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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;
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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.
Workers (mostly from rural areas) migrated in search of incomes ‘000
By 2008 Moldova was the 2nd country in the world in remittances as % of GDP..they fueled a growing domestic consumption
…. But growth in “tradeables”; ie the manufacturing and agriculture sectors, has been limited Source IMF – 29 May 2010 presentation at WB Office
…. exports of goods declined in relation to GDP, growing slower than in other countries in the region
And Moldova experienced jobless (and job shedding) growth…and people continue to migrate Thousands of jobs (y-axis) (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”
2What Causes and Perpetuates This Cycle of Jobless Growthin Moldova?
Moldova needs productivity gains to offset REER appreciation Improving the efficiency of the banking sector is critical • 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)
Firms have low and declining profit margins due to high costs, particularly indirect costs
Firm productivity is influenced by.. • Barriers to entry (highest start-up costs in the region) • Burdensome business regulations • Restrictive practices, lack of competition, monopoly and monopsony practices • High costs of transport and trade across borders (30% of domestic firms report transportation as a major constraint to growth) • Low access to reasonably priced utility services, including ICT • Public sector inefficiency, including SOEs
(Productivity is lowered by…)2. Onerous Business Regulations which hurt firms’ growth… particularly exporters. % of Mgt Time Spent on Regulations Exports Documents Preparation
(Productivity is lowered by…) 3. High Market Concentration which add to high costs of entry to limit competition…
(Productivity is lowered by)5. Low access to and use of broadband internet at high costs relative to regional comparators Access to High-Speed Broadband (% of firms) Internet Usage in Business (% of Firms)
(Productivity is lowered by)6. Low productivity growth and poor management performance in SOEs
(Productivity is Lowered by)6. High levels of Government inefficiency in service delivery, and limited returns to public spending…
Consider the Impact of Investment Climate: Profitability in agriculture is low compared to regional standards… first because yields are low Average regional crop yields calculated on the basis of yields of 5 countries: Ukraine, Romania, Russia, Poland and Turkey.
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
3What Should Moldova Do?…To Break the Cycle through a new Growth Strategy
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;
So clearly Moldova needs more balanced growth in future: Moldova needs a second growth engine driven by productivity and export growth
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.
Some Growth Policy Priorities • Make remittances work better for balanced growth • Improve productivity and competitiveness by reforming the investment climateand through utilities reform (energy, transport, telecoms) • Support export competitiveness (especially for agri-business) through transport liberalization, better regulation, technical standards and export logistics and facilitation (not through subsidies) • Generate expenditure efficiency gains to create fiscal space for infrastructure investments and better quality public services, and improve SOE performance (by revitalizing privatization)
Shaping a Structured and Accelerated Growth Strategy (Adapting the Gvt Action Plan) • 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 quality 2) 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
`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.
`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 (egconstruction 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
