# **1 Introduction**<sup>1</sup>

The economy of Moldova is strongly linked to the outside world via worker remittances and trade. As a consequence, it was also strongly affected by the global economic crisis that erupted in 2008. Its future evolution will depend on domestic policies and the timing and extent of resumed growth in the outside world, most importantly Moldova’s neighbors in the EU and the CIS, which have absorbed the bulk of the country’s worker emigrants and also dominate its foreign trade.

In this paper, we explore how influences from the outside world and domestic policy together may condition the development of Moldova’s economy during the period up to 2020. The content of the analysis is informed by discussions of the consequences of changing Moldova’s development strategy from reliance on workers’ remittances toward reliance on export-oriented goods and service production. To this end, we have developed a Moldovan version of MAMS (Maquette for MDG Simulations), a CGE model for country development strategy analysis developed at the World Bank. More specifically, we will address the impact of alternative scenarios for worker migration and remittances, international prices for Moldova’s main exports (in the agro-industrial area) and fuel imports, as well as government transfers aimed at promoting growth and equity. Our analysis covers the impact of these scenarios on indicators related to the macro economy, major production sectors, as well as household welfare and its distribution. We will proceed as follows: Sections 2 and 3 provide background on Moldova’s economy and describe MAMS and its Moldovan database. The simulations are presented and their results analyzed in Section 4. Section 5 summarizes our findings. Appendix A describes the construction of the Moldovan database in greater detail while Appendix B provides more detailed simulation results.

# **2 Background**<sup>2</sup>

During the period 2000-2010, Moldova’s GDP growth was rapid but quite volatile (see Figure 1), reaching an average annual rate of around 5 percent. Among the components of absorption (i.e. total domestic final demand or gross national expenditure), growth was most rapid for investment (gross fixed capital formation), which grew at close to 9 percent, whereas private and government consumption grew at rates of 6-7 percent. The fact that domestic final demands grew more rapidly than GDP indicates that Moldova was able to finance a growing trade deficit from non-trade foreign exchange sources, most importantly workers’ remittances and compensation of employees (workers who during parts of the year work abroad but still are considered residents of Moldova), which have been more important than FDI or transfers to the government (see Figure 2). In terms of volumes

> **1** The authors gratefully acknowledge support for this research from the Trust Fund for Environmentally and Socially Sustainable Development as well as overall guidance from José Cuesta of the World Bank. They are indebted to the Knowledge for Change Program (KCP) Trust Fund for funding of the initial development of MAMS. Feedback on an earlier version of this paper from Lalita Moorty, Ruslan Piontkivsky, and Karlis Smits, all of the World Bank, is also highly appreciated.

> **2** The background section includes data up to and including 2010. In Moldova, fiscal years coincide with calendar years.

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