Moldova’s Middle-Income ‘Mistaken Identity’: The Severe Income and Human Development Costs

Abstract

The newly independent Republic of Moldova joined the World Bank and the IMF in 1992. The World Bank designated it a ‘middle-income’ country, a status it retained for Bretton Woods lending until 1997. The middle-income designation implied that the government of Moldova was not eligible for concessionary lending from the World Bank and IMF, and would not receive concessionary finance from the major bilateral development agencies. After demonstrating that assigning middle-income status to Moldova was a mistake, which was implicitly conceded by the World Bank in 1997, this Country Study investigates the consequences. It uses a simple procedure for calculating counterfactual scenarios based on assigning Moldova low-income status in the early 1990s. The counterfactual scenarios suggest that the development and welfare costs of the mistake were extremely high: a much greater fall in income per capita than would otherwise have been the case, with an associated increase in headcount poverty and lower life expectancy. There is a cruel irony associated with this mistake. Had Moldova been designated a low-income country in the early 1990s, it would have been by the mid-2000s a middle-income country instead of remaining the poorest country in Europe. Thus, there is a strong case for multilateral compensation.