Economic Forum: Regional Economic Cooperation in East-West - October 7, 2010
Association of Businessmen in Moldova

Speech of the Governor of the National Bank of Moldova, Mr. Dorin Dragutanu
Regional cooperation and competitiveness of the Republic of Moldova



Republic of Moldova has a small and open economy, which exposures it to external economic shocks. Republic of Moldova has no significant natural resources except agricultural land. Moldova's long-term development can be achieved only in close cooperation with external partners.

Increasing our economic competitiveness and ensuring a healthy economic growth on long term can be only achieved by attracting massive foreign investment, implementing modern technologies, and advancing to external outlet markets. This will allow the transition from a consumer-based economic growth to one based on export.

In the global competitiveness report for 2010-2011, published by the World Economic Forum, Republic of Moldova ranked 94th out of 139 countries. Based on this report, the top five general factors affecting business environment in Moldova are: the instability of government policies, limited access to financing, corruption, low efficiency of government because of bureaucracy and government instability. This result indicates how our problems are acute and reiterates the need for rapid, bold, and serious reforms. The listed factors seriously affect the competitiveness of Moldova and represent the major impediments in attracting foreign investment, long-term economic growth assurance, and clients  welfare increase.

Without diluting the importance of the above factors for the overall competitiveness of Moldova, I would like to focus in this speech on a more narrow micro-economic approach.

The most important economic resource of the Republic of Moldova is the labor force. It is clear that our approach to increase the economic competitiveness cannot neglect this fact. Labour costs can be effectively adjusted through the policies promoted by the state to remove the restrictions on the labor market, to heighten the education and professional ethics, etc.. Nevertheless, the external competitiveness increase of the enterprises and entrepreneurs in Moldova can be achieved by reducing the unit cost of labor. As for the state policies, it can be achieved through three well-known methods: the depreciation of the national currency, wages cuts, and labor productivity growth.

Nominal and real depreciation of the national currency against the currencies of major foreign partners, with the purpose to enhance the competitiveness, was and it is a method widely used by many countries. We all know the current heated debate between the U.S., EU, and China on Chinese currency undervaluation. In Japan, the concerns about yen appreciation and the risk of competitiveness loss and reduction in exports are obvious. Many countries in the region have depreciated at some stage the local currency to maintain the competitiveness and to move more easily through the crisis. The southern European countries of the Euro zone do not have that option, which significantly impede their exit from the crisis and competitiveness increase.

From a technical standpoint, the national currency depreciation leads to lower unit labor cost expressed in foreign currency, thus decreasing the price of local products on foreign markets.

Over-appreciation of MDL was a real problem about two years ago. In the second half of 2008, the Moldovan leu has experienced a significant nominal and real appreciation. In February 2009, the real effective exchange rate of national currency against the currencies of our foreign partners appreciated by 40% compared to 2000. It was a difficult moment for our economy. Simply speaking, if all other conditions are equal, Moldovan products were 40% more expensive than products of our trading partners. A heavy blow to the competitiveness of Moldovan economy was given. Due to the actions undertaken by the NBM, the real effective exchange rate returned to normal at the end of 2009, the national currency depreciated in nominal terms by 18% and 30% in real terms. This has contributed to our competitiveness in the medium term recovery. Throughout the 2010, the real effective exchange rate of MDL is maintained within acceptable limits.

It is worthwhile to note that the depreciation of the national currency was a shock to our economy, but especially it affected the population welfare. However, in retrospect I can say that although we understand how difficult it is for our citizens to go through this period, the depreciation of national currency is good for the economy in general. The sacrifices of today, has been the basis for a sustainable economic growth in the future, thus assuring the long-term wellbeing.

Of course, we shall not resort to the national currency depreciation whenever there is a problem with competitiveness. There are some limitations, mainly derived from the sacrifices accepted by the society. However, in critical situations, the national currency depreciation is a tested method to come out of the crisis.

Wage cuts have never been a popular way of fighting the crisis and increase the competitiveness. In general, this method is used in exceptional cases and when quick and drastic recovery measures are necessary. We all know the difficult times some European Union countries are going through now. Public sector wage cuts were a tough decision that will bring significant social and probably political costs. On the other hand, I think there are very few companies in the private sector that have not reduced the wages during the crisis.

This method of competitiveness increase is very effective, but its implementation requires a general solidarity in society. Each citizen must be communicated in an accessible way that these sacrifices are made for the common good in the future.

With a very high level of poverty in the country, the application of this measure may lead to unimaginable social reactions. For these reasons, wages cuts do not seem to be acceptable in the country.

If the first two methods can be independently applied by Moldova with a particular international aid, the third method of competitiveness increase requires a high degree of regional and international cooperation.

In a recent interview, the Governor of the National Bank of Romania, Mr. Mugur Isarescu said that the economic agents should not rely solely on the Romanian leu depreciation to overcome the crisis, but we must find solutions for increasing national productivity.

Namely, this method is the key for solving the problem in Moldova called “competitiveness”. However, there are here some objective obstacles, which hinder finding the solution. We must recognize that the entrepreneurial culture in the Republic of Moldova is still in embryonic stage and innovation is a term used only in state policies and scientific treaties. Production capabilities are rudimentary. The company still expects the state to solve all the problems, including those at the enterprise level, although this “generous” state disappeared 20 years ago.

Thus, there is no other way to increase the labor productivity than the acquisition of international best practices. The role of foreign investment is crucial in enhancing competitiveness, providing them access to modern technology, advanced management, financial resources and access to cheap foreign markets.

If policy makers are concerned with enhancing the competitiveness of the Republic of Moldova, attracting foreign investment remains “number one priority”. Nevertheless, as long as the state policies are not predictable, corruption and bureaucracy will not be eradicated and we will not have a stable government and the direct investment in Moldova will not experience any significant increase.

However, just eliminating these inhibiting factors will not ensure the massive influx of investment. It is not enough just to open the door for foreign investors. It is also necessary to make the Republic of Moldova attractive for them. I am sure that our country has much to offer, not just cheap labor.

A first step would be to know which are the needs and concerns of investors to provide solutions. This can be achieved only through a continuous dialogue with external partners, through changes of ideas and exploration of opportunities. Ultimately, we need to know better and develop a solid relationship based on mutual trust. They should be, in my opinion, the “soundtrack” of the regional and international cooperation and the way forward to improve Moldova's competitiveness.

Thank you.