Assessing Competitiveness In Moldova's Economy - Economic Growth

Development Alternatives, Inc. Moldova Competitiveness Assessment: The Textiles & Apparel Cluster
Policy Aspects
As in other sectors, and well documented in the Cost of doing business in Moldova survey,
policies and administrative practices add to the cost of production. These additional costs are
reportedly significantly higher than in competitor countries. The apparel sector case study
under the recent World Bank Trade Diagnostic Study identified the following policy-related
cost items:
Delayed VAT reimbursement;
VAT payable on cutting waste (which can account for as much as 25 percent of imported
materials);
Additional personnel costs to handle bureaucracy;
Customs charges;
Chamber of Commerce charges, for such items as Certificates of Origin, export licenses,
and the like.
The study estimated that these policy-related costs add over 20 percent of the value added to
the free on board (FOB) price of garments produced in Moldova. Bureaucratic hurdles and
delays in customs clearance may also negate the locational advantage that would enable
Moldova to build on its low labor cost advantage. By adding to the time its takes to ship to
the EU, these factors impair competitiveness.
Moreover, the current policy environment makes it more difficult for producers in the higher
value-added segments in the industry. For example, since it is mostly small and mediumsized
enterprises that have been moving into higher value-added production, delays in
reimbursements become more important. Thus, policy provisions are making it more
attractive for producers to remain in the CM end of the business. Unfortunately, that is also
the segment most vulnerable to switching by lowest-cost-seeking buyers. It is also the
segment least equipped to serve Moldova’s other markets to the east (already playing a
critical role for some segments, such as carpet manufacturing), which require full-package
service.
Conclusion
Moldova’s producers, typically with foreign partners, have shown that they can leverage the
country’s advantages in low-cost, high-productivity labor and a favorable location to the
market. At the same time, some larger producers remain stuck in the low value-added
segment of the cluster, limiting themselves to CM operations. Moldova could serve as an
exporting platform to both the West and East, but this transformation will require significant
changes in the business environment—to create greater incentives to move up the valueadded
ladder than penalties for innovative activity.
July 2004 • DRAFT Page 10