Hot spots: Moldova. (International Section).

Moldova, a country barely larger than Maryland (population 4.5 million, capital Chisinau), made its break from the Soviet Union in the 1980s riding a wave of nationalism among ethnic Romanians. The leaders of this constituency, once in power, declared Romanian to be the state language, banned the Cyrillic alphabet and tried to get rid of an army of trappings of Communism, to the point where the authorities even switched clocks from Moscow time to Bucharest time. After a decade of a wild, capitalist free-for-all, however, which left the small country broke, driven by corruption, and plagued by civil war, the Communists (PCRM) were swept back into power in elections held in February 2001.

Following this balloting, parliament elected the Communist leader Vladimir Voronin as the new president. Voronin is a former baker who rose through the ranks to become the chief of the Moldavian police and of the local KGB in the dying years of the Soviet Union. The PCRM ran on a platform of wanting to form a new political union with Russia and Belarus. Such intentions have since been shelved. The population is ethnically two-thirds Romanian and only one-eighth Russian, although the territory (aside from a short, forced union with Romania during World War II) spent most of the last 200 years under Russian rule.

Moldova's economy is in dismal shape. It has contracted by about 60% since independence. The infrastructure is in dire condition, and the road connections of this landlocked country are terrible. Half the local households eke out a living with subsistence farming. While some surplus food is produced, there is no real market for it. Only about one-fifth of Moldavian exports reach the European Union. While the EU's common agricultural policy blocks imports of the few products Moldova has to offer--primarily wine, fruit and vegetables--the Union is competing with Moldova in third countries with subsidized products of its own.

Moldova is, today, in terms of income per head, the poorest nation in the region, behind even Albania (with an average wage last year of USD 70 per month). Any economic growth, therefore, is measured from a very low base. Still, it is encouraging that the government reported an acceleration for 2002 in the expansion of real GDP to 7.2% from 6.1% in 2001. The authorities say that the speed-up was due to a higher rate of private investment which, in turn, spurred growth in foreign trade and agriculture. The government expects real gross domestic product to gain by 6.0% in 2003, and on current trends, this appears to be a reasonable assessment.

Industrial output reportedly grew by 10.6% in 2002. Inflation is not a big problem at this time, indicated by the authorities at 4.5-5.0%. The foreign trade deficit increased only moderately last year, to USD 386.0 million from USD 326.5 million in 2001. The foreign debt is large for an economy as small and fragile as Moldova's, reported by the Central Bank at USD 1,284.74 million as of last June. Chisinau succeeded, however, in restructuring overdue five-year Eurobonds worth USD 75 million last year, when the government bought back USD 45.4 million and persuaded the London Club of commercial creditors to change the maturities for the remaining USD 39.6 million.

At that, Moldova will not be able to keep making economic progress and avoiding a default on its external obligations without fresh and increased aid from abroad, in the form of grants and credits as well as direct foreign investment. Inflows of foreign venture capital into Moldova have been minimal (covering less than half the annual current-account BoP deficits) because the privatization process has been going backward (with companies being nationalized), there is a high degree of legal uncertainty, corruption is pervasive and the business opportunities are few and far between.

Also, the government's ...