Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment In 2003, Moldova’s exporters increased exports overall by more than a third over the previous year. In the West, recent trends have been favorable to Moldova’s economy, primarily in terms of outsourcing opportunities in manufacturing; exports to the EU grew by more than 47 percent over 2002. Exports to the EU tend to leave the initiative with the buyer, who typically (though no longer always) provides design specifications, furnishes all of the materials, handles compliance with norms and standards, and markets the finished goods to the end consumer. As buyers in the EU have gained experience with Moldova, and as the EU’s eastern neighbors are now members, Moldova is becoming more a more attractive place for outsourcing business. Of course, these arrangements mean that only a portion of the total value added is generated in Moldova. Yet when viewed in a strategic context, rather than as a stopgap measure, these arrangements offer a (relatively) low-risk opportunity for learning how to operate and succeed in competitive markets. At least some of Moldova’s exporters understand that opportunity and are viewing current arrangements strategically. To the east, Moldova’s exporters are facing an increasingly sophisticated market in Russia. As Russia’s integration into the world economy proceeds, a new market architecture is replacing traditional CIS standards and expectations. The experience in the wine sector, where Moldova’s share in the Russian market has fallen from 57 percent in 1998 to 45 percent in 2003, points to the following: unless Moldovan exporters adapt to the emerging market architecture, they will be squeezed out of traditional markets. While the old way of doing business with CIS countries will not become extinct overnight, patterns and trends in demand in the east are likely to approach those in the west of the country. Figure 4 illustrates the inroads that Asian exporters (China and Japan) have made into the Russian market. While both the EU 15 and the new EU members (plus Romania) have also gained market share, while Moldova was a big loser in the wake of the 1998 ruble crisis, but has continued to lose ground since. A further breakdown reveals that Moldova’s exporters have been maintaining their aggregate market share for agricultural products (Chapter 01-24 in the Harmonized System of Customs Statistics), and their overall loss in market share is due to nonagricultural exports. Figure 4: Shifts in the penetration of Russia’s import markets July 2004 • Draft Page 7
Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment Supporting Economic Activities Competitive performance in an economy hinges on the performance of market support structures that can be grouped into five categories: Physical and social infrastructure Moldova’s physical infrastructure is no longer up to the task of supporting competitive performance in export markets or efficient distribution in domestic markets. The road transport network, although extensive, has fallen into disrepair, by some estimates increasing vehicle operating cost by as much as 50 percent for heavy trucks. The telecommunication infrastructure is inadequate for pursuing any aspirations to become a trade hub between West and East. Finally, while primary energy—natural gas and oil—is in effect subsidized by Russia (charging the domestic price, which is significantly below the world market price), Moldova’s electricity sector on the whole is inefficient, and carries some risk: aside from three small combined heat and power (CHP) plants in Chisinau and Balti, the country’s major generating capacity is located in Transnistria. As a result, larger enterprises find it preferable to invest in their own generating plants, although the economics of these investment decisions are likely to be affected by the upcoming price increases for primary energy. Market intermediation services For the most part, market intermediation services—market information, sourcing, facilitation, consolidation, freight forwarding, storage and warehousing, wholesale, and so on—are rudimentary. Intermediation activities, and wholesale operations in particular, tend to be viewed with suspicion, that translates into special regulatory and administrative attention. In addition, the benefits of more efficient market architectures are generally only dimly understood, and producers are unwilling to “give up” margins to intermediaries, thereby cutting themselves out of critical elements of their respective value chains. In export markets, Moldovan producers rely almost exclusively on foreign partners. In the CIS countries, these partners tend to be part of networks developed during Soviet times, often reinforced through cross-ownership. In the West, the partners may be either clients in outsourcing arrangements or joint venture partners. In either case, they provide market information, handle customs formalities in the destination countries, and distribute goods to end consumers. For imports of fast-moving consumer goods (FMCG), distribution channels are fairly well organized. Similarly, market access channels for the construction materials industry, perhaps the major beneficiary of the surge in demand sparked by the rise in workers’ remittances, are among the most sophisticated. Several levels of distributors are organized geographically, and producers sell their products at varying discounts so that prices for end consumers are the same no matter where they buy. July 2004 • Draft Page 8
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