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World Bank Document Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. 107502-MD MOLDOVA PATHS TO SUSTAINED PROSPERITY A Systematic Country Diagnostic August 2016 ii CURRENCY EQUIVALENTS (Exchange Rate as of August 15, 2016) Currency Unit US$1.00 = MDL 19.7648 Weights and Measures: Metric System ABBREVIATIONS AND ACRONYMS BEEPS Business Environment and Enterprise Performance Survey DCFTA Deep and Comprehensive Free Trade Agreement (EU) EU European Union FDI foreign direct investment GDP gross domestic product NBM National Bank of Moldova NCFM National Commission for Financial Markets OECD Organisation for Economic Co-operation and Development PISA Program for International Student Assessment (OECD) PPP purchasing power parity SOE state-owned enterprise Vice Presidents: Cyril Muller, Dimitris Tsitsiragos World Bank Country Director: Satu Kahkonen International Finance Corporation Regional Director: Tomasz Telma Senior Directors: Felipe Jaramillo; Ana Revenga Practice Managers: Ivailo Izvorski; Carolina Sánchez-Páramo co–Task Team Leaders: María E. Dávalos; Ruslan Piontkivsky iii Table of Contents Team members and acknowledgments ........................................................................................................ ix Executive Summary ...................................................................................................................................... 1 I. Introduction ........................................................................................................................................... 6 II. What makes Moldova unique? .............................................................................................................. 8 III. How has Moldova fared in advancing toward the twin goals? ....................................................... 13 IV. What has driven progress toward the twin goals? ........................................................................... 19 V. Can progress toward the twin goals be sustained? .............................................................................. 28 The driver of economic growth in the past, remittances, is slowing down ............................................. 29 The role of pensions is unsustainable ..................................................................................................... 30 The increase in the volatility of the climate and in the economy and politics ........................................ 31 VI. Creating more and better jobs ......................................................................................................... 34 Providing access to good-quality assets and services: closing the input gap .......................................... 38 Finance ................................................................................................................................................ 38 Electricity and water ........................................................................................................................... 39 Connectivity ........................................................................................................................................ 40 Human capital ..................................................................................................................................... 42 Strengthening the regulatory environment: closing the regulation gap .................................................. 43 The overall regulatory framework ...................................................................................................... 43 Sectoral regulations ............................................................................................................................. 44 Trade facilitation and the framework for integration .......................................................................... 45 Improving public and private sector governance: closing the implementation gap ................................ 46 The rule of law and the judicial system .............................................................................................. 46 Governance and Competition.............................................................................................................. 50 Macroeconomic management ............................................................................................................. 54 VII. Building up and protecting the stock of assets of the population .................................................... 57 Preparing people for the labor market ..................................................................................................... 57 Education and skills ............................................................................................................................ 57 Health care .......................................................................................................................................... 60 Barriers and disincentives to employment .......................................................................................... 62 The increasing equity, quality and coverage of services ......................................................................... 66 Infrastructure services ......................................................................................................................... 66 iv Quality of institutions ......................................................................................................................... 67 Efficiency and spatial equity of spending ........................................................................................... 70 Reducing vulnerability and improving the resilience of the population ................................................. 71 Climate change and environment risks ............................................................................................... 71 Social protection systems .................................................................................................................... 72 VIII. Priorities for poverty reduction and shared prosperity in Moldova ................................................ 75 IX. Knowledge and data gaps ............................................................................................................... 82 X. References ........................................................................................................................................... 84 Annexes ...................................................................................................................................................... 88 Figures Figure 1. Openness to trade, 2014................................................................................................................. 9 Figure 2. Remittances as share of GDP, 2014 .............................................................................................. 9 Figure 3. Population projections, 1990 = 100 ................................................................................................... 10 Figure 4. Aging challenges index ............................................................................................................... 10 Figure 5. Average municipal area (square kilometers) in the EU27 and Moldova, 2011 ........................... 11 Figure 6. Contextual and structural factors, Moldova................................................................................. 13 Figure 7. Poverty headcount ratio, 2000–05 (national and regional poverty lines) .................................... 14 Figure 8. Poverty headcount ratio, 2007–14 (national and regional poverty lines) .................................... 14 Figure 9. Inequality indicators, Moldova, 2007–14 .................................................................................... 14 Figure 10. Consumption growth among the bottom 40, 2008–14 .............................................................. 14 Figure 11. Growth in income and consumption among the bottom 40 and the total population (shared prosperity indicator), Europe and Central Asia .......................................................................................... 15 Figure 12. GDP per capita and moderate poverty headcount ($5-a-day), Europe and Central Asia, 2013 16 Figure 13. Poverty headcount in urban and rural areas, 2007–14 ............................................................... 16 Figure 14. Income sources, by poverty status and location, 2014 .............................................................. 17 Figure 15. Poverty headcount, by region, 2007–14 .................................................................................... 17 Figure 16. Education level, poor and nonpoor adults ................................................................................. 18 Figure 17. Dependency ratio, the poor and nonpoor ................................................................................... 18 Figure 18. Employment status, poor and nonpoor ...................................................................................... 18 Figure 19. Employment sector, poor and nonpoor ...................................................................................... 18 Figure 20. GDP growth, 2000–15 ............................................................................................................... 19 v Figure 21. Real GDP index, comparator countries, 2006–15 (2007
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