the republic of moldova
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The Republic of Moldova. An Assessment of Macroeconomic Policies 1998-2001 and Recommendations Shannon Hill, Liana Mesropyan, and Chad West – December 7, 2005. History. The Republic of Moldova declared independence from the USSR in August 1991 - PowerPoint PPT PresentationTRANSCRIPT
The Republic of Moldova
An Assessment of Macroeconomic Policies 1998-2001 and Recommendations
Shannon Hill, Liana Mesropyan, and Chad West – December 7, 2005
History
The Republic of Moldova declared independence from the USSR in August 1991
Transnistria declared independence from Moldova September 1991 – “frozen conflict exists to this day”
Massive outflow of labor force: 25% currently resides outside of the country
Economy in the 1990’s
High inflation and low GDP/capita Weathered the 1998 Russian financial crisis Based on agriculture and agro-processing,
later largely on remittances
Gross Domestic Product
Russian Financial Crisis in 1998 caused downturn in output from 17.475 billion Lei to 16.020 billion Lei in 2000.
Beginnings of recovery from 2000 to 2001 to 17.321 billion Lei. GDP per capita decreased from 4,064 Lei in 1998 to 3,763 Lei in 2000. Beginnings of recovery from 2000-2001 to 4,065 Lei.
0
5000
10000
15000
20000
25000
1998 1999 2000 2001 2002
Years
GD
P Nominal GDP
Real GDP
Household Consumption
Household consumption declined substantially from 1998-2001 from 13.172 billion Lei to 11.990 billion Lei.
Consumption is likely due to the sharp rise in unemployment after 1998.
Consumption then recovers to 15.516 billion Lei from 2000-2001.
Government Consumption
Total government consumption decreased from 4.458 billion Lei in 1998 to 2.561 billion Lei in 2001.
Government share of GDP declined from 35% to 22.8% over the same time period.
Inconsistent with the IS-LM model because GDP rises from 2000-2001 while government consumption continues to fall.
0
5
10
15
20
25
30
35
1998 1999 2000 2001 2002
Years
Gov
exp. a
s %
of G
DP
Investment
Most significant problem facing Moldovan economy. Investment continued to decline from 4.523 billion Lei to 3.475 billion Lei from 1998-
2001. Investment continued to decline despite a substantial reduction in the interest rate
from 30.9% to 5.1%.
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
3500.0
4000.0
4500.0
1998 1999 2000 2001 2002
Years
Inve
stm
ents
Net Exports
Moldova has been dependent upon imports since its independence from the Soviet Union in 1991.
Net exports have improved from 1998-2001 from -4.676 billion to -4.231 billion.
Improvement in NX caused by a depreciation of the Lei to major currencies. Ex. Exchange rate against the dollar fell from 8.3 to 13.1.
Inflation and Unemployment
Inflation remained high after Russian Financial crisis.
46% in 1999 and 31.2% in 2000.
Inflation rates have decreased but still remain in double-digits to the present day.
Low unemployment figures before 1998 contribute to very high annual inflation rates (in some years unemployment is below 2%).
Unemployment has fallen from 11.2% in 1999 to 7.4% in 2001.
Monetary Policy 1998-2001
Contractionary from 1998-1999
Expansionary from 1999-2001
Year Money Supply (in lei)
Interest Rate Inflation (% over previous year)
GDP growth (% over previous year)
1998 2,041,111,111 30.9 -6.5
1999 1,942,047,244 32.6 45.9 -3.4
2000 2,023,220,000 20.8 31.2 2.1
2001 2,276,867,031 11.0 9.8 6.1
Fiscal Policy
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
7000.0
1998 1999 2000 2001 2002
Gov. Rev
Gov Exp
Loan MarketLoan Market
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1998 1999 2000 2001 2002
Year
Inte
rst r
ate
Series2
19981999
2000
2001
2002
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
0.0 500.0 1000.0 1500.0 2000.0 2500.0 3000.0 3500.0 4000.0 4500.0
Investments
% ra
te
Policy Option 1. Reduce Inflation
Y0 Y
LM1
LM0
IS0
r
BP
Policy Option 1. Reduce Inflation
Y1 Y0 Y
LM1
LM0
IS1 IS0
r
BP
Vulnerability
In the short run
counter-productive effects for GDP in total
Unemployment increases
Policy Option 2: Encourage Foreign Investment
Setting high interest rate
Capital inflow to the country
New job-places created
Increase in output
Policy Option 2: Encourage Foreign Investment
… and expansionary fiscal policy
Expenditures to social sector
This will hold the shift of IS to the right which might be caused by decrease of Nx
Policy Option 3: Improve the Investment Atmosphere
EU Border Assistance
Resolution of Transnistria problem
Institutional reforms
Adoption of anti-corruption strategy
Reduction of transaction costs for business
Promoting vocational education
Retrain labor force for market economy
Conclusions
Moldova has suffered from a number of negative macroeconomic trends, most of which do not follow from basic macroeconomic models.
Fiscal and monetary policies alone will not address these challenges. Instead, Moldova must continue to make commitments to the previously mentioned policies.
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