Poll: What Hinders Development in Moldova?

Human Capital Development in Moldova: A Chicken and Egg Problem

There is an interesting discussion on Sandu’s blog about the existing differences between the intellectual elite in the US and Moldova. In the US, and by extension, in the Western Europe, the academic and professional elite are open to change, inquisitive, simple and flexible. In Moldova, however the intelegentzia, including university professors and students, is arrogant, narrow-minded, mediocre and unproductive. Initially, I found the family and pre-university education system as being the main factors that can guarantee high quality professionals (technocrats) and academic elite.

However, if you look at this issue from a larger perspective, we can see a more relevant picture. First, Moldova is an underdeveloped country. Many problems that the Moldovan society and economy is currently facing stem from a very low level of human development. In this sense, a nation’s human development is much more than mere financial well-being of its individuals.

Human capital, as input in the production cycle of an economy, is attained through consumption of education services. The better the education services, the more developed the human capital. But human capital is only an input. In order to achieve high quality outputs, you actually need a functioning economy. A rapidly developing economy demands better human capital via a vibrant labor market.

It is easy to see how the quality of the human capital is directly determined by the quality and dynamics of the labor market. In order to ensure development of human capital, there must be a strong motivation for investment into development. People need to perceive a promise of reward for studying hard, exercising critical judgment and being creative and innovative. Without it, peole, being what they are, won't be able to achieve and develop much. In the West, people pay a high price (including in financial and personal effort terms) and demand high quality education because they know it will eventually pay back (both in financial and esteem terms).

In Moldova, however, such motivation does not exist. There is really no promise whatsoever that if you study hard in school or work conscientiously at your workplace, you will be rewarded in any way. The Moldovan employers rarely require candidates to have previously-attained academic or professional achievements. Rewards are distributed in a random and inconsistent manner, which perpetuates all types of insecurity. There are no question asked, no promises made, and no guarantees. People are on their own with their conscience, and we very well know of what human nature, when left unattended, is capable of.

Moldova and European Union: What Next?

Since the first day of 2007, Moldova has become one of European Union’s neighbors. Moldova’s hopes related to EU integration are pretty clear and well-known, and its Government is actively pursuing a dialogue with the European Commission, the ultimate objective of which is an EU Association Agreement. However, this objective is yet far from becoming a reality. Today, negotiations between EU and Moldova are focused around two important agreements: Visa Regime Facilitation and Readmission Agreements. Here is a very good article by Gheorghe Stamate about the meaning and significance of these agreements, as well as positive and negative implications for Moldova.

Global Warming in Moldova

Last week it was unusually and disturbingly (at least for myself) warm in Moldova. On Wednesday, the outside temperature reached 14 degrees Celsius, thus making this January the warmest winter month since the first instrumental weather records in the country.

I don’t see common Moldovan people being concerned by this phenomenon. At most they are just amazed, and sometimes pleasantly surprised by generous warmth and sunshine. Farmers are worried because this unusually warm weather might mess up their crops, and consequently, their families’ incomes (for those interested in the potential impact of this weather conditions on Moldovan agriculture, here is an opinion). Government is passive because it is widely-accepted that one “cannot change the weather.” Some scientists are probably amazed in their own, scientifically tacit way.

I do not hear anybody talking about global warming, and this unusually warm January temperature for Moldova being a real manifestation of it.

How to Tax Real Estate Property in Moldova?

Until recently, revenues from property taxes throughout Moldovan cities and villages were merely symbolical and represented an extremely small share of already meager local budget revenues. A property tax reform, initiated in 2003, intended to change this situation.

Firstly, all residential properties (so far, in cities only) were re-assessed so as to reflect their market value, considering a multitude of factors like location, condition of apartment building and availability of residential infrastructure. Owners of apartments and houses were informed about the re-assessed value of their property and given the opportunity to petition the decision. Only in Chisinau Municipality, about 190,000 apartments and 28,000 single-family houses were re-assessed.

Secondly, Section VI on Real Estate Property of the Fiscal Code was recently modified. For Chisinau, the tax rate was set at 0.02% of the re-assessed value of taxable property. All other municipalities should set their own rates (0.02% being the minimum allowed), so as to achieve an average increase of 10% in revenues from this particular tax compared to the previous year. For large properties (with surfaces comprised between 100 and 200 square meters), the tax rate is 3 times bigger, and for very large real estate (more than 200 square meters), it is 28 times bigger.

What will be the real outcomes of these policy measures? According to a rather good article in Economic Overview, the impact of these changes, particularly on municipal governments, the ultimate beneficiaries of this reform, has not been calculated. Judging by the extremely small number of transactions on the real estate market, (543 sales, 483 donations, and 346 inheritances in Chisinau in 2006), and a large number of social categories that are exempt from this tax, the municipal budget will fail to incur the much-needed revenues. Theoretically, the tax revenues that could accrue from 9,000 very large residential houses located in Chisinau could make a real difference in the municipal budget. However, experts are rather skeptical because it is obvious that these well-off owners might prefer to experiment with various tax avoidance loops.

Moldova as a Loser

A well-known journalist from The Economist who specializes in Eastern Europe and whom I highly respect, Edward Lucas, published an article “Stars and soggy bottoms” which contained a brief description of Moldova. Because I find his choice of words precise in describing our reality as perceived from abroad, I just want to quote it here without further comments:

“Loser: Abandoned by the West, and with a defeatist political elite unable to look beyond Russia, Moldova is sinking. If any post-communist country faces real collapse, it is this one. Nothing seems to be working in its favour, save that its neighbour, Romania, has just joined the EU.”

Electricity Crisis in Moldova: a Single Extraordinary Event or Should We Expect More?

The recent electricity crisis that occurred in the rural areas of Moldova as a result of a strong snowstorm (3-4 January) revealed a high degree of vulnerability of the country’s electricity networks to extreme natural phenomena, which due to global warming, are expected to become more frequent and severe in the future. According to official data , about 500 settlements in the southern and central parts of the country have been cut off from power. Although the raion (district) centers were reconnected quickly, many rural areas are still in darkness.

Some consider this situation as the worst energy crisis in the last twenty years. Although all discussions in the media are focused on how the private power supplier, Union Fenosa, and Government dealt with the crisis, I’m more concerned about the causes that triggered this situation. One obvious reason is the unusually bad weather conditions. However, given that we cannot change the weather and such conditions might occur pretty often in the future, having electricity poles fall like domino all over the country does not appear as an attractive scenario at all. Secondly, the power infrastructure, like any other type of infrastructure in the poorest country in Europe, must be pretty old and worn-out. According to my knowledge, the Spanish private supplier, Union Fenosa, was supposed to make significant investments in the electricity infrastructure. According to the severity of the crisis, the investment has been either of low quality or extremely limited. I wonder as to how the Government regulates and monitors such investments of one of the largest monopolies and most important public utilities in the country. Thirdly, based on the experience of other under-developed countries, it wouldn’t be far-fetched to assume that neither the Government nor the supplier had a well-rehearsed and operational emergency plan to be used in such situations, therefore the great delay in restoring power supply to final consumers. In my view, these could be the main factors (but not the only ones) that contributed to the ongoing electricity crisis in Moldova. In order to avoid such situations in the future, these factors should be addressed immediately and effectively by both Government and power supplier.