by BOV, revealed that with existing beds and other approved permits for new hotels, the country needs five million visitors to occupy 80% of the sanctioned bed stock. Certainly, this creed of run-away development has necessitated a Tsunami of visitors, that given the size of the island, cannot cope. Another effect of increased demand resulted in acute shortage of workers which is being solved by recruiting migrants. Moving on, following halcyon days a contraction in demand occurred in 2020 as we faced a global pandemic followed this year by another crisis, this time brought about by a Russian invasion war in Ukraine. Not everything is doom and gloom - progress was made on a reform of several institutions yet the experts did not mince words saying inter alia that Malta "clearly lacks an overall strategy and coherent risk-based approach when it comes to integrity standards for government officials".

On a positive note, it reported that for a country of Malta's size, it had an "impressive arsenal of public institutions involved in checks and balances, while unemployment rate is low at 8,500 persons. The resilience of the Maltese economy is something that we should be proud of and thank Heavens for. Malta's annual GDP growth in the five-year period pre-Covid was measured at an average of 8%, placing Malta consistently among the top EU countries with a growth more than double the EU average. The resilience of the Maltese economy was confirmed now post the pandemic period.

Finally, Mandeville's theory cannot explain that given our political administration is not spotless, yet the country survived the pandemic and is well braced to meet the challenges.

Author: George Mangion - Senior Partner PKF Malta
Published on Sunday Independent: 13th November 2022
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