Foreign Assistance and Moldova’s Economic Development
Valentin Lozovanu and Viorel Gîrbu
Although 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 percapita 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?
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;
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.
Donor`s Consultative Group Meeting on March 2010 pledge on US$2.6 billion to support Moldova over five years
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
2
3
This project is supported and financed by
-
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
6
7
Manufacturing, the industrial economy / rather than intangibles
In accordance with information held by the Ministry of Economy on May 11, 2010
This project is supported and financed by
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 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.
This project is supported and financed by
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).
8
According to the 2008 Survey of the Indicators of Paris Declaration on Aid Effectiveness
This project is supported and financed by
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).
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.
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
This project is supported and financed by
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 project is supported and financed by