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Tax Revenue Loss and Rails and Roads in Moldova

February 19th, 2010

This blog post is the last in a four part series, which highlights cases of tax revenue loss from trade mispricing, the topic of a recent paper by Global Financial Integrity, “The Implied Tax Revenue Loss of Trade Mispricing.”  To read the previous post, please visit Tax Revenue Loss and Malaria in Mali.

Moldova is led by the Party of Communists of the Republic of Moldova (PCRM), which has dominated the nation since the parliamentary election of 2001.  Moldova, a former part of the USSR, established independence in 1991 and was accepted into the United Nations in 1992.  In that year, Moldova introduced market reforms, which included price liberalization, though the political leadership left in place many communist policies, remnant from the USSR.  The result was an inflation rate of 2,600% and severe economic conditions that, between 1992 and 2001, left much of the population of Moldova below the poverty line.

Since 2001, the PCRM has moved away from traditional communist policies and now favors EU integration.  And the National Bank of Moldova has generally espoused sound policies.  As a result, Moldova has seen annual growth of between 5% and 10%, which has lifted many inhabitants out of poverty.

Nevertheless, one of the largest obstacles to development in Moldova remains the poor condition of infrastructure, which is a hindrance to economic growth.  Economic research shows that infrastructure is often a driver of economic growth and can have a significant positive determination on economic performance.  Infrastructure drives growth as producers are able to access wider markets of consumers, and as companies are able to reduce the cost of transport, both in real terms and in terms of time.

Unfortunately, these networks are lagging in Moldova.  As the Economist Intelligence Unit has noted, both rail and road networks are in urgent need of rehabilitation.  Furthermore, 80% of the national roads and an even larger share of local roads need to be overhauled and inadequate financing remains a huge problem.  There is a nationwide local transport network that includes around 17,000 buses, but more than one third are obsolete, and bus terminals need modernization.

The good news for the country is that spending infrastructure has risen over the last five years, with increased lending from international financial institutions and with funding from the EU.  Yet many projects remain underfinanced and there is still a great deal of work to be done before Moldova can have an infrastructure of rails and roads that will contribute to growth.

Global Financial Integrity’s new report, The Implied Tax Revenue Loss of Trade Mispricing, shows that Moldova loses an average of US$73.5 million annually in government revenue due to trade mispricing.  The graph below compares this average yearly tax revenue loss to Moldova’s total spending on infrastructure, from both domestic and external sources (this includes both international organizations and other governments).

This graph was compiled using data from official government statistics from the Ministry of Finance of the Government of Moldova and from the data in the recent GFI report.  As the chart clearly shows, an increase in government revenue equal to the annual tax revenue loss would significantly increase the resources available to the government of Moldova to improve its infrastructure, thereby fueling economic growth and lifting many inhabitants out of poverty.

You can read the entire GFI report, “The Implied Tax Revenue Loss from Trade Mispricing,” here.

Written by Ann Hollingshead

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