Download The Elliot School of Foreign Affairs of George Washington University

The Center for Internatiopnal Private Enterprise (CIPE)
The Embassy of the Republic of Moldova to the United States
Institute for Public Policy, Moldova
Moldova’s European Way: Lessons from the Past and
Priorities for the Future
Ceslav Ciobanu,
VSU Eminent Scholar,
Professor of Economics,
PhD, Ambassador (ret.)
Washington, D.C. 17 March, 2011
Abstract
Nu pot exista îndoieli în privinţa opţiunii strategice de dezvoltare a Moldovei: viitorul
European prin democratizare, reforme economice, sociale şi politice. Chiar şi fosta
guvernare comunistă a adoptat acest slogan şi ritorica pro-europeană, aceasta însă nu a
împedicat-o să facă paşi concreţi în direcţie opusă, să omagieze clasicii marxismleninismului şi să depună coroane la monumentul lui Lenin cel puţin de două ori pe an.
Calea europeană a Moldovei s-a dovedit a fi mult mai anevoioasă decît s-a aşteptat.
După cum a menţionat Joe Biden, Vice-Preşedintele SUA, în adresarea sa recentă din
Piaţa Operei din Chişinău: “Oameni buni, schimbările politice sînt dificile. Reformele
economice sînt şi mai dificile, în special cînd şomajul este mare şi preţurile cresc”.
Pentru a identifica provocările şi oportunităţile în calea Moldovei spre prosperare şi
stabilitate, Ceslav Ciobanu, Profesor Universitar American, fost Ambasador al Moldovei
în SUA şi ex-ministru al privatizării, axează prezentarea sa pe următoarele componente:
1) învăţămintele din propria experienţă a Moldovei din perioada aşa numită
“romantica” a reformelor, anii 90; 2) “Momentul ascuns” al moştenirii comuniste; 3)
prioritizarea şi sicronizarea reformelor, vizînd îmbalanţele economice şi financiare
precum şi costurile sociale ale transformărilor; 4) Valorificarea eficientă a suportului
SUA şi altor donatori internaţionali în accelerarea reformelor.
Articolul Profesorului Ciobanu este bazat pe prezentarea sa la Centrul de Entrepriză
Internaţională Privată din Washington, SUA pe 17 martie 2011.
There is a little doubt about Moldova’s strategic choice: European future through
democratization, economic, social and political reforms. Even former communist government
adopted this slogan and pro-European rhetoric, along with very concrete steps taken in
opposite direction, tribute to the classics of Marxism-Leninism and wreath to Lenin’s
monuments at least twice a year. But Moldovan way to Europe proved to be hard, maybe
harder than anyone expected. As the U.S. Vice-President Joe Biden stressed in his recent
statement to the Moldovan people in Opera House Square in Chisinau: “Folks, political
change is hard. Economic reforms can be even harder, especially when unemployment is
high and prices are rising” 1.
Thinking about hardships on Moldova’s road to prosperity and stability, I would focus on a
few important issues: 1) lessons from the Moldova’s own past, particularly from the first
almost forgotten decade of independence, known as the romantic period of reforms in 90s;
2) a “hidden momentum” of communist’s heritage, which is not limited to just 8 years of
governance in 2001-2008; 3) prioritization and synchronization of reforms addressing
1
The White House. Office of the Vice-President. Remarks by Vice-President Joe Biden in Chisinau,
Moldova. March 11, 2011
2
economic and financial imbalances and bearing in mind the social cost of transformations; 4)
the U.S. and International donors assistance: how it can be efficiently used in support of
reforms.
1. At the start of Moldova’s transition from the communism and central planning at
beginning of 90s, the most important question was not about reforms. With exception of
communist hardliners, nostalgic for the defunct USSR, everyone agrees that radical reforms
are necessary. The most debated issues were how to promote them, what models to chose,
how to accelerate transition to a social oriented market economy. The Gorbachev’s
perestroika and glasnost’ of late 80s inspired Moldovan reformers and got an overwhelming
support from the people.
Let’s take just one example – mass privatization process: 95% of population received their
patrimonial bonds (vouchers) and 90% used them to privatize their homes, land, and other
assets owned by the government and offered for privatization. It is hard to imagine any
political party or leader to be advantaged with 90% of popular vote today and even then. In
the meantime this credit of confidence was gradually lost by the end of 90s due to a few
factors: first: the reforms required strong political will, unity and responsibility from the
ruling elites, but them were locked in internal fights for their own personal or class interests
rather on radical transformations in national interest; second, reforms were nor synchronized,
neither adjusted to the real situation and real needs of the people. Their social cost was to
high and especially painful for the old and retired who had been “forgotten in transition”, as
well as for the young generation, which was not so forgotten as never remembered, never
offered better chances for education, better jobs and better carrier opportunities in their own
country; and third, international assistance, although valuable, was not focused on what could
be called “arithmetic” of transition – the basic needs of populations, social protections,
education and healthcare programs, as to the “high mathematics” – structural adjustments,
restructuring assistance, etc.
Of course, it was an important period, when the seeds of democracy and future prosperity
were planted, but the harvest took the…communists. They came to power in 2001 on the
wave of democratization, popular discontent and populist promises, criticism of IMF, World
Bank and other International organizations. For example, one of the most important programs
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– land privatization called in Romanian “Pamintul” (land) was renamed by communist’s
propaganda in “Mormintul” (grave). In reality this program had been one of the most
successful and comprehensive reform that destroyed the bases of collective farms -kolkhozes,
- fortresses of communism in rural area, established and protected the ownership rights, led
to increased productivity of private agriculture, and settled an example for countries in the
region. Not accidentally in the last year World Bank’s Doing Business report, Moldova was
credited with an impressive ranking of 17 among 183 countries for “registering property”,
due to the land titling and private ownership of land with an efficient and low cost land
registration process. This is the only position where Moldova excels in this ranking compared
to its neighbors2.
Another forgotten lesson of 90s: reforms once started should be promoted firmly and
consequently with minimum government interference, but on government initiative and
under government supervision. This process was never a straight forward and in many cases
reminded the classics’ “one step forward – two steps back”. For example, when mass
privatization started in 1994 the government was very worried about an eventual imbalance
between the value of bonds distributed to population and the value of property submitted to
privatization for these bonds. To address this issue the government arbitrarily and artificially
increased the value of the state property and at the same time banned the privatization of
hundreds and hundreds of the so called “strategically important” state owned enterprises
(SOEs). Among them were Moldtelecom, electrical distribution networks, tobacco factories,
public utilities companies, wineries etc. In the end of this process, -1998, more than 20% of
state owned property designed for privatization against patrimonial bonds, was never
privatized. Some of these “strategic” SOEs are still under poor government management,
some other were “successfully privatized” to the “right people” during communist
governance, but most of them were just destroyed, stalled, lost and majority of people never
received the dividends for which they aspired. “Economies need a balance between the role
of markets and the role of government – with important contributions by non-market and
nongovernmental institutions”, mentioned Joseph Stiglitz, the Nobel Prize winner in
2
Moldova: Economic Growth Assessment. USAID Moldova, January 2010, p.7; Doing Business-2011:
Moldova ne uspela s reformami, by O.Nesterova, Logos Press, November 5, 2010.
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economics in his recent book “Freefall”3. In Moldova there always was (and still is) an
imbalance in favor of the government and its bureaucracy. That’s the explanation why in the
2011 Index of Economic Freedom Moldova continued to be classified as “partially free”
being placed on 120 position between Tonga, Malawi, Senegal and Cote d’Ivoire among 183
nations surveyed, with much lower than average scores on fighting corruption (33%),
protecting property rights (40%) and labor freedom (39%)4.
2. There is a notion in the Economic Development, which refers to the least understood
aspect of population growth – its tendency to continue after birth rates have declined
substantially. This built-in tendency, called “hidden momentum of population growth”, might
be compared with a speeding automobile: when the brakes are applied, it keeps going for
some time before stops5. This concept of “hidden momentum” could be used to explain why
Moldova’s economic model is still “skidding”, “sliding”, being characterized by some
Moldovan experts as a “fragile growth without development” in spite of impressive inflows
of foreign assistance, which of course, played an important role in macro-economic and
financial stabilization6.
The authors of the comprehensive Moldova’s Economic Growth Analysis (expert-group
headed by Valeriu Prohnitschi) pointed out on a few constraints that the new government of
the Alliance for European Integration (AIE-2) had to confront from the very beginning.
These constraints are first of all of financial, economic and institutional characters, such as an
economy in a free fall with 16% hole in the budget due to unfunded pre-electoral promises of
the communists Cabinet to increase salaries in public sector; -6.5% negative economic
growth in 2009 and substantial reduction of remittances from Moldovan workers abroad, and
hipper inflated, professionally incompetent and resistant (sometimes even subversive) to
reforms public administration inherited from the previous government7.
3
Freefall. America. Free Markets, and the Sinking og the World Economy, by Joseph E. Stiglitz.
W.W.Norton & Company, New-York, London, 2010, p.xii.
4
2011 Index of Economic Freedom, The Wall Street Journal, January 12, 2011; Modlpress, January 13,
2011.
5
Economic Development by Michael Todaro and Stephen Smith, Tenth edition, Pearson Addison-Wesley,
2009, p. 281.
6
Miraji moldavscogo rosta, by Irina Kovalenko, Logos Press, February 25, 2011, Nr. 7 (887).
7
Moldova Economic Growth Analys (MEGA), issue no. 3, December 2010, p.4 (http://www.expertgrup.org/library_upld/d287.pdf).
5
The “hidden momentum” – inertia of previously taken decisions, adopted laws, established
patterns and most importantly – anti-competitive (cartel) practice, monopolization and reprivatization of the most profitable businesses by the former Moldovan President
(V.Voronin) clan and its acolytes, are at the core of the inefficient economic model. During
communists’ ruling no single reform had been brought to its meaningful completion and the
results are respective: energy sector with its everlasting debts, outdated infrastructure with
the worst roads in the world, inefficient public sector with an expensive education system,
fragmented social assistance and high health spending, with corresponding indicators still
much below EU averages; fiscally unsustainable pensions system etc.
I would add to this murky picture of communist heritage a significantly increased migration
of the most educated and skilful Moldovan workers abroad, which remittances accounted for
almost a third of GDP, pushing Moldova among the top 5 world leaders on this indicator.
Outflows of Moldovan professionals, young talented specialists - “brain drain”- were caused
by discriminated selection of public servants according to the principle of “personal
devotion” to the communist Boss and not to their professional and moral qualities. To
overcome this heritage it will take not one and not two years. It will take even more to
change the mentality of people still indoctrinated by communist’s myths.
3. In 2010 Moldova’s economy registered one of the most vigorous post-crisis recovery with
the real GDP growth of 7%, which not only exceeds expectations of international and local
experts (IMF predicted 3.2%, EBRD – 4.5% and National Bank of Moldova – 5%), but
substantially outperformed other countries in the region (a decrease rates of growth and even
stagnation were registered in Armenia, Ukraine, Russia)8. It should be mentioned that this is
a still “jobless growth” model based on traditional for Moldova consumption pattern with
still high unemployment rate (6.5%) and low productivity growth, especially of SOEs.
According to experts, the mechanisms through which the global crisis affected Moldova,
worked this time in reverse, supporting the revival of the economy: exports exceeded 20%,
remittances increased – by 5%, accounting for more than $1.1 billion and foreign direct
investments – by 50%9. Interestingly, about a quarter of GDP formation represents the
8
9
Centrul Analitic Independent Expert-Grup, Express-analiza, by Ana Popa, nr.31, December 17, 2010
Realitatea Ecoomicda nr 16 – Radiografia Anului 2010, January 13, 2011.
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contribution of what National Statistics Bureau called “the elements of the unnoticed
economy”.
The robust economic growth with the projections to remain high during next few years (4-5%
annually) is an inspiring result of implementation of the “Economic Stabilization and
Recovery Plan” (ESRP) for 2009-2011 (October 2009). It was supplemented by “Rethink
Moldova” document (March 24, 2010) that established strategic directions of economic
development backed by unprecedented financial support from International donors - $2.6
billion, half of which in form of grants and another half – concessional credits10.
An important step in negotiation of an Association Agreement between EU and Moldova was
adoption of the Action Plan for the Deep and Comprehensive Free Trade Agreement, which
is expected to be signed in Brussels on May 5, 2011, at the next meeting of Moldova –EU
Cooperation Committee. The biggest challenges in its implementation will be further
liberalization of the market and its opening to loyal competition, especially in service sector,
efficient social protection policy, supervising closely the price changes and eliminating anticompetitive and monopoly practices.
In January 2011 the Moldovan government approved the Program named “European
Integration: Freedom, Democracy, Welfare” for 2011 - 2014 with clearly defined 7 priorities:
i) European Integration; ii) reintegration of the country; iii) efficient and balanced foreign
policy; iv) rule of law; v) fighting poverty, provision of high quality public services; vi)
sustainable economic growth, and vii) decentralization of power. By launching this Program
the Government is assuming the goal to change the development paradigm within next few
years: from consumption based economy to the knowledge economy based on investments,
innovations and competitiveness that could lead to a balanced and sustainable economic
growth and creation of new jobs11. Only in this way Moldova could overcome the existing
limits of growth estimated by experts to maximum 5% annually from traditional sources
while it needs at least twice as higher rates to catch up the development trends of Romania,
Bulgaria, and other peers in the south-eastern Europe12.
Realitatea Economica nr. 16 – Radiografia Anului 2010.
AIE-2 isi asuma schimbarea paradigmei economice. Journal de Chisinau, January 18, 2011.
12
Dorin Dragutanu, the President of the NBM considers that “the Republic of Moldova does not have
sources for more serious GDP growth than 5%. There are necessary more fundamental premises than
gastarbaiters’ transfers and the consumption growth, and exactly – the developed industrial basis and the
big investment flow”. Moldova has lowest interest rates on credits in its history, Infotag, November 5,
10
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7
Among priorities for the reform program I would mention:
First, increased efficiency of existing economic potential and sources of economic growth,
for instance - remittances, by creating conditions for their redirection from consumption to
investment (improve confidence of remitters in Moldova’s banking sector, public awareness
campaign and protection of property and consumers’ rights, legalization of shadow economy,
and introduction of modern banking instruments, such as on-line payments, savings,
encouragement of SMEs creation etc). Cumulatively during last 10 years remittances via
banks amounted for about $8 billion with only 6% of them invested, 20% saved and two
thirds used for consumption13. At the same time, as the assessment by the Global Financial
Integrity (GFI) showed, the currency outflows from Moldova during last decade equal to
$1.9 billion, or about $182 million annually. Among the main catalysts of the illicit financial
flows are bribe, corruption, theft, fiscal evasion, but the most spread is the distortion of the
value of goods at customs points14.
Second, improve the business climate, continue deregulation and liberalization of markets
and encouragement of fair competition that will bust privatization process, attract more
foreign direct investments (FDI) and could create necessary conditions for the new
knowledge and innovations based model of economic growth. The movement in this
direction already started when the government reduced by about a third the business
activities subject of licensing, eliminated about 120 products from the list of compulsory
conformity certification, implemented important reforms that placed Moldova in the top in
the region and the world on the fiscal and monetary freedom and freedom of commerce in the
2011 Index of Economic Freedom15.
Third, liberalization of trade, transportation and custom’s regime, removal of export
restrictions and adjustment of the national legislation to the European norms, improvement of
infrastructure, including banking services to facilitate the export of goods and services where
Moldova has a comparative advantage in the region, particularly in growing and exporting
2010; Republica Moldova pierde in competitsia economica cu tarile din regiune. Economist, BusinessExpert, September 17, 2010
13
Moldpress, January 6, 2011
14
Global finanacial Integrity: Moldova ranks 82nd in terms of illicit financial flows, Moldpress, January 24,
2011.
15
Moldova intre Malawi si Senegal, in topul libertatii economice. Moldpress, January 13, 2011
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high value added agricultural products, tobacco etc. Significant increased in export in 2010
with the forecast of its annual growth of 12% increase during next three years is considered
to be first sign of a new paradigm of the national economy’s development16.
Fourth, accomplishment of the public sector administrative reform, increasing its efficiency
and performances, including that of the SOEs and resuming of their privatization;
decentralization of powers and budget resources. This process started with downsizing of the
public administration by a few thousands, but is very slow and inefficient. The “marginal
(budget) cost“of apparatus is much bigger than its “marginal revenue” (tax contributions).
4. Last but not least, the role of the U.S and International donors assistance is unquestionably
crucial important for the success of Moldova’s economic recovery, democracy and reforms
on its way toward European integration. Along with substantial financial support for these
transformations, the recent visit of the U.S. Vice-President Joe Biden is a clear signal in
support of the Moldova’s Alliance for European Integration and its dynamic young
government. Moldova got attention on Capitol Hill due to Senator Richard Lugar initiative to
advance U.S. foreign policy objectives in Moldova and renew high-level engagement in
support of forging a solution for the protracted conflict in Transnistria, which is still a major
obstacle on the Moldova’s efforts to reintegrate the country and to its European integration
aspirations. In his Letter of Transmittal to the U.S. Congress Senator R.Lugar mentioned that
the Congress has “an opportunity to provide important support for Moldova’s Western
ambitious by graduating Moldova from Jackson-Vanik trade restrictions”17 . This bill has a
strong bipartisan support group of senior U.S. legislators and its adoption will install a
normal trade regime between Moldova and U.S.
The Jackson-Vanik amendment was enacted in 1975 to press the Soviet leaders to allow Jews
and other minorities to emigrate abroad, prohibiting the status of the most favored nation in
trade with the U.S. to countries with non-market economies and restricted emigration.
Although Moldova comply with all requirements of this amendment, joined the World Trade
Organization (WTO) in 2001, nevertheless receives only temporary exemption on a year-to
Economists see exports’ revival as first signal of economic growth. Moldpress, January 13, 2011;
Prognoz ekonomicheskoy nadezhdy, Logos-Press, March 4, 2011, nr. 8 (888).
17
Will Russia end Eastern Europe’s Last Frozen Conflict? A Report to the members of the Committee on
Foreign Relations. United States Senate. One Hundred Twelfth Congress. First Session. February 8, 2011.
16
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year basis. As John Todd Stewart, former U.S. Ambassador to Moldova, emphasized,
continued application of this amendment to Moldova “is simply an anachronism” and could
be explained just by “difficulty in passing what to the U.S. Congress is a less-than-significant
piece of legislation”18.
It is Moldova’s momentum19 and this time depends on Chisinau, but also on Washington and
Brussels how soon Moldova’s dream to reunite the Europe and become an EU member, first
from the Commonwealth of Independent States, will come true.
18
U.S.Senator wants trade sanctions lifted on Moldova, by Richard Solash, Radio Free Europe/Radio
Liberty, February 8, 2011.
19
Moldova’s Moment. By Mathew Rojansky and Lyndon Allin, The Moscow Times, March 11, 2011
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