Mistaken identity

Abstract

Newly independent Republic of Moldova joined the World Bank and the IMF in 1992. The World Bank designated it a ‘middle income’ country, a status it retained for Bretton Woods lending until 1997. The middle income designation implied that the government of Moldova was not eligible for concessionary finance from the multilateral and major bilateral development agencies. After demonstrating that assigning middle income status to Moldova was a mistake, this article investigates the consequences. A simple procedure is used for calculating counterfactual scenarios of Moldova being assigned low income status in the early 1990s. The counterfactual scenarios suggest that the development and welfare costs of the mistake were extremely high: a much greater fall in income per capita than would otherwise have been the case, with associated increases in headcount poverty and lower life expectancy. Had Moldova been designated a low income country in the early 1990s, by the mid-2000s it would have been a middle income country instead of the poorest in Europe.