Determinants of the External Competitiveness of the Republic of Moldova: The Interaction Between Macroeconomic Factors and Sectoral Comparative Advantages

Abstract

The Republic of Moldova, an EU candidate since 2022, faces the challenge of proving its capacity to operate a functioning market economy and to compete within the EU single market. This study examines the determinants of Moldova’s external competitiveness by combining macroeconomic and sectoral perspectives. At the macro level, cost and price competitiveness are assessed using the Real Effective Exchange Rate (REER) and Unit Labor Costs (ULC). At the sectoral level, competitiveness is analyzed through the Michaely Index (MI) and the Modified Lafay Index (MLI), applied to agricultural and industrial exports. The empirical analysis covers the period 2014–2023, drawing on official data from the National Bureau of Statistics, the National Bank of Moldova, UNCTAD, IMF, and UN Comtrade. Two econometric models are estimated to explore the impact of productivity, wages, investment, and inflation on competitiveness. To integrate macro and sectoral findings, a new Composite Competitiveness Index (CCI) is developed. The results indicate that productivity growth and fixed capital investment are the most consistent drivers of competitiveness, while rapid wage growth and inflation exert a negative effect. Agriculture remains the backbone of Moldova’s external competitiveness, with cereals, oilseeds, fruits, and nuts showing persistent comparative advantages. However, the sector’s high volatility and exposure to climate and market risks underline the urgency of diversification. Industrial exports, by contrast, display weak or negative competitiveness due to low technological intensity and dependence on imported inputs. Overall, the findings highlight a disconnect between resilient agricultural sectors and deteriorating macroeconomic cost indicators. The study concludes that Moldova’s long-term competitiveness requires a dual strategy: stabilizing macroeconomic conditions to control costs, while fostering investment, innovation, and value-added industrial sectors. JEL: C10, E20, F15, Q17