While on the one hand the publication ‘100 of the most pressing issues in the Republic of Moldova in 2008’ reaches some very important conclusions vis-à-vis the main problems facing the population of Moldova, on the other the analysis in the section, ‘The increase of external debts of Moldova – a reason to be concerned’, fails to propose a practical solution to the problem of external debt and its insufficient analysis is in fact counterproductive to true poverty reduction. Not in this section or in anywhere in the publication is any type of debt relief such as comprehensive debt rescheduling or debt cancellation discussed. My main point of contention is the line of reasoning in the following sentence: ‘at this moment the external debt, related to GDP and taken in consideration the spending for paying the debt services within budget expenditures, is acceptable.’ This claim should especially be called into question taking into consideration the next sentence which states that the rate of external debt has increased by more than 90% in the past 5 years.

This conclusion is in direct contrast to the analysis of Nobel Laureate Professor Dr. Joseph E. Stiglitz and Nina Orlova & Per Ronnas from the Swedish International Development Cooperation Agency (SIDA). In August 2002, when Joseph E. Stiglitz visited Moldova he observed that since Moldova’s transition from Communism in 1991 its GDP had plummeted some 70 percent and the cost of servicing its foreign debt soared-rising to 75 percent of the governments budget. Professor Stiglitz logically concluded that this external debt related to GDP and the budget expenditures was not at all acceptable and that as a result little money was left over for social services and infrastructure . Professor Stiglitz would also certainly disagree with the opinion that the amount of budget expenditures in 2008 dedicated to paying the external debt is acceptable in view of the fact that the rate of external debt has risen substantially since his visit in 2002. As of December 31, 2008 the external debt of Moldova was $4.092 billion, the public debt was 21.3% of GDP and the budget revenues amounted to $1.95 billion while the expenditures amounted to $2.01 billion .

In the SIDA publication Moldova’s Transition to Destitution Nina Orlova and Ronnas Per assert the following with regard to the external debt of Moldova:

“Relief from the excruciating debt burden is an absolute prerequisite for economic growth, a successful transition and to reverse the human disaster that is unfolding. This can take place through comprehensive debt rescheduling to more favorable long-term loans at low rates of interest,… It can also be achieved through outright debt cancellation.”

There is also a clear trade off between servicing the external debt and meeting human needs and rights in terms of basic health care and education. …there is a direct link between the sharp increase in the debt servicing cost and the dramatic fall in public expenditure on health care, education and other social services, from an already precariously low level. Under the present circumstances, the cost of debt servicing can be measured in terms of increased morbidity and mortality, foregone education and denial of basic human rights to food and shelter against the cold.

In the light of the above, it would appear that the best assistance that can be rendered would be to mobilise support for Moldova’s efforts to renegotiate its external debt.”

We must understand that while in 2008 the external debt related to GDP was lower than what it was in 2002 when Joseph E. Stiglitz visited Moldova or when Nina Orlova and Ronnas Per argued for debt relief in 2000, the growth of the GDP was a direct result of the massive inflows of remittances. Specifically, in 2007 remittances accounted for 38% of the Gross Domestic Product and there was a 44% increase of remittances in 2008 compared to 2007. Starting in 1999, according to statistics from the NBM, the volume of remittances has increased 15 times. In 2007, the volume of remittances represented 1,2 billion USD; and within the first ten months of 2008 the volume of remittances amounted to 1 billion 399 million USD. Accordingly, it should be clear that the reduction of the external debt as a percentage of GDP is a result of the GDP pie becoming bigger as a result of the ‘strong macroeconomic growth’ which is based on an extremely unstable and unsustainable model of development, namely 50% of the working age population going abroad to find work.

The Negative Economic and Social Consequences of Out Migration

The publication ‘100 of the most pressing issues in the Republic of Moldova in 2008’ has concluded in many sections, that this massively excessive inflow of remittances is indeed quite negative for the economy. The enormous flood of foreign currency into Moldova exerts a great deal of pressure on the currency market, on the monetary course and on inflation. The appreciation of the national currency brings about a negative impact on the exporters. The Moldovan exports, including agricultural, are getting more expensive, which thus decreases their competitiveness.

As well as the negative economic consequences that arise from out migration and remittance inflows, the publication‘100 of the most pressing issues in the Republic of Moldova in 2008’ points out that there is also a plethora of negative social consequences resulting from 50% of the working age population of Moldova going abroad as a survival strategy to find work. For example, the demographic security being in danger; depopulating of Moldova villages; consequences of parents’ labour migration on children; and migrants either legally, or illegally employed abroad having vastly insufficient protection in relation to working conditions and health care which can often lead to problems endangering their lives.

How Could Debt Relief Contribute to Higher Levels of Agricultural Production?

Low levels of agriculture production in Moldova which has led it to drop to the level of the Europe of 1970 has resulted in Moldova transforming from a country that exports agro-alimentary products into a net importer and this in turn can be attributed to, amongst other things, the drastic reduction of state support. The drastic reduction in governmental investment into agricultural research and extension has been one of the major factors to adversely affect agricultural (including biological) production levels. Government financing of Research and Development (R&D) activities has decreased from 2% of GDP in 1990 to 0.2% in 2001 but then slightly increased to 0.45% in 2006. In this period GDP has also decreased to one third its 1990 level . The Research Institute of Plant Protection and Ecological Agriculture (formerly known as the Bio-Institute) is one illustrative example. In 1989 the Institute counted 250 scientists; by 2006 their number has been reduced to a mere 47 . This level is not only significantly lower than the level of financing in developed countries (Japan – 3.6%, USA – 2.84%, Germany – 2.29%, France – 2.18%), but is also lower in comparison to other formerly command economies (Czech Republic – 1.26%, Hungary – 1.1%, Ukraine –1.1%, Russia – 0.85%, Romania – 0.54%) .

Agricultural research institutes and extension services have been for the most part shattered. “Large enterprises that were realizing the innovational cycle in the 90s (such as the Institute of Plant Protection and Ecological Agriculture) have been liquidated, or have ceased to exist due to insufficiency of finances.” And the future looks even bleaker with regard to obtaining the needed investment to renovate the technology sector to its former status. “International development partners are not interested in making long term investments in research and implementation of innovations, due to the higher level of financial risk.” Dr. Veaceslav Afanasiev’s declaration in 2004, when he was the deputy-minister of the economy, that the 2004 State budget had to be supplemented with an anticipated 600-700 million lei (44-52 million dollars) made it clear that the burden of debt results in great difficulty not only to obtain needed investment for Agricultural Research Development and Extension Systems but in addition in general, the State Budget.

Therefore, we once again come back to the fact that debt relief must be a top priority for the Government of Moldova in order for them to have more funds available that could be used to make the investments needed for growth because without growth Moldova is a poor prospect for lending. As Professor Stiglitz correctly concluded, default would at least stop the hemorrhaging of money out of the country.

There is Nothing to Fear But the Fear Itself of the Consequences of Default

When Joseph E. Stiglitz recommended default to the Moldovan government, officials responded that if they defaulted they would not have access to money to which Stiglitz answered that even while they were devoting three-quarters of their already meager budget they were not getting any money . As evidenced by the extremely low level of investment for Agricultural Research Development and Extension Systems as well as the statement of Dr. Veaceslav Afanasiev, it is apparent that Professor Stiglitz was absolutely right that they were not getting any money.

Only Argentina and Russia have overcome this fear and defaulted on loans they owed to the IMF. Both countries to the surprise of the World ended up growing after defaulting. In essence they have showed that there is life after default and in fact a country can even grow faster afterward.

That is not to say that defaulting is easy or simple. The brave, confident and informed political and economic leadership of Argentina, in closed-door, heated negotiations with the IMF bargained hard, not caving in to the conditions of the IMF. It was clear to the Argentine negotiating team that any additional loan from the IMF would only stay in Washington D.C. to repay what it owed to the fund, never reaching Buenos Aires. This was obvious given the fact that this is exactly what the IMF did with a loan to Russia after that country’s default. In view of the rich experience that the Government of Argentina has accrued in negotiating default with the IMF it would be very beneficial for the Government of Moldova to invite the team from Argentina, that bargained hard for a fair default, with the purpose of profiting from their savoir faire in order to work towards the implementation of debt default in Moldova.

In the following passage, Professor Stiglitz insightfully elucidates the need for default and the benefits that would arise from its implementation.

“For most of the countries overburdened by debt, so long as their economies remain stagnant-as they will, so long as they are shackled by debt-they will not be able to gain access to capital markets, no matter how faithful they are in servicing their debt. But once they start to grow, they will gain access to international capital markets again, even if they have defaulted. Russia regained access within two years of its 1998 default. Financial markets are forward-looking. They ask about a country’s prospects of repaying. An economy at full employment and stronger because it has rid itself of a huge overhang of debt is a better bet. In other words, default can, in a relatively short time, actually lead to an enhanced net inflow of capital.”

The observations of Joseph E. Stiglitz from his visit in 2002 on debt relief should not be considered out of date for the reason that the problems which arise from the burden of debt such as the poor state of roads, inadequate public health care and low levels of agricultural production, as evidenced by the report ‘100 of the most pressing issues in the Republic of Moldova in 2008’ by IDIS VIITORUL, are still problems that the Moldovan population have to contend with.

‘100 of the most pressing issues in the Republic of Moldova in 2008’ by IDIS VIITORUL logically concludes that farmer salaries being lower than the living minimum and lack of well paid working places results in Moldovans going abroad to find work. On the other hand, they do not dig deep enough to arrive at the following question: How could the extra funds generated from defaulting on the external debt be used by the Moldovan Government to raise the salaries of the farmers and generate more well paid working places? As long as the discussion on poverty reduction does not include debt relief, Moldova will remain the poorest country in Europe and in fact one of the poorest in the world. As long as a trade-off is made in favor of honouring the external debt at the expense of the internal debt, primarily in the form of wage and pension obligations, neither the Millennium Development Goals nor the goals of the Economic Growth and Poverty Reduction Strategy Paper for the Republic of Moldova will be met.

Let us be guided forward to a future of prosperity and happiness in Moldova by the sage counsel of Dr. Joseph E. Stiglitz (chairman of President Clinton’s Council of Economic Advisers, former chief economist at the World Bank until January 2000, Nobel Prize winner of Economics in 2001 and currently professor of finance and economics at Columbia University) from the closing paragraphs of the Chapter the Burden of Debt in his book Making Globalization Work.

“Resistance to these ideas will be great. As we have seen, the United States has opposed the establishment of an orderly process of debt restructuring. Some in the financial markets do not want to have an orderly process; they want the costs of going through a default to be high, so that few will do it. They object that debt relief will lead to more defaults, higher interest rates, and therefore less borrowing. Given that one of the underlying problems is over-borrowing, reducing borrowing would be desirable. And even many emerging markets will vocally oppose it-especially those that are looked at in the financial markets as suspects for default. They are putting on a brave show for the benefit for the creditors, showing by their willingness to undergo enormous pain , were a default to occur, that default is, for them, simply not an option. (Whether they are really against these reforms is another matter.)

Many of the problems in meeting debt payments arise not from mistakes on the part of developing countries but from the instabilities of the global economic and financial system. The need for better mechanisms for sharing risk and for resolving debt problems will continue to be great so long as international financial markets continue to be marked by such instability.”

Author: Randolph Anthony Piazza-Liaison between the Republic of Moldova and the Bolivarian Republic of Moldova; Nationality: USA;
Email: Randolph.Piazza@gmail.com