Note 14 – December 2004 

The New Neighborhood: Moldova – European Union
by Anatol Gudim

Enlargement of the EU, its replenishment with another 10 countries in 2004 – from the Baltic states in the North to Cyprus and Malta in the Mediterranean – created new challenges both for EU itself (EU-25 now) and its new neighbors. EU voiced its vision of the situation through the concept of “Wider Europe – Neighborhood”[1], which doesn’t exclude further enlargement of the EU, but gives priority to “its internal consolidation and encirclement with well-managed countries”. The new neighbors include 14 countries, most of which are in the Balkans and Mediterranean and four in the East – Ukraine, Moldova, Belarus and Russia. But only two of them – Ukraine and Moldova – aspire to join the EU. 

Moldova’s European Choice 

The first decade since gaining independence – the 90’s – Republic of Moldova devoted to formation of its statehood, transition to democracy and market economy, macroeconomic stabilization and overcoming separatist tendencies (Transnistria, Gagauzia), which first of all required establishing constructive relations with the UN and international financial organizations, as well as with Russia that dominated post-Soviet area. 

At the same time, due to position at the junction of the Central Europe, the Balkans and the CIS and being a country with predominance of Latin ethnos, common historical and cultural roots with the countries of South-Eastern Europe, with Romania in particular, the Republic of Moldova, like the Baltic countries, was more predisposed to “return” to Europe than other post-soviet republics. And the first steps along this path were:

·         Moldova’s ascension – first among the CIS countries – to the Council of Europe (1995);

·         Coming into effect of the Partnership and Cooperation Agreement between the European Union and the Republic of Moldova (1998);

·         Moldova’s ascension to the World Trade Organization (2001);

·         Moldova’s joining to the Stability Pact for South-Eastern Europe (2001);

·         Development of the Concept of the European Integration of the Republic of Moldova (2003);

·         Approval of the Action Plan EU-Moldova by the European Commission and the Moldovan Government (2004-2005).  

As we can see, Moldova’s progress towards Europe was not as dynamic and productive as that of other Central European countries. All those years EU was also sizing Moldova up without giving it hopes but not rejecting it, either. In fact, during that period the Republic of Moldova – balancing between EU and the CIS – was in a zone of geopolitical instability, following the principle “we should be everywhere where it is advantageous to us”.  This position could be explained mainly by economic arguments i.e., the CIS, especially Russia, is the main Moldova’s export market, on which Moldova completely relies for energy imports. On top of that, it is Russia’s companies (energy, engineering and winemaking) that are major investors in Moldova, including Transnistria. 

Finally, in 2003 Moldova’s leadership took a more explicit position on rapprochement with EU: “Republic of Moldova declared the path of European integration as the main national strategy of the state. We are aware how difficult and important this path is, but at the same time we announce that it is an internal political and economical choice of Moldova first of all”[2]. 

Advantages of Moldova’s rapprochement with EU lie in the political, economical and social areas. Politically it means stability of democracy, rise of the state and citizens security. Economically it means the elimination of “peripheral economy syndrome”, increase of country’s competitiveness and prospect of a stake in the EU’s Common Market, expanding access to the development funds, investments and new technologies. Social aspect means harmonization with European standards in education, healthcare and environmental issues, access to information and protection of human rights. And finally, the constructive settlement of Transnistria problem, the only ‘frozen conflict’ at the Eastern land border of the EU, is of considerable importance both for Moldova and the EU. 

Transformation of the Economy as a Driving Force 

Position of the Republic of Moldova as an EU’s neighbor will mainly depend on what social and economic bases will be created through the economic policy conducted in the country. The fact that over the transition period Moldova endured the deepest economic recess among the post-Soviet countries (2/3 of GDP), is currently a divided country (about 30% of its industrial potential is in Transnistria) and, unexpectedly for its population, has become the poorest European country makes this task more difficult. 

The transformation process of Moldova’s economy can be divided into two periods: radical and gradualist. The first of them (1991-2000) prioritized liberalization of the economy, while the second one (beginning with 2001) is marked by strengthening of the state’s role in stimulation of the economic growth. Having overcome crisis and depression, the country’s economy passed the “point of no return” in 2000 and started demonstrating a moderate economic growth over the last five years (6-7% a year), which is comparable to the average GDP growth indicator over CIS, but smaller than in the neighboring Romania and Ukraine (2004). 

Now, there are enough signs that Moldova’s economy has mainly adapted to the market conditions: major part of GDP (more than 70%), industrial and agricultural output, constructions, as well as services (including transport and telecommunications) are being provided by private sector; unemployment rate (under the ILO methodology) became steady at 6-7%; household incomes and consumption grow. Share of the population with incomes less than 2.15 USD per day decreased by 1/3 (about 40% in 2004). It is important, that these changes have also had positive influence on dynamics of the Human Development Index used by the UN. So, if in 1990 the HDI for Moldova was 0.736 and it worsened down to 0.673 in 2000 there was registered an increase in HDI to 0.700 during the last years. The positive dynamics for Gini coefficient and social inequality decrease is outlined too. 

At the same time, the range of problems requiring solution became more manifest: improving quality of economic growth, provision of comfortable environment for entrepreneurship and investments, elimination of mass labor migration, pro-poor targeting of social assistance, raising the quality of governance and counteracting the “takeover” of the state by business groups feeding corruption in the administrative system. These unsolved problems and slow course of structural reforms restrains modernization of the economy and promotion of its competitiveness and achievement of sustainable socio-economic development. 

Realities of 2004 

On the whole, 2004 was successful for Moldova’s economy, if judging by such indicators as:

·         GDP growth of 7.3%, and 33.2% - or 1/3 – over 2000-2004, which is quite a lot;

·         Incomes of the consolidated budget increased by 13.6%, which (along with the borrowing from the NBM’s reserves) allowed to decrease the Government's external debt by 12.1% and raise wages of those employed in the budget-supplied sphere and pensions;

·         A more balanced dynamics of money aggregates. Amount of bank credits increased by 22%. At that, the resource base of the banking system in form of drawn deposits grew by 39%;

·         Investments growth rate into fixed capital tended to forestall GDP growth. The main sources of investments are funds of economic units and the population (65%) and foreign investments (20%). 74% of investments were used at production units;

·         Export exceeded $900 mil, which is more than in any of the previous years of the transition period. Pro-EU orientation of the export has strengthened: 1995 – 12%, 1999 – 21%, 2003 – 26.6% and 2004 – 30.0%. Besides, 10.8% of export fall at the countries of Central and Eastern Europe;

·         Monetary reserves of the NBM were raised 1,6 times (up to $470,3 mil);

·         Real monthly wage grew by 10.2%;

·         Recovery of the demographic situation in the country begins to show (birth rate increase, death rate decrease).

The majority of these tendencies were of the positive orientation over the whole last five years. And it favored the growth of social optimism. At the same time, there is a changeable balance of positive and negative circumstances in the Moldovan economy (see Graph 1), which has showed through the realities of 2004 well:

·         The economy has rebounded mostly due to agriculture, favorable external market situation and domestic consumption growth, fuelled by the “tsunami” of workers’ remittances and sizable increases in wage;

·         The major part of the GDP growth in 2004 was provided by agriculture and food industry – sectors of unstable development. Food products made up 60.8% of export, including alcohol – 28.3%, which is more than the share of machinery and light industry products (26.1%);

·         Creation of new workplaces does not neutralize the tendency for employment decrease (7.1% over 2000-2004). Export of labor force is no less than 300 thou persons, or 20% of the economically active population;

·         Chronic lack of investments hampers reconstruction of the industrial potential and infrastructure (energy sector, roads and transport, water supply, etc.);

·         Trade balance deficit reached dangerous proportions: in 2004, import was 1,8 times larger than export – the country helps other countries’ producers;

·         Inflation rate of 12.4% (average annual) was the highest since 2000, which has fairly weakened efficiency of the social policy.

Problem of the quality and sustainability of economic growth became the central topic of political discussions in 2004. The President has also contributed to this by setting a task for the Parliament and the Government to “proceed to reforms of the new type”. In harmony with this, “sustainable and socially-oriented development” has been established as the main reference point of the Economic Growth and Poverty Reduction Strategy (2004-2006). It was acknowledged that “the quality of economic growth in Moldova is affected by unbalanced structure of the economy, by mono-structural export, and by low investment in fixed capital. Such a growth paradigm does not provide a basis for the sustainable growth needed to reduce poverty… To change the paradigm and quality will require mobilization of new resources and factors of growth…[3]” 

EU – Moldova Action Plan 

Republic of Moldova has become the first country, with the Government of which the European Commission coordinated the Action Plan (February 2005), thereby suggesting Moldova to demonstrate specific progress in Europeanization of the country, in mobilization of new sources and factors of growth within 5 principle components of the plan:

·         Political dialogue (democracy and the rule of law, human rights and fundamental freedoms, sustained efforts towards settlement of Transnistria conflict);

·         Economic and social reforms and development (improve welfare, functioning market economy, trade-related issues, movement of persons and coordination of social security);

·         Justice and home affairs (efficient implementation of legislation, border management, fight against organized crime, drugs, money laundering);

·         Transport, energy, telecommunication and environment (implementing selected policies, measures and reforms);

·         People-to-people contacts (research and development programmes, education, culture issues, civil society cooperation, cross-border and regional level cooperation).

The key element of the EU-Moldova Action Plan is the economic component. What is important, the term of its implementation coincides with the medium-term Economic Growth and Poverty Reduction Strategy, which the Government of the Republic of Moldova agreed with the IMF, World Bank and donor organizations. This increases even more the responsibility of the Government, which has outlined the following progress steps for itself[4]:

·         Implement the EU-Moldova Action Plan in 2005-2007 and create conditions for Association Agreement between the EU and the Republic of Moldova;

·         Achieve the first Copenhagen criterion (democratic state system) by the end of 2009, and the second (competitive market economy) – by the end of 2012;

·         Complete negotiations of the Moldova’s adherence to the European Union by 2015.

Having accepted a decade as a term for approaching the EU, Moldova’s Government sees the following obstacles on this path: imperfect national legislation as compared with the communitarian legislation, absence of appropriate institutions and personnel, slow advancement of the second wave of reforms, and unsettled Transnistrian conflict, as well as “uncertain position of the EU as concerns Moldova’s status as an adherence candidate”. And it is true. Moldova’s European choice has to have a historical perspective.