On the need for a new growth paradigm in Moldova and the role of the Moldova 2020 strategy

1. On the need for a new growth paradigm in Moldova and the role of the Moldova 2020 strategy ApostolosPapaphilippou Chisinau, 28 July 2011

2. Characteristics of growth in Moldova to date • Consumption-driven • Mainly in non-tradable sectors • The importance of remittances A growth accounting decomposition of growth in Moldova to date indicates: • The primacy of growth in the economy’s Total Factor Productivity over the period (and to a lesser extent of new investment and the addition to the economy’s stock of capital). • In contrast total employment was reduced (with the swift away from the agricultural sector accounting for some of the growth in the economy’s Total Factor Productivity over the period)

3. Limitations of the existing growth model in Moldova • Limited area for further catching up : Moldova’s growth record to date reflected also the initial condition characterized by significant unemployment (or under-employment) of productive resources • The inherent limitations imposed by Moldova’s small domestic market • Well-known characteristics of remittances regarding their volatility and their likely evolution through time • Empirical work suggesting limited growth prospects in the economy under a “no policy change” scenario

4. A new growth paradigm increasingly relying on investment attraction and export led-growth • Circumvents the limitations of the current growth model • Is conducive to a sustainable supply-side response (based on the specialization in areas of comparative advantage and the dynamic gains associated with investment-attraction and export-led development) • Of particular importance given: (i) Moldova’s significant FDI potential; and (ii) the limited intermediation between savers and borrowers under current conditions • Challenge: to facilitate the required shift in Moldova’s growth paradigm through time, taking into account: • The continuing importance of migration and remittances in the medium term; and • Moldova’s longer-term aspirations

5. On the Moldova 2020 strategy and its draft priorities • Long-term vision aligned to Moldova’s aspirations, and road map focusing on growth and development challenges • Supplemented by the maintenance of macro-stability and fiscal sustainability, and efforts to facilitate export penetration • Will generate resources for sustainable growth, employment creation and well-targeted poverty-reduction interventions All 7 draft priorities have a clear focus on economic growth and address key issues for Moldova’s socio-economic development: • Three priorities arise out of the binding constraints to growth diagnostics, namely: road infrastructure investment, education sector reform, and financial issues linked to access to capital • The remaining capture issues of importance for socio-economic development, with positive externalities for growth and investment attraction: the business climate; energy sector reform; the pension and social insurance system, and justice sector reform and the fight against corruption

6. Key issues for the strategy’s success: country ownership, implementation capacity and commitment • Reliance on comprehensive country-specific diagnostics with clear focus on sustainable growth and development Will be supplemented by consultation and co-ordination processes to facilitate implementation, monitoring and evaluation: • Periodical assessment to ensure diagnosis remains relevant • A co-ordination process to assist the action plan’s efficient implementation and its link to resource availability through time – linking the annual update with the budget process; and • Wide, periodic and effective consultations with stakeholders in the development process to: promote consensus, improve the strategy and its efficient and accountable monitoring and evaluation