Centre of Government and Delivery

From Colonial Dependence to Blockchain Leader

Briefing
Posted on: 20th January 2020
Jonathan Said
Head of Inclusive Growth and Private-Sector Development Practice, Tony Blair Institute for Global Change
Aerial view of a town in Malta

Celestin Monga and Maudo Jallow have recently argued that Africa is undergoing a silent policy revolution with its policy makers increasingly charting their own course for the economic development of the continent. As this revolution takes hold, one country that offers a hidden lesson is one of Africa’s smallest neighbours. Malta is a former British colony that gained independence in 1964 and now tops the European Union’s growth chart for 2019 with 5.9 per cent expected growth, way above the 1.9 per cent expected for the 28-country bloc as a whole.

Despite facing many development challenges – it has few natural resources and continues to face institutional weaknesses – Malta’s GDP per capita rose from just $828 in 1970 to $26,945 in 2017. The Sub-Saharan African average stood at $1,570 in 2017.

Malta’s economy is today driven by dynamism in numerous sectors: it is leading the way in Europe in the development of the distributed ledger technology sector, earning it the name blockchain island, while also leading in the development of crypto currencies and initial coin offerings. It’s also seeing sharp growth in data analytics, robotics, fintech, regtech, financial and investment services, aviation services, online gaming, life sciences, biotechnology, pharmaceuticals, healthcare, conventions and tourism. Quite the list. Though Malta has a very small economy, there are nonetheless important lessons that can be extracted.

How did Malta get there given that prior to its independence, its economy was grossly imbalanced, with one in every four jobs in 1959 directly employed in the servicing of the British defence sector – a sector that was about to end – while agriculture, manufacturing and other services were underdeveloped?

The answer lies in effective and well-coordinated government that allowed the private-sector to flourish in key strategic sectors that transformed the economy. And crucially, it lay in one policy tool that was consistently applied over the course of 60 years that allowed progressives in government to attract catalytic investors despite numerous capacity gaps. This tool was a pragmatic industrial policy – something my colleagues and I call for Africa’s leaders to adopt, labelling it market-based sector development.

Malta’s industrial policy was born in 1959 when Malta’s leadership recognised the need to diversify its economy and set this agenda as the country’s top priority. They built the island’s first five year development plan around it. This plan was supported by its only development partner, Britain, who – because its geopolitical interests aligned – treated local leadership with agency by providing a grant equivalent to 67 million Euros in 1959 prices., approximately 43 per cent of the economy.

The plan focused on industrial production, ship repair and tourism. It was export focused, given the small local market, and crucially, it coordinated all aspects of government around the plan to ensure it could lock down anchor investors: from access to land to access to energy to suitable financing to a tailored regulatory framework to skills development to market development. It achieved such coordination by setting up and properly resourcing a government agency that had the mandate and authority to coordinate: the Malta Development Corporation (now called Malta Enterprise), the country’s economic development agency. This set the basis for the government to build its expertise in ensuring a sector-specific enabling environment that worked for private investors.

Through this approach Malta was able to allocate land in the 1960s for hotel development and the attraction of anchor hotel services investors like Hilton and Holiday Inn. Likewise it established its first industrial park which allowed it to attract its first anchor investors in manufacturing. Beyond large investments in textiles and footwear by European companies, it attracted Playmobile (toys), ST Microelectronics (semi-conductors), Trelleborg (engineering) and Toly (packaging). At this stage, Malta’s GDP per capita was still only around $1,000 in real terms, much like where many African countries stand today.

As time went on, Malta faced numerous challenges – including a failed import-substitution policy in the 1970s and political clashes. But the export-oriented industrial policy remained and drove Malta to raise its GDP per capita to $15,100 by 2004 when it joined the European Union in 2004. Beyond using the accession impetus to upgrade its laws, regulations and processes to meet the high standards of the bloc, it evolved its industrial policy into an advanced industrial policy for services. Although it set up a favourable tax regime, it exploited the expertise centred in and around the Malta Development Corporation to be a first mover in developing regulatory frameworks tailored to specific exported-oriented service sectors. For example Malta was the first EU country to license iGaming through a dedicated regulation in 2004, an industry worth $55 billion worldwide in 2019.

The central feature of effective government for a successful industrial policy is securing dedicated human resource in government with enough political power to ensure the enabling environment for strategic sectors is good enough to attract the desired investment to develop local know-how and firm capability. Governments can start with an individual in a high enough office, or a team of individuals, evolving into units or dedicated agencies in time.

This is what Malta did well. Building out from Malta Enterprise, Malta has gradually built a series of public agencies dedicated to key sectors, with their work being separate from the day-to-day work of regular government ministries. These include a Gaming Authority for online gaming, an Industrial Parks Company for new industrial parks adapted to investor’s demands, Finance Malta for distributed ledger technologies like blockchain, fintech and investment services and the Malta Investment Management Company, which is responsible for an ecosystem of support services for start-ups and SMEs. It boasts a number of other agencies for other sectors. In 2018 it launched the Malta Digital Innovation Authority (MDIA), to oversee the cryptocurrency and blockchain sector, while setting the basis to target new sectors such as big data, AI, internet of things and quantum technology. In addition, these entities are topped with a dedicated Minister within the Prime Minister’s Office who is dedicated to financial services, online gaming, ICT and telecommunications.  This is what a modern pragmatic industrial policy, or market-based sector development, is.

Malta is one of many examples that shows why it is critical for governments to put in place a pragmatic trade-friendly industrial policy that assigns dedicated teams to key sectors, anchored in the highest level of government. A key lesson from Malta’s story is that through this approach, dedicated teams of capable people within government can be politically empowered with the resources and mandate to facilitate and coordinate a suitable enabling environment for economic transformation. Key lessons like these, which the Tony Blair Institute has also seen in countries like Ethiopia and Rwanda, is why we provide long-term embedded advisory support to visionary, progressive leaders in Africa to build the government capability needed to implement their economic development agenda. On a similar note, it is important also for other development partners to treat governments with the same agency the British did in Malta in the early 1960s by providing the flexible financing and management support to ensure their plans succeed.