Antonio Afonso, Ludger Schuknecht and Vito Tanzi, Public Sector Efficiency: Evidence for New EU Member Sates and Emerging Markets. ECB Working Paper No 581 (2006). 2  BIS Review 113/2006  result, the 6% of GDP allocated to capital spending had to be funded almost entirely by additional borrowing, which gives rise to further debt-servicing costs. Repeated year after year, this pattern pushed the debt/GDP ratio steadily upwards to a peak of 75% in 2004. This tendency for recurrent revenue to be matched by recurrent expenditure in the context of fiscal retrenchment has had a crowding-out effect on investment, and partly explains why the country’s investment/GDP ratio has been static at best in recent years. A more telling indicator of the relatively small investment in productivity-enhancing activities is the share of GDP devoted to R&D, 0.6% in 2004, compared with an average EU ratio of about 2%. It is doubtful whether the existing pattern of resource allocation is conducive to the desired improvement in Malta’s international competitiveness. The latter can only be achieved by increasing the size, flexibility and skill level of the labour force, while simultaneously creating an institutional and physical infrastructure more likely to attract high value-added foreign direct investment. And since the State must play a leading role in this effort, the question of financing arises spontaneously. Now in the context of a fiscal consolidation process that has not yet run its full course, increasing recurrent spending beyond the natural creep caused by existing commitments such as pensions is clearly not an option.

Another account, the Medisave Account, can be used for hospital and other medical expenses, or to participate in the MediShield insurance programme. Under this scheme the patient pays a deductible amount and is required to make a co-payment. The system encourages efficiency, because medical practitioners and hospitals must compete for patients. Other areas susceptible to reform As these examples show, it only takes some imagination and a clear sense of purpose to devise mechanisms that promote a more efficient use of resources. But it is not just in the areas of welfare, higher education and health that a policy review is needed. Take transportation, for example. Restrictive practices at the harbour raise costs by pushing up the price of imports and lower our competitiveness by increasing the cost of exports. It is rather ironic that decades after the abolition of hereditary titles, and at a time when the merits of free markets and competition are widely acknowledged, Malta sanctions the inheritance of licences and protects monopolies not only in the harbour, but throughout the public transport system. More generally, if investment is to be channelled to productive activities that generate the highest return, profit signals should not be distorted by monopolistic market structures, subsidies or protection. The need for a consensual approach to reforms Mr President, I am aware that the thrust of my remarks challenges the continued existence of what have come to be perceived as acquired rights. They might have been acquired, but they are often  3  Sapir, A.