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Macro 2014 conference, Chisinau

What can Moldova learn from east European EU joiners?

October 21st 2014

David Dalton© Economist Intelligence Unit

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1. EU association agreement

Moldova signed AA in June. What is it?

Political

“Strengthening democratic institutions”.

Economic: “DCFTA”• Export duties eliminated • EU taxes on Moldova disappear• Moldova taxes on EU phased out Harmonisation with EU commercial

rules, affecting business practice

Visa liberalisation

From May 2014, travel to Schengen for 90 days without visas

Long-term benefits

Trade gains • Specialisation, big EU market• Agriculture & food-processing• EU says: 7.1% GDP rise from trade

Institutions Rule harmonisation, cuts business

risks, boosts savings, investment  

 Living standards. • Wage convergence, price reduction• Increase in choice/quality

Short-term costs• EU trade admin, food & labour safety Economic disruption as competition

diverts resources to stronger sectors: firms close, jobs lost

• More disruption to Russian trade

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2. Lest we forget

• Moldova did badly in transition and remains poor: economy 1/3 smaller than in 1990

• Poland's is main transition success story: GDP up by 130% since 1990

• Ukraine economy was 1/3 bigger then; now it's 1/3 size of Poland's

• Moldova, Ukraine, Russia falls worse than US Great Depression

Chief transition errorWestern macro policies applied without same micro foundations in place

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3.i What’s happened: Catch up

• All countries caught up with the German moving target at least a bit

• EU joiners gain most: Estonia (up 20pp), Poland (15) , Romania (12); also Russia (18; energy boom)

• Main stragglers: Ukraine (up 7), Croatia (6), Moldova (4)

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3.ii Growth performance, 1999-2013?

European CIS grew faster overall • Lower starting base, spare capacity• Commodity price booms

EU joiners

Bad crisis, slow growth since, or yet to recover

Russia: Gross Domestic Product% Change - Year to Year NSA, Bil.Chn.2008.Rubles

Average Spot Price: Crude Oil: Brent% Change - Year to Year US$/Barrel

10050095Sources: GKS, WB /Haver

15

10

5

0

-5

-10

-15

160

120

80

40

0

-40

-80

r = 0.65

Case of Estonia• Fast growth 2000-07 from foreign borrowing

made vulnerable in 2008-09: big CA deficits. • FX debt weighed on lending to households.• “Internal devaluation,” restored competitiveness

by cutting wages, triggered emigration • Euro sovereign debt crisis

• Moldova’s low integration in global finance protected from turbulence: less debt to unload

• Ukraine paid for foreign borrowing in the boom with weak growth after (Ukraine)

• Poland sailed through

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3.iii What’s happened: Gini index , 1999-2012

2000s• Broad downward trend in Poland, Romania,

Moldova• Spread still wider in Euro CIS than EU joiners• Croatia & Estonia worsened since mid-2000s• Russia still most unequal

What is a Gini index?• Measures inequality of data distributions,

such as income• A number from 0-100

0: everyone gets equal income 100: 1 person gets all income Numbers usually between 20 & 70

1990s• All start low & roughly equal: 20-25• Sharp rise in income inequality in transition

decade, esp Russia, Moldova, Estonia • 2000s

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3.iv What’s happened: Human development index

What is the HDI?Composite measure of economic, includes.• Living standards: GDP per

head• Heath: life expectancy• Education: adult literacy

• Moldova, Ukraine, Russia & Romania do badly in 1990s

• Moldova, Romania (followed by Ukraine, Russia) improve strongly in 2000s

• Overall, EU joiners improve much more strongly than Euro CIS.

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3.v Why different catch up rates?

Starting conditions

Stability

State capacity• A strong state equalises the

economic playing field, reducing business risk, to withstand external pressure.

• Some states inherited stronger political institutions, civic cultures (eg Poland & Solidarity)

• In some, old nomenklatura fused with new business/ mafia (Ukraine, Russia, Moldova)

Policies• Appropriate, politically viable

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4.i Broad conclusions

Broad conclusions• EU joiners did better• EU AA should help Moldova

emulate• Free-trade & resource

reallocation• Rule harmonisation supports

institutions, factor inputs • Main issue may be political

economy: internal Moldovan question

• Moldova can also learn from EU joiners bad experiences

• EU-Russia tensions have damaged medium-term prospects, esp Russia’s

Be experimental, pragmatic but realistic: optimism of the will, pessimism of the intellect

Tougher medium-term• Still in aftermath of 2008-09 crisis• EU recovery is feeble, deflation a threat• New economic paradigm not developed

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4.ii Four suggestions

Goal: protect against destabilisation, key growth killer

Investment of least destabilising kind:• Higher domestic savings: EU rules

could help to strengthen banking, as part of wider resolution of Moldova’s political economy.

• FDI encouraged into export sectors: boost earnings offset outflows of investor income: less vulnerable to external corrections.

Education, education, education• “Human capital”, higher wages;• Re-training programmes to aid social

cohesion in face of trade competition.

Participatory budgeting• Porto Alegre, Brazil.• Citizens take part in budget

formation, aided by specialists Shifts spend to poorest Boosts civil society

Economic education

Make economists less gullible to fads:• learn economics, maths; economic

history, history of economic thought