Assessing Competitiveness In Moldova's Economy - Economic Growth

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