The Relevance of Malta’s Negotiation Experience to Croatia

The mixed economy practiced by Malta gave traders practically unhindered trade liberalization on the local market, where a number of vital economic sectors were always privately owned and completely liberalized. These included commerce, retailing, services, fisheries, agriculture, real estate, transport, tourism services, crafts and small enterprise in general. The local internal market was, however, protected and it was practically impossible for foreigners to operate on the local market. Malta was very successful in attracting foreign direct investors to the manufacturing zones. More than 95% of Maltese manufacturing production is exported. This sector has always enjoyed complete liberalization. The end result of a successfully operated mixed economy was steady GDP growth.

This successful strategy however began to suffer rapid decreasing economic returns. There was clear economic evidence that in the face of globalisation and WTO induced liberalisation, the Maltese economy was entering a cul de sac. The Maltese economy effectively stopped growing and whatever growth was registered was as a result of heavy public deficit financing. This deficit financing was necessary to sustain the re development and re allocation of resources as the Maltese economy took the long hard drive towards the alternative.

The alternative was Malta’s participation in the Single European Market. This meant transforming the old Association Agreement with the European Community which Malta enjoyed since 1972 into full membership in the shortest possible time and also transforming the Maltese Economy in the shortest possible time. Politicians and state bureaucrats believe these things can just happen and forget the reality that in a dynamic liberalized economy, such a change requires tremendous financial commitments by thousands of private entrepreneurs be they small, medium or large, as well as the loss of business while change and transformation was occurring.

This is in fact

My first warning to Croatian business owners: change is costly, don’t assume it just happens and don’t assume somebody is going to compensate you unless you fight for it.

GRTU, as the Maltese national organisation with the largest number of small and medium enterprises spread all over the Island of Malta and its sister Island Gozo, was determined to see the transformation through but not at the expense of breaking the back of many business owners. This issue landed GRTU as the national voice of small businesses. GRTU started its first serious clash with government during discussions on the reform of the tax system. The EU Commission was insisting on the introduction of VAT and the removal of all customs tariffs and all other measures supporting local enterprise so that Malta could meet the EU entry requirements. It also meant the liberalization of trade licenses and the introduction of a tax audit, which then would ensure and facilitate rapid increase in tax compliance by small businesses. GRTU negotiated a good deal with government and the Maltese authorities had to pay millions of Maltese liri to our business owners as compensation for the losses they were due to suffer. GRTU also ensured that prior to any implementation of measures that effected business owners, all the process of constant and structured consultation had to be put in place and activated.

The issue was hot and serious enough to have first brought about the fall of the centre-right government as most of our members and other business owners, traditionally centre-right voters, voted against the party in government as they apprehended the negative consequences of EU membership. Then again after only 22 months in power, the downfall of the new centre-left government, due primarily to its lack of alternative policies to EU membership, and finally the subsequent return of the previous centre-right government.

This is my second warning this time to Croatian politicians:
Do not assume that small business owners will remain loyal simply because you promise them heaven in the EU. If you do not support them in a practical way and listen to them, they will turn against you.

Once the politicians learned their lessons the process of consultation moved pretty smoothly. But it was very hard. Hard on us as representatives of businesses and enterprises since we were faced with a mammoth task as we did not have the resources, financial and manpower, to sustain all the work.

GRTU took part in all the detailed discussions on negotiation positions on thirty of the thirty-three Acquis Communautaire Chapters negotiated. This Acquis Communautaire incorporates 90, 000 pages of rules and regulations that the EU Commission built over 59 years and we were expected to adopt them to suite Malta’s structure within a short period of two years. Croatia has four years. We did have some EU funds to pay for expertise, but most of it went to Government authorities. Croatia will have more; you are not only bigger but have also access to special programmes which we did not have.

My third warning is to watch out how government and state bureaucrats spend the pre-accession funds.

What government officials are good at is getting money and spending it themselves on salaries, travel, offices and whatever. Organisations representing business must ensure that as much money as possible is passed on to the private sector. The private sector in reality had to put its hands in its pockets and pay for what it needed and as a result we did not do as well as we should have done. The results are being felt now that we are in the EU. Too many directives and too many rules are being imposed at a heavy expense to businesses. These are now impositions that we did not discuss before simply because we did not have the time and the means. You should not make this mistake.

So this is my fourth warning. Do not assume that some rules and directives are important and most others are not: they all involve an increase in bureaucracy, an infringement on your time, and an addition to your costs. So be prepared to get the right advice and be able to cause government authorities, how and when, to impose at the least expense and burden to business.

The issue that caused most concern to Maltese enterprises operating on the local internal market was the opening up of the local market to foreigners. Our craft enterprises and self-employed owner-managed businesses from agriculture, fisheries, trading, retailers, construction, transport services, professional services, a list too long to mention, were all restricted to Maltese owners. Our people were hesitant to lose this protection, so we needed to create a structure that, while removing the old barriers, would, wherever possible under EU rules, create new operation limitations or obtain transition periods or derogation and wherever possible, as in the case of agriculture and fisheries, obtain direct EU funding both from the pre-accession funds and more importantly from post-accession structured funds.

The other great issue was the cost of reallocation and restructuring.

We needed to identify:
· Which sectors of enterprise would suffer unduly under the pressure of competition;
· What human resources needed to be reallocated from the public sector services that were to be privatised as well as from the private sector,

as the new opportunities expected as a result of liberalisation were opening up. This needed redeployment of people, re-training, assistance for business start-ups, reform of legislation, creation of new institutions, training for the new tasks, and for institution building and the facilitation of small entrepreneurs to bring about change without breaking their entrepreneurs’ backs.

Fifth warning: nothing happens on its own, the rule of the jungle, the fittest survive and the weak die, should not be an option. The only correct option is the smooth transition. You need institutions to manage this. You need trained people. You need fiscal and financial incentives. You must be able to negotiate this as you are moving from the Screening Stage to the Negotiation Stage.

In Malta the negotiation stage moved quite fast. Indeed today we say it was too fast. All our energies were concentrated in ensuring, first and foremost, an understanding of what the EU negotiators from the Commission wanted, and secondly, how to implement all this with a view to get more benefits than sufferings.

GRTU insisted all along on the production of economic and social impact assessments for all the proposals and changes that were being proposed by government. We also lobbied and visited European Union institutions and other organisations supportive of small and medium businesses like UEAPME, to ensure that the Commission did not impose excessively and to obtain whatever assistance was possible. Some of these studies were very good, others not so good.

Sixth warning: Get the impact assessments on all the areas that effect you. Make sure all stakeholders are contacted and that an agreed mitigation plan is drafted and activated so that the transition is done with least pain and maximum benefit.

When the final package was negotiated we then ensured that a detailed economic impact analysis was drawn by an independent outside team of economists on all the package. This is not a political document but an essential tool for the post accession strategy.

One important theme, what we as GRTU, on behalf of small and medium Maltese businesses, failed to cause government to accept was the designing of a Post-Accession Plan. We were, in my view, very good in taking up positions on most chapters and on participation at all levels that were of interests to our members and to get all the advise that we could master, but it was all geared to achieve a good Negotiated Package in the best interest of the sectors we represent and the best interests of the Maltese Economy in general. If we had also worked, as we strived for, on a Post-Accession Strategy, we would, today, be in a happier situation.

Two years after the accession the Maltese economy is still not doing well. The economists who drew the Assessment Reports at the end of the Negotiation Process, did point out that this would happen and that for the first years we will not enjoy additional growth as the economy geared itself to the new exigencies of the Single European Market. They also indicated to us and to government what needed to be done to remedy this situation. Since accession in the EU, however, government is too busy participating in all the Committees, seminars, consultations, dialogues, and a hundred of other meetings all over the EU. They are also too busy drafting and imposing the new rules and building new institutions. Some action was planned and we were pre-warned but many were not and much came to us as a surprise. GRTU is working very very hard to remedy and we will succeed as the positives are much more than the negatives but life would have been happier if after we joined we had a Post Accession Strategy to activate instead of building one as we got along.

7th warning: Insist on two teams at pre-accession stage: one working on the pre-accession documents and positions for negotiations with the EU Commission, the other on the Post-Accession Plan.

You will join the EU and you will join on good terms, I am in no doubt about this. You will also be successful as EU members and we all look forward to have you as partners. The opportunities for all of us, owners of small and medium enterprises, in the large and growing Single European Market, are so great that there is really no alternative to all of us but that of being economically active in this great and growing market. But we must be assisted so that we can make the best of it. It is a highly competitive market but also a market which is too loaded with rules, regulations and bureaucracy, that only the EU Commission is so expert at inventing.

But don’t be detracted. Like the Maltese, the Croatians are clever people. We have survived in very difficult circumstances in the past and bureaucratic hurdles do not frighten us. But be prepared. Take your time and plan your actions. My Chamber is available to help you. The team of experts we built up to help us during negotiations, is available to you too, should you require them.

In the meantime we are very active at a EU level. We have learned through our representation in the highest economic and social levels in our own country and, through our direct representative on the European Economic & Social Committee in Brussels, on the Committee of Regions, on the European Social Fund Committee and effectively with our own member in the European Parliament and through our participation in important European Organisations like UEAPME, and Euro Commerce, to ensure at European level that we aim for the best. And the best is round the corner. It does not fall from heaven. And it is what our members expect and deserve. We have, however, to work for it. You have to work for it too. Work hard and your membership of the European Union will bring to your beautiful country the greatest period of prosperity that Croatians could have ever imagined. The foundation for this success is now. Prepare yourself well. Leave no stone unturned. The EU Commission is there to help and assist but they do not come to you knocking on your door. You have to investigate, get the best advice and take action. Take a positive attitude. Make sure your members are positive about the whole process. Warn them that if they sleep they may wake up to find a very difficult time, yet if they prepare well now, they can be assured of a good future, unfortunately not for all, as some will fall under the pressure of competition. Your task is to ensure that more will grow and prosper than fail. Get the Pre-Accession Strategy right. Get the Post-Accession Strategy even better. And Croatia will prosper.

I thank you for giving me this great opportunity to address you and to be of service to you in this historical economical and political step forward in Croatia.