Note #1 – January 2004
Moldova as a Neighbor of an Expanding EU:
The future position of the Republic of Moldova as an EU neighbor will depend mostly on the economic policy pursued today. On the whole, the nature and direction of reforms initiated in 90’s – given all their inconsistency and contradictoriness – transformed a centrally planned economy into a market one.
At one time Moldova even enjoyed a reputation as one of the leading reformers in the region. By the mid-90’s Moldova’s policy-makers had successfully tackled a number of first-generation reforms, such as freeing up the vast majority of prices and liberalising domestic trade. Similarly, responsible monetary policies had brought a relatively quick end to the hyperinflation experienced in the early 90’s, while liberalised trade policies permitted Moldova to become one of the first CIS countries to join the WTO. In terms of privatisation, a mass voucher scheme relatively quickly sold off the state-run small and medium enterprise sector. As a result, Moldova’s private sector now accounts for 90% of officical GDP, dominating not only the nascent services sector but also agriculture, following the break-up of collective farms in the late 90’s, and industry, following the post-privatisation restructuring of two-thirds of the country’s manufacturing enterprises.
Over a short period of time economy of the Republic of Moldova firstly went through a sharp downfall (by 2/3 as regards GDP), later endured a stable depression (aggravated by consequences of the Russian financial crisis of 1998) and, finally, during the last four years, experienced renewal of economic growth, increasing internal consumption and incomes of the population.
Moldova’s economy and its trade, earlier fully oriented to the East, have started to turn gradually to Europe. Thus, in 2003 more than 1/3 of Moldova’s export fell on EU and CEE countries. To a certain degree, this was facilitated by realization of the Partnership and Cooperation Agreement between the EU and Moldova (since 1998). Priorities realized now by both parties are as follows: negotiations on a Free Trade Area, investment promotion, customs and cross-border cooperation, justice, home affairs and legal approximation.
The problem is that over the last years Moldova stayed within a so called “grey zone” – zone of geopolitical uncertainty. But even in this situation the country has already received about 300 mil euro of aid from the EU within the framework of the European Commission, TACIS and other programs. These funds were meant for macroeconomic support, stimulation of private sector and export, as well as for reformation of administrative and judiciary systems.
At the present, though, Moldova’s leadership puts the question more actively – it declares that European integration is an external policy priority of the country. The Government has finally prepared the Concept for European Integration, which emphasizes that “on the internal level the actions of the Republic of Moldova will be mostly oriented towards meeting the Copenhagen criteria”. And further on: “a progressive economic development of the Republic of Moldova represents the basis for the improvement of economic environment and consolidation of the relations with the EU. Promotion of structural economic reforms is a way to modernize the Republic of Moldova, to lessen and gradually eliminate gaps between developed European states and to create a functional and transparent market economy compatible with the EU principles, norms, mechanisms, institutions and policies”.
These are our intentions. The reality is much more contradictory. And results of 2003 show it. The Government thinks “2003 will go down in history as a year of new achievements in socio-economic development of the Republic of Moldova” (Prime-Minister V. Tarlev in the Parliament, 26.12.2003). But Fitch Ratings evaluated, nonetheless, 2003 as “another disappointing year for Moldova… the government has failed to accelerate structural reforms” (5.12.2003).
The truth apparently is somewhere in between. One could assess work of the Government, Ministry of Finance and National Bank as successful based on the fact that they managed to maintain macroeconomic stability, there were positive changes in industry, constructions and services, incomes of the population increased, but the Government’s activity along the reformation path has been mostly based on the “one step forward – two steps back” principle, which was the cause IMF and World Bank were so evidently disappointed saying that Moldova’s liberal-market economic course is being transformed into state dirigisme.
Any government has to produce optimism. And ours does, as well. Results of the year, according to official estimates, are very optimistic: GDP grew by 6.8%, industry – 17.0%, domestic investments – 23.0%, export – 25.1%. State budget incomes increased by 36.2% and incomes of the population – 19%, including average monthly wage in the national economy – by 31% and pensions – by 28%. Social sphere received 53.7% of the total expenditures of the consolidated budget.
These indicators are used by the Government to confirm that its actions to revive the economy are correct. It would be proper, though, at the same time to mention the risk factors as well that in 2003 intensified, rather than subside. Among them are:
Unfortunately, 2004 is another pre-election year and, of course, there will be a lot of PR-economy, Government’s promises and counter-critics of the opposition. Nonetheless, one could insist that the country’s economy had already adapted to market conditions and therefore growth inertia has already emerged, and given all risk factors no one should expect any force majeure events during 2004. There are encouraging signs that, economic policy will finally become intelligent and we will get a “year of active actions”.
Reasoning from that, the Government and the business community must concentrate on improving the functioning of the economy:
The Government is convinced that there are no fundamental contradictions between the pro-CIS and pro-EU policies. The European Commission’s opinion is apparently different declaring that in the mid-term perspective Moldova has no chances of becoming an EU member. The EU Board started to work out an action plan for Moldova. And further everything will depend on political will and consistency of actions of the Moldovan party.
Proposing ever new initiatives along the European direction (as also regards settlement of the Transnistrian conflict) we should not slacken efforts to realize political and economic clauses of the EU-Moldova PCA. The PCA potential is far from being fully realized. What can PCA give to Moldova as regards approaching Europe? This includes:
Now, the most realistic for Moldova is its participation in processes of sectoral integration with the EU. This means ensuring Moldova with autonomous trade preferences followed by the Free Trade Agreement, infrastructure development, border control, etc. One of the priority directions of the PCA implementation is creation of a free trade zone between Moldova and EU. It is important to mention that since the present Moldova still cannot assume obligations to create a zone of free trade with the EU (due to underdeveloped competitive environment and administrative capacities), the EU is willing to consider new possibilities of providing Moldovan goods access to the market within the framework stipulated by the WTO.
Speaking of Moldova’s European vector, one should consider both “pros” and “cons” of such orientation. Indeed, it could be already a near future when Moldova as a new neighbor of the EU will be able to count on raising financial and technical assistance, facilitation of visa regime, access to new markets. At the same time, given the Moldova’s unavailability, some of these advantages may turn into problems.
Thus, for instance, transition of the united Europe to common norms and standards will undoubtedly facilitate movement of goods throughout its market. With this in mind, Moldova should provide “euro-harmonization” of its standards and requirements and the conformity assessment procedures. Sluggishness will sharply worsen the access of Moldovan products to European markets, especially as regards foodstuffs.
Another important aspect is attracting foreign investments into the country. And this requires urgent improvement of the country’s investment climate; otherwise after the EU enlargement it will be our neighbors – the new EU members – who will become main recipients of European subsidies and technical assistance programs. It is not excluded it will be the new members’ economies that EU will encourage investments into, leaving the “tardy” Moldova outside this activity.
Process of Moldova’s approaching Europe requires a lot of efforts and time. Therefore it is not rare when a question arises: is EU membership an absolute necessity for Moldova? To answer this question, a more detailed analysis of the impact of EU policies (Common Agricultural Policy, Social and Labor Market policies, Standard and Costs in Environmental Protection, etc.) on our national interests is necessary.
According to the President V. Voronin “enthusiasm of all branches of power is now focused at the European integration”. But this enthusiasm also requires a wider public support. It is still unstable. According to opinion polls, population favors EU and CIS almost equally. Taking this into account, the two-level EU policy concerning Moldova is important – at the level of the Government and the civil society. This will be the case when in our country notion of “integration” will link closer to such notions as “democracy” and “development”.
Ultimately, all of us need democratically stable Moldova, integral from the political, social and territorial points of view. And its approach to Europe will undoubtedly enhance external positive impact upon the quality of governance, business and living in our country.