The Moldovan Economy in the Great Recession

Olivér Kovács, Research Fellow, ICEG European Center  | 

If we take a mere glimpse into the development of real GDP growth path in various country groups, it becomes obvious that the flame of the era of Great Moderation, coined by Stock – Watson (2003), between 1992-2007 has seemingly gone out with the eruption of the 2008 financial and economic turbulence.

With globalisation, economic processes all over the world have become asymmetrical interdependent by leaving merely limited role to a national government to fend off the dramatic consequences of the global crisis by its own. A country’s recovery is getting more and more influenced by growth prospects of another relevant country or a group of countries. It is also reflected in the growth trajectory of Moldova.

Chart 1. Real GDP growth (%, 1992-2018)

         
Note: Data for the period 2013-2018 are estimations.
Source: IMF (2013), World Bank (2013) 

          At this point, we can formulate the following insights on the basis of the Moldovan development: 

• the takeoff started significantly later than in other Continental European countries (i.e protracted growth strengthening was an ubiquitous phenomena in CIS countries during the 1990s);
• up until the midst of the 2000s, Moldovan economy converged to the emerging markets and developing economies (between 2000 and 2008, the average annual real GDP per capita growth rate was 6 per cent), but after 2005, the growth prospect became much more gloomy; 
• the 2008 financial and economic crisis, which infiltrated into the European continent, had substantial repercussions in CIS countries as well being dependent on countries from where remittances are coming back and the main energy resources are imported. In Moldova, on average, the recession was even deeper than in advanced economies, and even in the world (GDP collapsed by 6%). 
• Although mainly expenditure-based fiscal adjustment was implemented to meet deficit and debt targets being accompanied with structural reforms to boost export, the regenerating growth performance of 2010-2011 disposed into the air as the European economic potential weakened further. It has at least two implications for economics: 1) expenditure based fiscal adjustment may not have negative effect on real GDP growth; 2) but the sustainability of the achievements relies heavily on whether the consolidation is constructed along a strategy (i.e. focusing on specific fields like innovation and R&D that potentially will have long-lived positive impetus on the economic performance) or the consolidation is just imagined as a mechanistic stabilisation of deficit and debt targets through reducing various expenditures like wages, salaries etc.  
• During an economic turmoil, and especially in a time when the debt accumulation can be treated as normalcy and their dampening tends to be a decade-long task, fiscal consolidation should be considered not only as a short-term economic policy engineering mechanism to cool down the fiscal challenges, instead, a developing function should be carefully integrated into that which considers longer term strategic vision (inclusive growth, innovation-based knowledge economy etc.);
• Beyond this fact, the volatility-prone Moldovan growth path conveys us the message that the socioeconomic learning, the institutional quality and the growth context of the country still has a lot room for improvement. Its exposure to the economic situation that of its regional trading partners (including the European Union) with regard to remittances, capital inflows and exports can be considered as one of the highest ones among CIS countries. 

  This post features the author's personal view and does not represent the view of ICEG European Center.