Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment Source: Mattila, ibid. Figure 13: Cost per standard minute in the apparel industry Moldova’s second advantage derives from the persistence of excess capacity and the lack of alternative employment opportunities that allow for quick responses to incoming orders. Laid-off workers can be recalled on short notice to fulfill a particular order. Third, Moldova’s geographic location between East and West confers a potential advantage of speed to market. As its neighbors to the west are becoming integrated into the European Union, buyers there are looking further east, but are still seeking to retain geographic proximity. The potential speed to market may in fact favor Moldova when quotas are phased out completely by January 1, 2005. Moldova’s apparel producers have been gaining market shares in recently (2001-2003) growing EU markets. These product categories account for US$73.2 million of apparel and textiles exports, or just about US$50 million without the bed linen (HS 6302) produced in Transnistria. For another US$32 million, Moldova’s apparel producers have been losing market in growing EU markets. Constraints Weaknesses in the transport services sector, especially trucking, have led a number of apparel producers to acquire and operate their own trucks. This pattern is a symptom of critical bottlenecks in the value chain for a key export article. Normally, the skills required to operate a competitive apparel or textile operation are quite different from those for transport services providers. If apparel manufacturers find that they can operate the needed services at a lower cost or with higher quality or reliability, there is a clear issue of either incentives or capacity, or both. While this assessment did not study the road transport sector in any detail, one of the barriers to its modernization is the lack of appropriate financial instruments or services, such as leasing. July 2004 • Draft Page 23
Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment 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. The study estimated that these policy-related costs add over 20 percent of the value added to the the free on board (FOB) price, that is, the price of a traded good excluding the transport cost, of garments produced in Moldova. The World Bank study also included Chamber of Commerce charges for such items as Certificates of Origin, export licenses, and the like, as a cost element. Our own research, however, suggests very strongly that these processes have been streamlined to an extent that exporters do not consider them in the least onerous. Assessment 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 location favorable to sophisticated apparel markets. At the same time, some larger producers remain mired in the low value-added segment of the cluster, limiting themselves to Consequence Management (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, creating greater incentives to move up the value-added ladder than penalties for innovative activity. The rigidities in the system, and the poor performance of the financial system, preclude the emergence of supplier industries that could provide greater backward integration. Hides, Leather, and Leather Goods Skins, leather, footwear, and leather goods are among Moldova’s rising stars in the EU. However, export performance is highly concentrated. There is one state-owned producer of shoes (Zorile) that accounts for virtually all of the exports to the EU (Germany and Italy), working under contract to an Italian and a German shoe firm, a major brand. Altogether, the company is producing roughly 1 million pairs of shoes per year; it accounts for 13 percent on average of the German firm’s outsourced production. The activity is limited to assembly, with all materials and inputs imported duty-free under the EU’s Outward Processing Traffic protocol. The current arrangement reflects in part a learning process. Following independence, Zorile sought to compete in external markets on its own, only to be brought to the brink of bankruptcy; it survived only because of the lack of an effective bankruptcy system in Moldova. It is now considering the working arrangements as a kind of apprenticeship for surviving in global markets, and perhaps to move to higher value-added activities as a new generation takes over. For now, the contracts provide steady employment for the workforce, although there remains considerable excess capacity. July 2004 • Draft Page 24
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