Assessing cost competitiveness in European Union candidate countries: the case of the Republic of Moldova

Alexandru Stratan, Alexandru Fala and Victoria Fala
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Alexandru Fala: Academy of Economic Studies from Moldova,Chișinău,Republic of Moldova
Victoria Fala: National Institute of Economic Research of the Academy of Economic Studies from Moldova,Chișinău,Republic of Moldova

Romanian Journal of Economics, 2024, vol. 59, issue 2(68), 25-35

Abstract: The Republic of Moldova signed an Association Agreement with the European Union (EU) in 2014, which officially entered into force in July 2016. By 2022, Moldova had been granted candidate status by the EU. To achieve full EU membership, candidate countries must demonstrate a functioning market economy and the ability to withstand competitive pressures and market forces within the EU. This paper aims to assess Moldova’s price and cost competitiveness as indicators of its capacity to compete within the EU market. To achieve this objective, we analyzed the evolution of the Real Effective Exchange Rate (REER) and Unit Labor Costs (ULC). The findings indicate that although the Republic of Moldova exhibits relatively low ULC levels compared to EU countries, the country’s slow real productivity growth, combined with the rapid increase in gross nominal wages, has led to a significant rise in ULC. Along with the real appreciation of the Moldovan leu, the fast growth of ULC threatens to undermine the country’s competitiveness. If left unaddressed, these trends could negatively impact Moldova's long-term economic growth. Furthermore, structural reforms aimed at boosting productivity, encouraging innovation, and enhancing labor market flexibility will be essential for maintaining and improving the country's external competitiveness.

Keywords: Cost competitiveness; Real Effective Exchange Rate; Unit Labor Costs; Productivity (search for similar items in EconPapers)
JEL-codes: C10 E20 F15 (search for similar items in EconPapers)
Date: 2024
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