Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment Figure 2: The relationship between the business environment and FDI Figure 2 also illustrates another point about the relationship between FDI and the business environment: below a certain threshold level for the business environment, around 5 on this scale of 1 to 10, FDI does not respond to changes. What is required to stimulate foreign direct investment (as well as domestic investment) is a significant shift toward a more hospitable investment climate. Such a shift demands concerted commitment from both the public and the private sector. Trends at the Enterprise Level FIRMS AND MARKET LINKAGES Moldova’s economy remains stuck between the statist structures of the past and an emerging private enterprise sector. Private enterprises, many with foreign partners, have emerged in part from the restructuring and privatization of state-owned enterprises. Many of todays (privatelyowned) small and medium-sized enterprises started as survival mechanisms, and there is wide variation in their competitive performance, primarily with respect to domestic markets. Yet successors to the large-scale enterprises of the Soviet era, whether with foreign majority partners or continuing under state ownership, often occupy positions of market power that hamper the growth of market linkages needed for competitive clusters. July 2004 • Draft Page 5
Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment Cooperation among entrepreneurs and enterprise managers in related or competing activities tends to be low, not unusual for a low-trust environment with a government disposed towards excessive levels of surveillance and interference. Lack of trust has been a major factor in bringing structural reform to a virtual standstill. At the same time however, there are informal support arrangements among complementors, and even competitors, with respect to joint sourcing of inputs, flexible payment terms, or joint marketing (such as a single showroom for shoes from competing manufacturers). Demand Conditions Figure 1 shows that Moldova lags most in terms of market opportunities. A small population and low incomes limit the size and sophistication of the local market. However, domestic markets cannot be written off, as they remain the principal target for a good portion of the country’s small and medium-sized enterprise sector. Moreover, as competition and incomes increase, these markets will become increasingly important. At present, the flow of workers’ remittances from abroad is largely responsible for fueling a surge in demand that is boosting growth (even if much of the demand is going to imports) in particular construction materials for the rehabilitation and renovation of the country’s aging housing stock, or new construction. As a small open economy Moldova's export markets to the east and west, as well as overseas, will continue to be major targets. Currently (2003), 45 percent of Moldova’s exports go to Russia and Ukraine, and 39 percent to the countries of the EU 25; Romania accounts for another 8 percent, as illustrated in Figure 3. (Prior to the ruble crisis of 1998, two-thirds of Moldova’s exports went to Russia and Ukraine, and only 17 percent to the EU.) The forces shaping trends and shifts in these two main markets thus matter most from a strategic point of view. Figure 3: Moldova’s 2003 exports by importing country July 2004 • Draft Page 6
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