Assessing Competitiveness In Moldova's Economy - Economic Growth

Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment
THE POLICY DIMENSION
Creating a business environment or investment climate that stimulates, supports, and rewards
competitive enterprise performance is the principal economic policy challenge anywhere. Studies
focusing specifically on Moldova, such as the annual Cost of doing business survey, and
international comparisons suggest that the policies of Moldova’s government hinder rather than
foster competitiveness in the country’s economy. In fact, government policies, and the
uncompetitive practices they spawn and protect, have become the biggest obstacle on the path to
prosperity. Where Moldova’s enterprises manage to perform competitively, it is in spite of, rather
than because of, the country’s business environment.
Policies that have harmed the competitiveness of Moldova’s economy start at the
macroeconomic level. Prior to the 1998 ruble crisis, a combination of tight monetary and loose
fiscal policies led to a loss of competitiveness and a rapid buildup of the current account deficit.
Lagging structural reforms hampered an adequate supply response to the rising aggregate
demand, fueling imports instead. Overregulation, excessive interference, corruption, and the
failure to ensure an adequate physical and economic infrastructure impose significant costs on
enterprises, whether in the domestic or in export markets. The Cost of Doing Business in 2004
survey concluded that enterprise managers spend almost 19 percent of their time striving to meet
all mandatory requirements. Inspection costs averaged US$752 across all companies in the
survey.
With respect to export markets, the crumbling infrastructure and inadequate administrative
performance are sapping one of the country’s potential strengths: its location as a trade hub
between East and West. Exporting companies in the Cost of Doing Business survey spent an
average of about 3.5 days and US$223 per transaction to meet all customs requirements.
Benchmarking Moldova’s business environment against that of other countries confirms these
diagnostics. Such comparisons have become something of a growth industry; the web site of the
World Bank’s Foreign Investment Advisory Service (FIAS) lists some 21 separate rankings and
ratings. Perhaps the best known and most widely cited benchmarking exercise is the World Bank
Economic Forum’s Global Competitiveness Report (GCR), which annually ranks over 100
countries in terms of two composite indices. Unfortunately, the GCR does not yet include
Moldova.
Other rankings reflect more closely the particular interests of investors, such as the business
environment scores published by the Economist Intelligence Unit (EIU), which links these scores
to investment responses. An EIU appraisal published in September 2003 covers 27 transition
economies in Eastern Europe and the CIS. This appraisal presents business environment scores
based on 70 individual measures, aggregated into 10 indicators, for the period 1998-2002,
together with forecasts for the period 2003-2007. It also provides measures of foreign direct
investment as an indicator of business response.
Using the EIU scores, we can sketch the position of Moldova for the 10 principal indicators
relative to selected benchmark countries. Figure 1 shows a comparison of Moldova’s scores with
July 2004 • Draft Page 3