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Business Week: Moldova: Hooked on Remittances

As young wage-earners continue to emigrate, this former Soviet nation becomes the country most dependent on money sent from abroad

Since independence from the Soviet Union in 1991, Moldova rarely gets mentioned without the accompanying phrases "failed state," "Europe's poorest country," or "the only post-Soviet nation with a Communist Party president."

Now there's a fourth—"the world's most remittance-dependent economy." According to the World Bank's Migration and Remittances Factbook for 2008, 36.2 percent of Moldova's GDP in 2007 came from money sent home by emigrants. The country tops the rankings together with Tajikistan.

Around 25 percent of the population has left to look for opportunity elsewhere, and many of those émigrés are young and educated, a vital segment of the work force.

This dependence on remittances highlights the vulnerability of a Moldovan economy hobbled by domestic strife, poor management, and, most recently, clashes with the Kremlin. At a time when some of their neighbors are reveling in newfound prosperity, the Moldovans should be hunting for the defibrillator. Yet the Communist Party-led government's track record doesn't promise much hope of progress from President Vladimir Voronin and new Prime Minister Zinaida Greceanii, whose cabinet was approved 31 March.

In truth, Moldova rarely gets mentioned at all—it has been called the country the West forgot—so a quick primer is helpful. Clamped between Romania and Ukraine, Moldova has a population of 4.3 million. Despite some western leanings, the government has tried to stay close to Russia and has neglected developing civil society by, for instance, allowing independent media. Moldova's economy remains agriculturally based, with a strong wine industry.

The transition to a market economy started with independence, but a significant reform package didn't come until 1994 under Prime Minister Andrei Sangheli of the Agrarian Party. Large-scale privatization of industry and agricultural land was at its center.

The transition has not gone well. Economic output plummeted 60 percent between 1991 and 1999. Today, Moldova's economy is arguably the weakest in Europe. Per-capita GDP is well under the Central European average, at just ,200, and nearly 30 percent of Moldovans are impoverished, according to the CIA World Factbook. True, average annual GDP growth between 2004 and 2007 was a robust 6.3 percent, but only because the economy had bottomed out; it could only go up.

To be sure, Moldova has faced daunting obstacles to modernization. The break and subsequent war with Transdniestria has been painful, as the region accounted for 45 percent of Moldova's industrial base. Transdniestria declared independence in 1990 fearing Moldova would one day reunify with Romania. Cozy with Russia, it's been a persistent annoyance ever since, though Voronin's 11 April meeting with Transdniestrian President Igor Smirnov, their first since 2001, signals progress.

That struggle contributed to Moldova's early economic belly flop, but today the Communist leadership is the biggest impediment to progress, according to Vlad Spanu, executive director of the nonprofit Moldova Foundation in Washington, D.C. While not overhauling the reform package of the mid-1990s since coming to power in 2001, the regime has leashed its chief objective—privatization—keeping a grip on the remaining state-owned companies. Communist leaders have also dragged their feet on crucial problems such as corruption and the weak media. The same goes for labor market inflexibility; it remains nearly impossible to fire someone in Moldova.

Such inflexibility, along with high levels of corruption and poor infrastructure, repels investors. FDI barely broke 0 million last year, compared with .4 billion in Romania, according to the Heritage Foundation's latest Index of Economic Freedom.

Exacerbating Moldova's troubles was the 2006 Russian ban on its wine exports. Criticized as retribution for Moldova's nascent interest in European integration, the ban cost Moldova dearly. Wine exports accounted for around 25 percent of GDP, with 80 percent going to Russia, so the entire economy was undercut. Russia has since relented, but exports haven't rebounded to pre-2006 levels.


Cleary, Moldova's economy is in a deep hole. Corruption, infrastructure, labor legislation, an over-dependence on agriculture and remittances—these are all problem areas. But the salient question isn't really where Moldovan leaders should focus their attention in this miasma of dysfunction—just focusing would be enough at this point—but whether they will, especially with elections approaching in 2009.

Voronin has intimated a desire to work on the economy, while Prime Minister Greceanii, a former finance minister, has said bolstering ties with the European Union is priority No. 1. That is especially encouraging, as European integration has invigorated the new Central and Eastern European EU members through increased investment, trade, and aid.

Many observers argue, however, that the current regime is too authoritarian to pursue the meaningful free market, democratic reforms necessary for a legitimate shot at EU accession, which, though Brussels has said it's willing to increase cooperation with Moldova, remains a distant prospect. These skeptics point to the government's inaction on corruption—Moldova ranks 111 of 179 countries on Transparency International's Corruption Perception Index 2007—and its renationalization of industry to support their argument.

Spanu is one such skeptic. Moldova's only hope for modernization and one day joining the EU, he says, is shedding its Communist leadership.

"In order for Moldova to move forward, they need to have a capitalist-minded government. You cannot become a part of Europe with Communist leadership," Spanu says, adding that the party is gradually losing ground. "Moldova needs to pursue this path—or else it will become Turkmenistan."

That's one dubious distinction Moldova certainly doesn't want.

Source: Business Week

by S. Adam Cardais

S. Adam Cardais has been writing about business and economics in the European Union since 2004. A former editor at The Prague Post, Cardais is now a business reporter based in Berlin.



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