ReThink Moldova 2.0 – Moldova needs an investment and economic recovery plan. Commentary by Dumitru Vicol and Iulian Groza /// IPN.MD
The employment rate in Moldova is one of the lowest in the region. This puts pressure on the sustainability of finances and the pension system. Job creation and raising the employment rate is paramount. Economic growth should accelerate to 7.6% in the next decade to boost the employment rate by 10 p.p. Creating more jobs is not a mere political desire, but an element of national security. External partners assistance is crucial. That is why, despite the current political confrontations, the competent national authorities and responsible decision-makers must already strive for a clear and predictable vision, which will include a comprehensive investment and economic recovery plan for the country.
The labour force is shrinking, and the employment rate is too low
The year 2020 was dominated by the COVID-19 pandemic and the need for measures to support all those affected by the virus or the subsequent crisis. Approval of vaccines by regulators has propelled a dose of optimism over the recent months. Their accessibility and implementation of national vaccination programmes remains a challenge for emerging countries such as the Republic of Moldova. The Economist predicts that Moldova will be able to vaccinate the majority of its vulnerable population by early 2023. While vaccination programmes will remain the number one national priority, governments of the world will also focus on strengthening the resilience and the economic recovery to address medium- and long-term challenges.
The momentum of economic growth in emerging countries had already begun to moderate before 2020. The pandemic crisis further highlighted the structural weaknesses. In figure 1, we compare the average IMF forecast for economic growth for the years 2022-25. Here we dropped the year 2021 to eliminate the effect of the comparison base relative to the year 2020, with the average post-crisis economic growth for the years 2016-19 for similar countries like the Republic of Moldova. We note that a good part of this group of countries, such as Romania, Montenegro and Hungary – will feel a slowdown in economic growth in the medium run. Moldova is likely to have a pace of economic development similar to those before the crisis. But is that enough to create enough jobs?
Figure 2 illustrates the growth rate of the population over the age of 15 and the potential of the workforce in the next decade as predicted by the UN. Most countries similar to Moldova will experience a decrease in the working age population, and in our country this indicator will contract by 2.4%. A steady decline in the population, in combination with one of the lowest employment rates (Figure 3), will significantly diminish the Moldova’s potential to balance its public finances, the pension system and the political elite’s constant desire to raise wages. Therefore, job creation to increase the participation rate is imperative.
More jobs – an element of national security
Creating more jobs is strictly dependent on economic growth. Consequently, for the purpose of our analysis we calculated the GDP growth rate over the next decade, which would be needed to boost the participation rate by 10 percentage points from the current level of only 40.4%. The results of a simple regression between the GDP growth and the increase of the number of employees for the years 2001-2019 are shown in Figure 4. Thus, in the Republic of Moldova, the GDP growth by 1 p.p. generates an increase in the number of employees by 0.2 p.p., which represents a relatively low sensitivity, compared to the rest of the countries in the analysed group.
Therefore, in order to increase the participation rate by 10 p.p., the Republic of Moldova needs to generate an average economic growth of 7.6% per year in the next decade, which would be more compared to Armenia, Bosnia or Albania (Figure 5).
External credibility is paramount
We have argued in our previous analyses about the solutions to attract external assistance and on the economic recovery, that the Republic of Moldova would need in addition at least USD 135 million in public investments annually to boost the economic growth from 3.8% before the crisis to 5%.
An annual economic growth of 7.6% to raise the participation rate by 10 p.p. in the next decade would require additional public and private investment of at least USD 400 million per year. It is true that productivity in the Republic of Moldova, expressed as GDP per employee, is a relatively small one but is slightly higher than in Armenia, Albania and Ukraine (Figure 6). At the same time, the level of average wages in our country remains relatively competitive compared to some Balkan and Caucasus countries, for example (Figure 7).
A need for an investment and economic recovery plan
Attracting external funding to support public investment, increasing the productivity rate and create jobs in the real sector respectively will be crucial for overcoming the crisis and ensuring a sustainable economy of the Republic of Moldova.
The recent openness of the external partners encouraged by President Maia Sandu creates the necessary premises to radically change the course of Moldova’s economic development for the coming years. This unprecedented openness could be capitalized on in a tandem with a government backed by a stable pro-reform majority in a reset parliament.
The perpetuation of the political crisis, the lack of a government that comes with a complex vision of economic recovery of the country and is able to implement the necessary measures to capitalize on external assistance, will deepen the socio-economic crisis, delaying the development of Moldova and helpless citizens will remain hostages to narrow political interests of the group.
That is why, despite the current political confrontations, which is crucial for Moldova’s future, the competent national authorities and responsible decision-makers must strive for an economic recovery plan aimed at the real sector of the economy, supporting SMEs and financing public investments.
In late 2020, the European Commission announced its support for such an investment and economic recovery plan for the Western Balkans, estimated at EUR 20 billion. The European Union could support a similar plan for the Republic of Moldova, in the context of its new Multiannual Indicative Program for 2021-2027. And for this our country must develop a clear vision, coupled with the objectives of sustainable development and those of the Association Agreement, which could be the basis for such a plan – a new development project of the country – ReThink Moldova 2.0.
Dumitru Vicol is an associate analyst at the Institute for European Policy and Reform (IPRE) and a strategist on emerging markets in London. He has been involved in projects for the promotion and development of financial instruments in Moldova. He is a graduate of the London School of Economics (UK).
Iulian Groza is an expert in the field of international relations, European policies and good governance. He held the position of Deputy Minister of Foreign Affairs and European Integration. He is currently the Executive Director of IPRE.
This Commentary is prepared within the project “We and Europe – Analysis of EU-Moldovan relations through innovative media and analytical products”, implemented by the Institute for European Policies and Reforms (IPRE), in partnership with IPN, Radio Chisinau, Zugo.md and with the support of Konrad Foundation Adenauer. The opinions presented in this comment belong to the authors.
 Data quality is a challenge for the analysis of countries such as Moldova. However, comparing Moldova with similar countries decreases the margin of distortion of data generated by informal economy, level of corruption, quality of governance, etc.