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. the external dimension of the economic imperative is further reinforced by domestic considerations. these arise mainly out of the small size of the economy and its lack of natural resources, which translate into a high degree of openness. malta depends heavily on imports for its consumption and investment needs, and equally critically on exports to generate the foreign exchange required to service its import bill. imports and exports each account for around 100 % of gdp. such dependence on international trade is clearly a source of vulnerability. most business activities in malta are thus inevitably exposed to the full force of international competition. producers for the domestic market face import competition while export - oriented firms face an ever - tougher competitive environment as new countries enter the global market - place. in the export - oriented sector, there is a predominance of foreign direct investment that often provides the technical and marketing expertise which is a prerequisite for success. a loss of competitiveness would thus be doubly damaging. in the first instance, there would be a drop in domestic output in favour of imports and a contraction in export revenues. in the longer term, as malta became a less profitable location, there would be a decline in new foreign investment and a consequently negative impact on growth prospects. apart from these structural factors, the need for competitiveness is accentuated by the current phase of the economic cycle. for most of this year the world economy has been on the brink of a recession. following the recent tragic events in the united states, recessionary pressures are likely to intensify. some analysts are predicting that growth this year may be as low as 2. 2 %, with recovery likely to take over a year. against this backdrop of slowing global demand growth, competition will become even more intense, as buyers will be better able to pass the burden of cost reductions on to sellers, while investors will be ever more cautious about the risks they face and about securing reasonable rates of return. indeed, there have already been widespread job losses in many countries as companies retrench and economise on costs.

financial authority naturally prompts the question of where that authority should reside. this is now the subject of intense debate in quite a number of countries. and where such entities have been created, they mostly exist outside the central bank. this can be seen to have a number of advantages : given the blurring of distinctions between different types of financial institutions, the retention of supervisory responsibilities within the central bank may give rise to perceptions that the lender of last resort function is being extended, with consequent risks of moral hazard. there could also be a conflict of interest with monetary policy, if central banks were induced to be excessively expansionary in order to head off weaknesses at individual financial institutions. there is also the issue of reputational risk. finally, the central bank may be perceived as too powerful if it is both independent and endowed with a broad range of functions. there are, however, arguments for retaining at least some supervisory functions within the central bank. the central bank will have easier access to market information in the case of a crisis, and it will be easier to co - ordinate monetary and prudential policy actions. it will be easier to assess and respond to the build - up of systemic risk if the supervisory authority also has responsibilities, and hence specific know - how, in other areas of the financial system ( e. g. market functioning and the operation of clearing and settlement systems ), as do central banks. and, access to supervisory information can help the central bank better calibrate monetary policy ( e. g. the case of the “ headwinds ” that confronted the us economy during the recovery of the early 1990s ). in these terms, there is no obviously “ right ” answer to this debate. individual observers may have their own preferences, but at the end of the day, the answer probably depends on country - specific circumstances. for example, how independent from political and industry pressure can a separate supervisor be? how scarce are the relevant skills? and how blurred have the distinctions between * different types of financial intermediary become? some, such as charles goodhart, have argued that these considerations lead to the conclusion that the case for combining supervisory and monetary policy responsibilities in the central bank will generally be stronger in emerging markets. but whatever is the answer to the question “ who should supervise? ”, it is necessary to define tasks clearly and in such a way that the tools are available to discharge them. one risk in the present trend to remove supervision from the