Stas Madan, economic analyst with Expert-Grup, spoke in an interview for the FES/APE foreign policy newsletter about how the Republic of Moldova implemented the recommendations of the European Commission in the economic sector during the last year. We discussed about the main conclusions with regard to the economic sector of the Shadow Report no. 1 ”Evaluation of the progress of the Republic of Moldova regarding the implementation of the recommendations of the European Commission in the context of the accession process to the European Union” published this July. The report was developed ten independent experts, within the “Civil Society for European Integration” Project, who analysed the implementation of the EU recommendations for Moldova since the last report issued by the European Commission last autumn. We learned from Stas Madan about how Moldova’s EU accession process is proceeding from an economic perspective, what needs to be done to attract foreign investors, but also how the gaps in the labour market can be bridged. The full interview follows below:

The experts who contributed to this report made a complete X-ray of several key sectors that need to be reformed in the Republic of Moldova. How do you characterize the overall conclusions of the report, which includes an assessment of the progress on the most important negotiation chapters - justice reform, the fight against corruption, local public administration, parliament’s activity, security and freedom of expression?

The average score given by the experts, based on a scale from 1 to 5, is somewhere around 3. Implementation of most recommendations was assessed with this score. Obviously, certain results have been achieved, but we need also to say that the recommendations of the European Commission are quite varied and heterogeneous to be able to evaluate them all uniformly.

Some recommendations are very technical, for example, adherence to a particular convention. However, there are also quite complex recommendations, such as mitigating vulnerabilities on the labour market, which is a much more complex process.

The European Commission’s report, released in November 2023, makes an thorough assessment of all 35 negotiation chapters and contains recommendations on all these chapters. We started the monitoring with the chapters that are part of the cluster called “Fundamentals”, since the 35 negotiation chapters are divided into six clusters. The European Union will start the negotiations precisely on these chapters, which refer to justice, rule of law, and functional market economy.

In other words, if we are deadlocked on these chapters, there is no point in opening the negotiations on others. So, there is a certain consecutiveness in the negotiation process with the European Union and, because of this, the chapters that are part of the “Fundamentals” are the most important or represent a priority.

Precisely for this reason, we focused on these topics in our monitoring. It was a sustained effort, as we had a total of 43 recommendations to analyse, a rather impressive volume. 10 experts worked on this report, so you cannot say that a certain ideology was imprinted. The experts evaluated the extent to which the recommendations of the European Commission were fulfilled by the Moldovan government.

We have the lowest average score on the freedom of expression, but those recommendations are more about media transparency, not necessarily about not being able to express ourselves freely. And the best score was given to the security chapter. But somehow it is also logical that when we are good at security, we are a little weaker at freedom of expression.

The average score of the Republic of Moldova for fulfilling the 43 recommendations of the European Commission is approximately 3 out of 5 points provided by the evaluation methodology.

Restructuring and privatization of state property

How can the business environment be improved and maintain a rapid pace of reforms to restructure and/or privatize state property? And what about the state interference in pricing?

First of all, we need a very clear vision of what we would like to attain and, just as importantly, to have sufficient will and capacity for implementation. Because, very often, we manage to develop a pretty good vision, but, unfortunately, when we get to implementation, there is limited administrative capacity.

Regarding the state interference in terms of the presence of state-owned enterprises, the Republic of Moldova has a very good strategy, which was adopted at the end of 2022. It has clear targets, including transparency and integrity with regard to the privatizations to be carried out. Very importantly, all the enterprises in the state portfolio are classified into several categories, as part of a process called the screening mechanism, which was developed by the Government. However, here unfortunately, we have a problem of transparency, because that list has not yet been made public, communicated or explained to the public – namely, which enterprises remain in the state’s portfolio and which are to be privatized, which are to be liquidated and under what shape. It should be noted that the enterprises are divided into five categories.

Regarding this chapter, we have a strategy, but we do not yet have an approved implementation programme. Such a programme was developed and has been under public consultations for several months, but its implementation is delayed.

We also talk about state interference when prices are influenced, this being generally a rather sensitive topic in society. In the Republic of Moldova, there is often a wrong perception about the state’s interference in setting the price. In reality, there is no very much interference. There was such a situation during the state of emergency, when the state intervened. But that intervention was justified. When we had that rampant inflation, one of the state’s tools to limit price increases was to limit the trade mark-up on certain products.

Thus, they made up a list of important basic products, and when the inflation returned to the optimal parameters, they got back to the original list, those products being removed.

Regarding the business environment, in some areas we see certain progress, especially in deregulation and debureaucratization, where we have several packages developed by the Ministry of Economy and approved by the Parliament.

With regard to digitization, we have made certain progress, more precisely, in the digitization of public services. However, we still have reservations when it comes to the quality infrastructure, consumer protection, and competition protection. This is where intervention is needed in order to have a more viable and predictable business environment.

Improvements in the labour market

What is the situation of the labour market, where there is a need, according to the report’s conclusions, for increased incentives to attract labour? And what are the measures to combat informal employment?

Indeed, the Republic of Moldova has two major constraints that were highlighted by the European Commission. On the one hand, we have a very high inactivity rate, although the unemployment rate in the Republic of Moldova is quite low. The inactivity rate in Moldova is one of the highest in Europe and that is a big problem.

Also, the informal economy has a fairly large share. Almost every fourth person in the employed population, who has some income, is part of the informal economy. Obviously, these are important challenges. What the Ministry of Labour and Social Protection has done in this field in the last three years is indeed commendable, at least from the perspective of the coherence of the policies developed and implemented.

There is a framework programme - the National Employment Programme - where these two issues are very well set. However, it is one thing to develop policies and another to have the tools to implement them. In this sense, the tools of the Ministry of Labour are two key institutions. On the one hand, there is the National Agency for Employment (ANOFM), whose main mission is to employ as many people as possible, which means to be a broker or an intermediary on the labour market on behalf of the state. On the other hand, we have the State Labour Inspectorate (ISM), whose basic mission is to combat undeclared work and legalize as many people as possible.

The Ministry of Labour and Social Protection, in addition to that framework document - the National Employment Programme - has also developed two specific vision documents for each institution, with concrete action plans that must be undertaken to improve things, both for ANOFM and ISM. We already have some tangible progress, that is why, the evaluation of the implementation of the EC recommendations in this area was positive, the score being 3.5 points out of 5.

For example, if we refer to ANOFM, in 2023 there was an increase of over 14% in the number of people employed with the assistance of this institution and a much better assimilation of the budget for active employment measures. Much has also been achieved in terms of the design of these active employment measures. For example, mobile teams were created to identify job seekers more easily. In short, quite good progress has been made in this regard.

If we are talking about the State Labour Inspectorate, this institution was somehow amputated with the 2018-2019 reform, when it was forbidden to make unannounced checks. Because how can you detect undeclared work in the case of a planned control? There is clearly a cognitive dissonance here. Parliament amended the legislation in force and this institution regained this right to make unannounced checks. It is also very important to note that controls are implemented based on risk criteria, so that honest economic agents are not inspected. Only those who are in the risk zone, according to certain parameters, are inspected.

As for the State Labour Inspectorate, it is equally important to mention that there has been a reorganization of this institution with a much better governance, because when you inspect an entrepreneur with the aim of detecting undeclared work, integrity and diligence of inspectors are very important. And here we can already talk about very good results, but there is certainly still a lot of work to do.

For example, in the first five months of the year, the State Labour Inspectorate managed, thanks to the controls, to legalize people who worked illegally, so that they have an official employment contract. Thus, in a rather limited period of time, much more people were possible to legalise than in the entire 2017-2023 period. We understand that things have picked up speed, which looks very good, but it is very important that the implementation of those strategies continue.

In addition to this, efforts are certainly needed from other ministries, especially the Ministry of Education and the Ministry of Economic Development and Digitalization. If we are to talk about the Ministry of Education, there is also a recommendation of the European Commission, whose implementation we evaluated. During the last year, the Ministry of Education promoted several reforms to make the labour market more flexible. Today much more attention is paid to education and lifelong learning. Because we live in a world where adaptability is becoming more and more important. It is imperative to invest so invest in the people’s capacity to adapt. Certain instruments have changed, including the Education Code, by introducing the so-called micro-qualification.

In this field, as a whole, we have quite good progress in what the state institutions have done, but, of course, there is a lot of room for improvement. This progress must not stop here, there should be continuity in these reforms, because we already have some quite important dilemmas in society. One is related to the import of labour. There is increasing pressure from a section of the business community to import even more labour, to liberalise the labour import even more. On the other hand, we still have a very high inactivity rate, which suggests that we have to work very hard to, first of all, reactivate or bring into the workforce people who are in the Republic of Moldova and currently not working for various reasons.

Strengthening energy security

One of the recommendations of the report refers to increasing investment in infrastructure, especially to improve energy security and to facilitate international trade, but also digitization. Can we hope in the coming years that at least a highway will be built from those pre-accession funds?

If we take concrete actions in this regard, the dream can become a reality. Indeed, the issue of connectivity is critical for the Republic of Moldova, under all aspects. In recent years, we have made substantial progress in energy connectivity. Until recently, we were practically 100% dependent on the Russian Federation and trembled at any blackmail from Moscow. Now, things have changed radically. The Vulcanesti-Chisinau overhead power line is under construction and there is already a concrete plan and financing for the Balti-Suceava highvoltage line.

It was a success of Ukraine and the Republic of Moldova that in 2022, in record time, the connection or synchronization with the European energy system ENTSO-E was produced, which meant a lot for us, especially in the autumn 2022, when we had only certain periods without electricity. We could have been without energy in general if we had not connected to the European system. So, significant progress has been made when it comes to energy security.

In terms of road and railway infrastructure, there are still a lot of growth reserves for the Republic of Moldova. Because if we look, for example, at the World Bank’s logistics performance index, we have a rather modest score, only 2.5 out of 5. Infrastructure is a very important catalyst for the economic growth, and after the Russian invasion in Ukraine, when enormous pressure was put on our infrastructure, we realised we still have quite a few deficiencies.

It is very important that Moldova is part of certain transnational plans in terms of connectivity. For example, if we talk about railway connectivity, there is a joint Poland - Ukraine - Romania project. This would also mean having European gauge lines in the Republic of Moldova. Likewise, the Unirii highway in Romania, which will pass through the Republic of Moldova and further towards Odesa.

There exist good prospects, but we need to remain anchored in the European integration process. It is very important that we do our homework because when it comes to public investment we have a big problem. On the one hand, we have this acute infrastructure deficit, which means infrastructure investments are needed, but if we look at the level of execution of public infrastructure expenditures, every year only 70-75% of the budget is executed. So we fail to execute both what we plan and we can afford. This is very sad and we need to improve the processes in this regard a lot. We need to work much more on the preparation stage of the projects, so that we have fewer impediments in their implementation. Especially since infrastructure projects are very complex. We need to work more thoroughly and spend more time on pre-feasibility studies. One of our recommendations was that these pre-feasibility studies be published on the websites of the central public authorities, so that there is also public control, so that we can see to what extent and how well those projects are planned and why we end up with blockages in their implementation.

Together with the European integration process, I think things will improve. It is important to be coherent in our policies because, unfortunately, certain reforms are somehow at odds with the national strategic planning framework.

For example, we have this reform through which the state road administration absorbs the 10 SA Drumuri, that is joint-stock companies, which does not fit into the denationalization policy and will create impediments in the future. There are transnational plans in which the Republic of Moldova is included, and it is very important to have the absorption capacity as well as the necessary skills to convince the investors to come in Moldova.

For example, last year, we held a debate about the Republic of Moldova being able to issue a Eurobond in the next period. Namely to make the preparations in this regard, because we are the only country in Europe that does not have an economic reference on the foreign capital market. And this is not a good thing. We also need to issue new Eurobonds, because this also makes the authorities more accountable, since no one evaluates you better than the private investors who have invested their money.

The stumbling block in those discussions, however, is again which projects to finance so that they are economically viable enough and can be implemented domestically, because we usually have delays with infrastructure projects.

Conditions for attracting foreign investors

Attracting foreign investment can only be done in a functioning rule of law and even a militarily defended one. How can we convince investors to come to the Republic of Moldova with a war in the neighbouring Ukraine?

Yes, this indeed is a constraint, which has been highlighted also in this evaluation report. If we look geographically, we are the only neighbour of Ukraine that is not a NATO member. Obviously, the security risks for the Republic of Moldova are much higher when we are evaluated from an investment point of view. And this is a risk that cannot really be fought. Investors’ perception is also influenced by this factor.

But at the same time, again, we have to do our homework well. Because we had a national strategy for attracting investors and promoting exports that expired in 2020, and until July 2024 we did not have a strategic planning document. We did not have a clear, coherent vision of what we want to do and what we will do to attract foreign direct investment. This document was approved only at the beginning of July this year, and in addition to the strategy, we must provide stability and predictability. However, in the report, we have concrete examples of laws that directly target foreign investors. For example, the Law on foreign investments, the Law on public-private partnership, the Law on concessions. From an investment perspective, these laws are very important. Last year, these laws were amended and we signalled, for example, that the public-private partnership draft law was not good enough. The law, however, was passed and a few months later, it was amended again.

If we look, for example, at the United States, which is the best performing economy in the world, we often wonder: How come they have such outdated provisions? Or why do they have such an electoral system? But they have it that way because there is stability and predictability in the legislative act. In conclusion, it is what we have to learn too, which is to offer stability and predictability to foreign investors.

Thank you!