Moldova and the Global Economic Crisis

Report by: Maia Otarashvili

May, 2013

Economy

Moldova struggled through multiple years of recession since its independence and the Russian ruble devaluation of 1998 had a deleterious effect on the economy, which finally started to rebound in 2000. From 2000 to 2008 the country’s economic growth averaged 6.3% and was driven primarily by consumption fueled by remittances from Moldovan migrant workers. Growth moderately stalled at 4.8% in 2006 and 3.0% in 2007 as a result of an unprecedented drought in 2007 and a 2006 ban on Moldovan wine imports to Russia[1], but quickly resumed in 2008 at 7.8%[2]. At the time Moldovan wines accounted for 1/3 of the country’s exports and 80% of the wine went to Russia. Despite the rapid GDP growth rates inflation remained a serious problem and it was only in 2008 that the inflation dropped below 10%, although keeping it at single digit levels remains challenging.

In 2009, at the peak of the global economic crisis, Moldova experienced a deep recession with -6% of GDP growth – a 13.8 point drop from the 2008 growth numbers. The economy was able to bounce back in 2010, and growth quickly resumed as a result of large scale international assistance. The World Bank reports that Moldova has staged a full recovery from the global economic crisis; however, 2012 growth statistics show a sharp decline at 3.5% of GDP.

Moldova’s initial recovery was mostly export-led as the Russian import bans and restrictive regulations on agriculture and new manufactured product exports eased, helping the private sector recover. Agriculture and food processing accounts for one-third of the country’s GDP. The recession also affected banks’ credit quality. In 2010 the situation in the banking sector improved, but lending conditions worsened despite expansionary monetary policy pursued by the National Bank.

Moldova’s economy remains overregulated and is weighed down by government control and large-scale corruption, forcing Moldovans over the years to migrate in increasing numbers to find work abroad. However, the global economic crisis and the EU financial crisis have forced many of those Moldovans to return home, causing the foreign remittances to decline, and the unemployment to increase.[3] Unemployment rates rose from 4% in 2008 to 7.4% in 2010 and to 7.2% in 2012[4]. More than one-quarter of Moldovan residents are living below the national poverty line, making Moldova Europe’s poorest country[5].

Democracy

Moldova is currently a transitional government or a hybrid regime as measured by Freedom House[6]. The country’s democratic performance has slightly improved since 2005, but has not changed categories. Between 2008 and 2010 the democracy scores worsened by mere 0.14 points, but 2011 and 2012 scores show a trend of positive improvement. Corruption culture is still highly present in Moldova, and according to the Freedom House studies no real improvement has taken place since 2007 in combating the systemic, large-scale corruption.

The economic crisis years were characterized by constant infighting in Moldovan politics. The ruling Alliance for European Integration (AEI) has pursued an ambitious program to support private investment and export-led growth, however high political uncertainty has complicated the implementation of the structural reforms. The impact of these setbacks is reflected in the modest 2012 growth rates.[7]A three year gridlock, preventing Moldova’s parliament from electing a president, damaged the pro-European government’s credibility and created a politically uncertain environment. The Communist opposition had systematically boycotted previous presidential votes and the parliament was not able to elect a president until March 2012, when Nicolae Timofti won the support of 62 deputies in Moldova’s 101 seat chamber[8].

The new president is faced with major challenges such as the separatist pro-Moscow Transdniestrian territory, large-scale systemic corruption and foreign policy challenges such as the EU integration plans and maintenance of strategic ties with the US, Romania and Russia.

Conclusion

Much of Moldova’s economic progress has been a result of globalization. Since Romania joined the EU, FDI inflows along with hopes of possible EU integration have increased for the country. Romania’s President Basescu has expressed his willingness to support Moldova on its path to EU membership and this new proximity with the EU has facilitated increased number of migrant workers whose remittances have helped the overall economic growth.

Moldova has made at best limited progress towards democracy since 2000, even though the economy has experienced a positive turnaround and, despite the global economic crisis, the growth rates have been more promising than before 2000. However, the continuing strength of the Communist Party, added to entrenched systemic corruption, and difficult relations with the breakaway region of Transdniestria are some of the major challenges for Moldovan leaders to resolve before democracy can become reliably rooted.

The extremely high influence of the Communist party should be alarming to the international community, as its presence has acted as a setback to the democratization processes and has provoked prolonged political infighting. Moldova’s democratization processes were not directly stalled by the global economic crisis, although the financial instability has acted as a contributing factor to the overall sense of uncertainty in the country. Despite these major challenges, some elements of a mature democratic framework have been put into place and all transfers of power (delayed or not) have been constitutional and have not provoked regressions to authoritarian rule.