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Moldova: recession hits a frozen conflict

About the author
OSCE Ambassador and Head of Mission to Moldova from 2006 to 2008. A lawyer, he worked in the Office of Russian Affairs as the White House Fellow under Colin Powell.
There will be no revolution in Moldova, but the worldwide wave of economic pain has officially hit what is technically the poorest country in Europe.  And apparently right on schedule.

Following accusations of fraud by the opposition, Twitter-driven mass protests, uncharacteristic violence, the torching of government buildings, a disputed recount and scads of recrimination, the Moldovan Constitutional Court recently certified the victory of Vladimir Voronin's Communist Party of Moldova in parliamentary elections.  On the very same day, the International Monetary Fund released a report warning of severe economic troubles ahead for this quirky, confused little country.

The IMF projected a 5% contraction in the economy this year and stagnation next.  It expects a 10% budget deficit, a plunge in the balance of payments, declining foreign investment, and - most importantly - a reduction of as much as 33% in remittances from Moldovan workers abroad.  In the current climate, none of this should be surprising news.  

However, when the economic crisis first hit, Voronin's government, which had long been in power, did what incumbents often do.  It increased social-welfare payments, pumped up the local currency, and repeatedly assured the population that Moldova, being better run than other places, was immune to the global calamity elsewhere.  But with barely a banking system to speak of, an average monthly wage of about 200 euros and lots of people engaged in subsistence agriculture, the truth was closer to Bob Dylan - "When you got nothing', you got nothin' to lose."

The last decade of apparent growth and fiscal health in Moldova was due to an export very much dependent on the global economy: Moldova's horde of guest-workers. Perhaps a million strong, they were sending home rubles, dollars and euros to the tune of one-third of the country's GDP.  

These guest-workers are roughly split between East and West.  As a general rule, poorer, less educated Moldovans headed for Russia, which represented a highly "male" destination for construction, renovation, rough-necking and seasonal work.  Western Europe and North America attracted the somewhat better educated and those with less direct responsibility for their households (due to visa barriers).  These countries comprise a more lucrative "female" destination with an emphasis on health care and service jobs.

There is, of course, nothing economically problematic per se about a poor country sending large numbers of workers abroad in pursuit of higher wages and better opportunities. Two factors do matter, however, for the country's long-term development. It is important to ensure that the money sent back gets put to productive use and that at least some of the more skilled expats return to help build a successful nation.  What we have been seeing in Moldova is just the opposite.

The pooling and efficient use of remittance money for investment in value-producing projects have been stymied by the very character of the economy. This combines corruption and a closed financial system with a workforce where the many live a hand-to-mouth existence, while the few enjoy a paradoxical culture of conspicuous consumption.  You see so many new houses, sleek BMWs and Prada-wearing molls in Chisinau, while the country's infrastructure crumbles around them.  Today's "reverse brain drain," is seeing the return of labourers in great numbers while those migrants with even semi-skilled jobs are hunkering down to hang on to what they've got somewhere else.

A portion of the thousands protesting against alleged election fraud were undoubtedly freshly back from abroad, and likely without work. It remains to be seen whether these returning expats - who could soon number in the tens of thousands or more - will form a political force in Moldova as the Communists' bread-and-butter platform of stability is upended.

Yet Moldova's clannish economy looks positively progressive when compared to that of the country's breakaway Transnistrian region.  Production in Transnistria's heavily industrialized economy, a legacy of Soviet central planning, has collapsed. Twenty three out of one hundred and fourteen major industrial enterprises have shut down so far in 2009.  

The local currency, the Transnistrian ruble, is even more virtual than the Moldovan leu.  Without ongoing heavy subsidies from the Russian Federation, including an open tab for natural gas purchases which currently stands at $1.5 billion, this region would not be able to pay even the meagre wages and pensions it currently provides.  These costs were less burdensome to Moscow when the price of oil was soaring. In the current environment such endless grants could prove increasingly irksome.

Unfreezing the Transnistrian stalemate

The Transnistrian stalemate, already in its 18th year, plays a large part in keeping everyone's economy down.  Both areas are isolated and marginalized. For example, there are no flights at all from Moldova to Kiev, Transnistria's airport has been shut down for years due to the conflict and a bitter fight over control of the railroads flares up periodically.  European Transport Corridor IX is cut off.  Duplication of government services squashes efficiency and economies of scale.  As the rest of the world moves towards the free flow of goods, services and people, artificial barriers prevent trade and human contact. In both places, corruption, spurred by rent-seeking elites and an undeveloped rule of law, discourages innovation and investment.

The steady flow of money from abroad to both Moldova and its Transnistrian region had reduced the motivation for serious structural reform. For it looked as though a steady improvement in living standards was under way.  But now that elections are over, living standards are about to plummet.  

Perhaps this, combined with excitement elsewhere about rebooting great-power relationships, could leaven interest in a good-faith, compromise solution to the Transnistrian conflict.  If so, underscoring the economic benefits will be key to convincing people on both sides of the Dniester that settlement in one country is in their direct, personal interest.

I frequently advised donor countries to make sure that proportional funding was provided for Transnistria, since it is an internationally recognized part of Moldova.  This can be tricky, as the Transnistrian authorities usually refuse to participate jointly with Chisinau in any donor-sponsored projects, even when the benefit would be great.  

But now, with the economic pain so palpable, a new, high-level push should be made to get the sides working together on joint infrastructure and human-development programs across all of Moldova.  Even if the Transnistrians once again opt out, the new government coming to power in Chisinau needs urgently to undertake the hard work of real economic reform - reduced corruption, banking-sector modernization, a stronger rule of law, a responsive bureaucracy - that will make Moldova more attractive to its citizens on both sides of the Dniester River.

Louis O'Neill was OSCE Ambassador and Head of Mission to Moldova from 2006 to 2008. A lawyer, he worked in the Office of Russian Affairs as the White House Fellow under Colin Powell.


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