The Crippling Cost of an Incomplete Transformation: The Case of Moldova

Abstract

Moldova holds the unenviable distinction of having suffered the largest fall in gross domestic product (GDP) and living standards among the former socialist countries in Europe. By the end of 1998 GDP had fallen to a mere 30% of its level in 1990, while living standards had plummeted from a situation of relative well-being before independence to one of abject poverty today. The country is presently in such severe economic difficulties that the fundamental social and political fabrics of society are at risk. Yet Moldova was for a long time praised by the IMF and others as a progressive reformer and 'over-achiever' in terms of macroeconomic stabilisation policies. It would appear that the virtual economic collapse can be attributed to two main factors. Firstly, an extreme external shock resulting from the collapse of the former Soviet Union and, secondly and more recently, yet another external shock following from the financial collapse in Russia in the autumn of 1998. Arguably, the second of these shocks reflects internal weaknesses, primarily a failure to detach the economy from that of Russia and to radically reorient it towards other countries and markets after independence, but also inadequate economic and political reform and institution building. The first part of the article is devoted to an analysis of the economic decline since independence, with particular emphasis on the past few years. In the second part the social and human consequences of the economic decline are examined. Drawing on data from detailed income/expenditure surveys, the decline in living standards, changing composition of sources of incomes and expenditure patterns resulting from dramatic decline in cash incomes and the rising inequality are analysed. The parallel erosion of education, health care and social security is examined in the light of the dramatic decline of the public sector in absolute terms. The article ends with a discussion of the reasons behind this unfortunate development.