Aid for Trade Needs Assessment for the Republic of Moldova Eugene Hristev United Nations Development Programme

Trade-Human Development Linkages  Trade liberalization and reforms imply both benefits and costs in terms of: 1.employment, 2.government budget revenues, 3.consumer prices, and 4.environment for SME development  Potential interventions in the framework of the AfT should: 1.contribute to employment and income generation, 2.target relatively disadvantaged social groups, 3.produce public goods with maximum spillover effect, 4.address imperfections on the factor or commodity markets

Economic developments and trade  Low labor costs continue to be among the comparative advantages of Moldova, but these costs are growing quickly  Productivity growth and market access of participants of foreign trade is inhibited by different structural problems of the economy - Regional inequalities - Informal sector - Labor force skills - Underdevelopment of infrastructure - Small scale of the economy

 Imports consist mostly of energy products (in , 20-23% of total imports) and consumer goods (52-60%); the share of capital goods is not high (14-18%)  Geographically, the trade of the Republic of Moldova is split into two roughly equal parts: EU and CIS; other partners’ shares in exports and imports are much smaller  This reversal in terms of exports to EU and CIS started in 2006, as an aftermath of the crisis produced by the trade embargo for wines, fruits and vegetables to the Russian market Trade Performance

Forthcoming changes in the trade regime 1. Creation of the Custom Union of Belarus, Kazakhstan and Russia 2. Preparation of new Free Trade Agreement between the CIS countries and expected WTO accession of the Russian Federation 3. Preparation of Free Trade Agreement with Turkey 4. Preparation of Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU – the trade regime change, which is potentially the most important and beneficial in the long-term, but requiring implementation of ambitious domestic reform program

Trade and Human Development Nexus: Agriculture and Agro-processing Industry  Large role in employment (28% in 2009) and exports (30% of total exports of goods and services in 2009)  Large potential in exports of higher-value added products  Many structural problems and regulatory issues in the sector: - underdeveloped markets for inputs and outputs, - ageing and insufficient infrastructure, - standardization, SPS measures, custom controls, excessive licensing requirements, untargeted government subsidies (until the recent change) - insufficient information support for farmers

Trade and Human Development Nexus: Information and Communication Technologies  Quickly growing sector, important contributor to the government budget (28% of VAT collections in 2007) and to exports (≈7% of total exports of goods and services in 2009), employer for skilled labor force  Good prospects for export expansion with positive externalities for the budget and education system  Structural issues in the ICT sector: - monopolistic structure - informality - infrastructure - professional training of employees

 Foreign trade is a key driver of human development in Moldova  The country has a vast potential of trade expansion and is making important steps in this direction  The following issues are to be addressed: - business climate improvement through upgrade of regulatory policies, creation of competitive environment etc. - infrastructure investments - macroeconomic stability and control of inflation - development of professional education system Main Conclusions

Main Recommendations  The main interventions include concrete actions in several areas: 1. In trade policy: a. continuous liberalization of trade regime with EU and Turkey to ensure the economy of scale opportunities for the domestic businesses b. Preserving free trade area with CIS countries, including with the Customs Union of Russia, Belorussia and Kazakhstan c. Harmonizing internal trade regime with its WTO and DCFTA obligations in order to improve business and investments climate and ensure a sustainable environment for the job creation.

Main Recommendations 2. Other areas of interventions: a. Macroeconomic, fiscal and structural policies b. Building analytical capacity for trade policy making and implementation c. Business awareness-raising on trade policy and development of dialogue between business and government d. Creating a favorable business environment e. Infrastructure development f. Standards, technical regulations, customs controls