foster initiative and encourage investment. social dialogue can, and should play a crucial role in promoting acceptance of the policies necessary to bring about this change. the attainment of greater efficiency in the public sector is a key objective because it provides vital support services to the productive sectors of the economy. it must, therefore, become better geared to ensure that the intentions of policy - makers are implemented rapidly and effectively. determined efforts must be made to streamline bureaucratic procedures, eliminate outdated regulations and generally reduce the cost of engaging in any economic activity. the better regulation unit in the office of the prime minister must meet the expectations its creation has raised. failure to do so risks compromising all the efforts being undertaken at both the macro and microeconomic levels to create a modern, dynamic economy. at the national level, moreover, we need to understand that the simultaneous pursuit of economic growth and a high degree of social protection can only be achieved by making our product and labour markets more flexible ; by investing more in people, refining their skills and helping them into work, while introducing an obligation to take up jobs ; and by giving more importance to developing our scientific and technological base. we do not need to look far to see how this can be done. faced with high labour costs in the late 1990s, german companies started restructuring and downsizing. the government meanwhile introduced social security reforms aimed at making the welfare state less expensive, as well as labour market reforms that created incentives for the jobless to work. an awareness developed that the solution to chronic deficits and unemployment could no longer be to cut public investments. as a result, germany ’ s unit labour costs have fallen by 12 per cent since 1999 against those of france. the payoff was significant : the volume of german exports rose by 47 per cent over the same period, compared with 25 per cent in france. the french were not unaware that they, too, had a competitiveness problem. a commission of independent experts led by the former managing director of the imf, michel camdessus, was set up in 2003. reporting earlier this year, the experts concluded that without a change of direction, decline was a real threat for france. they identified two obstacles to growth : first, not enough people worked, and those who did failed to work long enough ; second, the heavy state had become a costly drag on the economy. our own country faces a similar predicament. malta ’ s labour participation rate is among the lowest in the eu at 58 per cent

##ze the economy. … and by a higher dependency ratio due to population ageing. the third challenge is the demographic shift caused by population ageing, such that the ratio of the working age to the dependent population is expected to shrink from almost four - to just over two - toone by the late 2020s. some effects of this trend are already being felt this year as the first cohorts of the baby - boom generation reach retirement age. this has produced a significant acceleration, by some lm7 million or 10 per cent of the budget deficit, in the rate of increase in pension expenditures. pension reform clearly cannot be delayed any longer. population ageing also represents a broader threat to the sustainability of living standards and to social cohesion because the burden of supporting a growing number of dependent persons will, at some point, become unbearable for the productive sectors of the economy. this burden consists not only of pension and other welfare payments, but also of services provided in kind, most notably by the public health system. this is another reason why reducing government recurrent commitments should be a priority objective. a better understanding of the magnitude of these challenges can be obtained by synthesising their effects in terms of the growth rate necessary for the economy to deal with them effectively. for example, in order just to compensate for the increase in the dependency ratio associated with population ageing, the economy would have to grow by around 1 per cent per annum over the next twenty years. at this rate of growth, which is more or less what malta averaged over the past five years, there would not be any improvement in per capita gdp, that is in living standards. as for hopes of raising the activity rate by ten percentage points to around 70 per cent over twenty years, the economy would have to grow by an average annual rate of at least 3 per cent. this growth rate, in turn, would still not be sufficient to ensure convergence with the average per capita gdp of the eu twenty years from now. for this latter objective to be achieved, a real growth rate of some 4 per cent would be required. the way forward : a concerted push for faster growth these scenarios underline the urgency of achieving more rapid, sustainable growth. the longer it takes to expand the productive base of the economy, the more onerous the challenge will be. the prospects for a significant recovery in the short term, moreover, are doubtful since oil prices are expected to remain at their current high level, and the dynamic benefits of fiscal