Abstract
The role of external demand in determining economic growth has undoubtedly increased as a result of globalisation. However, the conventional approach used to assess the contribution to growth of exports diminishes the positive influence of higher foreign demand by attributing to it the entire increase in a country’s import bill. Given that other components of GDP have significant import contents, this approach typically underestimates considerably the importance of external demand in driving growth. This article applies an alternative approach that uses information from input–output tables to apportion imports across all expenditure components, before assessing their relative contribution to GDP growth. When applied to Malta, one of the fastest-growing EU economies, this approach leads to a significant reassessment of external demand’s contribution to economic expansion. This is more in line with other macroeconomic indicators, such as the improvement in the country’s current account and exports-to-GDP ratio.
Highlights
IntroductionThe Maltese economy experienced the second-fastest rate of growth amongst EU countries
Over the last decade, the Maltese economy experienced the second-fastest rate of growth amongst EU countries
5 Conclusions The aim of this article was to reassess the role of external demand in explaining the very rapid growth of the Maltese economy in recent years
Summary
The Maltese economy experienced the second-fastest rate of growth amongst EU countries This has coincided with the emergence of a number of new export-oriented services sectors, such as online gaming, and a pronounced expansion of existing ones, such as aviation services, which have had a significant impact on the islands’ main macroeconomic indicators (Grech et al 2016). In 2015, despite exports of goods and services rising by nearly half a billion euro—the equivalent of a quarter of all government current expenditure during that year—the contribution of net exports to real economic growth was deemed to be significantly negative (see European Commission 2016 and Central Bank of Malta 2016) This result was driven by the fact that during that year, there was an exceptional rise
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