Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment INTRODUCTION This report summarizes the findings of an assessment of competitiveness in the Moldovan economy requested by USAID under the umbrella of the BIZPRO/Moldova project, implemented by Development Alternatives, Inc. (DAI). BIZPRO staff and visiting consultants conducted this assessment over a period of four weeks in May 2004, although related activities are continuing. This analysis of strategic competitiveness issues relied on DAI’s Market-Driven Competitiveness Appraisal (MDCA), which links competitive performance to evolving market architectures in terms of demand patterns and preferences, rules and incentives, and competitor behavior. The MDCA seeks to identify strategic priorities as a basis for building consensus. This report represents an interim step in a continuing effort to foster competitiveness and productivity growth in the Moldovan economy. Part I offers a succinct summary of the findings on issues that cut across the economy—the policy environment, the market architectures, and quality assurance system. It also provides highlights of the analysis for clusters selected for closer scrutiny on the basis of performance indicators, in particular their performance in competitive export markets. These clusters include wine; agribusiness, especially fruit and nuts; light industry (textiles and apparel, leather goods); and information and communications technology. Part II presents more detailed reports on crosscutting issues and assessments of the selected clusters. COMPETITIVENESS FOR MOLDOVA:THE KEY TO PROSPERITY The path to prosperity for Moldova lies in rapid productivity growth for both labor and capital. Sustained productivity growth is the mark of competitiveness. On that score, Moldova’s economy on the whole falls short. The country today is Europe’s poorest. A growing number of Moldovans are working abroad: at the current rate, workers’ remittances may equal gross foreign exchange earnings from all merchandise exports in 2004. Outside of their traditional markets to the East, Moldova’s exporters are competing primarily on the basis of low wages for an often highly skilled labor force. At the same time, low labor costs do not protect Moldovan producers of consumer goods for the domestic market against increasing competition from imports. Neither exporters nor enterprises competing with imports get much help from the government, which continues to hew to policies virtually designed to increase the cost of doing business and to sap the country’s competitive potential. Yet the picture is by no means all bleak. In a difficult environment, some of Moldova’s enterprises increasingly manage to compete successfully, to survive and even prosper in competitive markets. The country’s exports to the EU 15 are gaining market share in growing and stable markets there. Apparel producers are moving along the upgrade path from just sewing, to cutting and sewing, and on to private label production. The need to meet quality standards and certification requirements in new markets is putting increasing pressure on the country’s quality assurance infrastructure, which shows some signs of responding, albeit hesitantly. July 2004 • Draft Page 1
Development Alternatives, Inc. / BIZPRO Moldova Moldova Competitiveness Assessment The challenge for Moldova is to leverage emerging capacities, to raise productivity levels throughout the economy, and to improve the competitiveness of the country’s producers, in domestic as well as export markets. Meeting that challenge demands a carefully articulated strategy, focusing on areas of economic activity that have a high payoff in terms of productivity gains. THE ENVIRONMENT FOR COMPETITIVENESS Competitiveness means different things to different people. For our purposes, it simply stands for a firm’s ability to meet (or exceed) productivity standards in the marketplace on a sustained basis. Productivity, in turn, is the ratio of the value of a good or service—what consumers are willing to pay for it—to the value of all resources used in its production. Productivity growth flows from innovation. The rate of innovation—not just major leaps forward, but particularly small incremental improvements in product and process—in turn depends on incentives and capacity. Incentives are largely determined by the business environment, shaped by both policy and customs. In terms of innovative capacity, all evidence points to the importance of market linkages, both with complementors—suppliers, clients/customers—along the value chain and with competitors, in the form of joint action and formal or informal information exchanges. The term cluster, stripped of all its quasi-ideological connotations, refers to this particular combination of vertical linkages with complementors and lateral linkages to competitors. The quality and intensity of linkages—economic as well as social—in a cluster drive systemic efficiency or productivity. They determine transaction costs and shape innovation. In fact, in Organisation for Economic Co-operation and Development (OECD) parlance, clusters are innovation networks. The structure of market linkages, the market architecture, not only influences innovative capacity, but affects competitiveness directly. Understanding and adapting to the rules, institutions, and channels of the market interface between consumers and producers, between suppliers of inputs and upstream services, and between enterprises and factors of production (labor, capital, land, and technology) are critical for achieving sustained productivity growth. This issue is central for Moldova’s export economy, which faces a still unfamiliar market architecture in the West, with a sophisticated and evolving set of standards, consumer expectations, distribution channels, and supply chain features, and a more familiar one to the East, still largely shaped by the rules and relationships of the Council for Mutual Economic Assistance (COMECON) days, but yielding rapidly to new structures. Changing architectures in the export market help explain Moldova’s export performance. The three dimensions of competitiveness—the firm, the business environment, and market architectures—provide the overall analytical framework. DAI’s competitiveness appraisal focuses on both the policy environment, sometimes characterized as national competitiveness, and on market linkages for selected clusters that have demonstrated competitive potential in key markets. It touches only in passing on issues of competitive strategy at the level of the individual firm. July 2004 • Draft Page 2
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