Aggregate demand would thus grow at the expense of higher inflation or an increase in imports. This policy would be appropriate if the economy were in a situation of severely depressed demand relative to its supply capabilities. In an economy operating at relatively high employment levels with a deficit in the external current account, however, a fiscally-driven expansion in aggregate demand would only produce short-lived growth. At this juncture, therefore, the best contribution that fiscal policy can make to the economy’s growth prospects lies in the further consolidation of public finances, a policy stance that has already contributed positively to Malta’s standing with credit rating agencies and the IMF. 2  BIS Review 83/2001  Some commentators think it is possible to stimulate the economy via monetary policy, that is through the lowering of interest rates. As I have often had occasion to explain, the intermediate objective of monetary policy in Malta is to maintain a stable exchange rate by pegging the lira to a basket of currencies of low inflation countries. This restrains volatility in import and export prices, thereby contributing to lower costs; mitigates domestic inflationary pressures and contributes to export price competitiveness. If we are to continue enjoying the benefits of the exchange rate peg, our interest rates will have to shadow those prevailing in the currency basket countries, especially as restrictions on international capital flows are being lifted. The alternative would be to risk outflows of funds and a possible financial crisis.

Indeed, the volume of global FDI has almost quadrupled since 1980, a much faster progression than world trade, which barely doubled. For the FDI host countries this has meant not only an increase in output and employment, but often also a transfer of technology and know-how that has considerably strengthened their economies. In this respect, the experiences of Ireland and Portugal immediately spring to mind. Thus, failing to compete in a globalized world is likely to result not merely in lower sales but, more importantly, also in less investment and, therefore, in weaker growth prospects. In sum, globalisation implies increased opportunities but also risks. The opportunities cannot be seized and the risks minimized, however, without an appropriate strategy. For this reason many countries are to-day actively engaged in improving their market positioning and their cost structures relative to their competitors in order to exploit opportunities for increasing their value added. Some of the more interesting dynamics engendered by globalisation are taking place at the regional level. Economic integration is proceeding rapidly in Europe, Asia and the Americas and, as a result, the region rather than the nation state is gaining pre-eminence as the locus for policy-making in the political sphere and for investment in the economic sphere. Regional integration is, therefore, rapidly becoming a key vehicle for gaining access to world markets and for attracting foreign investment. There is a growing realization that countries which remain outside of regional alliances are likely to become increasingly marginalized.