State of the Country Report 2017

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Publishing date: Friday, 06 October 2017
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Moldova’s state of the country has worsened against the background of a number of exacerbating systemic vulnerabilities. The development prospects of the country are challenged by a series of economic, social and demographic constraints. From the economic point of view, the growth proved to be slow and unsustainable, implying the erosion of GDP potential and competitiveness. Moreover, the economic growth did not materialize in meaningful improvements in the wellbeing of the population, given the decline in formal employment and increase in informal one, which created challenges from the social point of view. The demographic challenges are related to poor capacity of the economy to integrate the largest cohort of the population with an age profile of around 30 years, which gradually leads to losing the opportunity to explore the benefits of the demographic dividend.

The internal (geo)political struggles and frequent controversial legal initiatives have worsened the internal systemic vulnerabilities. The period 2016–2017 was marked by the fact that the presidency, along with the left-wing parliamentary opposition party, intensified the Russian factor, which made the society and business environment confused about the country’s European orientation. This feeling was intensified by the slow pace of reforms and even by actions that distanced Moldova from the EU association agenda, promoted by the ‘pro- European’ Government. These actions included a number of legal initiatives heavily criticised by a large part of civil society and most of the development partners (i.e.: the law on ‘fiscal and capital amnesty’, modification of the electoral system, an initiative to limit non-governmental organisations’ access to external financing, low transparency in electricity procurement and others). These slippages and the tactical struggles (sometimes, even partnerships) between the ruling party and the left-wing parliamentary opposition party have fostered even more the deficit of trust in the Government by citizens, business entities and development partners. As a result, investments have fallen and the financial support from development partners is uncertain (particularly after the approval of the mixed voting system and the failure of reforms in the areas of justice and anti-corruption). Moreover, the reform process is also undermined by the low level of public legitimacy of the current Government: surveys show a low level of electoral support for the ruling party, which is close to the electoral threshold.

The exacerbating internal vulnerabilities have distanced Moldova even further from the Central and Eastern European countries, in terms of development. These discrepancies have increased during the recent years in all of the country’s development areas: economic, social and governance.

Economic discrepancy: slow and volatile economic growth in recent years, in tandem with the constant erosion of the potential growth, has kept the country with easily the lowest gross domestic product (GDP) per capita in the region (it represents only one-tenth of the average level of GDP per capita in the in the Central and Eastern European (CEE) countries that are members of the EU, with no major changes in past years). Moreover, discrepancies also increased in the industrial and energy areas, as well as in the levels of exports and gross capital formation. Therefore, both the level and the structure of the Moldovan economic growth have remained far removed from the trends observed in Central and Eastern Europe, revealing once again the increasing fall in the country’s competitiveness.

Social discrepancy. The shortcomings in terms of the economic growth pattern have also impacted citizens’ wellbeing. Thus, the deficit of investments and capital have caused Moldova to remain at a low level of specialization and competitiveness, which has worsened the discrepancy between the labour productivity of Moldova and that of the CEE countries from EU. This has affected even more the discrepancies related to the quality of employment, particularly from the perspective of indicators related to informal employment and the level of salaries.

The discrepancy in the quality of governance is made clear in Moldova’s declining position in the international rankings on governance transparency, perceptions of corruption and freedom of media.

The increasing discrepancies between Moldova and the Central and Eastern European countries fundamentally undermines Moldova’s development perspectives. Specifically, it undermines the country’s competitiveness in the markets where its goods are sold (mainly due to economic discrepancies), in human capital (mainly due to social discrepancies) and in economic/financial capital (mainly due to governance discrepancies). For a country that is so small and so dependent on export markets, labour force and investors’ and development partners’ capital, such a widening of the development discrepancies must sound an alarm bell for decision-makers in Chisinau. They should respond by speeding up the key reforms that will ensure the country’s convergence to the development level of the CEE EU countries by 2030.

The basic sources of Moldova’s sustainable development are the private sector and human capital. Both of these need to be boosted in parallel and in a balanced manner. If policy-makers disregard human capital, the country’s competitive potential will be harmed, because competitiveness based on a relatively cheap labour force, as is the case nowadays in Moldova, would dissipate over time, especially in the context where real salaries grow faster than productivity. At the same time, the develop- ment of human capital, in the absence of a strong private sector, is not possible because Moldova’s public sector alone does not have enough resources and capacities in this respect.

So far, Government policies have not focused enough on the main source that underpins the country’s long-term competitiveness – the country’s people. People have always represented the main source generating economic growth. For example, in 2016, households’ consumption accounted for 82% of total consumption and 87% of GDP, the individual income tax, VAT and excises – indirect consumption related taxes – constituted 78% of the total duties and taxes collected for the State Budget, while the balance of term deposits – the main source of crediting consumption and investments – made by individuals constituted 88% of the total deposits. At the same time, paradoxically, there have always been a shortage of effective people-centred policies in Moldova. As a result, the economic growth did not translate into proportional increase in the wellbeing of the population. Another result is that over the past years there has been a declining quality of employment (an increase in informal employment, in parallel with modest salary growth) and an increase in the discrepancies between the quality of employment in Moldova and that in the Central and Eastern European countries. Moreover, the declining trust in Government, alongside the increasing development discrepancies, have contributed to a new migration outflow, depriving even further the country of the pool of working-age population.

Consequently, the main source of the country’s development – its labour force - which underpins its competitiveness, is continually being eroded in terms of both numbers and productivity. Thus, Moldova is losing its key competitive advantage that has, to date, allowed it to attract some strategic investments and unlock its export potential. Until now, industrial sector growth that had ensured about two-thirds of total exports of goods and investments was based, largely, on the high avai- lability of a cheap labour force. However, these advantages are gradually dissipating. The main problems here are related to faster salary growth, as compared to labour productivity, the emigration phenomenon and an educational sector that does not meet the needs of the real sector. The failure to counteract these tendencies will cause the definitive failure of the only real competitive advantage Moldova possesses, meaning that the country’s sustainable development will be totally compromised.

It is necessary to change the focus of the country’s development policies in order to unlock the main source of growth and development that could ensure long-term competitiveness – its people. This means that people-centred policies should be implemented in all areas, especially in ones related to private sector development. Specifically, the development policies for the business environment should focus more on boosting entrepreneurial initiatives and developing small and medium-sized enterprises, fostering improved access to capital, ensuring a free competitive environment, promoting formal employment and encouraging the creation of decent jobs by pro-business and pro-human policies implemented in parallel, rather than consecutively or in isolation. At the same time, the education sector needs to be reformed thoroughly. This should create the proper environment for unlocking both the potential of children/pupils/ students in line with the economy’s needs, and of their parents (i.e.: building nurseries, which will allow parents, after childbirth, to integrate faster into the economic environment). In this regard, there is a need for closer institutional collaboration between the Ministry of Economy and Infrastructure, the Ministry of Education, Culture and Research, and the Ministry of Health, Labour and Social Protection. This should take place within a permanent, operational and institutionalised platform, with the Prime Minister’s leadership, and it should aim to anchor the policies of the aforementioned ministries to the objectives referred to above.

The reform of the public sector governance should remain the top priority and should be the starting point for other systemic reforms. This finding from the previous edition of the State of the Country Report appears again for the 2017 report because the need of a far-reaching reform of the public sector, especially of its governance, remains as topical today as it was a year ago. Besides parametric adjustments related to optimisation of ministries or the number of civil servants, there is also a need for substantial and in-depth reforms that would make the public institutions less politicized, more transparent, more accountable and more attractive to professionals. Currently, the public sector is too weak in relation to private or political actors, which makes it vulnerable to influences from vested interests from both private and political circles. Over the past years, this has tarnished the reputation of the public service and has contributed to mass migration of many talented individuals from the public sector, which hinders reforms in other vital areas. Therefore, the authorities should urgently: rethink the salary scales and other monetary and non-monetary motivations (these should be based on performance); encourage top-down reforms in order to allow civil servants to really feel ownership for reforms and their influence over public policies; implement the integrity system reform effectively in the public sector; and increase public institutions’ transparency by promoting the ‘open gover- nment’principle, especially in relation to reporting on the basis of performance indicators and budgetary programmes.

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