The document discusses Moldova's economic development and foreign assistance. It notes that while Moldova has received official development assistance (ODA) for 16-17 years, the impact on economic development is unclear as Moldova went from the highest per capita income in the Soviet Union to one of the poorest countries in Europe. It finds that ODA focuses more on social sectors and governance rather than the real economic sectors, questioning the utility of ODA for economic development. A reorientation towards addressing specific economic problems and constraints could help spur productive activities and ultimately improve social conditions.

1. Institute for
Development and
Moldova’s Foreign Policy statewatch Social Initiatives
“Viitorul”
Issue 11, September 2010
Foreign assistance
and Moldova`s econoMic
developMent
Valentin Lozovanu and Viorel Gîrbu
Next topics
Moldova’s Foreign Policy Statewatch represents a series of brief
analyses, 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 in
international organizations and peace building activities in the region. Moldo-German
It aims to create a common platform for discussion and to bring
together experts, commentators, officials and diplomats who are relationship
concerned with the perspectives of European Integration of Moldova.
It is also pertaining to offer to Moldova’s diplomats and analysts a
valuable tribune for debating the most interesting and controversial
points 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 statewatch
Statement of the problem
For the period January-June 2010, the external assistance accounted for 1490 ml MDL3 (122,13
ml USD) from which grants represented - 496 ml MDL (40,65 ml USD) and credits - 994,1 ml MDL (81,48
ml USD) (covering the 1305.3 ml MDL of budget deficit in a proportion of 76% or - 106,99 ml USD). The
total 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 ml
USD).
As one can see from the structure of ODA allocations, the largest foreign support is directed to the
macroeconomic stability (mostly IMF allocations designated to compensate the repercussions of the world
economic and financial crisis over the national economy), social sector and justice, while the assistance
allocated 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 2009
from de total amount of ODA), while real sector of the economy and regional development receives limited
support (9-7% and 10-8% respectively).
According to the information presented by the Ministry of Economy at the Economic Sector Council
on external assistance7, the estimated volume of the assistance necessitated by the real sector of the
economy is about 476,9 ml USD from which only 16 ml USD are covered from the budget resources and
external assistance.
The mentioned distribution of ODA in Moldova questions its utility for the process of economic
development 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 instead
of its causes.
According to IMF’s report (IMF, 2010) most of the additional revenues brought by higher than initially
estimated growth rate of the economy in 2010 will be directed to finance a 37 percent increase comparing
to 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 needs
of the population, and with improvement of the regulatory framework, good governance measures, than
with the problems faced by the national economy. This approach is unsustainable, as the increase in social
expenditures and involvement into ambitious institutional reforms, in order to be sustainable, have to be
financed 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 exist
in this area (high production costs, weak infrastructure, access to finance, technology and markets etc). In
this 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. Vasile
3 http://www.mf.gov.md/common/raportinfo/budget/national/lun/Anul2010/iunie_2010/Tab_1.pdf
4 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 07.01.09
6 Manufacturing, the industrial economy / rather than intangibles
7 In accordance with information held by the Ministry of Economy on May 11, 2010
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

3. Moldova’s Foreign Policy statewatch 3
Pușcaș, who mentioned that „While the Visegrad group has used pre-integration funds for infrastructure
and 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. From
2000 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 could
have a greater impact on Romanian economic development.
Comparative analysis
of the present donor’s approach
There are any known major experiences of the economic development in a particular country as
a consequence of the foreign assistance in the framework of so-called ODA. The one notable exception
constitutes the European Recovery Program applied in the post World War II in Western Europe, but still
this program was mainly as it follows from its name a recovery program and not entirely new, economic
development program. In any other cases of successful industrialization, easy distinguishable in the second
half of the past century, for instance in the South-East Asian region, economic development came from a
coherent 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 other
donors 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 acquired
only 8% from total. Also, the average annual number of donors present in Moldova easily goes beyond
twenty 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, given
its already weak capacities.
Taking into account that at least half of the donor resources are delivered in form of loans and the
assistance is mainly policy based directed for social sphere and public administration, ODA might finally
transform in Moldova into an unsustainable burden for the state budget, if no positive changes will be made
in the real economy.
The need of directed economic development is still not fully acknowledged in Moldova. “The
National Development Strategy does not give any solution for a timely economic catch-up of Moldova
rather this process is entrusted to the market forces” (Girbu, 2010, p.18). In addition, “business sector
environment 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 an
ordinary economic growth strategy followed by societies that are now at the economic development frontier
where the future economic setup is still obscure? Or it has to be a catch-up strategy where the tools and
technologies used by advanced economies, not only regulations are known and an efficient approach to
transfer 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 leading
economies, the importance of a specially established development fund/agency9 is essential to support
and build industries with high technological potential to accelerate modernization of the economic structure
and stimulate exports growth with subsequent job creation. Despite of it, “the need to create a national
development 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 Effectiveness
9 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, Saudi
Industrial 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 statewatch
Policy options
and recommendations
The situation described above contains risks, which may become critical in the near future for
the sustainability of Moldova as an independent state, if no action will be taken. A more experimental
approach should be adopted in Moldova that would take into consideration recent successful experiences
of economic growth. Development of its own active and interventionist economic growth strategy and not
exclusive reliance on ODA and market forces should become a priority for the Government. The necessity
to fully assume the responsibility for the country’s economic development has to be recognized by the
Government 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 even
subsidized financial resources in order to help them to build the capital stock and operational capacities to
efficiently compete with foreign companies. There is no virtual possibility for a company to grow up without
access to finances as for a plant to grow without water. The intensity of flowering is given by the disposability
of water in nature and the mode how the economic framework functions have no differentiation comparing
to the natural environment. In this respect, given the weak state of the banking sector in Moldova, the
necessity 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 foreign
investment and efficient protection of the national market that will give to the national companies time to
grow and develop. Under a crown of a well-developed tree, even the grass is not growing. There is no
surprise why not even one large and viable on foreign markets or even at the national scale business
didn’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 in
Moldova (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 that
formulate the approach of the Government to economic issues. Government of Moldova has to forget the
word “stability” until it will achieve positive changes in the level of economic and social development of
the country. Stability for Moldova in the present situation equates with persistence of high outflow of work
force/lost of citizens, corruption, human trafficking, weak economy, political uncertainty and impoverished
population. 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 national
economy 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 Thesis
Reinert, E. The Other Canon Foundation & Tallinn University of Technology, Ekoué Amaïzo, Y. UNIDO, Vienna and Kattel, K. Tallinn
University of Technology, The Economics of Failed, Failing, and Fragile States: Productive Structure as the Missing Link
Popescu, L. 2006, Optimizarea practicilor și politicilor Republicii Moldova de utilizare constructivã a ofertei asistențiale a UE
IMF Country Report No. 10/234, July 2010.
This publication was produced by idis “viitorul” with the financial support of soros Foundation
Moldova 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.org
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