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Romania is becoming main destination for Moldovan exports. Is there any connection with growth of lohn supplies?
Adrian Lupusor, July 31, 2008

May has brought a great change of principle for Moldova’s external trade. In particular, Romania has become the main destination country for Moldovan exports, ranking the Russian Federation on the 2nd place. According to NBS data, Moldova exported goods worth 123.4 million dollars to Romania in May, which is by 59 percent more than in the similar period of 2007. At the same time, the share of exports of goods made within lohn operations to Romania has also grown up to 55.7 percent, compared with 32.1 percent in the similar period of last year.

As the export of lohn goods to Romania has grown 2.4-fold in the 1st quarter of this year, compared with the similar period of 2007, the growth of supplies to this country in the period concerned was due to larger lohn operations (see Table 1). By analysing data on trade balance, one may note that the value of exports which are not part of lohn operations has declined, in spite of the strong growth of supplies to Romania. Thus, lohn-free exports worth 32.38 million dollars were recorded in the 1st quarter of 2007, compared with 28.75 million dollars in the similar period of this year. This is a reason to be sceptical over evolution of quality of Moldovan exports, which is strongly affected by lohn operations. That means importation of raw materials, their processing and re-exportation of finished products on the basis of contracts and with the brand of the ordering company. Therefore, enterprises manufacturing in lohn just provide raw material processing services in exchange for remuneration. These companies are service providers, not producers and revenues raised from trading of these products go to ordering companies, not local enterprises which executed the finished product.

However, what is the essential reason of growth of exports of after-processing goods to Romania which gave such an impulse to supplies to this country? Once Romania joined the European Union many foreign companies which had contracts in this country have started placing their orders in Moldova, being particularly attracted by a cheaper workforce than over the Proute. Thus, the price of production factors, particularly of workforce is the key factor making the domestic industry attractive for lohn.

Primordial advantages of lohn operations for Moldovan enterprises are that the ordering company provides the executor with the necessary equipment, raw material, know-how, and finally the sale market. This is a good possibility to reorganise domestic enterprises, modernise inventory and join western markets. This opens additional jobs and helps enhancing welfare of people at certain extend. As noted above, finished products are exported under the brand of the ordering company, which also raises the profit from sales.

Thus, the strong dependence on ordering company is the main disadvantage of lohn operations for Moldovan enterprises. Lohn enterprises work on the basis of strict contracts on procurement of raw material, processing mechanisms and export. The ordering company quits its equipment and market should the contract be cancelled.

In addition, lohn operations make errors in trade balance because lohn supplies are recorded as exports; that means trading of goods on foreign markets, while companies working in lohn supply but do not sell finished products. In reality, they are remunerated for their processing services. Finally, the big share of lohn supplies in all exports reveals the low quality of Moldovan exports. According to NBS accounts, the share of lohn exports has grown by 36.3 percent in the 1st quarter of this year, up to 30.8 percent of all exports. Given the fact that this share reaches 55.7 percent as regards the trade with Romania, the growth of exports was quantitative, not qualitative.

The decline of attractiveness of Moldovan industry for lohn operations is a major risk. This may occur because of higher prices for production factors, especially for electricity and fuels, as well as evolution of exchange rate through appreciation of domestic currency versus main reference currencies, producing additional losses to exporters. Another negative trend capable to affect the attractiveness of domestic industry for lohn may be observed on the workforce market, manifested through massive exodus of people to other countries, and this produces a deficit of workforce.

Therefore, advantages of lohn operations for domestic enterprises have a short term. The quantitative growth of exports to Romania is not based on a rise of competitiveness of Moldovan economy but rather on advance of lohn supplies which do not bring a value-added to our exports and economy in general. The only way to escape from this dependence on lohn is to make enterprises pass from exclusive after-processing supplies to diversification of their activities by participating in parallel with the lohn in procurement, processing and trading of finished products on own account and under own brand.

Table 1. Export of after-processing goods (lohn)

1st quarter of 20071st quarter of 2008Change of share1st quarter of 2008 compared with 1st quarter of 2007Degree of influence *
Export of goodsExport of goods
TotalAfter processingShare in totalTotalAfter processingShare in total
mil. USD%mil. USD%p.p.**%p.p.**
United Kingdom8.636.5275.68.917.2581.45.8111.20.9
Other countries128.142.622.0173.434.182.40.4159.52.0
TOTAL 78.4428.6 106.8930.82.2136.336.3

Source: NBS






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