DEVELOPMENT CHALLENGES
Since its declaration of independence in 1991, Moldova has undergone a period of transition with numerous reforms. Until the global economic crisis, the Moldovan economy had an average annual GDP growth rate of 5.6% from 2001 to 2008, led by a consumption boom driven by remittances and foreign direct investment (FDI). In 2009, the financial crisis caused a fall in remittances and a corresponding 6% contraction in GDP, but the country recovered quickly, with GDP growth returning to a high positive level in 2010 (6.9%). Considered a “lower-middle” income country, with a GNI per capita of US$1,810 in 2010, Moldova has a “medium” Human Development Index (HDI) of 0.649 and is ranked 111th of 187 countries. Nevertheless, Moldova remains one of the least developed countries in the European and CIS region and faces a number of development challenges.
Poverty and inequality
Since 2000, Moldova’s strong growth and remittance inflow has contributed to substantially decreasing the proportion of the population living below the national poverty line, from 67.8% in 2000 to 26.3% in 2009. Yet progress has been uneven: poverty among vulnerable groups and disadvantaged areas remains high and, in some cases, is increasing. For example, 33.6% of elderly people and over half of households with three or more children lived in poverty in 2009. In rural areas, where 80% of the poor population lives, poverty is growing.
Labour migration and heavy reliance on remittances
In order to escape poverty and employment insecurity, and because of lower administrative and travel barriers, emigration from Moldova has been progressively increasing in recent years, particularly among youth. It is estimated that 25-40% of the total workforce is currently abroad. Moldova is also a transit country for irregular migration to the EU. Remittances sent by migrant workers to their families are a major source of livelihood, amounting to nearly 40% of the country’s GDP in 2008, among the highest in the world. However, remittances fell by 27% during the economic crisis, which had serious implications for the living standards of households, of which 40% rely solely on remittances as income.
Labour and skills shortages
Whereas preschool enrolment has increased since 2000 (from 44% to 75% in 2009) and adult literacy reached 98% in 2009, the primary school enrolment rate has decreased over the same period, from 93% to 87%. It is also believed that access to education for disadvantaged minorities and remote areas is considerably lower. Moreover, despite a two-thirds increase in public spending on education between 1999 and 2007 (attaining over 9% of GDP), the quality of education has not kept pace with the skills demanded by labour markets due to the slow modernization of curricula and loss of qualified teaching staff. Over-qualification is of equal concern, as up to 80% of secondary and vocational school graduates continue their education, despite the limited demand for specialists with tertiary education. Together with the brain drain caused by advanced labour migration, this situation may be eroding human capital in Moldova and jeopardizing employment opportunities for thousands of youth.
Political instability and internal conflict
Another challenge faced by Moldova is political instability. Between 2007 and 2011, at least one election was held every year, with disputed presidential outcomes since 2009. Adding to this uncertainty is the frozen conflict over the breakaway region of Transnistria, which continues to pose a threat to the country’s stability and nation-building ability, having produced thousands of refugees and internally displaced persons (IDPs).
Weak governance and corruption
In addition, public institutions are characterized by limited overall capacities, undertrained and underpaid staff, fragmented and underfinanced local governments, inefficient law enforcement mechanisms, and insufficient dialogue with civil society. This situation of poor governance provides incentives for corruption, which creates uncertainties in the business environment, discourages domestic and foreign investment, negatively affects the delivery of services, and reinforces inequalities and social exclusion.
KEY TRADE ISSUES
Export concentration, weak competitiveness, low productive capacity and trade deficit
Three commodity groups make up the majority of exports from Moldova: agricultural products (cereals, fruits, vegetables, wine and tobacco); re-exports of consumer goods, including garments and footwear, cables, wire and some furniture; and, unlike other countries in the region, services (transport, tourism, communications). The range of other internationally competitive products is small, and their value-added is low, due to the weak productive capacity of enterprises. Moreover, existing trade support institutions (TSIs) in the country have limited capacities to provide the services necessary for enterprises, in particular SMEs, to increase their international competitiveness. Moldova is also heavily dependent on energy imports (97%), as well as imports of high value-added equipment, machinery and vehicles. Combined with concentration on low value-added exports, this results in a wide trade deficit, with exports being 2.5 times smaller than imports.
Market concentration
Despite the country’s membership in the WTO since 2001, the geographical destinations of its exports are concentrated on a small number of trading partners: in 2010, the three largest markets (Russian Federation, Romania and Italy) accounted for 51.4% of total Moldovan exports. The lack of economic diversification creates a dependence on, and makes the country vulnerable to sudden changes in, international commodity prices and partners’ politico-economic situation, like in the case of the 2009-2010 Russian embargo on Moldovan wine and agriculture exports.
Limited access to finance
Moldovan financial markets are underdeveloped, and access to trade finance is costly and/or limited. High interest rates and collateral requirements, credit tightening during the financial crisis, and inadequate guarantee schemes hinder access to start-up and long-term financing, in particular for SMEs. While the micro-financing system is relatively well developed, it does not provide sufficient funds to cover demand and targets mainly the agricultural sector. Access to international capital markets is also limited because of the small size of most firms by international standards, as well as the unfavourable risk profile of the country. Whereas FDI grew well in 2006-2008, inflows of FDI have decreased from 12% of GDP in 2008 to 3% in 2010. FDI goes mainly to the services sectors.
Cumbersome regulatory and business environment
Slow and cumbersome customs clearance procedures and border controls are also present in Moldova and adversely affect trade costs and the reliability of the cross-border movement of goods. Ineffective implementation of laws and complex and opaque technical regulations also negatively influence business activities in the country, as well as limit FDI inflows. Regardless of some gradual improvement of the business climate in recent years, Moldova was ranked 134th of 183 countries on the World Bank’s “trading across borders” indicator in 2012.
Underdeveloped physical and quality infrastructure
As a landlocked country, Moldova has limited access to world markets, which is further impeded by its underdeveloped infrastructure. Power, transport and telecommunications infrastructure is lacking or in poor condition, which increases the volatility and cost of trade operations. In particular, rural infrastructure, including roads and energy and water supplies, remains inadequately connected to the capital and business centre of the country. The underdevelopment of the quality management infrastructure also constrains the international competitiveness of Moldovan businesses, despite efforts to harmonize regulations and standards with those of the EU.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the 2011 United Nations Country Team in the Republic of Moldova Country Analysis; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2011 UNDP Aid for Trade Needs Assessment for the Republic of Moldova: Trade and Human Development; and the 2011 OECD book on Development in Europe and South Caucasus: Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine.