Conference “Moldova and Europe: Bridging the Gap” Chisinau, April 26-27, 2005

1. Conference“Moldova and Europe:Bridging the Gap”Chisinau, April 26-27, 2005

2. Economic and Social Issues The view from the World Bank Franz Kaps World Bank Special Representative for Southeast Europe Joint European Commission and World Bank Office for Southeast Europe Brussels EM: fkaps@worldbank.org

3. Useful to remember some key messages from January 2004 Starnberg Lake Conference on “European Perspective for Republic of Moldova”: • Moldova should focus on "wider Europe/new neighborhood policy" and reach early agreement with EU on European Neighborhood Policy (ENP) APs • APs will offer important opportunities to gain access to EU single market's four freedoms • important that Economic Growth and Poverty Reduction Strategy Program (EGPRSP) and ENP complement each other • World Bank keen to be associated with ENP AP so as to ensure consistency with World Bank Moldova assistance agenda • transparent discussions of EGPRSP and ENP AP with civil society essential • Moldova government should not use solution of Transnistria conflict as excuse to delay economic and structural reforms

4. 15 months after Lake Starnberg conference much progress made: • EGPRSP is key Government strategy • Moldova and EU have reached agreement on ENP APs • ENP serves as important complement to comprehensive EGPRSP • Recent elections, which government parties conducted under "EU agenda" umbrella, confirmed desire of large majority of Moldovan people to get closer to Europe • Orange "revolution" in Ukraine provided important impetus • re Transnistria, there is now potential to expand five-sided negotiations format to include EU, US and Romania which might lead to speedy solution of Transnistria conflict • on economic front, total external debt as share of GDP declining quickly: falling from 106 % of GDP in 2001 to around 60 % in 2004

5. A few negative developments during pre-election period: • privatization process has stalled • some concern regarding informal export restrictions • also, concern about non-transparent and poorly designed subsidy programs which often favor better off segments of society • recent increases in pensions, introduction of new pension privileges, "freezing" of increase in pension age and delinking of benefits from contributions represent serious deviations from pension reform implemented with Bank support in 1998. Developments threaten financial sustainability of Social Fund • absence of IMF program (PRGF expired in December 2003) had implications for other donors' assistance, especially budget support; (IMF colleague may elaborate)

6. A few words about EGPRSPIt aims to achieve over medium-term: • sustainable economic growth, including in rural areas where poverty is currently highest • reduce poverty and inequality and increase participation by the poor in economic development • contribute to greater human development • there is close link with Millennium Development Goals (MDGs)

7. World Bank approved in December 2004 country assistance strategy which is entirely consistent with Moldova's European aspirations and the EGPRSP. Overall objective: • promoting conditions for economic stability, growth and employment creation • improving access to social services, capital and community infrastructure, and minimizing environmental risks • improving public sector governance, independent judiciary and combating corruption

8. Some essential requirements to ensure success: • Government needs to demonstrate continuous commitment to and ownership of EGPRSP/ENP AP • essential that Government speaks with one voice on both programs. Ideally, same government agency(ies) in charge of both • Government needs to fully engage civil society in debate and implementation of programs. Good communication policies essential; media play key role • Moldova's partners and donors need to fully subscribe to and support program

9. Some essential requirements to ensure success (continued): • Moldova's trading partners, especially EU, to provide greater market access to Moldovan products • in turn, Moldova to significantly diversify its trade patterns, while, at same time, improve quality and standards of Moldova products • also, need to lessen dependence on taxation of imports for fiscal revenues • further, substantial improvement of business and investment climate essential to attract more FDI; ENP agenda might help • closely related thereto is need to substantially improve transportation and other infrastructure • workers remittances, which are a backbone of Moldova's recent growth rates, need to be oriented towards productive investment rather than primarily serve for consumption. Government has to quickly and substantially deregulate SME establishment so as to encourage channeling of workers remittances

10. Human Development and Social Protection require greater attention: • health, education and social protection systems in Moldova have suffered from economic decline and stalled policy reforms • health indicators lag substantially behind European standards and access barriers to health care remain significant, especially for the poor • HIV/AIDS is rapidly becoming a threat • although access to compulsory schooling high, increasing number of students, especially poor and rural children, drop out before completing grade 9 and too few enter/complete upper secondary and university • gaps in performance between urban and rural students widening

11. Social assistance requires better targeting: • social assistance programs rely on targeting of categories of population that are perceived to be poor, but are not necessarily poor (e.g., not all the single pensioners in Moldova are poor) • direct means testing is not possible; methodologies for indirect assessment of incomes need to be developed; • errors of inclusion and exclusion are high – many non-poor benefit from SA programs, while coverage of those in need very limited (SA programs reach only one fifth of poorest quantile) • size of social assistance benefits does not match the needs (either too big or too small)

12. More attention has to be given to Moldova’s youth: • 16-30 years old account for one fourth of population • young people leave or try to leave Moldova in alarming numbers • situation in rural areas is particularly worrisome

13. Good governance and fight against corruption require particular attention: • civil service too politicized which result in lack of trust by citizens • issue needs to be tackled within context of upcoming administration reform and downsizing of civil service with Moldova President recently announced. World Ban ready to assist to ensure that expected results are achieved • local governments which have increasing administrative and fiscal responsibilities face great difficulties in service delivery • judiciary is not trusted • recent World Bank/EBRD Business Environment and Enterprise Performance Survey (BEEPS) reports that nearly 60% of respondents consider corruption to be "moderate" to "major" constraint to business operations, highest such perception in the region • civil society in Moldova is emerging but still weak. EGPRSP process has resulted in creation of Participation Council and NGOs are meant to monitor and evaluate progress under EGPRSP

14. Bottom line: • Government on right track in many areas but off track in some other important areas • Essential that Government follows through with EGPRSP and ensures that ENP AP fully consistent with EGPRSP • Moldova's partners need to provide respective support • as regards continued World Bank support through scarce IDA resources, proven good governance key to Performance Based allocation of future IDA resources