How could it happen? How could a country described by the Economist as a "model of correct reform and a perfect laboratory for running reforms" become a model of stagnation where the Communist party won by a landslide? Several factors have been at work.

Moldova’s economy did not improve during the transition years (see table), and the conditions for economic growth were not created. Instead, real GDP in 1999 shrank to 33.7 percent of the 1990 level. As the Wall Street Journal put it, "Moldova’s improvised, political and managerial classes failed to pursue market reforms with any consistency. That failure led to economic collapse and general pauperization, which the electorate perceived to be consequences of market economics, not of the absence thereof."

Ninety percent of the population in Moldova—some 4.5 million people—live on less than $1 a day. About 80 percent of the population live on less than $20 (233 lei) a month—that is, below the subsistence level—according to the Moldovan Department of Statistical and Sociological Analysis. The average salary covers only 40 percent of the minimum consumer basket. Increases in nominal wages have lagged behind the inflation rate, causing living standards to drop significantly. During eight years of transition, real income per capita also fell sharply. Salaries are not only low, they are also not paid on time: arrears by enterprises and state organizations constituted more than 381 million lei in February 2001.

Income inequality has also grown. The income of the top 20 percent of the population is more than 11 times that of the bottom 20 percent, and the Gini coefficient is 0.44, indicating a high level of income inequality. (A country with a Gini coefficient of more than 0.35 is generally considered to have a high level of income polarization.) Most of the country’s 800,000 pensioners are socially marginalized, and their average monthly pension of 82 lei ($7!) puts them under the poverty level. No wonder a large majority of pensioners voted for the Communist Party.

The continuing deterioration of the quality of life and the impoverishment of the population seriously diminish the social basis for further reforms. As recent public opinion polls show, 80 percent of the public believe the country is heading in the wrong direction. The majority of the population—some 70–90 percent—think that before 1991 (the year Moldova gained independence) the quality of governance, social protection, living standards, and even respect for human rights and liberties were better or much better than they are today.

Transition proved to be a much more complex and dramatic process than policymakers had expected. The government’s "Program of Transition to a Regulated Market Economy," approved by Parliament in 1990, was supposed to create the framework for developing a market economy and a democratic society in a matter of a year and a half or two years. It is now clear that it was naive to assume that society could change that rapidly.

Despite creating the legal and institutional framework for a market economy, reform in Moldova did not achieve the government’s declared goals. The populist voucher privatization process, which sought to give all Moldovans a chance to become "capitalists," did not improve corporate management or attract real investments in the privatized companies.

Industry in the former Soviet Republic of Moldova was oriented toward Soviet military needs; the dissolution of the Soviet Union was not followed by an efficient conversion program of military-oriented enterprises. Prolonged state control of enterprises in key industries (energy, tobacco, and wine) led to the rapid deterioration of their balance sheets. Delaying privatization presumably gave state managers enough time to strip these companies of their assets. The foreign loans and grants for supporting structural reforms were used mostly for consumption; total government debt increased to 135 percent of GDP.

Reforms in the agriculture sector were intended to change land ownership and implicitly to increase the efficiency of land use. The first step has almost been completed: 75 percent of agricultural land concentrated in 989 large collective farms has been distributed to some 800,000 farmers. But the measure did not increase efficiency, as it is impossible to create an efficient agricultural sector based on farms of one or two hectares. Consolidating small parcels into larger farms on a voluntary basis has only just begun.

Ethnic and linguistic differences in voting habits are clear from the results of the last election, in which the Communist Party gained the support of 80 percent of Bulgarians, 63 percent of Ukrainians, 58 percent of Russians, and only 27 percent of Moldovans/Romanians.

The economic and social situation in Moldova is so difficult that the new government will have little room for maneuvering. The new government’s top priorities are to transform institutions that remain serious impediments to economic growth and to settle the Transnistria conflict. (This breakaway territory with a large Russian population enjoyed Moscow’s backing throughout the 1990s. A settlement is now more likely as Moldova’s new parliamentary majority appears prepared to accept federalization and grant Russia the status of a state language in exchange for closer economic ties with the CIS.) The new government will also have to deal with fighting corruption, reducing tax evasion, shrinking the size of the shadow economy (equal to some 60 percent of official GDP), creating a stable legal environment for business, and consolidating the fiscal budget.

These efforts are more or less consistent with the Communists’ electoral program; other necessary reforms are not. Key tobacco, wine, energy, and telecommunication enterprises need to be privatized, for example. Agrarian reforms that will help create a market-oriented agricultural sector—such as developing the land market and establishing independent commodity exchanges—must also be undertaken.

Several commitments made during the Communists’ electoral campaign could have severe negative consequences if fulfilled. One example is the promise to redraw the administrative districts by reintroducing the old rayons. Increasing pension payments and subsidies to energy, public transportation, and other goods and services would put tremendous pressure on the budget. Joining the Russia-Belarus Union could escalate social and interethnic tensions.

Will the Communist Party insist on implementing its pre-electoral program, or is the party pragmatic enough not to commit itself to a counterproductive antireform policy? Only the future will tell.

Economic Indicators in Moldova, 1993–2000

Indicator

1993

1994

1995

1996

1997

1998

1999

2000a

Real GDP growth rate (%)

-1.2

-30.9

-1.4

-5.9

1.6

-6.5

-4.4

0

Annual inflation rate (%)

2,707.2

104.6

23.8

1.1

11.1

18.2

43.8

31.3

Exchange rate (lei/$US) 

3.64

4.27

4.50

4.65

4.66

8.32

12.3