THE WEAK BUSINESS AND INVESTMENT CLIMATE IS A MAJOR CONSTRAINT TO GROWTH

Growth constraints analysis assigns a central role to the reduced profitability of capital in limiting economic growth. In turn, an important cause of the low profitability of capital is microeconomic risk. In fact, microeconomic risks largely lie the conditions that determine the quality of the business environment, and relate to: the permissiveness of the regulatory framework, the level of taxation, corruption, the quality of the judiciary system. Basically, in the whole spectrum of the elements that form the business environment, with some exceptions, Moldova ranks lower than other countries in Eastern Europe. This allows us to conclude that for Moldova, the inadequate business climate is a constraint to economic growth. The multiple factors that hamper business activities cause the under-exploitation of the economic potential of businesses, thereby slowing economic growth and adversely affecting its quality. Corruption remains a major problem for business. Compared with other countries in the region, the level of corruption in Moldova is high: about 41 per cent of businesses in the Republic of Moldova consider corruption a major constraint to their development, a level that is much higher than in other countries in the region. Figure 6. The percentage of Firms Identifying Corruption as a major constraint, comparative aspects
52,34 33,52 33,91 38,61 25,12 5,43 40,92 24,07 31,12 20,38

a i n a m o R

a i n a u h t i L

a i n o t s E

i v t a L

i k a v o l S

y r a g n u H

d n a l o P

Source: Enterprise Surveys 2009, available at: http://www.enterprisesurveys.org/

In the Global Competitiveness Rankings 2011-2012, conducted on a sample of 142 countries, in the field of informal payments and bribes Moldova is ranked 102. At the same time, Moldova is not making much progress in reducing corruption. According to data for 2010, Moldova has a score of 0.73 on curbing corruption, on a scale of -2.5 to 2.5 (higher values correspond to better control of corruption) and, within the region, lies on par with Ukraine.

a i r a g l u B

h c e z C c i l b u p e R

f o c i l b u p e R a v o d l o M

Figure 7. Control of corruption in 2010, comparative aspects

0,91 0,84 0,58 0,45 0,32 0,31 0,27 0,21

-0,16 -0,16 -0,18 -0,43 -0,73

Source: The Worldwide Governance Indicators, World Bank In this context, it is worth mentioning that according to the Economic Freedom Index, on property rights the Republic of Moldova has a score of 40, and the rule of law is not strongly sustained by an effective legal framework. The judiciary has been improved but is vulnerable to executive influence. According to the Global Competitiveness Report 2011-2012, in the independence of the judiciary chapter, Moldova is ranked 132nd. Similarly, many investors consider that justice in Moldova is unreliable. In Moldova, labor market regulation is rather rigid. The non-wage costs of employing a worker are high, and the dismissal of an employee is a difficult and lengthy procedure. Compared with other countries in the region, in terms of employment rigidity Moldova has a higher score (indicating reduced flexibility) than many, and ranks lower only of Estonia, Romania and Latvia. Figure 8. Ranking score of the Republic for rigidity of employment index, comparative aspects
51 43 25 38 41 25 11 46 31 22 22

19

Source: Global Competitiveness Report 2011-2012

Another serious problem related to the workforce is the low level of available skills. The degradation of the education system in the past 20 years and the migration of large numbers of specialists have caused a reduction in labor skills. Currently lowskilled labor has become a serious problem for business in Moldova. According to the Transition Report 2010, prepared by the European Bank for Reconstruction and Development, work skills are the most serious constraint to business in the Republic of Moldova. The seriousness of a constraint is highlighted by its deviation within the adjusted average of a broader list of 10 constraints: infrastructure, with three components: access to electricity, telecommunication and transport services; access to land; labor skills; fiscal management; labor market regulation; duties; licensing; justice; corruption and the level of crime. A greater positive deviation is a more serious constraint to business. For the Republic of Moldova, qualified labor has a deviation of 0.25 (the highest level, compared to other constraints), followed by access to land 0.14 and infrastructure 0.07. Although there is some improvement in investment activity, the low score for investment freedom indicates the complexity of the issues facing investors. This is confirmed by the investor protection index, which shows low values for Moldova compared to other countries in the region. The investor protection index gives scores between 1 and 10 (a higher value corresponding to an increased level of investor protection).
7.3 6 5.7 5.7 5 5 6 4.7 6 4.7 4.7 4.3

Figure 3. Investor protection index, comparative aspects Source: http://www.doingbusiness.org/ The government is trying to implement reforms in this area, which would provide a more enabling environment for business. However, only the first phase of a broad regulatory reform ("Guillotine 1") was implemented, while the implementation of the second phase was delayed, and other regulatory optimization projects are being implemented too slowly. The World Bank Doing Business 2011 study shows that the position of the country in the world ranking is falling, from 87th in 2010, down to 90th, which places Moldova in one of the last positions among the countries of Eastern Europe. This confirms that the reforms in Moldova are too slow compared with the other countries analyzed.

Figure 8. Ranking of the Republic of Moldova according to "Doing Business 2011," comparative aspects Source: http://www.doingbusiness.org/ The Doing Business 2011 study reveals that important issues that adversely affect business activities in the Republic of Moldova are the conditions for import / export and for receiving permits for construction. Particularly burdensome for businesses are export-import operations, because the time and costs associated with cross-border operations in Moldova are higher than in other countries in the region. For a small country, which does not have a sizeable domestic market, this could be an impediment to economic development. The same impediment may hinder the transit of goods across the country, thus limiting the expansion of related services, especially transport. Table 3. Conditions necessary for conducting export-import operations, comparative aspects
COUNTRY Albania Bulgaria Estonia Latvia Lithuania Czech Republic Republic of Moldova Poland Romania Slovakia Ukraine Hungary EXPORT Cost, Time, days USD/container 19 725 23 1551 5 10 10 17 32 17 12 17 31 18 725 500 870 1060 1765 884 1275 1530 1560 1225 IMPORT Cost, Time, days USD/container 18 710 21 1666 5 11 10 20 35 25 13 19 36 17 725 801 980 1165 1960 884 1175 1505 1580 1215

Source: http://www.doingbusiness.org/ In the case of construction permits, we are in a particularly bad position in terms of the number and duration of procedures. Obtaining permits for construction, too, places the Republic of Moldova in a not very advantageous position in comparison

with other countries in the region. Table 4. Conditions for obtaining building permits, comparative aspects NUMBER OF COUNTRY TIME, days PROCEDURES Albania 24 331 Bulgaria 24 139 Estonia 14 134 Latvia 24 186 Lithuania 17 162 Czech Republic 36 150 Republic of 30 292 Moldova Poland 32 311 Romania 17 228 Slovakia 13 287 Ukraine 22 374 Hungary 31 189 Source: http://www.doingbusiness.org/ Another problem faced by enterprises in Moldova is the low intensity of competition in its markets. Low competition in the several sectors of the national economy, as well as limited progress in countering anti-competitive practices, place the Republic of Moldova in a disadvantaged position. According to the Global Competitiveness Report 2011-2012, the Republic of Moldova is at the bottom of the table in areas reflecting the level of competition: rank 104 - intensity of competition; rank 111 - presence of market dominance; rank 123 - anti-trust policy efficiency. Global Competitiveness Report 2010-2011, in addition to corruption, also highlights other important difficulties faced by business: policy instability (19.5 per cent of respondents); access to finance (10 per cent of respondents); bureaucracy of public institutions (9.2 per cent of respondents). The determinants of internal demand recovered at the post-crisis level, the consumption financing sources being changed. Of course, remittances have priority but the influence of investments, salaries, turnover and profits is increasing. In the last years, the rating of the Republic of Moldova in the classifications of the World Bank and other international bodies improved. Thus, the conditions of initiating a business improved, as the number and the cost related to the initiation of the business decreased. Starting with 2006, the number of days necessary to the business initiation decreased dramatically from 30 to 9 days in the 2012 classification. The business initiation cost, as compared both to 2006, and to the year before the crisis, 2008, is lower on the whole.

In the global competitiveness classification, RM evolved more modestly, although the country scoring over the year remained practically unchanged, because of the enlargement by more countries of the coverage area of the index, the national economy in the classification lost the position held in 2006-2007.

Figure. Cost of initiating a business (costs, % revenue per capita) and Construction permits Source: Doing Business, WB. The measures taken in view of improving the situation in the field of building permits stagnate, historically the Republic of Moldova did not register notable progress in this regard. The situation did not change with the Economic stabilization and re-launch plan initiation. Such action finalized through the approval and the amendment of certain legislative aspects. According to the Doing Business data, the situation in this field did not essentially change, the number of procedures decreased by 3, and the decrease of related costs was not essential. The number of activity types diminished from 37 to 32 in the 2008 2011 period. But the simplification of the licensing procedures does not have a well-defined result, the total number of valid licenses decreased by 7% as compared to 2008.

Figure . Evolution of active licenses Source: Chamber of Licences of Moldova.