Bulgaria's Economy on the Path to the EU

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Bulgaria is proof that not all currency boards are destined to an Argentine denoument. Having witnessed its GDP plunge by one third between 1989 and 1997, it has risen by 11% in the three years since, driven by net exports and domestic demand, in equal measures. This was achieved as hyperinflation was reduced to an annual rate of 1.7% in 1998. It has since worryingly climed back to 11.4% last year and has come down to only 8% since, due to higher energy prices and a severe draught. Bulgaria also re-paid its sovereign debt so that it now constitutes less than 70% of its GDP. This is often attributed to strict fiscal policies (the budget deficit amounts to c. 1% of official GDP and wage bills in most loss making state enterprises have been frozen) and to a successful implementation of a currency board. The boards is very popular with the Bulgarian: it gave them a stable currency, increased exports, liquified banks and halved interest rates, among other benefits. After years of crony privatizations ("management and employee buyouts") financed by criminal groups and followed by widespread asset stripping and a botched voucher cum investment funds scheme - more than 80% of bank assets and 50% of state enterprises have been genuinely privatized (often through the stock exchange). A series of well publicized and government sponsored raids by police ands tax authorities on the likes of "Multigrup", the penumbral holding company, have gone a long way towards decriminalizing the economy. And corrupt Ministers are being given the boot as a matter of course. The authorities have also been making the right noises regarding health care, pensions and bank supervision. Real investment, depressed wages, and restructuring led to higher productivity and enhanced competitiveness.

All sectors experienced growth. The failed transition from communism to a market economy forced many Bulgarians to go back to agriculture. This process has reversed and re-industrialization commened. Gross fixed investment almost doubled itself to 16% of GDP. Though most foreign direct investment (FDI) comes from poor and non-sophisticated non-EU countries and is plunged into labour-intensive greenfields, FDI (half of it in privatization proceeds) climbed 10-fold to $1 billion. The FDI stock (and with, sorely needed technology, intellectual property, knowledge and management) reached $3 billion at the end of 2000.

Surprisingly, these macro-economic achievements had little effect on the business climate. Bulgarian businessmen have remained largely sceptical of the economic prospects of their country. Enterpreneurship is still obstructed by insufficient infrastructure, inefficient, arbitrage-orientated and lending-averse banks, and over-regulation (e.g., in the energy sector). Venal red tape deters investors. There is no central revenue authority, for instance, and no functioning treasury system. Labour taxes are stratospheric and drive people into the thriving informal economy (estimated to be about one third of the total). And, despite being a trading nation, Bulgarian customs duties and tariffs are both complex and high.

The lot of simple people has not discernibly improved either. Output is 30% below the communist-era peak. Unemployment is high by European standards (between 16 and 18%). The average monthly income in  southern Bulgaria (an agricultural and textile area that borders Greece) is still $50 or less, one of the lowest in any economy in transition. Wages are one fourth the EU's. Cheap labour has its advantages, though. It attracts "foreign direct" investment (shoes and textile sweat shops) and generates foreign exchange (seasonal workers).

The pace of structural reform has slowed to a halt in the latter part of 2000. The presentment of important bills (such as the Energy Law) has been postponed. Lucrative but growth retarding monopolies (from tobacco to telecom) have been left untouched, despite a revamped Privatization Law. Should this continue, Bulgaria may find it harder to attract the FDI that, last year, covered its gaping current account deficit (equal to 6% of GDP). Foreign exchange reserves (at $3.6 billion, or almost 6 months of imports) are sufficient to offset a run on the lev - but rising inflation does take its toll on the competitiveness of Bulgarian products. In real terms, the lev has appreciated by 20% since the end of 1996 (1 lev equals 1 DM).

Bulgaria is still too dependent on handouts or multilateral "investments" from the likes of the IMF, the World Bank, and the Stability Pact. It claims to have lost over $6 billion in export proceeds during the Danube-blocking 1999 Kosovo crisis and its aftermath. The war affected rail transport and tourism as well. Bulgaria may be adversely affected by fighting in its tiny neighbour, Macedonia, and in Bosnia. The meltdown of Turkey's economy - one of Bulgaria's important trading partners - and a looming recession in the USA and Japan - may also have an impact. Should inflation or the current account deficit worsen, the government will have to tighten its fiscal stance and, thus, induce a recession. Elections in June may make it difficult to maintain fiscal discipline, though.

Can Bulgaria continue to grow by 5% a year? Not if its investment rate doesn't. It needs to increase by 20%. Human capital needs to be better exploited (unemployment needs to drop). The IMF reckons that "total factor productivity (TFP) growth rates of around 2% p.a. will be required" (IMF Country Report 01/54, p. 6). This cannot be achieved without non-comprmising and socially dislocating structural reform. Bulgaria faces now the tough choices that post-communist countries such Hungary, Poland and Estonia faced years ago.

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