Note #2 – February 2004

A Look from the Outside: Structural Impediments to Growth Run Risks of Strangulating Moldova's Recovery
by Karsten N. Pedersen, The Netherlands

While reading CISR’s recent new discussion papers on economic developments in Moldova some thought came to mind - perhaps useful for your thinking, perhaps just bits for the web to digest.

Year 2003 well-extended an economic performance of high income and spending growth that during past three years provided for remarkable improvements to Moldavian livings standards.

In an increasing liberal economic environment, households' purchasing power rose again last year as not only income transfers from migrant labor abroad continued to increase but also in response to the further opening of the country's external trading regime.

To date, economic reforms have proven largely inexpensive to government budget that continues strive for the soon return to social safety nets well-known from the past - but still unaffordable as public funding arrives principally from low taxation of incomes, external tariffs and modest exercise duties on increasing consumer spending high income sensitive consumer articles. Since late 1990s, budget expenditure extended consistently with revenue receipts offering the financial room to early repayment of outstanding debts - while recurrent expenditure sustaining minimal public service helped maintain the country's productive work force.

On this background, the arrival of growth in 2003 with declining formal sector employment and fiscal budget imbalance symptomize structural deficiencies that pose an increasingly toll in economy recovery by putting into place the question of likely benefits from recent economic reform initiatives.

Moldova endures – with her growing share of labor force locating abroad – a migrant society where small change to earning and employment opportunity tends to generate large flows of job seekers between the domestic economy and foreign countries. The government – in collaboration with the international financial institutions – recently embarked on a large scale poverty reduction program whose positive incentive effects on the country's labor force to reside and contract jobs domestically only gradually ameliorates as the provision of basic social service recovers and opportunities to take formal sector employment improves the to country's poor that in the past migrated to assume informal employment as illegal labor abroad.

With imperative in mind, that pubic proceeds from ownership reform and reform of government recurrent revenue base process as extremely slow pace - expenditure warranted by increasingly ambitious government reform surface as overly ambitious.

Agricultural output reduced in 2003 – considerably affecting the lives of Moldova's large rural population and substantially clouded their prospects to sustain a reasonable future living from their farms. Recent land ownership reform coupled with a literal non-existence of logistical market structures including transport webs and the technical assistance warranted to ignite a new Moldavian agrarian economy – while eroding historical production incentives – hereto failed to install a productivity enhancing
alternative to former cooperative farming industry.

External viability nevertheless continued ameliorated as National Bank of Moldova's foreign currency holdings rose with a reasonable gradualism – eliminating foreign currency risks to the lei while posing minimal risks to inflationary pressure of reserve money origin.

With the reasonable assumption that labor migration continued generate substantial outflows of skilled Moldavian labor during 2003 – as demonstrated by a record high level of remittance payments received from abroad – educational reform remains a principal issue. Moldova's government may accommodate requirement to improve recurrent budget balance by rescaling access requirement while providing new lines of
specialization at higher level education. Evidence from economies of broadly similar nature such as the new Baltic republics suggests that substantive admission fees may resolve as a viable avenue for public revenue reform while providing better incentives for the direction of students into their choice of expertise.

Moldova's educational base and the country's national training institutions nevertheless remain amongst the country's strongest assets and need maintained as prime pillars for future growth. While obvious trade-offs between labor drain and requirements to sustain high educational standards raise shorter term concerns that need immediate policy attention – a new enterprise environment that coaches the country's work force into higher productivity jobs provides the better alternative to 'quality inferior' educational reform.

As demonstrated by last year's growth to industry output and business investment – slowing the pace of privatization may not in itself retard the pace of economic revitalization. While Moldova integrates deeper with her historical markets in Russia and new markets within the European Union – challenges and opportunity to Moldova's labor force raise new incentives for employment seekers to reside at home.

Most urgent is a policy reform purporting new investment in Moldova's non-tradable assets base – with the motivation to enhance economic returns from improvements made to the country's human capital base. In this regard, the creation of an open business environment for productivity growth in a large agrarian sector and onward processing of its products warrants immediate attention. While new market re-orientation purports the creation of a supply response to recent ownership reforms –provision of new public service should over a slightly longer term substantially raise benefits from holding a job in this increasingly migrant economy.

As the ripe fruit needs fertile growing conditions for new trees to be raised – East European labor demands cultivating environments to build an income base for future generations.