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Political consensus vs. competitiveness of public policies
Iurie Gotisan, September 30, 2007
I have recently attended an International Conference organised by the Independent Analytical Centre Expert-Grup in partnership with the Ministry of Economy and Commerce, which focussed on the National Development Plan (NDP). I think that the event had a double significance because it was attended including by representatives of Central European states who are ready to share their rich experience in elaborating and implementing similar plans or strategies in their native countries.
I have enjoyed the privilege to listen to diverse statements and commentaries by authorities and representatives of the associative sector. But two of them captured my attention. Firstly, I mean the political consensus, with participants signalling controversial public policies (when one thing is said and another one is done), in particular, as regards the competitiveness of public policies in general. Secondly, they discussed the willingness and patience of our political class to finish its work and to explain the results of a public policy (indeed, it was rather discussed the contrary of these two issues, in particular, the EGPRSP, a document which was drafted, discussed, but not implemented, and there are fears that the NDP could have the same fate).
Any way, I often remember these terms that reveal control, good manners and, most important, clear-slightness, when the course of political affairs of our and other countries is discussed. High-ranking governmental officials often deliver curious statements (including at the conference concerned); they state something that runs counter the political consensus or competitiveness of policies. For example, the opinion that the appreciation of the leu would be positive, as it would favour some government-promoted policies like that against inflation.
However, both the Government and the National Bank of Moldova (NBM) should me more cautious in this conjuncture when they support the appreciation of the leu, even if this helps stop the inflation. The recent rise of the basic interest rate (from 13.5 percent up to 16 percent) and of the rate of minimum mandatory reserves (from 10 up to 15 percent) by central bank is nothing but one more finding that main bankers do concern with evolution of inflation, since it has reached 13.5 percent in eight months, compared with December 2006. It means that the main actor of the monetary market is trying everything to stop the inflation. The Government could modify soon its inflation forecast for 2007.
As regards the exchange rate, I have heard statements that a strong Leu advantages the state when the latter buys fuels (in particular, natural gas: but their prices will unlikely stay unchanged) or such a situation is favourable to acquire shares in foreign firms for lower prices). But an economic logic would not explain such statements, particularly if we mean the general situation of economy, its sectoral evolution, increasing foreign deficits (trade and current account deficits).
Further, I will try to give more explanations regarding the trade deficit and foreign competitiveness. I have heard many "revolting" voices concerning the immensity of trade deficit and gravity of the current account deficit on one hand. On the other hand, I must note that the current account and other components of the balance of payments like the trade balance are structural and I do not observe any problem in this respect as long as they are completed (particularly from remittances and less via foreign direct investments). Perhaps this is an absolutely natural situation since the country has a surplus of currency and it should be redirected back, while high imports is also a proof in this regard.
Even more, the structure of imports should be also studied. Or, the rapid rise of the trade deficit is normal when mineral products (including natural gas), whose import prices have grown 2-fold, count for 25 percent of the imports. In addition, there are incontrollable factors like the higher prices of Russian natural gas, a rise that advances the foreign deficits for sure.
One more thing should be noted: a significant part of the current account deficit (about 40 percent) rests with the private sector, or the private sector borrows more than the state. There is a very elementary explanation in this respect: the private sector is probably more reasonable than the public sector (because it respects the market rules) and finally these deficits have natural explanations. Statistics for 2007 demonstrate this fact, too: imports of technological equipment, machines and appliances are larger, and therefore economic agents invest in modernisation of enterprises, expecting higher profits in future.
I have made a simple economic analysis and I found out that the trade deficit is not the most relevant indicator with direct tangencies with the foreign competitiveness of enterprises, especially when there are states with higher deficits compared with GDP than Moldova (Estonia, Poland, etc). Of course, there are some critical limits at which foreign deficits would challenge a potential economic crisis and would worsen more the foreign competitiveness of the country.
The conference that I have mentioned above focussed among others on foreign competitiveness. However, in spite of statements supporting exports and industries which manufacture some goods that could replace the imports, the imports continue to grow faster than deliveries of Moldovan goods to foreign markets. Officials of the Ministry of Economy and Commerce have recently stated that the domestic productive sector "cannot keep place with the internal demand," and therefore we have massive imports. And I have asked myself: perhaps it should not meet the internal demand?
Perhaps the comparative advantage of Moldova rests with the goods that it does not consume much? Why not to import tomatoes from Turkey or juices from Ukraine if they are cheaper than those made in Moldova? Why to try reanimating some very expensive and inefficient industries instead of letting the market choose the specialised branches of Moldova? We should let the market direct its priorities alone and I think that the market ensures a better allocation of resources than the planning. Let’s look at the service sector only, which already covers about 60 percent of the GDP; I think that potential priorities should be focussed in this sector.
Finally, I would like to note foreign finances, which have become a very important issue that captures much attention and raises speculations. It is very well and even excellent that Moldova has repaired its relations with main international organisations; it is very good when the Government receives funds from IMF, NBM or when it expects financing from the Millennium Challenge Corporation. However, I think that authorities should remember that foreign finances cannot treat still a laming economy or when these funds are not reasonably administrated. One cannot allocate very large funds but they would be inefficient if the economic system is ill in terms of structure, sectors, etc.
The same conference has discussed the competitiveness of public policies. Authorities shall have a strategic vision capable to encourage an efficient management of foreign funds. But the implementation of such a vision means "an intellectual control" on public policies. Of course, such an approach of public policy or policies requires a modern economic qualification of public functionaries and politicians, while the participation of a new generation in elaboration, formulation and promotion of public policies would be welcome.
We need well-educated people with managerial experience outside the public sector, persons who may easily discuss on an equal footing with the East and the West (I do not mean only speaking languages, but also the thinking of those from East and West, their mentality), persons capable to refrain from populist policies, to reach a consensus, to demonstrate patience and competitiveness while drafting and promoting public policies.
1 The rate on REPO operations for purchase of two-month state securities carried out within open market operations of NBM.
2 Mandatory minimum reserves are made of domestic or foreign currency attracted from commercial banks in accounts in NBM. The National Bank of Moldova establishes the rates on mandatory minimum reserves depending on its monetary policy objectives.