Demography matters: How population dynamics impacts the economy of the Republic of Moldova?

Publishing date: Monday, 16 October 2017
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The Republic of Moldova is going through a demographic transition, with significant long-term implications. Due to a falling fertility rate and intense outmigration, the age distribution of population has turned from a stable pyramid 30 years ago, into a constricted Christmas tree nowadays. A key feature of the Moldovan society is the intense age-specific migration of working age people to other countries, for both seasonal and long-term or even permanent work. These challenges are magnified by economic weaknesses and by a protracted and rather unsuccessful economic transition.

Despite economic hardships, the Government has a relatively high presence in the economy, both as provider of public services and as redistributor of incomes. Payment of the social benefits represent the main item of the public budget expenditures with 35 percent of total. Moldovan Government redistributes high shares of the GDP through the age-related public programs: social protection program costs around 13 percent of the GDP, the education program – 7 percent of the GDP and the health – slightly more than 5 percent of the GDP.

The life-cycle deficit accounts for 36.4 billion MDL and seems quite high compared to the majority of other countries in the NTA project. Only the population aged from 34 to 56 years has lifecycle surplus, meaning that only during these 23 years of life people earn more than consume, which is also a very short period of time compared to other countries in the NTA global project. Significant differences in the lifecycle deficit by gender are worthwhile mentioning. Women accumulate surplus only between 35-54 years old, and is lower compared to the surpluses accumulated by men at all ages. Men accumulate surpluses almost twice longer - between 25-59 years old.

The life-cycle deficit is financed by public and private transfers and public and private asset-based reallocations. For early ages, up to 20 years old, the deficit is financed mainly by private transfers, with a share of 69 percent, while public transfers come second with a share of around 31percent. At these ages, the consumption of public and private education is a key factor determining the deficit. Compared to all other countries in the NTA project, Moldova spends very large amounts of public and private resources for funding education. The inter-household transfers, coming mainly from family members working permanently or in long-term abroad is a key inflow supporting the younger generations. One key figure to mention, the migrants’ remittances represent around one fifth of the Moldovan GDP. Combined with public transfers and income derived from own labor, they are used to pay for the education at the younger ages and for accumulation of savings.

At later ages, after the life-cycle surplus ends, the deficit is financed mainly by public transfers and private asset-based reallocation.Public pensions and dis-savings are the main sources used to finance deficits of the older generations. The analysis of how Moldova can benefit of demographic dividends has been a special analytical topic in this report.

The analysis suggests that Moldova could miss the opportunity to exploit its first demographic dividend, if necessary investments are not made in youth health and education and a better inclusion of young people into labour market. Depending on the level of capitalization of the first demographic dividend, Republic of Moldova may further have a second demographic dividend. This requires two streams of policies: (i) aimed at minimizing the risks of the negative first demographic dividend by unleashing the potential of the young population, and (ii) aimed at maximizing the opportunities of the second demographic dividend by enhancing the business climate and fostering the financial sector.

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