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Foreign assistance and Moldova’s economic development

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  • 1. Institute for Development andMoldova’s Foreign Policy statewatch Social Initiatives “Viitorul” Issue 11, September 2010Foreign assistanceand Moldova`s econoMicdevelopMentValentin Lozovanu and Viorel Gîrbu Next topicsMoldova’s Foreign Policy Statewatch represents a series of briefanalyses, written by local and foreign experts, dedicated to the to be covered:most topical subjects related to the foreign policy of Moldova,major developments in the Black Sea Region, cooperation with opportunities ininternational organizations and peace building activities in the region. Moldo-GermanIt aims to create a common platform for discussion and to bringtogether experts, commentators, officials and diplomats who are relationshipconcerned with the perspectives of European Integration of Moldova.It is also pertaining to offer to Moldova’s diplomats and analysts avaluable tribune for debating the most interesting and controversialpoints of view that could help Moldova to find its path to EU. A lthough Moldova has benefited from Official Development Assistance (ODA) already for about 16-17 years the impact of it is doubtful. Moldova went from having the highest per-capita income in the Soviet Union to one of the poor countries in Europe.1 The present level of the country’s economic development incites various donor organizations to broaden even more their assistance programs2, but to what extent can ODA influence economic development in Moldova? 1 Moldova in 1994 had the highest domestic investment (55.8%) as a percentage of GDP, and its HDI index in 1995 was 0.7. 2 Donor`s Consultative Group Meeting on March 2010 pledge on US$2.6 billion to support Moldova over five years
  • 2. 2 Moldova’s Foreign Policy statewatchStatement of the problem For the period January-June 2010, the external assistance accounted for 1490 ml MDL3 (122,13ml USD) from which grants represented - 496 ml MDL (40,65 ml USD) and credits - 994,1 ml MDL (81,48ml USD) (covering the 1305.3 ml MDL of budget deficit in a proportion of 76% or - 106,99 ml USD). Thetotal executed budget revenues represent 1,239 ml MDL (100,93 ml USD), with ODA (grants with loans)constituting 12% and respectively 10.8% of budget expenditures. For the period 2008-2009, the main areas of interest for external assistance in Moldova constituted4: - Macroeconomic stability 63,78 ml USD5 (23,7% ODA) in 2008 and 74,95 ml USD (31% ODA) in 2009; - Social sector (health, education and social services) comprise about 52,6 ml. USD (22% ODA) in 2008 and 34 ml USD (14% ODA) in 2009; - Justice, preventing corruption and border management – 44,18 ml USD (18% ODA) in 2008 and 44,76 ml USD (18% ODA) in 2009; - Regional development - 24,79 ml USD (10% ODA) in 2008 and 20,5 ml USD (8% ODA) in 2009; - Real sector of economy6 – 22,7 ml USD in 2008 (9% ODA) in 2008 and 17,7 ml USD (7% ODA) in 2009; - Good Governance – 20,25 ml USD in 2008 (8% ODA) and 19,97 ml (8% ODA) in 2009. The allocations for 2009 year (239,28 ml USD) slightly increased comparing to 2008 year (234,08 mlUSD). As one can see from the structure of ODA allocations, the largest foreign support is directed to themacroeconomic stability (mostly IMF allocations designated to compensate the repercussions of the worldeconomic and financial crisis over the national economy), social sector and justice, while the assistanceallocated to the economic sectors amounted the same value as for 2009 year or even decreased. Social sector/ justice/ good governance are major beneficiaries of ODA (48% in 2008 and 40% in 2009from de total amount of ODA), while real sector of the economy and regional development receives limitedsupport (9-7% and 10-8% respectively). According to the information presented by the Ministry of Economy at the Economic Sector Councilon external assistance7, the estimated volume of the assistance necessitated by the real sector of theeconomy is about 476,9 ml USD from which only 16 ml USD are covered from the budget resources andexternal assistance. The mentioned distribution of ODA in Moldova questions its utility for the process of economicdevelopment in Moldova as it is often focused on, as Erik S. Reinert calls, “palliative” economic approaches(E. Reinert, Y. E. Amaïzo, R. Kattel, 2009, p 14), being directed to treat the symptoms of the disease insteadof its causes. According to IMF’s report (IMF, 2010) most of the additional revenues brought by higher than initiallyestimated growth rate of the economy in 2010 will be directed to finance a 37 percent increase comparingto the previous year in capital expenditures and over 50 percent increase in social assistance spending. Currently, the Government altogether with donors community are mainly concerned with social needsof the population, and with improvement of the regulatory framework, good governance measures, thanwith the problems faced by the national economy. This approach is unsustainable, as the increase in socialexpenditures and involvement into ambitious institutional reforms, in order to be sustainable, have to befinanced by a growing economy. By reducing the number of assisted areas and focusing on specific economic problems faced by Moldova,donors could give an impetus to productive activities in the country and address major constraints that existin this area (high production costs, weak infrastructure, access to finance, technology and markets etc). Inthis way, at the final stage, this approach will give an improvement of the situation in the social areas. A similar view in this prospect is expressed by the ex-chief negotiator of Romania to EU - H.E. Vasile3 http://www.mf.gov.md/common/raportinfo/budget/national/lun/Anul2010/iunie_2010/Tab_1.pdf4 Data from Donor mapping questionnaire (July 2009), presented at the Donor`s meeting from 24.06.10 http://www.un.md/donors/meetings/5 Exchange rate from 07.01.096 Manufacturing, the industrial economy / rather than intangibles7 In accordance with information held by the Ministry of Economy on May 11, 2010str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org
  • 3. Moldova’s Foreign Policy statewatch 3Pușcaș, who mentioned that „While the Visegrad group has used pre-integration funds for infrastructureand development of the market institutions, Romania (between 1993 – 2000) has used these funds - 70%for democratic development and 30% for developing of the market institutions and infrastructure. From2000 the percents has been reversed” (L. Popescu, 2006, p 25). The immediate conclusion of that remark is that an earlier concentration on the economic targets couldhave a greater impact on Romanian economic development.Comparative analysisof the present donor’s approach There are any known major experiences of the economic development in a particular country asa consequence of the foreign assistance in the framework of so-called ODA. The one notable exceptionconstitutes the European Recovery Program applied in the post World War II in Western Europe, but stillthis program was mainly as it follows from its name a recovery program and not entirely new, economicdevelopment program. In any other cases of successful industrialization, easy distinguishable in the secondhalf of the past century, for instance in the South-East Asian region, economic development came from acoherent and well coordinated government led process. In the case of Moldova, ODA is offered in an insignificant amount to produce any essential changes(World Bank annual lending portfolio represents about USD 40-50 ml, although contribution from otherdonors brings the total annual ODA for Moldova in the last years to the value of USD 200 ml USD8).According to the information presented by the World Bank during the whole period of its activity in Moldova,46% of the lent resources were directed for policy development, while financial and private sector acquiredonly 8% from total. Also, the average annual number of donors present in Moldova easily goes beyondtwenty units, without taking in the consideration the number of active donors led projects during one year.This situation annihilates the possibility of the Government to efficiently coordinate donor`s activities, givenits already weak capacities. Taking into account that at least half of the donor resources are delivered in form of loans and theassistance is mainly policy based directed for social sphere and public administration, ODA might finallytransform in Moldova into an unsustainable burden for the state budget, if no positive changes will be madein the real economy. The need of directed economic development is still not fully acknowledged in Moldova. “TheNational Development Strategy does not give any solution for a timely economic catch-up of Moldovarather this process is entrusted to the market forces” (Girbu, 2010, p.18). In addition, “business sectorenvironment in the country is plagued by the many social diseases habitual in the impoverished nations,but the major economic problem - the limited access to finance has not yet found an efficient solution”(Girbu, 2010, p.29). In this respect, “Moldova has to decide what development strategy to follow. Is it anordinary economic growth strategy followed by societies that are now at the economic development frontierwhere the future economic setup is still obscure? Or it has to be a catch-up strategy where the tools andtechnologies used by advanced economies, not only regulations are known and an efficient approach totransfer them to Moldova has to be found” (Girbu, 2010, p.26). As it is clear from the experience of the countries that succeeded to catch up with leadingeconomies, the importance of a specially established development fund/agency9 is essential to supportand build industries with high technological potential to accelerate modernization of the economic structureand stimulate exports growth with subsequent job creation. Despite of it, “the need to create a nationaldevelopment financial institution cannot be found in any strategic document in Moldova” (Girbu, 2010,p.26).8 According to the 2008 Survey of the Indicators of Paris Declaration on Aid Effectiveness9 to see the examples of Finland - Finnish Innovation Fund, (SITRA), Finnish Funding Agency for Technology and Innovation (TEKES),Finnvera, Estonia- Estonian Development Fund, Enterprise Estonia, Singapore Development Fund, Hong Kong SME Development Fund, SaudiIndustrial Development Fund, Chilean Economic Development Agency etc. str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org
  • 4. 4 Moldova’s Foreign Policy statewatchPolicy optionsand recommendations The situation described above contains risks, which may become critical in the near future forthe sustainability of Moldova as an independent state, if no action will be taken. A more experimentalapproach should be adopted in Moldova that would take into consideration recent successful experiencesof economic growth. Development of its own active and interventionist economic growth strategy and notexclusive reliance on ODA and market forces should become a priority for the Government. The necessityto fully assume the responsibility for the country’s economic development has to be recognized by theGovernment of Moldova, and efficient measures have to be taken to make it real. One important measure could be improved access for the Moldavian firm to cheap, or evensubsidized financial resources in order to help them to build the capital stock and operational capacities toefficiently compete with foreign companies. There is no virtual possibility for a company to grow up withoutaccess to finances as for a plant to grow without water. The intensity of flowering is given by the disposabilityof water in nature and the mode how the economic framework functions have no differentiation comparingto the natural environment. In this respect, given the weak state of the banking sector in Moldova, thenecessity to found with the state’s participation of a specialized financial institution has to be considered. Certainly, the financial assistance has to be added to a coherent state policy in the field of foreigninvestment and efficient protection of the national market that will give to the national companies time togrow and develop. Under a crown of a well-developed tree, even the grass is not growing. There is nosurprise why not even one large and viable on foreign markets or even at the national scale businessdidn’t appear in Moldova, even by now. Moldova is fully liberalized, open economy placed totally under the“shadow” of older and better-established economies, a rule which already became known by farmers inMoldova (and not only), but as it seems, not yet fully acknowledged by the central Government. Another issue is related to the principle of stability that is to be found in all major documents thatformulate the approach of the Government to economic issues. Government of Moldova has to forget theword “stability” until it will achieve positive changes in the level of economic and social development ofthe country. Stability for Moldova in the present situation equates with persistence of high outflow of workforce/lost of citizens, corruption, human trafficking, weak economy, political uncertainty and impoverishedpopulation. Proper word that could describe the Government`s will in Moldova should be “changes”,operated in all fields of the socio-economic life, and first of all in the role which Government plays in nationaleconomy that should become an active, interventionist one.References:Girbu, V. 2010, Problems and Prospects for Economic Growth in Moldova: A Critical View on Institutions, Master’s ThesisReinert, E. The Other Canon Foundation & Tallinn University of Technology, Ekoué Amaïzo, Y. UNIDO, Vienna and Kattel, K. TallinnUniversity of Technology, The Economics of Failed, Failing, and Fragile States: Productive Structure as the Missing LinkPopescu, L. 2006, Optimizarea practicilor și politicilor Republicii Moldova de utilizare constructivã a ofertei asistențiale a UEIMF Country Report No. 10/234, July 2010.This publication was produced by idis “viitorul” with the financial support of soros FoundationMoldova and the national endowment for democracy. The opinions expressed in this publicati-on reflect the author’s/authors’ position and don’t necessary represent the views of the donors.str. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.orgstr. iacob hîncu 10/1, chişinău Md-2005 republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax office@viitorul.org www.viitorul.org