Assessing Competitiveness In Moldova's Economy - Economic Growth

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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
Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment those for the EU accession countries in East-Central Europe and the Baltics. The comparison highlights the gap in a number of key policy areas, although the largest gap, for “market opportunities,” is more a function of the small size of the domestic economy. Many of the laws and regulations that account for major benchmark gaps are effectively in violation of Moldova’s obligations under its WTO membership. Just bringing the legal and regulatory system into compliance with WTO obligations would narrow many of these gaps. Figure 1: Moldova’s Policy Environment Compared to New EU Members These comparisons are not just of academic interest. Understanding how the country stacks up against others, and how it can do better may have some intrinsic incentive value. However, the most important incentive is the direct link to economic growth. Economic growth hinges on productive investment that advances innovation. There is, of course, a strong and consistent relationship between the investment climate and the level and pattern or productivity of investment, as illustrated in Figure 2. A country like Moldova needs to look to investors both at home and abroad, because some of the needed investments and the associated technologies call for foreign investors. For example, a recent study on high-value agriculture competitiveness conducted for USAID (under the Private Farmer Commercialization Program implemented by the Citizens Network for Foreign Affairs, CNFA) concluded that some US$2 billion needed to be invested to have an impact in that cluster. Moldovan investors cannot raise that amount. Foreign direct investment therefore remains critical for Moldova, both for the financial resources and for technology. And some of that investment has begun to move into the economy. July 2004 • Draft Page 4
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