How can Moldova shift from a growth model based on remittances and consumption to one driven by investment, productivity growth, and innovation?
For this small and landlocked country, integration into global markets is crucial. As such, Moldova’s National Development Strategy, “ Moldova 2020”, calls for prioritizing the expansion of exports of goods and services. To boost exports, the country needs to join regional and global value chains, to become more efficient in what it already produces, and to innovate. Attracting investment, both foreign and domestic, is also key.
So, how is Moldova doing in this regard?
It’s certainly true that Moldova keeps relatively liberal trade policies . However, the country has not been doing great in terms of trade and investment. Exports have grown at an annual rate of 13 percent, while imports at 16 percent. Moldova’s export growth has also lagged behind regional comparators.
Although the country has successfully diversified away from traditional markets, its exports strongly depend on a few main products. Actually, diversification in products accounted for less than one-tenth of total export growth between 2010 and 2013. And, while FDI inflows have been high by international comparisons, Moldova is still overshadowed by the best performers in the European region.
International evidence suggests that, while liberal trade and investment policies are necessary for better integration into global markets, they are not sufficient. There are other factors that enable countries to benefit from the opportunities and maximize the gains from deeper integration.
In the recent “ Moldova Trade Study”, we specifically examine the role of the investment climate and the quality of backbone services. It’s worth noting also that other enabling factors, such as macroeconomic stability, competitive input markets, world-class connectivity and a skilled labor force, are important determinants of a country’s successful integration into the global marketplace.
Using firm-level data from Moldova and other countries in the region, we investigate the effects of investment climate and backbone services on firm productivity. Our results suggest that Moldova’s competitiveness is hindered by poor provision of services and by an inefficient business environment.
The productivity of firms in the country is negatively affected by insufficient financial, electricity, infrastructure and connectivity services. More than 40 percent of surveyed firms viewed access to finance as a moderate obstacle to their operations. Another 30 percent of firms said poor quality of electricity was a problem.
And these obstacles vary by region in Moldova. Firms in larger cities such as Chisinau and Balti perceive the provision of services as less of an obstacle than in other cities and regions in the country. Firms appear to be slightly more critical of the quality of backbone services than those of their peers in other countries in Europe. Interestingly, we find that exporters and foreign firms suffer more from the poor quality of backbone services than domestic oriented firms.
We find that significant productivity losses are associated with poor institutional quality and governance. Moldovan firms identified corruption as the most constraining aspect of the business environment , followed by poor tax regulations and administration. Moreover, we find evidence that firms that relied on informal payments and gifts were between 6 and 7 percent less productive than their law-abiding counterparts.
The importance of an adequate business environment and access to key backbone services in Moldova is probably best exemplified – in terms of investment attraction and productive transformation – by the results from operations in the special economic zone in Balti. Which raises an important question: why not replicate the Balti experience at a country-wide level?
More can certainly be done to improve connectivity and reduce trade costs – starting with streamlining customs and modernizing all border points, as well as implementing simplified customs procedures and electronic declarations for customs regimes to facilitate trade.
In addition, it is necessary to improve the quality and reliability of transport and logistics services, through the implementation of Moldova’s Transport and Logistics Strategy and the development of national public investment programs – all very important for a landlocked country like Moldova. This will also help facilitate trade via better roads, railways, and airports.
Finally, in order to improve the business climate, the implementation of anti-corruption initiatives is critical for transparency, and ultimately for investment attraction and economic growth. Then perhaps, we may see the gains from integration reach all Moldovans, through better jobs and higher incomes!
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