Moldova

							MOLDOVA
Rank: 81 Regional Rank: 33 of 41

M

oldova’s economy is 59.5 percent free, according to our 2007 assessment, which makes it the world’s 81st freest economy. Its overall score is 0.1 percentage point lower than last year, partially reflecting new methodological detail. Moldova is ranked 33rd out of 41 countries in the European region, and its overall score is lower than the regional average. Moldova’s trade freedom, business freedom, and fiscal freedom are strong. The top income and corporate tax rates are 18 percent and 15 percent, respectively. Additional taxes are imposed by the government, and overall tax revenue is fairly high as a percentage of GDP. The average tariff rate is low, but the government maintains non-tariff barriers that include burdensome regulations and restrictive customs. As the poorest country in Europe, Moldova has an economy with significant shortcomings. Monetary freedom, investment freedom, and freedom from corruption are weak. Inflation is high, although the government has been phasing out its price supports on certain goods. Foreign investment in virtually all sectors faces hurdles, from outright restrictions to bureaucratic inefficiency. There is also significant corruption in most areas of the bureaucracy, and although the government has been reforming its judiciary, public institutions are weak overall. BACKGROUND: Moldova has struggled since becoming independent after the collapse of the Soviet Union in 1991. It is now trying to deal with problems created by a secessionist enclave in Transnistria. The March 2005 elections gave the Communist Party of Moldova a majority of seats, which is expected to reinforce commitment to European integration. Agriculture remains central to the economy, with foodstuffs and animal and vegetable products as the main exports. A Russian embargo on Moldovan wine imports has severely hurt the overall health of the economy.

The economy is 59.5% free
100

80
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60

40
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Europe Average = 67.5 World Average = 60.6

20

0

1995

2007

QUICK FACTS
Population: 4.2 million GDP (PPP): $7.3 billion 7.3% growth in 2004 6.0% 5-yr. comp. ann. growth $1,729 per capita Unemployment: 8% Inflation (CPI): 12.5% FDI (net inflow): $300 million (gross) Official Development Assistance: Multilateral: $35 million Bilateral: $83 million (40% from the U.S.) External Debt: $1.9 billion Exports: $1.3 billion Primarily food, textiles, machinery Imports: $2.1 billion Primarily mineral products and fuel, machinery and equipment, chemicals, textiles

How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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MOLDOVA’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 70 74.4 90.4 71.7 68 30 50 50 29 61.2
0

INVESTMENT FREEDOM — 30%
Foreign investment is welcome as long as it does not conflict with national security interests, anti-monopoly legislation, environmental protection norms, public health, and public order. The business environment is overwhelmed with informal obstacles such as corruption and weak governance. Foreign investors may not purchase agricultural or forest land. Both residents and non-residents may hold foreign exchange accounts, but approval is required in some cases. Payments and transfers require supporting documentation and approval by the National Bank of Moldova if they exceed specified amounts. Nearly all capital transactions require approval by or registration with the National Bank of Moldova.
L L L L L

50

L L L L L
100

100 = most free,

= world average

BUSINESS FREEDOM — 70%
Starting a business takes an average of 30 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license and closing a business are relatively simple, but bureaucratic procedures are not always transparent, and red tape can make processing unnecessarily long. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.

FINANCIAL FREEDOM — 50%
Moldova’s small financial system was wholly controlled by the state as recently as the 1990s and has been undergoing restructuring and consolidation. Supervision and regulation fall short of international standards. There are 16 commercial banks, including two foreign bank branches. The sector is highly concentrated, with the top five banks controlling over 70 percent of bank assets. The government, which holds shares in two banks, has announced its intention to sell its majority stake in Banca de Economii, one of the country’s largest banks. The insurance market was opened to foreign competition in mid-1999 and consisted of 33 insurance operators in March 2006. The formerly state-owned insurance company Asito, which dominates the market, is now majority foreign-owned. Capital markets are immature, and the stock market is very small.

TRADE FREEDOM — 74.4%
Moldova’s weighted average tariff rate was 2.8 percent in 2001. Cumbersome and restrictive customs procedures, corruption, burdensome regulations, and export restrictions add to the cost of trade. Consequently, an additional 20 percent is deducted from Moldova’s trade freedom score to account for these non-tariff barriers.

FISCAL FREEDOM — 90.4%
Moldova enjoys low tax rates that have been gradually reduced over the years. The top income tax rate is 18 percent, and the top corporate tax rate is 15 percent. Other taxes include a value-added tax (VAT), an advertising tax, and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 29.8 percent.

PROPERTY RIGHTS — 50%
The judiciary has been improved in recent years but is still subject to executive influence. Delays in salary payments also make it difficult for judges to remain independent from outside influences and free from corruption.

FREEDOM FROM CORRUPTION — 29%
Corruption is perceived as widespread. Moldova ranks 88th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.

FREEDOM FROM GOVERNMENT — 71.7%
Total government expenditures in Moldova, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.6 percent of GDP, and the government received 1 percent of its total revenues from state-owned enterprises and government ownership of property.

LABOR FREEDOM — 61.2%
The labor market operates under highly restrictive employment regulations that could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee is relatively costless. There are rigid regulations on increasing or contracting the number of work hours.

MONETARY FREEDOM — 68%
Inflation in Moldova is relatively high, averaging 12.1 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government has phased out most price controls and many subsidies, but it still influences prices through numerous state-owned enterprises and utilities, including electricity and energy. Consequently, an additional 10 percent is deducted from Moldova’s monetary freedom score to account for these policies.

278

2007 Index of Economic Freedom