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After the Global Crisis Promoting Competitiveness and

Shared Growth in Moldova

World Bank Country Economic Memorandum

May, 2011

Moldova – economic X-ray and way forward• 1) Growth in Moldova has been jobless: recent growth and

poverty reduction came from remittances;• 2) Remittances financed consumption and housing - they will

not continue to grow at the same rate;• 3) Moldova therefore needs a second growth "engine" from

exports;• 4) With the workforce shrinking with aging, export growth will

need to come with new investment and productivity gains;• 5) To achieve higher productivity and attract new investment,

Moldova needs a more competitive investment climate;• 6) If the right reforms are implemented, there is scope in the

short-term for improving value from existing agro-based exports products in EU markets.

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1Moldova’s Growth Story :

Jobless Growth with Migration

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Moldova had average growth in a fast-growing Region

5

Workers (mostly from rural areas) migrated in search of incomes

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090200400600800

1,0001,2001,4001,6001,800

Urban Secondary or less Urban Secondary + Rural Secondary or lessRural Secondary +

Source: (Workforce) World Bank staff estimates from Bureau of Statistics Data

‘000

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By 2008 Moldova was the 2nd country in the world in remittances as % of GDP

..they fueled a growing domestic consumption

2001 2002 2003 2004 2005 2006 2007 2008200

300

400

500

600

700

800

Thousand Sq Meters of Apartments Built

Total Meters sq'd of property (000)Self Funded

2000 2005 20080

2

4

6

8

10

12

14

16

18

20

0

0.5

1

1.5

2

2.5

3

3.5

Household Consumption Expnditure Imports

GFCF

GFCFBillions lei

Consumption& ImportsBillions Lei

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…. But growth in “tradeables”; ie the manufacturing and agriculture sectors, has been limited

Source IMF – 29 May 2010 presentation at WB Office

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…. exports of goods declined in relation to GDP, growing slower than in other countries in the region

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And Moldova experienced jobless (and job shedding) growth…and people continue to migrate

(Employment) Moldovan labor force shed 330 thousand jobs during that period of time or almost 22 percent of its value in 2000 with agriculture as a “loosing sector”

Thousands of jobs (y-axis)

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It’s a cycle...

Remittances

Fuelling domestic demand esp.

import of durables goods

and construction

Wider CAD, but also lack of flows to entrepreneurial

activities; limited flows to investments

in agriculture and processing industries

Limited export growth;

Limited business expansion;

Limited opportunities to

invest; Limited job creation in Moldova

Migration

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2What Causes

and Perpetuates This Cycle of Jobless Growth

in Moldova?

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Moldova needs productivity gains to offset REER appreciation

• High lending rates – in part due to lack of information on credit risk, mostly affecting new and small enterprises (who cannot shop around for loans)

• High collateral requirements, costly and ineffective registration, handling and enforcement

• Short maturities (in part due to lack of capital market)

• Accentuated by low profitability of firms and thus limited bankable opportunities to expand lending in the tradables sector

• Only consumer lending grew fast (again fueling the import of durables, real estate, and construction)

Improving the efficiency of the banking sector is critical

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Firms have low and declining profit margins due to high costs, particularly indirect costs

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Firm productivity is influenced by.. 1. Barriers to entry (highest start-up costs in the region)2. Burdensome business regulations3. Restrictive practices, lack of competition, monopoly

and monopsony practices4. High costs of transport and trade across borders

(30% of domestic firms report transportation as a major constraint to growth)

5. Low access to reasonably priced utility services, including ICT

6. Public sector inefficiency, including SOEs

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Exports Documents Preparation% of Mgt Time Spent on Regulations

(Productivity is lowered by…)2. Onerous Business Regulations which hurt

firms’ growth… particularly exporters.

Georgi

aEC

A

Moldova

Exporte

rs

Non-Exporte

rs02468

101214161820

Georgia Romania Moldova0

5

10

15

20

25

No. of Documents Days taken

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(Productivity is lowered by…)3. High Market Concentration which add to high

costs of entry to limit competition…

20032004

20052006

20072008

2009

Moldova

Ukraine

Hungary

RomaniaRussi

a0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Herfindahl Index of the Manufacturing Sector - an international compar-ison of market concentration.

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Internet Usage in Business(% of Firms)

Access to High-Speed Broadband (% of firms)

(Productivity is lowered by)5. Low access to and use of broadband internet at high costs relative to regional comparators

Moldova

Ukraine

ECA

Romania

0 10 20 30 40 50 60 70 80

54.5

62

62

69

MoldovaGeorgia Ukraine ECA Romania80

82

84

86

88

90

92

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(Productivity is lowered by)6. Low productivity growth and poor management performance in SOEs

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(Productivity is Lowered by…)6. Large Government intake …

2002 2003 2004 2005 2006 2007 2008 20090

5

10

15

20

25

30

35

40

45

Taxes % GDP Moldova vs ECA Av-erage

MoldovaECA Average

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(Productivity is Lowered by)6. High levels of Government inefficiency in service delivery, and limited returns to public spending…

Moldova

Kyrgyz RepublicUkraine

BelarusLatvia

Poland

LithuaniaSerbia

RomaniaBulgaria

Russian Federation

Tajikistan

Macedonia, FYRArmenia

AlbaniaGeorgia

Turkey

Kazakhstan

Azerbaijan0.01.02.03.04.05.06.07.08.09.0

Public education expenditure as % of GDP2008 or latest available year

6.00

16.00

26.00

36.00

46.00

56.00

Pupil-Teacher RatioRaions of Moldova vs. Countries

of the World

Coun

trie

s of t

he W

orld

Dubăsari Japan

Raio

ns o

f Mol

dova

400

420

440

460

480

500

520 Average score on TIMSS 8th grade mathematics assessment

20032007

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Consider the Impact of Investment Climate: Profitability in agriculture is low compared to

regional standards… first because yields are low

020406080

100120

2000 2001 2002 2003 2004 2005 2006 2007 2008

apples grapes tomatoes wheat

Moldova's crop yields as % average regional yields*

* Average regional crop yields calculated on the basis of yields of 5 countries: Ukraine, Romania, Russia, Poland and Turkey.

Average regional crop yields calculated on the basis of yields of 5 countries: Ukraine, Romania, Russia, Poland and Turkey.

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Second… because output prices are depressed and input prices rise faster, due to monopolistic

practices and import restrictions Low Producer Prices Input Prices Rising Faster Than

Output Prices

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3What Should Moldova Do?

…To Break the Cycle through a new Growth Strategy

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Remittance growth will continue – but may not be sustained at pre-crisis growth levels over the long run

• 40% workers already gone -> potential for more migrants is low;

• Labor force-age population will start to decline again;

• Remittances tend to decline over time as families relocate;

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So clearly Moldova needs more balanced growth in future:

Moldova needs a second growth engine driven by productivity and export growth

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Some key considerations related to export growth –

Which Exports have potential?

– Moldova’s export products are mostly low tech and agro-based

– There is scope to increase export product values in agro-based and processed products given Moldova’s Revealed Comparative Advantage in them

– Other light manufacturing industries may also have good prospects given the set of tech capabilities and skill mix. Potential for jobs.

– ICT may also hold some promise if telecoms reforms are accelerated.

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Some Growth Policy Priorities1. Make remittances work better for balanced growth

2. Improve productivity and competitiveness by reforming the investment climate and through utilities reform (energy, transport, telecoms)

3. Support export competitiveness (especially for agri-business) through transport liberalization, better regulation, technical standards and export logistics and facilitation (not through subsidies)

4. Generate expenditure efficiency gains to create fiscal space for infrastructure investments and better quality public services, and improve SOE performance (by revitalizing privatization)

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Shaping a Structured and Accelerated Growth Strategy (Adapting the Gvt Action Plan)

1) Focus systematically on actions that address “the cycle”– Improve the investment climate with a focus on enhancing

productivity, improving export competitiveness and reducing border costs

– Target EU standards– Reduce the public footprint on the economy whilst improving

service quality2) Be selective and sequence reforms to get the job done!– Sine qua non (within the next 12 months)– Low hanging fruit (within the next 12 months)– Important structural reforms-medium term

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`Sine Qua Non’ Reforms• Liberalize transport routes to operators and facilitate their

entry and improve governance and transparency in the management of the sector (including tariffs).

• Eliminate (guillotine approach) all outdated regulations and standards and move towards integration with EU standards in food quality and safety.

• Reduce the burden of inspection by elaborating a general framework law (Law on Controls) to establish risk based inspections and streamline procedures for all control agencies.

• Eliminate restrictions on farmers’ access to approved seeds and seedlings in EU common catalogue, streamline procedures for registration and testing.

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`Low-Hanging Fruit’ Reforms• Re-commence efforts to reduce the share of shipments physically

inspected by Customs by fully implementing a risk-based approach

• Eliminate institutional overlapping in food safety across various government agencies such as MOA, MOH and Moldova Standard.

• Make more transparent the procedures involved in granting the EU zero-tariff export quota allocations.

• Implement the law on one stop shop at the business registry and streamline procedures for granting permits (eg construction permits).

• Establish a public credit registry/bureau within the NBM to make information on borrowers more transparent, reduce risk aversion in the banking sector, and improve access to credit to SMEs