Moldova - ECONOMY

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Moldova - THE ECONOMY

Historically, the region now encompassed by the Republic of Moldova was poorly developed. Economic activity was principally agricultural, rural poverty was endemic, and the urban economy, such as it was, was based almost entirely on commerce, food processing, and the production of consumer goods. Development prior to the mid-eighteenth century lagged for a variety of reasons, but principally because of limited resources and political instability. The region of Moldova was relatively backward in comparison with the rest of Romania.

The Economy in the Soviet Period

Under Soviet rule, the Moldavian ASSR (1924-40) experienced considerable industrial development between the two world wars, particularly in and around Tiraspol, the site of new manufacturing activity. After World War II, substantial industrialization occurred throughout the Moldavian SSR (1940- 91), especially in Chisinau, but with a continuing focus on Transnistria as well. In addition to further developing the foodprocessing industry, the government introduced the textile, machine tool, and electronics industries.

Until independence, Moldova's economy was organized along standard Soviet lines: all industry was state owned, as were commerce and finance. Approximately one-third of all enterprises were subordinate to the economic ministries of the Soviet Union, and two-thirds were subordinate to republic-level authorities. Agriculture was collectivized, and production was organized principally around state farms and collective farms.

The Moldavian economy, robust in the 1970s, slowed down somewhat in the early 1980s and contracted sharply in 1985, mainly as a result of declining activity in the wine sector, a casualty of Gorbachev's antialcohol campaign. In the late 1980s, the economy briefly regained strength and grew faster than the economy of the Soviet Union as a whole.

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Moldova

Moldova - THE ECONOMY - Independence and Privatization

Once independence was achieved, Moldova's government undertook measures to begin privatization, which included passing a law mandating privatization and establishing the State Department for Privatization to direct the process. The overall reform policy was guided by "The Draft Economic Reform Program of the Government of Moldova," a 1991 document calling for establishment of a market economy but permitting significant provisions for government intervention.

In late 1992, the government presented Parliament with a more market-oriented policy in its "Program of Activity of the Government of Moldova for 1992-1995." Its goal was to form a new social pact as a basis for a new society and economy for Moldova. The two-part program would first aim at stabilizing the country and then provide for the economy's recovery and growth by such means as agrarian and trade reform, social protection, and a legal framework for a market economy. The direction of the new government was elaborated in the "Program of Activity of the Government of the Republic of Moldova for 1994 to 1997," which was adopted by Parliament and which focuses on restructuring the economy, reorganizing enterprises, privatizing small and mediumsized enterprises, promoting entrepreneurship, decreasing the budget deficit, implementing an efficient fiscal policy, and formulating new mechanisms to create a market economy. Another bill, the "Program for Privatization for 1995-1996," was approved by Parliament in March 1995. It focuses on foreign investment, privatization of agricultural land, the introduction of cash auctions, mass privatization, and the development of capital markets. Over 1,450 state enterprises are to be auctioned off.

During 1992 enterprise privatization committees inventoried assets at each enterprise in the republic; the aggregate result of this inventory became the basis of calculations of Moldova's total industrial wealth. Each citizen was to be provided with vouchers (or Patrimonial Bonds) in 1993, endowing him or her with a share of this total wealth based on years of employment in the economy. Citizens would receive one voucher point per year of work in the republic. Enterprise employees were to be allowed to purchase up to 30 percent of the value of their enterprises at nominal value. By special arrangement, 40 percent of the value of enterprises in the food-processing sector was to be allocated to suppliers. The program was to be completed by the summer of 1995. As of the beginning of 1995, Moldova had 4,400 state and 57,000 private enterprises.

Employees of collective and state farms were also to be provided with vouchers based on the length of their employment in the agricultural sector. In January 1992, Moldova expanded the amount of free land that eligible families would receive from state farms to 0.5 hectare per family, with an additional 0.1 hectare to be added for fourth and subsequent family members up to a maximum of one hectare per family, on the condition that it not be resold before 2001 (although it could be bequeathed).

Collective and state farms were to be converted into jointstock companies first, and the land and property were to be allocated later. In 1993 Moldova had 481 small private farms; by 1995 this number had increased to 13,958. In 1995 1.5 percent of agricultural land in Moldova was held by these small farmers. The reasons for slow privatization of the agricultural sector include slow privatization of large organizations, the use of outmoded production methods and equipment, poor accounting practices, and a shortage of processing facilities.

At the same time that privatization plans were under way, actual reform efforts were halting and relatively ineffectual, and Moldova's economy declined. A number of factors contributed to the decline, including the complicated political situation in the republic (which had seen several changes of leadership in its first years of existence) and the political and military conflict with Transnistria. Substantial industrial capacity is located in Transnistria, and the disruption of traditional economic ties with enterprises there has had a negative effect on the economy of right-bank Moldova.

Further, because Moldova's economy was firmly embedded in the broader economic structures of the former Soviet Union, it also suffered damage from the breakdown in interrepublic trade, abrupt increases in external prices, and inflation resulting from the Russian government's policy of printing large amounts of money. (Moldova retained the Russian ruble as its currency until November 1993.) The consequence of all these factors has been a substantial economic downturn in both industry and agriculture, accompanied by increased unemployment and a decline in labor productivity. In 1991 Moldova's national income was only at 1985 levels. Moldova's industrial output in early 1995 was half of the output of 1990. Moldova's gross domestic product (GDP) declined by 30 percent in 1994 (by 5 percent in 1993 and by 28 percent in 1992), and its industrial output declined by 34 percent (by 12 percent in 1993 and by 27 percent in 1992).

Moldova

Moldova - Labor Force

Moldova's labor force still reflects the structure of the economy under communism. In 1991, 78 percent of the population employed outside the home worked in the state sector, 19 percent worked on collective farms, and 3 percent worked in the private sector. The private sector employed 9 percent of the workforce in 1995. In early 1995, the official unemployment rate was 1 percent, but experts put the real rate at between 10 and 15 percent.

Moldova

Moldova - Agriculture

At the time of Moldova's independence, agriculture continued to play a major role in the country's economy, as it had during the Soviet period. In 1991 agriculture accounted for 42 percent of the net material product (NMP) and employed 36 percent of the labor force.

The organizational backbone of independent Moldova's agriculture continues to be its system of former state and collective farms, one-quarter of which were transformed into joint-stock companies by 1994 and are now owned in shares by the people who work them. In 1993 Moldova's 600 collective farms covered 16.2 million hectares of land and employed 401,300 persons; in the same year, its 389 state farms encompassed 600,500 hectares of land and employed 168,200 persons. Agricultural output from private farms increased from 18 percent in 1990 to 38 percent in 1994.

Moldova possesses substantial agricultural resources; its climate and fertile soils (1.7 million hectares of arable land in 1991) support a wide range of crops. The country is an important regional producer of grapes and grape products, and its orchards produce significant amounts of fruit, including plums, apricots, cherries, and peaches. Fruit production is concentrated in the north, in the central region, and in the Nistru River area. Tobacco is also an important commercial crop. Sugar beets are grown throughout the republic and provide raw material for a substantial (although antiquated) sugar-refining industry, and sunflowers are grown for their oil. Cereal crops, including wheat, are grown widely (corn is the leading grain) and are used for domestic consumption, export, and animal feed.

Meat accounts for less than half of total agricultural production. In 1991 about half of total meat output was accounted for by pork (145,000 tons), followed by beef and veal (97,000 tons), chicken (56,000 tons), and lamb (5,000 tons). From 1990 to 1994, the amount of arable land used for livestock production decreased by some 25 percent; the number of livestock in 1994 was 400,000.

Probably the most widely known products of Moldova are its wines, sparkling wines, and brandies, which were recognized as among the finest in the former Soviet Union. In 1991 these accounted for 28 percent of the output of the food-processing sector, followed by meat processing with 22 percent of production and fruit and vegetable processing (including the production of canned fruits and vegetables, jams, jellies, and fruit juices) with 15 percent. Moldova also produces sugar and sugar products, perfume, vegetable oils, and dairy products.

Approximately half of Moldova's agricultural and food production is sold to former Soviet republics. Traditional markets are Russia, Ukraine, and Belarus.

Agricultural production has been in serious decline since the late 1980s, both in terms of overall production levels and in terms of per-hectare production of most crops. Overall agricultural output in 1991 was at 1970 levels. A number of factors contributed to the decline, including difficulties in providing necessary inputs and agricultural machinery, disruption of the transportation system, failures in the incentive system, difficulties related to political instability in Transnistria, Gorbachev's anti-alcohol campaign, and, not the least, Moldova's variable weather. In 1990 a drought resulted in a serious decline in production. On the heels of the drought, 1991 saw a spring freeze, severe summer flooding, and then the worst drought in some fifty years. Overall agricultural output in 1993 was down 15 percent from the previous year; grain production, one-third less than in 1991, was particularly affected (especially corn, which was down over 50 percent on average). The trend continued into 1994 when drought and storms with hurricane-force winds caused agricultural output to decline 58 percent from 1993 levels. Although Moldova was traditionally a wheat exporter, it had to import 100,000 to 200,000 tons of wheat as a result of a 1994 harvest that was 800,000 tons less than the harvest of 1993.

In fiscal year (FY) 1992, Moldova participated in the United States Department of Agriculture's P.L. 480 Title I program, which provided US$7 million in long-term credit for government-to-government concessional sales, offered repayment terms of ten to thirty years (with grace periods of up to seven years), and provided low interest rates. Moldova's line of credit was scheduled to increase to US$10 million in 1993.

By the beginning of 1994, total United States assistance to Moldova included approximately US$12 million in technical assistance, in support of Moldova's transition to a market economy and democracy, and US$68 million in humanitarian assistance. In 1995 the United States was scheduled to provide US$22 million in technical assistance for economic restructuring and privatization. This amount brings total United States assistance to Moldova since 1992 to more than US$200 million.

Moldova

Moldova - Industry

In 1991 industry accounted for approximately 38 percent of the NMP and employed 21 percent of the work force. Some of the main products of Moldova's industry include electrical motors and equipment, pumps for industrial and agricultural use, and agricultural equipment, including tractors and automobile parts. There is also a small chemical industry, which produces plastics, synthetic fibers, paint, and varnish, and a construction industry, which produces cement and prefabricated reinforcedconcrete structures.

The Moldovan consumer goods industry in the early 1990s was faced with the same problems affecting the rest of the Moldovan economy. The supply of cheap fuels and raw materials, provided to Moldavia under the Soviet economic system (under which Moldavia specialized in consumer goods and agricultural products), dried up with the demise of the Soviet Union and the hostilities in Transnistria. Together with high inflation, the cost of goods went up tremendously, sometimes doubling in the course of one year.

In 1991 consumer goods accounted for 22 percent of Moldova's industrial output; the textile industry accounted for approximately 50 percent of this, and food processing accounted for 40 percent. Clothing manufacturing made up another 29 percent of total production.

In 1994 Moldova had eleven military-goods producing enterprises. Attempts were being made to convert ten of them to civilian production. However, these facilities were operating at only 15 to 20 percent of capacity, as compared with the industrywide average of 40 percent of capacity. As a result, conversion prospects were not bright.

Moldova's heavy industry is almost entirely the product of development during the Soviet period. Machine building predominates within heavy industry, accounting for 16 percent of total industrial production.

Moldova

Moldova - Energy and Fuels

Among the most pressing difficulties facing the republic's economy is a near total lack of energy resources. Moldova's own primary energy sources consist of small hydroelectric power plants on the Nistru River at Dubasari and Camenca (Kamenka, in Russian); minor thermal electric power plants at Balti, R�bnita (Rybnitsa, in Russian), Ungheni (Ungeny, in Russian), and Chisinau; and firewood, all of which combine to meet only 1 percent of domestic needs. A coal-fired power plant was under construction at Cuciurgan (Kuchurgan, in Russian), in Transnistria, in 1995.

Another source of problems is the fact that almost 90 percent of power and 100 percent of power transformers are produced in politically troubled Transnistria. In addition, Transnistria's adversarial "government" has frequently disrupted the flow of fuels into Moldova from Russia and Ukraine.

Moldova has an electric power production capacity of 3.1 million kilowatts, and it produced 11.1 billion kilowatt-hours of electricity in 1993. By 1994 electricity production had decreased 14 percent in comparison with 1993. Over the same period, thermal electric production decreased 22 percent.

Despite its lack of energy resources, the country continues to export some of the electricity it generates to Romania and Bulgaria. However, these exports have been cut back (the countries receive electricity only to the extent to which they supply fuel). Some electricity shortages have occurred in Moldova, mostly in winter, and have been dealt with by rationing. Much of the country's generating equipment (which is not produced by Moldova) and approximately one-quarter of its transmission and distribution lines are in need of repair.

In the early 1990s, energy shortages were prevalent, and energy availability was sporadic, leading to disruptions in economic activity; imports of coal, natural gas, diesel fuel, and gasoline declined by an estimated average of 40 percent from 1991 to 1992. In 1994 the picture was somewhat different. Gasoline imports were up 33.6 percent and coal imports increased 15.4 percent, while imports of diesel fuel, mazut, and natural gas fell 25 percent, 51.5 percent, and 3.1 percent, respectively.

In 1994 Moldavia was dependent on Russia for 90 percent of the fuel needed for its electric-power generation plants: diesel oil (88,000 tons), gasoline (65,000 tons), fuel oil (365,000 tons), and natural gas (2.8 billion cubic meters). By March 1995, Moldova owed Russia US$232 million for fuel, with half of this amount owed by the "Dnestr Republic."

Moldova had started paying off this debt in goods, including agricultural products, but beginning in late 1994 the government paid these debts by giving Gazprom, the Russian state-controlled gas company, equity stakes in key Moldovan enterprises. In January 1995, Moldova gave control of Moldovagas, the state-owned gas company, to Gazprom.

Moldova

Moldova - Banking and Finance

Moldova's banking system, part of the Soviet system during the communist era, underwent major changes in 1991. The National Bank of Moldova (NBM), established in June 1991 and modeled on the Bank of Romania, is subordinate to Parliament. It has an extensive set of monetary policy instruments (such as maximum lending rates and reserve requirements) and is legally responsible for bank supervision. However, shortages of trained staff and a lack of experience in making and executing monetary policy caused the NBM difficulties in its early years.

In 1995 Moldova's banking system was composed of the NBM and twenty-six private, joint-stock commercial banks, including the Joint Bank for Export and Import (Banca Mixta Pentru Export i Import). In 1995 the largest commercial banks were Moldindconbanc, Banca de Economii, Banca Sociala, Agroindbanc, Victoriabanc, and Interprinzbanca. The banking system also includes four branches of foreign (Romanian and Russian) banks.

After Russia enacted economic reform measures in January 1992, Moldova liberalized prices for most of its commodities (except bread, milk, energy, utilities, and transportation) and raised other prices by 200 to 425 percent. Price controls were eliminated gradually, with none left after May 1994.

In early 1995, the average monthly rate of consumer inflation was estimated at under 5 percent. This represented a major improvement, as the annual inflation rate had been 105 percent in 1994, 415 percent in 1993, and a staggering 1,500 percent in 1992.

In the early years of its independence, Moldova used both the Russian ruble and the Moldovan coupon (issued only to residents of Moldova) as its currencies. The leu was introduced in November 1993 to replace these currencies and to escape the inflation in other former Soviet republics. It has remained reasonably stable against major hard currencies despite the country's high rates of inflation.

Moldova