Small Business Reform in Moldova: A Way Out?

For weeks, the news coming out of Moldova has centered on the chaos surrounding the recent parliamentary elections and the resulting political uncertainty. Amid the growing crisis, a coalition of business associations organized by CIPE’s partner in Moldova the Institute for Development and Social Initiatives (IDIS “Viitorul”) began implementation of a project aimed at establishing a large-scale advocacy campaign to encourage the government to improve the national business environment by removing key barriers to small businesses. Why, in the midst of political repression not seen in the small East European country since the Soviet era, should Moldovans, let alone the international community, concern themselves with these seemingly mundane reforms?

The answer is that establishing responsible and accountable institutions is the only way to ensure that fair and competitive elections occur, election results are respected, and human rights are observed. With its monopoly on executive and legislative power, the ruling Communist Party has few incentives to develop such institutions in the political sphere. As pertains to business, however, the government may soon be compelled to act. The global economic crisis is likely to hit Moldova especially hard in the coming months. Many Moldovans depend greatly on remittances from family members working abroad, which flow into Moldova at a rate equaling 30 percent of the country’s GDP – the highest rate in the world. As unemployment rises throughout Western Europe and North America, this source of income will continue to shrink – by as much as 33 percent according to one article. The shock to families who rely on these payments will be substantial, and could well lead to further instability and dissatisfaction with the current government.

In order to overcome Moldova’s dependence on remittances and promote sustainable economic growth, these funds must be used not only to supplement incomes, but as capital for small businesses that will provide opportunities for increased employment and trade. According to a World Bank study, only 7 percent of remittances to Moldova are invested. A higher rate – 21 percent – are saved, but because of Moldova’s weak banking infrastructure, only a fraction of these savings are available to small businesses as loans. The key to encouraging higher investment rates, the study concludes, is improving the country’s business environment. Moldovans must feel comfortable and secure channeling remittance payments into small businesses that can provide the necessary jobs and income levels to increase the overall standard of living in the country. Thus the government has a strong incentive to accept the recommendations of the advocacy coalition that would make it easier to open a business, hire employees, and conduct trade across national borders.

To implement these recommendations effectively, the government will have to build and strengthen the institutions that will ensure that these reforms are put into practice. Admittedly, there is a considerable difference between ensuring proper regulation of licensing businesses and achieving the full supremacy of the rule of law. However, convincing the government to accept the role of civil society as a necessary component of governance is the first step toward establishing a functional and meaningful democracy in this troubled region.

Published Date: May 18, 2009