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Ministry of Economy/TACIS
Seminar “EG-PRSP and Donor Coordination”, September 28-29, 2004

Quality of Growth – Changing Priorities

Economic growth, combined with increasing incomes of the state and population, is an indispensable condition of social progress and poverty elimination. It has recommenced over the last 5-7 years in most post-Soviet countries, including Republic of Moldova, and possibilities for improvement of people’s living have widened. Range and scale of these possibilities are mainly determined by the way economic growth is achieved since the mere growth rates are not important, but rather its quality is, just as health and life interval of people depend not only on amount of food, but the composition of ration as well. 

An attempt was made, within the framework of the Economic Growth and Poverty Reduction Strategy elaborated by the Government for 2004-2006, to bind together economic and social aspects of the country’s development with an emphasis on the “pro-poor growth”. This, according to the President V. Voronin, requires “switching to reforms of the new type” (see: plenary session of the Parliament of July 28, 2004). This very intention was confirmed once again by E. Ostapciuc at the opining of the session of the Parliament on September 23, 2004: “we have to start reforms of a new type that would contribute to a more sustainable and long-term development”. 

It is still pending for both state bodies and the scientific circles to specify the contents of the “reforms of the new type”, but a fact is obvious – they have to be aimed at both economic growth and provision of sustainable human development (see Box 1). 

Box 1

Moldova: Human Development Index Trends

·         1990 – 64^th position among 173 countries rated by UNDP

·         2002 – 113^th position among 177 countries rated by UNDP

It is generally thought that the “first wave” reforms went off in the countries of transition economy in the first half of the 90’s. In Moldova, they are associated with 1992-2000 – beginning with the starting market-oriented laws, introduction of the national currency, liberalization of prices, suppression of inflation, privatization of enterprises, etc. right up to the hasty administrative territorial reform of 1998 and land reform of 1997-2000.

Box 2

As the Box 2 shows, as regards the economy and social life the 90’s were marked firstly by the recession stage (GDP collapse by 2/3 over 1991-1994 and, correspondingly, of employment and incomes of the population) and, later, by the stage of stable economic depression, abrupt widening of the poverty zone and the mass labor migration abroad (since 1995). It was these years when it became clear that macroeconomic instability was, first of all, the problem for the poor. Adaptation of the economy and Moldova’s population to the new market conditions was mainly over by 2000. One can say that it was 2000/2001 when Moldova surmounted the turning point in its after-crisis development. GDP growth recommenced, unemployment became stable (7-8% under the ILO methodology), there were positive changes in the industry, agriculture and constructions, the dynamics of investments and export, wage and social assistance of the population. The poverty zone began to shrink and its intensity abated. 

Realization of the mid-term Economic Growth and Poverty Reduction Strategy combined with the EU-Moldova Action Plan is meant to consolidate and develop these positive trends. Moldova’s collaboration with international financial organizations and donor-countries has to be subjected to the same goal. 

Truth to tell, we should admit that the 12-year experience of such collaboration and its results are quite contradictory. Based on the analysis accomplished by TACIS/CISR (2003) one can see that the main problems related to rendering and utilization of technical assistance consist in the following (см. Box 3).

Box 3

Realization of the mid-term Economic Growth and Poverty Reduction Strategy combined with the EU-Moldova Action Plan grants a unique possibility to avoid errors of the past and concentrate efforts of the Government and the donor community in the most important, break-through directions. 

The principal guideline highlighted by the Strategy both among long-term and mid-term development goals is “sustainable socially-oriented development” (§§5.1 and 5.2). At that, it unambiguously says: “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. Current economic growth is based to a large extent on the export of labor. 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 sources and factors of growth…” (EGPRSP, May 2004, p.35).

One can say that this is the key thesis of the Strategy. Indeed, let us turn to the structure of Moldova’s GDP over 2000-2004.

Box 4

Structure of Moldova’s GDP

As we can see (Box 4), more than 60% of GDP during 2000-2003 was formed in services (including the paid services of state bodies), as well as from taxes on goods and import. And favorable conditions for export, especially to Russia, came in handy. The impact of currency remittances sent in by Moldovan citizens working abroad upon the increase of customer demand was unexpected, but very significant (Box 5). These remittances made up in 2003 more than 20% of GDP (cca 0.5 bil USD).

Box 5

Remittances

It seems that the state turned out to be unready to use those financial resources rationally. Migrants’ households spend the lion’s share of remittances for current consumption, and only 10-12% - for “family investments”: education for children, purchase of real estate and starting a business. At the national level, formation of bodies and mechanisms to accumulate those funds with a view to invest is still lagging. At the same time, their influence upon the expanding of demand and the increasing of import is quite obvious (it was 1.7 times as much as export in 2003), currency devaluation and pressure upon prices. 

According to the data of the Department of Statistics and Sociology, it was 2000 when it was recorded that growth rates of available incomes have abruptly exceeded the rates of GDP growth (see: Box 6). But this is the country’s average. Unfortunately, such a considerable inflow of currency to the country still had little impact upon reduction of poverty and elimination of inequality. It is mostly the top quintiles who enjoy economic benefits of these funds. Thus, the 5^th quintile (the most well-off group of the population) has been stably accumulating 48.4-49% of all available household incomes during 1997-2002, while the lowermost, 1^st quintile (the poorest) – only 3.9-4.6%. The improvement of the Gini coefficient (income inequality coefficient) was insignificant: 0,436 (1997) and 0,397 (2003).

Box 6

Thus, for the time being, we do not get a positive answer to the question: are the current growth rates and its nature reliable enough to reduce poverty in the country (half as much at least by 2015 under the UN Millennium Declaration) and eliminate inequality? And there is still an urgent task to provide for the “pro-poor growth”, at which, in fact, most efforts of donors working with Moldova are directed. This requires changing of the economic growth paradigm just as the EGPRSP stipulates. 

Under theory, sustainability of economic growth is determined by the accumulation of production and financial capital, human capital development and the well-balanced relations with the natural environment. As it is well-known, population of poor countries relies mostly on human and natural capital. 

The main indicators of stable growth are: quality of state management, employment, self-supporting budget, inflation, dynamics of the real economy, well-balanced regional development, social sustainability (incomes, health and education) and control over servicing of the external debt. It is important to make sure that GDP growth depends as much as possible on internal sources of growth, rather than on the state of international market alone. 

While aiming at the above-mentioned indicators of stable growth during the realization of EGPRSP, one should not fail to take into account both advantages and limitations, risks inherent to Moldova specifically.

Advantages: geographical and economical location at the junction of three macro-regions – Central Europe, the Balkans and CIS; polyethnic structure of the population and its traditional “bessarabian cosmopolitism”; unique soils, fertility of which, according to D. Cantemir, “exceeds by far the riches of the mountains”.

Limitations, risks: small open economy with the limited internal market and big dependence of export/import on a single country (Russia); barren of own energy resources; structural peculiarities of the national economy (large share of agriculture and instability of its development); no access to sea and engineering infrastructure inadequate to the modern requirements. This should be supplemented with problems of the demography, investments and external debt that emerged over the last decade. 

In essence, Republic of Moldova has to modernize its economy in the nearest future. And this does not mean just “achieving the GDP level of 1990”, but transforming the structure of the real sector and adapting the social sphere in such a way that they would provide for Moldova’s viability as a European state – as regards both competitiveness of its economy and welfare of its population. 

Revision of the growth paradigm will surely require combining the mid-term and long-term approaches to realization of the EGPRSP. Let us mention, by the way, that it has been the end of the 90’s already, when the World Bank together with other donors drew their attention to the phenomenon of poverty and specified 5 principles of work with a specific country:

• the country has to formulate a poverty reduction strategy as a normative document;
• the main attention is paid to measurable results;
• comprehensive approach to the poverty reduction (multipolarity of poverty);
• constructive relations between the government and international partners;
• combination of mid-term and long-term targets.

Poor countries, including Moldova, are implementing EGPRSP under the conditions when it is necessary to distribute and make use of limited resources as effectively as possible. And doing that requires analyzing the experience of other small countries (Portugal and Ireland in Europe, Republic of South Korea in Asia and Tunis in Africa) that at the initial stage of economic reconstruction during the 50-60’s put in action rather non-capital-intensive factors of growth. Among them are:

• taking measures to improve convergence in key areas of Moldovan legislation to EU legislation;
• normalizing the interface between public and private sector, improving business climate, competition, taxation, regulatory measures, etc., including national environment to private investment, both foreign and domestic;
• legalization of shadow economy combined with overcoming (avoiding) “state takeovers” by elite groups pursuing their own ends;
• creating “growth poles” on the basis of free trade zones, production and infrastructural complexes, groups of 7-10 towns;
• improving the allocative role of the labor market, expanding employment for the able-bodied and providing a more targeted social assistance.

Most measures for the nearest future have been defined both by EGPRSP and the EU-Moldova Action Plan. 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. 

At the same time as the “short-range” actions to accumulate resources, knowledge and experience, there have to be realized more profound, fundamental changes on the long-term basis:

• structural shift in the industry towards the labor-intensive and non raw material intensive production;
• reconstruction of agriculture and social recovery of rural environment;
• steady raising of the export potential, diversification of export and search for new markets;
• accumulation of internal savings and assisting the inflow to Moldova of capital and new technologies from the countries rich in capital;
• extension of investments to human capital. Education and professional training should be subsidized by the state, as well as the R&D sphere that should be considered as a peculiar type of capital.

It is also very important for Moldova to improve its institutional environment: the quality of state management and protection of citizens’ rights and freedoms. The international experience shows that politically open societies where laws are being observed, the right of property is being protected and market distribution of resources is being provided for, grow faster and they are more effective than societies where economic and personal freedoms are constrained. 

And the last: while starting the realization of EGPRSP it is important to start from the fact that the problem of poverty is the problem of a specific country in the first place. “Put the Government on the driver seat!” – was the viewpoint of IMF and WB from the very beginning. And this is correct. Moldovan Government has been avoiding/paying no attention to the problem of poverty for a long time. But the Government’s attitude towards this issue became more constructive during the last years. It is not excluded that we really are on the eve of the “second wave” of reforms. 

Center for Strategic Studies and Reforms