Economic Models of Aid Effectiveness in Moldova

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Publishing date: Thursday, 21 February 2019
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In this paper, we provide an overview of the objectives and challenges to be met in the delivery of EU development aid to Moldova. Our analysis, carried out with pooled OLS, suggests that aid commitments and the number of aid projects are conducive to higher levels of socio-economic development; while the results for aid disbursements are in the same direction, they are less robust. EU development aid is effective when we introduce the three-year lag and the outcome variable is long-term investment, meaning that the impact of EU development aid can be observed in the medium and long-run, which points on positive and sustainable impact on the development of the country. Giving Central European bilateral donors such as Austria, Slovakia, and Romania a share in the programs does tend to generate higher levels of socio-economic performance. The same observation holds for transport, health, and water projects. The authors found that aid disbursements are much lower compared to aid commitments, revealing a large unexplored potential of EU development aid in Moldova, which is mostly due to governance issues in Moldova. In order to bridge the gap between aid commitments and aid disbursements, it is important for the European Union to bolster transnational sovereignty partnerships that bypass central government budgets and foster the implementation of local-scale projects with the participation of subnational bureaucracies and local civil society. 

Policy recommendations

The main focus of this paper is the analysis of development aid effectiveness in Moldova. We also intend to complement existing evaluation mechanisms of aid projects. The majority of donor monitoring and evaluation instruments use a project-by-project or program-by-program approach. Nevertheless, there is still no comprehensive toolbox for assessing development aid effectiveness in the medium- and long-term. What is important is to multiply positive effects and concentrate on areas with lower levels of aid effectiveness. This would entail strategic planning and a full review of policy approaches at the country level. As the evidence indicates, the dichotomy between aid commitments and projects on the one hand and aid disbursements on the other, reveal the urgent need to review the strategic approach toward development aid, particularly when it comes to methods and channels of aid disbursement. The EU is one of the main central government donors in Moldova. From our study it is clear that bilateral donors focused on local development aid have produced better results. Academic literature and international aid policy experience show that direct developmental support and aid decentralization toward the regional, local, and community levels tend to generate higher levels of socio-economic development. But this approach has to be combined with new monitoring tools, thereby ensuring a rise in the quality and quantity of local civic organizations. Furthermore, aid projects should be seen as capacity-enhancing mechanisms that involve the local bureaucracy in the development process and produce socio-economic outcomes in line with the economic strategy and social welfare needs of the population of the respective rayons. Policy recommendations of the paper include therefore the following:

  • Thorough review of aid distribution channels and monitoring instruments. A significant share of development aid flows should arrive at the local level. The monitoring of aid distribution at the local level should involve civil society institutions.
  • Decentralization of monitoring and management structures of EU aid projects at the local level. This would reduce the rent-seeking incentives of central bureaucrats, minimize the expected payoff from corrupt practices, and utilize existing bureaucratic structures for purposes of capacity building. Joint EU-Moldovan bodies would then monitor the stages of project implementation by EU-Moldovan consortia, whose financial accounts would be located in European banks.
  • The Europeanization of the lower and middle levels of the Moldovan civil service, particularly in the Southern rayons of the country, which – with the exception of Gagauzia – are consistent underperformers both in the attraction of EU funds and general indicators of economic growth and human development. EU development aid should expand rather than undermine state capacity, and this can be possible only with the strengthening of Moldova’s economic bureaucracy at the local level.
  • Empowering Moldovan civil society and giving it a competitive edge. The active involvement of Moldovan civil society is key; it raises informational asymmetries for European business and civil society partners, giving local actors a leg up, and allows for the emergence of win-win policy scenarios and, eventually, situations where the long-run economic development of the country is backed up by a competitive “fringe” of EU-oriented civic organizations that do not interfere with but rather complement state functions. That way politics stays out of the immediate EU-Moldovan negotiations, and everybody becomes better off.
  • Flexible and efficient donor oversight of aid project implementation, which necessitates a higher degree of institutional embeddedness in the recipient economy. It requires EU institutions to be actively involved in Moldovan universities and the promotion of start-up entrepreneurship, as well as in partnerships and financing instruments that link EU small and medium entrepreneurs with possible Moldovan partners. The creation of synergetic structures between economy and society would only enhance the long-run impact of EU development aid projects. 

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Tags: Natalia Chitii

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