Moldovas Economic Transition: Slow and Contradictory1 [627457]

Moldova's Economic Transition: Slow and Contradictory1

Stuart Hensel and Anatol Gudim
The extent of Moldova's economic collapse exceeded that of all the other former Soviet republics
following the break-up of the Soviet Union. This refl ected not only dislocation related to the secession of
Transdniestria shortly after independence, but also the unusually severe terms-o f-trade shock suffered by
Moldova at that time. During the communist era, Moldova had sent its agriculture-related output to
markets throughout the Soviet Union and had recei ved subsidised energy imports in return. This
arrangement collapsed spectacularly with independen ce, when Moldova found itself cut off from export
markets and, as Russian energy pr ices adjusted to world levels, face d with an exponential increase in
import costs. By the late 1990s Moldova's official economy had shrunk to around two-fifths of its late-
Soviet size, in contrast to most of the former communist economies in Central Europe, which had
managed to return to 1990 levels. Among the form er Soviet republics, only Georgia and Tadjikistan
approached the scale of decline experienced in Moldova.
This poor showing belies a number of policy successe s achieved in the early years of the transition
period, when Moldova earned a reputation as one of the leading reformers in the region. By the mid-
1990s, Moldova's policymakers had successfully tackled a number of first-generation reforms, such as
freeing up the vast majority of prices and liberalising domestic trade. Similarly, responsible monetary
policies had brought a relatively quick end to the h yperinflation experienced in the early 1990s, while
liberalised trade policies (on paper at least) paved th e way for Moldova to become one of the first CIS
countries to join the WTO. In terms of priva tisation, a mass voucher scheme launched in mid-1994
relatively quickly sold off the state-run small and me dium-sized enterprise sector . As a result, Moldova's
private sector now accounts for 80 per cent of official GDP, dominating not only the nascent services
sector but also agriculture, following the break-up of collective farms in the late 1990s, and industry,
following the post-privatisation restructuring of two- thirds of the country's manufacturing enterprises.
These achievements in moving towards a market, or at least a hybrid, economy have nevertheless failed
to bring any significant improvements to the lives of most Moldovans. Despite the relatively strong
economic growth recorded since 2000, Moldova still ranks as the poorest country in Europe.
Malnourishment and disease have proliferated since i ndependence, life expectancy has fallen, and per
capita GDP is now equivalent to that of many thir d-world countries. Even though average wages rose by
almost 50 per cent in real terms in 2000—2001, they remained under $2 per day and well below
Romanian or Russian levels. As wages cover less than two-thirds of the minimum consumer budget,
many Moldovans are forced to rely on the shadow economy or household garden plots to survive, and
have yet to feel economically any more secure. Acco rding to an opinion poll conducted in early 2003, as
much as 60 per cent of the population claimed that th eir personal situation had e ither not improved or had
actually deteriorated over the previous year, despite the strong economic growth and rising real wages
reported by official data.
The fall in Moldova's living standards since i ndependence has produced a remarkable exodus of
somewhere between one-fifth and one-quarter of the workforce in search of jobs abroad, primarily in
Western Europe and Russia. The remittances that these workers send home through official channels
amount to 15—17 per cent of the country's total GDP. Adding in the sums sent through unofficial
channels (legal and illegal) would d ouble that figure. Although this helps to stabilise the currency and to
sustain family members left in Moldova, it underlines the extent of Moldova's brain drain, which has
deprived the Moldovan economy of many of its youngest , most skilled and most entrepreneurial workers.

1 Source: The EU & Moldova. On a Fault-line of Europe. Edited by Ann Lewis. Federal Trust. London 2000.

A narrow economic base
The scale of labour migration since independence, and of the country's poverty more generally, underlines
the failure of elites and institutions to transce nd Moldova's unfortunate Soviet inheritance.
Notwithstanding the relative success of first-generation reforms, Moldova 's leadership has for the most
part dragged its feet in implementing the structural reforms needed to protect the country from economic
shocks. The break-up of the Soviet Union left Moldov a even more susceptible to these sorts of shock than
most of the other republics. Unlike many of the Cent ral Asian countries, for instance, Moldova lacked a
readily exploitable fuel resource to drive economic growth, export earnings or investment inflows.
Instead, Moldova entered the transition dependent on fu el imports and reliant on the sort of agriculture-
related exports that struggle to penetrate hard-currency markets.
Moldova's narrow agricultural economy is partly a function of geography, which endowed it with a
favourable climate and the fertile 'black earth' that cove rs more than three-quarters of its agricultural land.
It is also a function of the extreme economic concen tration favoured by Soviet economic planners. For
decades, Moldova acted as a major supplier of food and beverages to the other republics, providing
almost 20 per cent of the Soviet Union's grapes and wine, 30 per cent of its tobacco, and 10—15 per cent
of its fruit and vegetables. This economic concentrati on intensified even further after independence, when
Transdniestria's secession from the rest of the count ry deprived Moldova of much of its industrial
capacity, since Soviet planners had situated most of the country's heavy industry and electricity-
generating capacity in Transdniestria. The importance of the farming sector in the rest of Moldova rose
sharply as a result, and the industrial sector become disproportionately reliant on agro-processing plants.
These plants now account for over half of total indust rial output, with wine alone responsible for one
quarter of total manufacturing sales. In terms of exports, the economic concentration is even more
extreme, with agriculture and agro-processing accounting for nearly two-thirds of export revenue. (Please
note that all the statistics in this article, with th e exception of the section on Transdniestria, refer to
Moldova excluding Transdniestria.)
Moldova's unusually narrow economic base has rendered the need for mean ingful structural reform that
much more urgent. In order to reduce the serious risks posed by bad weat her, Moldova needs to
encourage the expansion of industries and services not related to the agricultura l sector. Even then, as
agriculture and agro-processing will inevitably remain of undeniable economic importance, Moldova also
needs to boost competitiveness in these traditional sectors. Without greater competitiveness, these sectors
will find it difficult to penetrate the EU market, wh ich offers no concessions to key Moldovan exports
such as wine, fruit or vegetables, yet appears to be the most obvious alternative to the less predictable
Russian market. Shifts in Russian trade policies and import demands have repeatedly underlined the need
to diversify into new markets, most notably follow ing the collapse in exports to Russia during the rouble
crisis in 1998, and more recently Russia's decision to introduce quotas for key Moldovan exports such as
sugar, tobacco and liquor.
During the early transition period (the first 5—7 year s), successive governments delayed the reform of the
agricultural sector and the privatisation of key sectors su ch as wine production, in spite of the urgent need
to address the economy's structural shortcomings. At the time of independence, Moldova inherited
collectivised farms accustomed to operating in a centr ally-planned environment in which market signals
did not apply. Enterprises had responded to administrativ e targets rather than consumer preferences, and
benefited from favourable procuremen t prices and subsidised inputs. Easy access to credit and soft budget
constraints had obviated the need to consider prof itability or efficiency. The agro-processing sector in
Soviet times featured similar distortions, as it could rely on a centralised production and distribution
system, captive markets within the Soviet Union and protection from competitors abroad.
Both the agro-processing and agricultura l sectors were therefore woefully ill-suited to compete in a more
market-oriented environment. They lacked efficien t distribution and supply channels, expertise in
packaging and marketing, and effective means of c ontrolling quality. Not least, distorted Soviet energy
prices had resulted in massively inefficient production techniques. Not needing to account for input costs,
Moldovan producers had largely ignored efficiency c oncerns and consumed several times more energy
per unit of production than Western producers.

On paper at least, Moldova's first attempts to tackle these structural issues came shortly after
independence. As early as December 1991, Moldov a approved a Land Code and began the process of
transferring land from state to private ownership. However, these reforms sought only to restructure
collective farms into joint-stock companies and ignored the need to reinvigorate the agricultural sector by
breaking up collective structures. Moreover, for the ne xt few years, the resistance of powerful vested
interests among collective farm managers, who we re well connected politically at both regional and
national levels, effectively blocked c onsideration of more substantial sector al reforms. Vested interests in
wine and tobacco, two of the most important processing sectors, prevented any significant restructuring
there as well, with parliament waiting until 2000 to approve at long last the legislation needed to privatise
the large enterprises that the stat e still controlled in these sectors.
Meaningful reform in the agricultural sector began only slightly before the decision to privatise the large
state-owned wine and tobacco enterprises. Attempts to break up collective farms picked up moderately
during the second half of the 1990s, but only really began with the launch of the National Land
Programme in 1998. This USAID- supported programme was designed to reduce the unwieldy scale of
Moldova's inherited agricultural enterprises by turni ng coUectivised holdings ove r to individual farmers
and business-like corporate farms. By the end of 2000, the National Land Programme had emerged as one
of the most successful projects of its type in the form er Soviet Union. Over a relatively short period of
time, it liquidated almost 900 collective farms, creating more than a 1000 debt-free agricultural
enterprises and hundreds of thousands of individua l landowners. These new owners formed peasant farms
and rural household farms, and now account for over 80 per cent of agricultural output. Despite concerns
about excessive fragmentation in the newly-reformed sector, preliminary evidence suggests that newly-
created small and medium-sized private farms ar e proving more productive than larger holdings.
The post-privatisation reforms under way in the agri cultural sector since 2000 have proved more difficult
than the initial privatisation programme. These fo llow-on reforms are needed to ensure effective
regulation of the various new relati onships that have emerged within the sector and to establish a market
infrastructure, including networks of agro-stor es and machinery stations, Western-style service co-
operatives and an efficient commodity exchange. Fa rmers also need improved access to advice and
expertise on legal, technical and marketing issues. Not least, the new private farmers require financial
institutions able to serve their needs, including through mortgage lending and savings and credit
associations.
The creation of viable market-based structures ha s proceeded only slowly. Although the process of
transferring land from less efficient to more efficien t agricultural producers is under way, it still occurs
primarily through leasing arrangements due to lim ited progress in developing a viable land market.
Similarly, the commodity exchange in operation sin ce 2002 remains for the most part experimental, and
has yet to result in a fully developed wholesale mark et for agricultural products. As a result, powerful
local actors continue to capture si zeable rents through their local-level dominance, and show little interest
in permitting the transparency which would be po ssible through more effective price signals and
liberalised commodity trade.
Moldova's slow progress on post-privatisation re forms has precluded anything but limited progress
towards addressing the negative trends apparent in the agricultural sector in recent years. These include a
reduction in the area planted to high-value crops (s uch as peaches and apricots) and an increase in the
area devoted to low-value crops (such as cereals and potatoes). There is also a continuing problem with
low productivity of both land and labour. This is lik ely to have worsened over the last decade, as
displaced industrial workers have gravitated towards the safety net offe red by the agricultural sector. The
government has lacked the means to invest in the irrigation system, and hardening budget constraints
have sparked a sharp drop in investment in key inputs such as fertiliser.

A sustainable basis for growth
The agricultural sector's productivity problems, coupled with the slow pace of economic diversification,
raise questions over the sustainability of the econo mic recovery under way in Moldova since 2000. At
first glance this recovery seems impressive. The cu mulative 16 per cent GDP growth recorded in 2000-
2002 has drawn a line under the protracted decline of th e preceding years. Annual inflation fell to a record
low during this period, and the currency remained rela tively stable, in contrast to the high inflation and
extreme currency collapse of the late 1990s. This in turn allowed the central bank to boost liquidity and
encourage lending by aggressively lowering in terest rates and remonetising the economy.
The government, for its part, has achieved a remarkab le fiscal correction. For years, Moldova's political
elites resisted adjusting their unrealistic expenditure commitments to fit a shrinking revenue base. In
particular, they proved unwilling or unable to tack le rent-seeking by vested interests eager to secure
preferential treatment or subsidies. Only once external funding dried up during the financial crisis of the
late 1990s did the government finally accept the need for fiscal consolidation. By 2002, it had narrowed
its budget deficit to under 1 per cent, from as mu ch as 10 per cent in the mid-1990s, and reduced
expenditure to below 25 per cent of GDP, from almost 40 per cent in 1996. This proved possible only
through a steep reduction in net lending to the enterp rise sector, better targeting of social assistance, and
the almost complete elimination of quasi-fiscal su bsidies, including directed bank credits to favoured
sectors.
However it is by no means clear that these impressive achievements will suffice to sustain the 6—7 per
cent annual growth rates promised by the governme nt over the medium term. Most importantly, the
optimistic official forecasts ignore the extent to wh ich a number of unusually fortuitous circumstances
have converged to drive economic recovery. Not l east, Moldova has benefited from favourable weather
conditions. The importance of this should not be u nderestimated in an economy as concentrated as
Moldova's, or with a similar past history of crises sparked by bad weather. An unusually strong recovery
in three key export markets, Russia, Ukraine and Roma nia, has also proved crucial. Just as plummeting
demand in these countries had catastrophic effects in Mo ldova in the late 1990s, so their robust recovery
has buttressed Moldova's macroec onomic stability since 2000. Finally, Moldova has capitalised on a
significant shift in relative exchange rates, caused by the leu's collapse during the regional financial crisis
of the late 1990s. Faced with a sudden rise in th e local-currency price of imports, and a corresponding
improvement in the price competitiveness of exports, Moldova has succeeded at least in reducing the
external imbalances that impeded growth in the 1990s.
Lagging investment
These favourable one-off factors cannot be counted upon to converge again in a similar fashion over the
medium term. Instead, the economy still appears vul nerable. Most importantly, investment since
independence has fallen well below what is needed to ensure the steady technological improvements
needed to build a productive and broadly-based econom y. Consumption, rather than investment, proved
instrumental in achieving the economic recovery of 2000—2002, with the rise in consumption in 2002,
for instance, considerably outpacing GDP growth. This reflects in part the increase in wages and pensions
achieved by the communist government, which fuelled a surge in consumption-related imports. As a
result, net exports remain a considerable drag on gr owth despite the currency's real depreciation and the
export sector's recovery.
The moderate 4 per cent rise in investment reported in 2002 should therefore be viewed against a very
low base. At under 17 per cent of GDP, fixed capital i nvestment in Moldova remains extremely low even
by regional standards. Neither the government nor the ente rprise sector appears able to invest to the extent
required, while inflows of foreign direct investme nt, let alone portfolio investment, are negligible
compared with the more dynamic transition economi es in the region. A total of only around $725m in

FDI has flowed into Moldova since independence. This translates into around $200 per head, compared
with around $1000 in Poland and $2000 in Hungary.
Even Russian investors, who are most familiar with Moldova and relatively cash-rich after several years
of high oil prices, have only belatedly begun to co mpensate for the limited interest showed by their
Western counterparts. Russian companies have only recently begun to consolidate their presence in
Moldova, which lies across key routes for Russian exports to South-Eastern Europe. In the last few years,
Russian investment has begun to flow into infrastru cture projects, including gas transportation, the
production and distribution of electricity, rail transpor t, Danube port facilities, fuel storage and petrol
stations. The presence of Russian companies is gr owing in Moldova's wine and machinery sectors.
However, without more interest from Western inv estors, investment inflows into Moldova remain
insufficient. In theory, at least, the communist administration is open to Western investment. The
government's programme acknowledges the importance of FDI, particularly in the light of Moldova's
inadequate natural resources and lo w personal and corporate incomes. A series of conflicts between the
Moldova authorities and foreign investors has nevert heless sent opposite signals . The government decided
in early 2002 to review the list of foreign invest ors benefiting from income tax exemption (shortly after
unveiling its 'Investment Strategy fo r the Republic of Moldova') and h as presided over some controversial
renationalisation plans since coming to power. Some of the worst publicity has involved the largest
Western investor, Union Fenosa, wh ich has seen the legality of its purchase of three of Moldova's five
electricity distributors in 2000 questioned in court.
Reforming the busi ness environment
Even without these high-profile cases, Moldova woul d still struggle to attract significant inflows of
Western FDI. Not least, the country is handicapped by its less than ideal endowment, which includes a
small domestic market and the unresolved issue of Tr ansdniestria. Neither the current administration nor
its predecessor has done much to compensate for this. To a large extent, this reflects the power of vested
sectoral interests, and of state officials unwilling to surrender the prerogatives left over from their Soviet-
era role in running the economy.
The continued power of these groups has helped to de ter potential investors, and the expansion of the
SME sector more generally, by perpetuating an unpredictable legal environment and convoluted
procedures for obtaining licenses, permits, and certificates. For instance, the system of licensing
businesses has changed little since the establishment of a chamber to licence most types of business
activity in early 2002. The new chamber still needs to co-ordinate its decisions w ith the almost two dozen
ministries and departments that it has theoretically replaced. Similarly, registration procedures remain
costly and time-consuming. Entrepreneurs complain that it takes months to start a business, or that they
are discouraged even before registering, due to th e range of permits and au thorisations required from
local authorities. In a significant number of cases, this either precludes entrepreneurial activity completely
or else drives it underground.
Investors are further put off by the unstable a nd opaque tax system, which remains hostile towards
enterprises, and by problems of excessive inspect ions of enterprises. Although the authorities have
reduced the number of inspecting bodies, the process h as yet to become any more efficient. The various
inspecting bodies are still not subject to legal limits on the number of times they can inspect a given
enterprise, nor are they required to co-ordinate their activ ities with each other. Enterprises continue to
complain about excessive controls and the lack of professionalism of the inspecting authorities, and
generally avoid legal action in the knowledge that mo st court decisions favour the inspectors. Finally,
pervasive corruption remains a major concern. On most major scales of corruption, Moldova continues to
rank at or near the top for the region, generally ah ead of countries such as Russia and Ukraine. Despite
vowing to fight corruption on coming to power in 2001, the current communist lead ership has so far done
little to address the problem.

Moldova is not alone among transition countries in failing to address the shortcomings of its business
environment. In line with most other former S oviet republics, Moldova has struggled to establish
transparent and accountable institutions . As a result, powerful vested in terests have become entrenched
both in key economic sectors and within the bureaucr acy. They have benefited from the country's weak
and unaccountable political structures, which encourag e rent-seeking rather than entrepreneurship, and
have succeeded in slowing the structural reform s that might otherwise endanger their rents.
The reform process under the Comm unist Party of Moldova (CPRM)
Unlike much of Central Europe, Moldova's effort s to redress its skewed incentive structures and
accelerate reforms have not benefited from any credible promise of imminent EU membership. In the
more advanced transition countries, the promise of EU accession presented an effective means for
constraining policy options and forcing through tough decisions, while at the same time providing a
coherent framework for reform and technical as sistance. Although Moldova has long sought closer
integration, including through a PCA agreed in 1994, the EU has never been able to suggest that
accession is anything more than a distant, abstract possibility.
In the absence of a broad consensus united behind the goal of EU accession, the progress of reform in
Moldova has had to depend on the occasional appointment of reformers to key positions, as in the case of
the reformist government in 1999, or on the harsh r ealities created by Moldova's financing constraints.
The crisis in emerging markets in the late 1990s was a case in point. By putting an end to most external
financing inflows, it forced the government to work more closely with multilateral organisations and to
contemplate the sort of expenditure rationalisation it had long postponed.
The state's depleted financial resources have probabl y also helped to prevent a lurch away from reform
since 2001, when the CPRM won decisive control of parliament and subsequently the presidency. The
communists came to power on an anti-reform platfo rm and with a long-standing antipathy towards the
multilaterals. They tried initially to use their contro l of both executive and legislative branches to roll
back reforms passed by previous centre-right admini strations. In particular, the CPRM hoped to undo in
part the break-up of collective farms, re-assert state control over the allocation of agricultural inputs and
outputs, and reinstate a range of price controls. It is lik ely that financial constraints played a major role in
forcing the CPRM to retreat, however unwillingly, from this agenda.
Unfortunately for Moldova, the constraints imposed by depleted government coffers or the promise of
multilateral financing are hardly the same as a credib le promise of imminent EU membership. The CPRM
has only partially retreated from its state-centred econom ic agenda, and still hopes to achieve many of its
goals not through radical reforms but through ad ministrative methods, such as strengthened tax
administration, increased domestic borrowing, and le gislating minimum wage increases. Although some
of these measures have helped to raise incomes and contributed to economic expansion since the CPRM
came to power, the party's continued resistance to real reform is worrisome, and several of the most
important structural reforms have slowed noticeably since 2001.
The CPRM authorities appear reluctant to admit this , and in 2003 were still rejecting IMF criticism of
their slow progress in reform (reducing subsidies to agriculture, dismantling restrictions on exports and
privatising key sectors). In the end, the IMF and Wo rld Bank decided to suspend credit to the Moldovan
government due to its failure to comply with the co -ordinated terms. The government's attitude underlines
the ongoing internal debate within the CPRM over the need to accept reforms, a debate that has resulted
in considerable policy confusion. The results for 2003 are quite contradictory. While the country's GDP
continued to expand, inflation intensified, the trad e balance worsened, and state external and internal
debts increased. Most importantly, the CPRM has been unable to develop clear answers to several basic
questions, including how to improve the entrepreneurial and investment climate, how to bring the shadow
economy into the open, and how to deal with the pervasive problems of corruption. Until the government
finds answers to these questions, Moldova will strugg le to establish a sustainable basis for growth.

Transdniestria as a 'paral lel' developing region
The unresolved question of Transdniestria's political status has compounded this policy confusion.
Despite more concerted efforts since 2002 to address th e Transdniestria issue, the integration of the two
economies remains a distant prospect. To some exte nt, the reintegration process will benefit from the
range of economic links that have survived despite th e protracted political stand-off. The rest of Moldova
takes around a quarter of Transdniestria's exports, while the interests of private foreign investors have
ensured that some links have been re-established in a number of key sectors. However, over more than 10
years of quasi-independence, Transdniestria has bu ilt up a full range of parallel structures and a
legislative basis for its own banking sector, currency, tax system, trade regime and system of property
rights. Even with international assistance, the alignm ent of two separate financial, economic and social
systems promises to be a complicat ed and politically charged process.
Moreover, the process of reintegration will bring cons iderable short and medium-term costs for Moldova,
due to the poor state of Transdniestria's economy. This has seen far fewer struct ural changes than in the
rest of Moldova since the break-up of the Soviet Union. Although reform has speeded up somewhat over
the last two years, Transdniestria's leaders still retain considerable economic control. They play a leading
role in the joint-stock companies established in the industrial sector, and ha ve only recently begun the
process of reforming the agricultural sector, which has required significant government subsidies and
directed credits to avoid complete collapse. Alt hough the Transdniestrian government finally approved a
Land Code in 2002, in order to be gin reducing its role in the agricultural sector, a referendum on private
land ownership in April 2003 failed to s ecure the turnout needed for approval.
Delays in the structural reform process have brought similar problems to those experienced in the rest of
Moldova during the first decade of independence. These include extremely low levels of investment and
productivity, insufficent working capital, and widespr ead non-payment or barter transactions between
enterprises. Transdniestria has relied on only around a dozen exporting industrial enterprises to supply
more than two-thirds of GDP and the bulk of budg et revenue, and has needed easy credits and cheap
energy imports from Russia to disguise the uncompe titiveness of these enterprises. Forced to loosen
monetary and credit policies in order to compensate for the slow pace of reform and chronic external
imbalances, the Transdniestrian leadership precipitate d soaring inflation and a sharp currency decline in
the second half of the 1990s, as well as a considerable contraction in output. Although Transdniestria's
economy recovered briefly during the first three-qua rters of 2001, the Moldovan government cut this
short by introducing new customs procedures in Septem ber of that year as part of the country's WTO
accession requirements. The introduction of new Mol dovan customs seals, to which Transdniestrian
exporters were denied access, precipitate d a collapse in Transdniestria's exports.
Transdniestria's dire economic situation since late 2001 has at least helped to convince the region's
leadership of the need for some reforms, in th e hope of securing the investment inflows needed to
stabilise the economy and shore up the public finances. In addition to approving a new Land Code, the
Transdniestrian government has begun cash privatisati on sales of major industrial enterprises, including
the region's fixed-line telephone monopoly sold in Janua ry 2003. Other planned sales include stakes in
major strategic enterprises, including in the metall urgy and electricity sectors. Perhaps even more
importantly, the dislocation caused by the introducti on of the new Moldovan customs seals in 2001 might
also have spurred a greater interest in economic co-operation. Although Transdniestria denounced the
Moldovan government for imposing what it consider ed to be an economic blockade, the region's
leadership subsequently appeared more open to expandi ng bilateral ties. Transdniestria is more reliant on
exports than the rest of Moldova, and recognises that increased co-operation could help to overcome its
uncertain international status, which has impeded the investment and exports needed to ensure
macroeconomic and social stability.
For the whole of Moldova, closer economic co-ope ration and eventual reintegration promise obvious
benefits. Resolution of the Transdniestria issue woul d eliminate a major source of distraction and permit
greater investment and political stability. It would also help to broaden the country's narrow economy,
through access to the machine-building, light industry, el ectricity and metal sectors that are at the core of
Transdniestria's economy. However, reintegration on its own is unlikely to solve Moldova's problems. In

order to tackle its considerable economic difficulties, Moldova w ill above all need to improve its
administrative capacity and strengthen its existing in stitutions. In particular, Moldova needs a more
effective state administration in order to tackle wide spread tax evasion and exemptions, and to ensure the
allocation of resources based on more strategic prioriti es. More generally, it needs administrative reforms
to ensure a government responsive to citizens and less beholden to the powerful interests currently
entrenched within state structures and atop key sect ors. Reforms of this kind will prove critical if
Moldova is to achieve the robust long-term grow th needed to address problems of widespread
impoverishment, declining provision of even basic gove rnment services, and the continuing exodus of
much of the workforce.

Moldova's Main Macroeconomic Indicators

1994 1995 1996 1997 1998 1999 2000 2001 2002
"Real GDP (% change, year on year) " -30.9 -1.4 -5.9 1.6 -6.5 -3.4 2.1 6.1 7.2
as % of 1993 -30.9 -31.9 -35.9 -34.8 -39.9 -41.1 -39.9 -36.2 -31.6
Nominal GDP (Lei million) "4,737" "6,479" "7,798" "8,917" "9,122" "12,322" "16,020" "19,052" "22,040
Nominal GDP (USD million ) "1,165" "1,441" "1,694" "1,929" "1,698" "1,171" "1,288" "1,481" "1,624"
GDP per head (USD) 323 400 471 537 473 327 354 408 448
"Industrial output (% real change, year -27.8 -3.9 -6.5 0.0 -15.0 -11.6 7.7 13.7 10.6
as % of 1993 -27.8 -30.5 -35.0 -35.0 -44.8 -51.2 -47.4 -40.2 -33.9
"Agricultural output (% real change, -24.6 1.9 -11.9 11.4 -11.6 -8.4 -3.3 6.4 3.0
as % of 1993 -24.6 -23.2 -32.3 -24.6 -33.3 -38.9 -41.0 -37.2 -35.3
"Investments in fixed capital (% real -51.0 -16.0 -8.0 -8.0 10.0 -22.0 -15.0 11.0 4.1
as % of 1993 -51.0 -58.8 -62.1 -65.2 -61.7 -70.1 -74.6 -71.8 -70.6
Exports of goods (fob; USD million) 618 739 823 890 644 474 477 567 660
Imports of goods (fob; USD million) 672 794 "1,075" "1,238" "1,032" 611 770 879 "1,038"
Trade balance (USD million) -54 -55 -252 -348 -388 -137 -294 -311 -378
as % GDP -4.6 -3.8 -14.9 -18.0 -22.9 -11.7 -22.8 -21.0 -23.3
Curren t-account balance (USD million) -82 -98 -191 -275 -335 -69 -97 -95 -103
as % GDP -7.0 -6.8 -11.3 -14.2 -19.7 -5.8 -7.5 -6.4 -6.4
Foreign direct investment (nee yearly 18 73 23 78 76 38 129 156 110
State external debt (USD million) 506 659 766 "1,004" "1,003" 935 997 930 971
as % GDP 43.4 45.7 45.2 52.1 59.1 79.8 77.4 62.8 59.8
State internal debt (Lei million) 270 477 737 984 "1,572" "1,910" "2,022" "2,400" "2,821"
Consolidated bud get deficit (% of -5.8 -5.8 -9.7 -7.5 -3.3 -3.2 -1.0 0.0 -0.5
Nominal wage (monthly average; USD) 26.7 31.9 40.7 47.5 46.6 28.9 32.8 42.3 51.0
"Real wage (monthly average; % -40.8 1.6 5.4 4.9 5.5 -12.5 2.0 21.6 21.0
Consumer price inflation (end-period; 104.6 23.8 15.1 11.2 18.3 43.7 18.4 6.3 4.4
Consumer price inflation (annual 487.0 30.0 24.0 12.0 8.0 39.0 31.1 9.6 5.2
Exchange rate (en d-period; Lei/ USD) 4.27 4.50 4.65 4.66 8.32 11.59 12.38 13.09 13.82
Exchange rate (annual average; Lei/
USD)4.07 4.50 4.60 4.62 5.37 10.52 12.43 12.87 13.57

"Source: National Bank of Moldova, Departme nt of Statistics and Sociology, C1SR" 'A ll figures exclude Transdniestria, for which no suitable figures
are available." The data start from 1994 because previous years' statistics are unreliable.