MOLDOVA’S TRANSITION TO DESTITUTION MOLDOVA’S Moldova’s Transition to Destitution PER RONNÅS AND NINA ORLOVA BY PER RONNÅS AND NINA ORLOVA Per Ronnås is presently the Director of the Nordic Institute of Asian Studies in Copenhagen. His principal professional interest is the economic and social development challenges faced by the socialist/transition countries in Eastern Europe and Asia. Close to the heart of Europe, Moldova has suffered a severe peacetime decline in economic performance and Nina Orlova presently works in Moldova as coordinator of a project support- living standards during the past decade. Exploring differ- ing the reform of public administration and strengthening of local govern- ments, financed by Sida and implemented by the Swedish Institute for Public ent mechanisms both on the macro- and micro-economic Administration, SIPU. levels and in different sectors, Per Ronnås and Nina Orlo- va discuss the external debt, the foreign trade, the politi- cal and institutional development as well as the social effects of the crisis. The conclusion entails tentative lessons for future outside assistance. Sida studies THE SIDA STUDIES-SERIES OFFERS A SELECTION OF THE REPORTS AND STUDIES COMMISSIONED BY DIFFERENT no. DEPARTMENTS AT SIDA. THE SELECTION IS MADE TO REFLECT ISSUES OF RELEVANCE TO SIDA’S POLICIES AND PRACTICES, BUT EACH REPORT EXPRESSES THE VIEWS OF ITS WRITER(S). Swedish International Development Cooperation Agency Adress: SE–105 25 Stockholm, Sweden. Visiting adress: Sveavägen 20, Stockholm. Tel +46 8 698 50 00, e-mail: [email protected]. Sidastudies no. www.sida.se Moldova’s Transition to Destitution Sida Studies can be ordered by visiting Sida’s website: www.sida.se Sida Studies can also be ordered from Sida’s Information Centre. E-mail: [email protected] Tel. +46 8 698 55 80 The Sida Studies-series offers a selection of the reports and studies commissioned by different departments at Sida. The selection is made to reflect issues of relevance to Sida’s policies and practices, but each report expresses the views of its writer(s). Sida Studies no. Copyright: Sida and the author(s) - --- The studies in the series are selected by an appointed committe within Sida. Series Editor: Anne Sisask Graphic Design: Johan Nilsson/Kombinera Cover Photo: Thomas Raupach/Phoenix Printed by Novum Grafiska AB, Gothenburg Art. nr. Moldova’s Transition to Destitution BY PER RONNÅS AND NINA ORLOVA Sidastudies Foreword by Sida Moldova is one of the countries given priority in Sida’s cooperation with Eastern and Central Europe. Sida initiated its activities in Moldova in . The number of activities and the different sectors involved have in- creased during the last few years. Sida’s cooperation with Moldova promotes institutional development and capacity building – especially in the social sectors, and for democrat- ic development and economic reforms. The following are some examples: •We are cooperating with the World Bank in the Social In- vestment Fund. A Sida grant has enabled thirteen schools to be refurbished and it is expected that a further fifteen social projects will receive grant funding. • Capacity building is provided for the mayors and local decision-makers in two “judets” (regions). This has result- ed in well-balanced local annual budgets. • The Sida-supported debt management programme re- duced Moldova’s foreign debt in by million, which is approximately % of the total state debt. • Among the other projects we would like to mention the World Bank Land Cadastre Project that is receiving Sida funding for a period of five years. Furthermore a district heating strategy is currently being produced. In order to achieve fully-fledged consolidated cooperation with Mol- dova, Sida is planning to open a country office with a Swedish represen- tative in the capital city, Chisinau. It is our wish that this study will contribute to increasing interest in and knowledge of Moldova in Sweden, within Swedish authorities and among Swedish partners. Stockholm, October Staffan Herrström Kristina Salomonsson Deputy Director General Area Manager Table of Contents EXECUTIVE SUMMARY ....................................................................................... 10 PREFACE .......................................................................................................... 13 1. INTRODUCTION ................................................................................... 15 2. TRANSFORMATION OF THE ECONOMY ................................................. 19 2.1 Agriculture ..................................................................................... 19 2.1.1 Development of Agricultural Production ................................ 22 2.1.2 The New Private Sector and the Road Ahead ......................... 23 2.2 The Industrial Sector ....................................................................... 26 2.2.1 Privatisation ....................................................................... 28 2.2.2 Rural Enterprises ................................................................ 31 2.3 The Energy Sector: An Achilles’ Heel ................................................. 32 3. EXTERNAL IMBALANCES ..................................................................... 36 3.1 Foreign Trade ................................................................................. 36 3.1.1 Failure to Re-orient Exports .................................................. 40 3.1.2 The Impact of the Russian Crisis on Foreign Trade .................. 41 3.2 Balance of Payments and the Foreign Debt ....................................... 43 3.3 The Main Causes Behind the Debt Problem ....................................... 46 3.4 The Costs of Debt Servicing ............................................................ 47 3.5 The Role of International Lending ...................................................... 48 4. POLITICAL AND INSTITUTIONAL DEVELOPMENT ................................... 51 4.1 Early Detachment ........................................................................... 51 4.1.1 Brief Civil War...................................................................... 52 4.2 Harmonious Inter-Ethnic Relations .................................................... 52 4.3 Towards Political Pluralism .............................................................. 53 4.4 Political and Administrative Reform .................................................. 56 4.5 Present Issues and Problems ........................................................... 59 4.5.1 Vast Diversity in the Political and Institutional Scene ............... 59 4.5.2 Geopolitical Orientation ....................................................... 61 5. THE PUBLIC SECTOR IN CRISIS ............................................................ 64 5.1 Effects of Honouring the Debt .......................................................... 69 6. THE SOCIAL DRAMA ............................................................................ 72 6.1 Mechanisms behind the Falling Living Standards ................................ 72 6.1.1 Inflation ............................................................................. 72 6.1.2 Sharp Fall in Wages and Other Incomes ................................ 73 6.1.3 The Collapse of the Public Social Security System ................. 76 6.2 Changes in Income during Transition ................................................ 77 6.2.1 Income Inequality ................................................................ 79 6.3 Expenditure, Consumption and Nutrition ........................................... 80 6.3.1 Access to Medical Care and Education ................................. 83 7. CONCLUSIONS AND LESSONS ............................................................. 85 7.1 The Economic Decline ..................................................................... 85 7.2 Comparing with the Baltic Countries ................................................. 87 7.3 Tentative Lessons ........................................................................... 89 7.3.1 Understanding the Complexity ............................................. 90 7.3.2 Timelines, Relevance, Appropriateness.................................. 91 7.3.3 Need for Pluralism .............................................................. 92 7.3.4 Give Transition a Human Face ............................................... 93 7.3.5 In Need of Europe ............................................................... 95 7.3.6 Foster Economic Growth ..................................................... 97 7.3.7 Start in the Agricultural Sector ............................................. 99 7.3.8 Political and Institutional Development ................................ 100 7.3.9 Balance of Payment and Budget Support ............................ 101 7.4 The External Debt ......................................................................... 103 7.5 To Build Upon ............................................................................... 105 REFERENCES .................................................................................................. 108 GLOSSARY...................................................................................................... 111 NOTES ON THE AUTHORS ............................................................................... 112 Executive Summary Moldova probably holds the unenviable record of having suffered the most devastating peacetime decline in economic performance and living standards of any