Statement by Andrei Bugrov at the meeting of May 6, 1999

International Bank for Reconstruction and Development International Development Association 87404 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-120 ~fay 5. 1999 Stat~?mcnt hy Andrei Bugro\ Dati? of J\tccting: May 6. 1999 Moldova CAS The economic transition in Moldova proved to be a very uneven process which included a number of jump-starts and policy reversals. At this stage when Moldova is reclassified as an IDA-eligible country, the government must acknowledge the precarious situation in the economy and fully employ the opportunities provided by ESAF and IDA instruments in order to consolidate the much needed reforms. The country can hardly afford the course of development outlined in the "delayed reform scenario"; strong ownership ofthe CAS stressed by the staff and Mr. Stek must lead to determined implementation of the envisaged reforms. Macro stabilization is certainly a necessary precondition of successful structural changes. I shall not dwell on this issue for it is supposed to be covered in more detail by our colleagues across the street. I would only like to commend the G.overnment for their intention to tighten their budget commitments for FY 1999 by about 6.5 percent ofGDP, and wish them all the resolve needed to avoid softening this stance. It may be said in this context that ruling out new budget arrears in 1999 and beyond is even more important than clearing the existing ones. These existing arrears more often than not represent "fictitious" liabilities stemming from irresponsible budgeting and pressures by various vested interests, and to spend money on clearing them may in some cases mean doing injustice to more legitimate needs such as targeted social assistance. I see the Government's structural program as appropriate and deserving our full support. It deals with most important issues such as adequate social protection, agriculture, energy, and public sector reform. Agriculture is rightfuiJy viewed as a critical area. Moldova is endowed with rich opportunities for strong export-oriented agriculture, and the significant investments in both physical and human capital made over the last several decades should not be wasted. While the 1998 financial crisis in Russia has obviously presented a serious challenge for Moldovan exports, there are many reasons to believe that it is the lack of reform in the sector itself that is at the root of \This document has ~ restricted distribution and may be used b~ recipi~nts only ~n the 'performance of their official duties. Its contents may not otherv./lse be d1sclosed w1thout \ \Vorld Bank authorization. current problems. For example, although Moldovan producers enjoy substantial advantages over their competitors (well-established direct relations with customers, recognized trademarks and high quality of produce widely known in the region), they failed to increase their share of the Russian market during the recent crisis. Therefore there is a clear need to expedite reforms in this sector. In this respect we support Mr. Stek's suggestion that related projects be prepared sooner. Property rights should be clarified, and private initiative promoted. At the same time large and medium-scale enterprises may also turn out to be efficient. particularly in agro-processing industries. It is necessary to achieve a delicate balance between full empO\\erment of individual farmers and relati\ e efficiency of large capital-intensive enterprises. For instance. I am somewhat skeptical about the total liquidation of the ex-collecti\C farms. It seems more reasonable to do this nn a case-by-case basis. and Bank's e\pertise in this area should he fully engaged. In thi...; Clmtcxt I \\nuld like to dra\\. attention to a highly inappropriate point made by the staff on page 5. namd: that there is a "consensus forecast that Russia's GOP \\ill fall sharply". I ha\e no kno\\ ledge of th~.?se forecasts. and m: authorities ha' e rl.?pe:..~teJI: pointed to the fact that the output decline is practically bottomed out. In 'iew ofthis relati\e economic stabilization in Russia Moldo,·an export opportunities must be strengthened and developed. I suggest that this unfortunate point should be deleted from publicly circulated documentation. Energy is another area of crucial importance. I welcome the Government's plans to privatize electricity distribution and generation sectors within a year. It should be fully understood that the policy of accumulating further energy-related external arrears would render economic prospects uncertain at best. Debt-equity swap is a good solution of past problems; however, it is not likely· that this type of arrangements can serve as a substitute for a policy of transparent, disciplined and timely payments. I think that this issue should be made one of the focal points of the SAC. District heating is known to be one of the most cumbersome energy-related issues in transition economies. I see that the government has not come up with a clear scheme aimed at tackling this problem, so it would be appropriate if it is given special treatment within the framework of Energy II project. Perhaps a special district-heating project would also be appropriate. Public sector reform is, of course, a cornerstone of all other undertakings. So many issues ought to be dealt with that the whole exercise is rightfully labeled "modernization of the state". While I have some doubts whether administrative-territorial reform in such a small country is a critical priority. the other three "axes"- improving PSD environment, public administration refonn, and reorganization of core services - are of indisputable importance. While the Bank staff have extensive knowledge in these areas, I would suggest that the Government pay more attention to the experience accumulated by some other small transition economies which face similar fiscal and external constraints. For example. many innovative approaches were tried and found successful in Georgia and Armenia. Utilization of this experience can be only facilitated by the fact that these countries belong to the same constituency. Public sector reform needs to be approached with utmost creativity. All services currently provided by the state and paid for from the public funds (or would it be more accurate to say: "supposed to be provided", "supposed to be paid for"?) should be scrutinized and decision should be made whether the country can afford their continuation. It may well tum out that keeping under the state umbrella all those services and institutions which used to belong to the public sector actually produces little beyond flourishing corruption and depredation of human and physical capital. In this respect it seems that PSR must be made the major instrument of fighting corruption. If the issue of corruption is taken separately from the PSR it may sometimes result not in cleaning up the general regulatory em·ironment but in making things even dimmer. We should remember th:lt corruption is not a uniwrsal e\ il per se. It is bad'' hen it impedes implementation of good policies: it is simply a \\J.) ofsuni\:tl ''hen it is practiced in urder to adju~t fc1r inappropriate state pPiicies. Some instances of alleged cprruption. as L'IlU!llerated in para 1().can be' ic,,eJ as manifcstatilll1S of entrepreneurial spirit\\ hich should be lcg:.dizcd and institutiun3lizcJ. For e~ample. fcc-for-sen icc schemes in some social scctPrs slwuld be regJ.rdcJ J.s JcnwnstratiL)J1 ufreal pri\ate demand tor these sen ices: thus. these sen ices should be at least commercialized and in some instances pri,·atized. This would legitimize the marketing activities. eliminate subsidization of those who can afford these services, and release public resources for targeted assistance to the most vulnerable groups. Moreover, legitimization of these practices would improve the situation of those employed in sectors like education and health care, thus saving precious human capitaL This selective approach would make it possible to concentrate anticorruption efforts precisely where they are most needed, like in the areas of business registration and regulation, state administration, legal enforcement, and so on. I think that these issues must be discussed in more detail in the context of PSR credits.