From radev@cs.columbia.edu Thu Aug 1 12:37:54 1996 Received: from cs.columbia.edu (root@cs.columbia.edu [128.59.10.13]) by opus.cs.columbia.edu (8.7.5/8.6.6) with ESMTP id MAA07557 for ; Thu, 1 Aug 1996 12:37:53 -0400 (EDT) Received: from tangra.cs.columbia.edu (tangra.cs.columbia.edu [128.59.30.17]) by cs.columbia.edu (8.7.5/8.6.6) with SMTP id MAA02968 for ; Thu, 1 Aug 1996 12:37:52 -0400 (EDT) Message-ID: <3200DD31.67FA@cs.columbia.edu> Date: Thu, 01 Aug 1996 12:37:05 -0400 From: "Dragomir R. Radev" Reply-To: radev@opus.cs.columbia.edu Organization: Columbia University X-Mailer: Mozilla 3.0b5aGold (Win95; I) MIME-Version: 1.0 To: radev@opus.cs.columbia.edu Subject: ftp://econ.yale.edu/pub/izvorski/reform.txt Content-Type: multipart/mixed; boundary="------------55064033A47" Status: RO This is a multi-part message in MIME format. --------------55064033A47 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit ftp://econ.yale.edu/pub/izvorski/reform.txt --------------55064033A47 Content-Type: text/plain; charset=us-ascii; name="reform.txt" Content-Transfer-Encoding: 7bit Content-Disposition: inline; filename="reform.txt" Communist Economies and Economic Transformation, February 1993 [converted to plain text file] ECONOMIC REFORM IN BULGARIA: 1989 - 1993 by Ivailo Izvorski* * Yale University, Department of Economics, 28 Hillhouse Avenue, New Haven, CT 06520. I wish to thank Joe Peck, Thomas Richardson, and my wife, Roumyana Izvorski, for their helpful comments and suggestions. All remaining errors are mine. To many Bulgaria still remains one of the puzzles of Eastern Europe. In scholarly discussions and newspaper articles it is either completely ignored, or given scant attention in the shade of the other Eastern European countries. This treatment is largely determined by the fact that the economic reform in Bulgaria is still not as profound and inclusive as the one in Czechoslovakia, Hungary, and Poland. Moreover, the crisis in the Bulgarian economy, perhaps the deepest crisis among the former Eastern European countries, has generated considerable skepticism and distrust about the prospects for recovery in the near future. The following analysis shows that this state of affairs is to a great extent deserved. For years, Bulgaria was one of the closest allies of the Soviet Union, and her economy, trade, and specialization of labor were firmly tied to the Soviet Union to a degree tighter than that of any other country. This is why she was to experience one of the most severe shocks after the disintegration of the Soviet Union and the CMEA. In the post- totalitarian history of the country the six different governments displayed both the lack of a coherent, clear plan for economic reform, and a systematic, uncritical reliance on foreign aid and advice. On the other hand, as the bitter experience of several foreign advisors have shown, an economic program, prepared with foreign advice and expertise, and started by any government is very unlikely to be continued under the next one. Regardless of the negative trends, though, the Bulgarian experience has been one of peaceful transition in the midst of numerous problems accompanying the dissolution of the national and international totalitarian system. The Turkish minority problem, exacerbated to intolerance by the communist regime, hurt badly the international image of the country and led to the exodus of about 300,000 - 500,000 people to Turkey. Great effort is needed to overcome nationalistic hostilities and ethnic conflict. The atrocities in the former Yugoslavia, on the other hand, have been threatening to Bulgarian sovereignty and to its chances of economic recovery due to the trade embargo and the closing of the international routes, connecting Bulgaria and the Orient with Western Europe. In any case, Bulgaria deserves far more attention than currently awarded. This article is an attempt to remedy this deficiency. SOME HISTORICAL BACKGROUND Bulgaria occupies the geographic center of the Balkan peninsula with an area of 110,000 sq.km and population of 8.4 mln. The end of World War II marks the beginning of the Communist rule in Bulgaria. Soon after the government of the Fatherland Front was formed on September 9, 1944, the Communist party succeeded in eliminating its political partners and carried out the totalitarization of the country: rapid nationalization of the industry (completed in 1947), collectivization of agriculture (finished in 1951), total domination of the Marxist-Leninist ideology and the Soviet Union in the economic, political, and cultural structure. However, there are a few differences from the other Eastern European countries. Most importantly, Russia's role in the Bulgarian history prior to World War II can hardly be overestimated. It was the 1877 war that the Russian empire declared on Turkey that led to the Bulgarian liberation in 1878. The ensuing political life was dominated by the debates whether Bulgaria should be a German ally, or she should keep a pro-Russian orientation. This dichotomy produced the ironic result of Bulgaria being "on the wrong side" in both World War I and II. As an ally of Germany she suffered the harsh consequences of the post-1918 peace, and would have had a similar fate in 1945, had not the Soviet Union insured that Bulgaria was not punished. Another major difference, which might explain some of the later patterns of social and political development, is the lack of any significant dissident movement, to say nothing about events resembling the Budapest uprising in 1956, the Prague Spring of 1968, or the Solidarity movement in Poland in the early 1980's. The last communist president of Bulgaria, Todor Zhivkov, was ousted from power by members of the Communist party on November 10, 1989. The long-time foreign minister Petar Mladenov became both the leader of the Communist party and the country's president. The democratization process began in a fashion that would prove critical for the future development: the Communist party, clinging firmly to the political power, was trying to mimic reforms and, to a large degree, was successful conveying that image. Mainly due to the political activities of the Union of Democratic Forces (UDF) established on December 8, 1989, as a broad coalition of anti-Communist parties and movements, the roots of multi-party democracy were laid in Bulgaria. The formal side of this process comprised the talks on the round table, organized on the example of Poland. The basic results of these talks concerned the establishment of the foundations of a democratic society and a market economy: the decision that elections for a Grand National Assembly be held in the summer of 1990, the depolitization of the army and the police, and the dissolution of the Communist party organizations in all enterprises and non-profit organizations. On June 10, 1990 the elections for a Grand National Assembly were held. The Communist party, under the new name "socialist", won the majority of seats in Parliament. The result was certainly a shock for the democratic forces in Bulgaria, but to the careful observers it was not a surprise. After a year of debates, the Grand National Assembly voted the new constitution of Bulgaria in May 1991. No matter how important this achievement may be, it consumed valuable time which might have been allocated to the problems of economic reform. For a year the Bulgarian economy was left on its own: certainly, not a very good treatment of an economy with almost 100 % state property, linked to a dissolving system of international socialist integration. It was during that period that all the dirty money was laundered through the hidden privatization process. On February 1, 1991, the care-taker government of Dimitar Popov implemented its price liberalization plan. However, this provisional cabinet did not have the parliamentary mandate to devise or carry on any privatization program. The most complete plan for Bulgarian reform, the Rahn Program which advocated slower but persistent changes, fell into oblivion immediately after it was presented in October 1990. Ironically, the economic reform in Bulgaria has been much more moderate and slower than the one proposed by Rahn and his assistants. Indicative of this is the fact that as of today there exists no well prepared plan for privatization, fiscal and monetary reform, and development of foreign economic relations. After the October 13, 1992 parliamentary elections the UDF had majority in Parliament. It was not sufficient, however, to prevent the second UDF cabinet, led by Philip Dimitrov, from falling after a no-confidence vote in December, 1992. Currently, a government headed by Luben Berov, is in power with the support of the Socialist party and the Movement for Rights and Freedoms. THE SOCIALIST ECONOMIC LEGACY AND THE BULGARIAN EXPERIENCE The mechanism of the national socialist economy, as well as the international cooperation and integration between the former socialist countries is well documented and discussed in the literature. In what follows, I will try to put the Bulgarian experience in this context and pinpoint the critical and country- specific developments that make Bulgaria different from the other Eastern European countries. I will attempt to link the past experience and the stereotypes of the Bulgarian people and their governments with the proposed solutions of the problem called "totalitarian society of Bulgarian type" and the avenues towards the establishment of a market economy and a democratic society. Table 1 gives the origins and utilization of the Net Material Product of Bulgaria for 1989. It is obvious that the industrial sector had a significant share in the national economy, more than the development economists consider as the dividing point between the industrialized and pre-industrialized society. I will not explore the fact that a great deal of this industrialization was forced, and thus, of dubious value. The forced industrialization in Bulgaria, as elsewhere in Eastern Europe, was just an exercise in itself: it tested how far we can go in the useless construction of giants that would support other giants in as few years as possible. The transition from an economy dependent mainly on agriculture and light industry, to one in which the share of agriculture is 11.2% was indeed rapid. This task was accomplished by "accumulating" more than 35% of the NMP in the early 50's, approximately 30% in the 60's, and more than 24% in the 80's. Had investment been driven by a mechanism other than the socialist type of planning and the socialist economic integration, the outcome might have been different. Incidentally, it might have been more efficient: according to some estimates, more than 50% of the industrial enterprises have to close down because of gross inefficiency. Unfortunately, it is not possible to claim that the high level of accumulation just mentioned will persist, especially during the transition to a market economy. There are at least two reasons. Firstly, investment decisions were centralized and thus savings were both directly and indirectly forced, and secondly, the income effect of the transition period with prices rising much faster than incomes leads to lowering the real value of savings. However, there is an argument why this reasoning can be false, at least in the short run: with interest rates fixed at 1%, voluntary savings were almost negligible before the reform started. Now, with rates around 30 - 40%, the amount of "hot money" which is not consumed is quickly deposited to fight inflation. However, this process is final, and there is every reason to believe that when interest rates inevitably start falling to stimulate production, voluntary savings of this type are not going to rise any further. One of the distinguishing features of the Bulgarian economy, as pointed out, was its interrelatedness with the economies of the CMEA countries. For none of the other Eastern European countries and the Soviet Union were these relations so close and tying. The figures for intra-CMEA trade reveal that Bulgaria relied excessively on the CMEA on its exports and imports (Table 2). 86.3% (65.8%) of the Bulgarian exports and 75.9% (53.6%) of the Bulgarian imports respectively were accounted by the CMEA (Soviet Union). This excessive dependance has two sides. Since its foundation in 1949 as a counteraction to the Marshall plan which the Eastern European countries did not join (either because they were not proposed to, or because of solidarity with the Soviet Union, who bluntly refused) till its dissolution in 1991, the CMEA has been pushing for technology and resources transfers from the "haves" to the "have-nots." Simultaneously, through the "international socialist division of labor" the country-members developed specific industries that fitted in the overall block division of labor, but that were not well tied to the economic criteria. It is a truism that such a mechanism is a game with no winners: the longer the play went, the more the players lost. For Bulgaria the inefficiency was expressed two-fold. She relied on the cheap Soviet raw materials (oil, natural gas, ferrous and non- ferrous ores, and many others) to develop its heavy industry basically from scratch. The subsidies received through that channel were large: a study by the World Bank has found that Bulgaria received indirect subsidies through the cheap Soviet oil equal to as much as 12.1% of its GDP. It was a matter of pride for the Bulgarian Communist party that almost 80 to 95% of the technical documentation for the construction of Bulgaria's industrial giants, was received from the Soviet Union without any direct payment. No less pride was taken in the fact that Bulgaria produced its first computer shortly after the Soviet Union manufactured BESM, and that one of Bulgaria's field in the CMEA was the production of peripherals, personal computers, and other electronic equipment. But besides the political pledges made in exchange for these "gifts," the obsolete technology imported put Bulgaria on a different track of development from Greece, for example, which was in a similar economic situation in 1944. Because of this development, Bulgaria still relies excessively on Soviet oil, timber, iron ores, etc., as well as on Russian machines and equipment. The guaranteed markets for the Bulgarian products, which were often sub-standard, were the other source of distortions for the country's economy. It is very indicative of the inefficiency of the CMEA mechanism that in 1989, when the socialist economic system was just beginning to split up formally and political considerations were abandoned, the Bulgarian trade with the other Eastern European countries declined by 11.5%, and in 1991 it was down by more than a quarter compared to 1990. As estimated by Tarr, after the revaluation of Bulgarian exports and imports, previously calculated in transferable rubles, the figures for the Bulgarian trade decreased to 32% of their originally estimated values. The CMEA legacy, coupled with the poor performance of the Bulgarian economy in the 1980's made the task of economic reform much more difficult and urgent than in any other Eastern European country. The steps taken, however, have been hesitant, indecisive, and slow evoking an asymmetry that might lead to a division among the former CMEA members: the first tier, consisting of Hungary, Czechoslovakia, and Poland, countries which have achieved considerable results in their transition, and, correspondingly, are easier to invest in, and the second tier, comprising Bulgaria, Romania, and Albania, which are restrained by institutional, economic, and psychological factors in the speed of their transition, and which receive less investment, attention, and encouragement. ECONOMIC REFORM: THE FIRST STEPS On March 18, 1990, the communist government of Andrei Lukanov offered its plan for economic reform in which it strongly opposed a shock therapy a la Poland on grounds of "Bulgarian specificities," costliness, and considerations for " a social market economy." The main pillars of the Lukanov proposal can be summarized as follows: a) 40% price liberalization to be carried out in 1990; b) privatization of selected enterprises through auctions; c) increased independence of the remaining state companies; d) incentives for private entrepreneurs; e) measures to stimulate foreign investment. This program established the precedent for a limited, overly cautious, and stepwise reform which was difficult to change in the years to come. The partial price liberalization, as proposed and implemented by Lukanov, and followed neither by the breaking up of the state monopolies, nor by a financial reform to arrest the rapid money laundering, safeguard against the hidden privatization of state enterprises, and provide funds for the structural changes, sent a cold shiver to the agonizing economy, and a signal to the people that the government, once again, was governed by political, and not economic concerns. The partial price liberalization enhanced the existing disparities in the economy, and did nothing more than provide indirect subsidies from profitable to unprofitable firms on an arbitrary from an economic perspective basis. As the program suggests, the privatization scheme that the government was planning to employ was auctioning the state enterprises, and not distributing the claims in them. All the successive governments opposed the distributive schemes (either through vouchers, holding companies, investment companies, etc.) and favored the sale of the state companies. The conventional explanation that the state wanted to "cash in on privatization" holds in this case too, but there are at least two other important reasons why the Bulgarian governments, starting with Lukanov, neglect the proposals of various economists, summarized best in the phrase: "claims must be distributed, not sold." Firstly, the general distrust in the entrepreneurial abilities of the people, and secondly, the paternalistic role of the state and the authoritarian tradition in Bulgarian society, which could not be overcome by the fall of communism alone. The fourth part of Lukanov's proposal calls for greater liberty for state enterprises. This liberty led to the eruption of the hidden privatization which, much to the governments' embarrassment, became the most important privatization method, increasing the disparities in the economy, undermining reform, and stripping the state from the potential revenue from the sale of property. Until the end of 1990, the major law that formed the legal background for the economic development, foreign investment, and reform, was Decree 56, issued by the Zhivkov government in 1986. Although highly criticized, the decree was left almost intact even after the changes proposed by Lukanov in June 1990. Those included proposals to remove all restrictions on the number of employees a private firm can hire (previously limited to 10), and the abolishment of state monopoly in trade (foreign and domestic), printing, banking, and insurance. However, even with the state monopoly on foreign trade removed, firms still had to sell 20% of the hard currency they earned back to the state. This was a serious symptom about the coming insolvency in hard currency of the state. In April 1990, the government stopped payment on the principal of its foreign debt. Shortly, payment of interest was suspended as well, to be resumed only in 1992 after rescheduling agreements with the creditors were reached. At the request and with the assistance of the Lukanov government, Dr. Richard Rahn from the US Chamber of Commerce prepared a comprehensive and economically sound program for economic reform in Bulgaria. A great number of Bulgarian economists, standing on different political positions took part in the writing and preparation of the program: a fact that did not prevent the program from falling into disrepute immediately after it was presented in October 1990. The main assumption of the Rahn program was that a shock therapy of the Polish type was too costly. Thus, it proposed a set of immediate and medium run measures that "shielded" several sectors, housing, medical care, and schooling amongst them, from the initial shock. The authors thought that even though these sectors were inefficient, they would be necessary to provide some social protection in a period when the state had no time, money, and experience to establish a comprehensive social security system. The proposed measures to be implemented immediately included complete price and wage liberalization, monetary reform, legalization of foreign currency trade, formulation of new principles of taxation, changes in the business legislation, and establishment of a basic social protection system. In the medium run the necessary measures comprised banking reform, completion of the taxation system reform, constitutional reform, and sweeping legislative changes. As already mentioned, although several Bulgarian economists took part in the preparation of the program, it was neglected both by Lukanov's government, which requested it, and by the successive governments of the UDF, although for different reasons. Lukanov thought the program was too radical; the UDF governments considered it very slow. In reality, the Bulgarian approach to market transition was much slower than the Rahn program had called for. It is to be noted, in this line of thought, that the sequencing of the Bulgarian reform was almost opposite to the program prescription: the drafting of a constitution started in June 1990, monetary and financial reforms were postponed, and price liberalization was implemented on February 1, 1991. Despite Rahn's warnings against partial price liberalization, Lukanov's government did partially liberalize prices in 1990, only to aggravate the shortage problems and strengthen the tension on the already seriously troubled economy. Rahn's program was also against wage and pension indexation. Again, this was exactly what the Lukanov government did with the partial price liberalization, a trend that continues until today, a process that has fueled inflation expectations and forced the government to apply the printing press quite often. Moreover, the pressure on the government was higher after it committed itself to backward indexation once it joined the IMF and the World Bank in September of 1990. We will see further the importance of the IMF as a discipline factor in respect to the decrease of the government budget deficit, state subsidies, and the break-up of the state monopolies, as well as its role in supporting the Bulgarian currency, the lev, at levels out of proportion with the domestic inflation rate and the exchange rate with the dollar. PRICE LIBERALIZATION By the end of 1990, as a result of the economic reform initiated by the Lukanov government, 20% of the prices of goods and 50% of the prices of services were liberalized. As already pointed out, with a negligible private sector, and no plans for breaking up of the state monopolies, the partial price liberalization stimulated the process of hidden privatization. State managers, abusing their positions, started channelling large chunks of the state business, information, and resources to their private companies. With no monetary or banking reform envisioned, this entailed rapid money laundering and the solidification of the positions of the Communist party in the economic sector. The Communist party, in effect, became a major capitalist overnight (that is, in six months). On February 1, 1991, the care-taker government of Dimitar Popov fulfilled one of the IMF demands: it liberalized prices almost fully. This initial step of the shock therapy had been announced well in advance and was heavily discounted by the population. The rapid hoarding prior to the price liberalization created the worst shortages ever and put on edge the endurance of the people in the winter of 1990/1991. The government of Dimitar Popov fixed only the prices of coal, central heating, natural gas, and electricity, accounting for 10% of the volume of retail trade for the previous year. As another major step, the government formed a broad consumer basket, comprising 1,700 goods and services, on the base of which the backward indexation was initiated. The so called "prognostication prices" were establishes on several staples which determined the socially accepted minimum standard of living. Thus, after the price liberalization, wages were increased by 60% on the average, plus a one-time compensation of 270 leva for the people of age 18 and older. Throughout most of 1991 the indexation and the compensations given on various occasions constituted almost 75% of the people's income. In 1992, after another salary increase, the indexation was abandoned for a while amidst the hopes for lower inflation and economic stabilization. Unfortunately, starting on October 1, 1992 a new indexation mechanism came into effect, effectively indexing wages to 70% of the CPI increases. There is no doubt that the almost intact system of state ownership, coupled with the price liberalization mechanism and the populist tendencies of both Popov's and Dimitrov's governments fueled inflation expectations. But it is certain that the severe negative shocks on the terms of trade due to the conversion of the intra-Eastern European trade from transferrable roubles and subsidies to convertible currency and world prices added to inflation too. Table 4 gives some CPI figures, which illustrate the inflation situation in Bulgaria. The annual inflation for 1992, for example, is 79.5%, which is considerably higher than the inflation in Poland (40%), Hungary (20%), and the former Czechoslovakia (9%). It is doubtful whether Bulgaria could bring inflation down to levels that would not put additional tension on the budget and permit the continuation of repayments of foreign debt obligations. Moreover, the Bulgarian governments have often repeated in their letters of intent to the IMF that they will lower substantially the budget deficit and reduce subsidies, currently at 30% of GNP, to less than 4% in 1992. Ironically, the elimination of the subsidies did not save the deficit: production continued steadily to collapse, thus bringing less revenue into the state coffers. Moreover, the hidden privatization further contributed to the deterioration of the financial situation of the state companies, making them less valuable and attractive to foreign investors. It seemed that rapid privatization was the only solution to that specific crisis. But privatization has not happened yet. PRIVATIZATION: PROGRAMS AND REALITY Before the Rahn program was initiated, the British economist Desmond Macfaran advocated privatization through holding companies as the most suitable for the Bulgarian specificities. At the same time Blanchard, Dornbusch, and others were recommending a similar approach for Poland. Although the scheme was much debated, it was not politically accepted and was completely abandoned. The Rahn program called for privatization that was too quick for Parliament at that time, and privatization was temporarily put off. In the meanwhile, the foreign investment act established a moratorium on the sale of land to foreigners, thus effectively blocking genuine privatization in its teens. The facts that need explanation are why the Bulgarian governments prefer a privatization scheme that would sell the assets rather than distribute them freely, and why the Bulgarian governments give preferences to foreigners, while formally creating bureaucratic obstacles to foreign investment? As the experience of the other Eastern European countries confirmed, one of the biggest problems with privatization is not economic, but political and bureaucratic. This turned out to be true for Bulgaria as well. The evasion of privatization has been motivated, if at all, on patriotic and populistic grounds, but actually it is entirely determined by the reluctance of the state to surrender its "commanding heights." This is just one of the manifestations of the principles of the totalitarian state and its post-totalitarian embodiment. For it is not enough to denounce communism as a system, if an effective mechanism for the establishment of a new framework is not socially found and agreed upon. While parliament was quick enough to create the Privatization Agency, the body responsible for privatization in Bulgaria, it has been procrastinating with the actual privatization mechanism. The Agency itself can decide on the way of privatization of state companies with residual value between 10 and 200 million leva. For bigger firms the consent of the government is required. As this framework suggests, privatization will be accomplished, at least according to the present development, case by case, at the initiative of outside bidders, and, sometimes, the government, after negotiations with investors. It is interesting how the bureaucratic and political stalemate in Bulgaria produced the case-by-case approach in privatizing the state companies. The issue almost became the bargaining point amidst talks between the major political groups and each of them exploited it for political dividends. While the so called small privatization, comprising the privatization of small shops and trading establishments, the restitution of factories, and the renting of municipal property to private parties, started early in 1992 and is almost complete by now, the Privatization Agency announced that "there is enough legal ground for [medium and large- size company] privatization to begin just in September of 1992. In the two year waiting period, the restitution of land and small establishments, as well as of real estate property was carried on under the belief that the political implications of this process were going to subside by the time "real privatization" was carried on. But mass-scale privatization on the initiative of the government, as already pointed out, has been postponed and spontaneous privatization is the only method currently relied upon, as admitted even by the board members of the Privatization Agency. According to the same sources, 92 state companies should be privatized by the end of 1992. To reiterate, only land restitution and small-establishment privatization has been going on during the past years of reform. The restitution of land started in 1992, after the appropriate law was passed by parliament. It will return land to its original owners, or their heirs, as evidenced by property titles as of 1946. About 55 million decares will be returned to 1.7 million owners, who have filed a request with the respective municipal council. The land owned by the municipalities, but not claimed for restitution will remain in the municipalities' ownership, and some of it may be used in the process of subsequent agricultural reform. For example, according to a government instruction, people engaged in agriculture would be able to buy up to 50 decares of land at reduced prices, at approximately 1000 to 10,000 leva per decare. It seems that the government is engaged in land privatization and restitution solely for political benefits. This has been true for all the governments that changed hands after November 10, 1989. Land restitution is not too painful a process, and it is not likely to cause much political trouble. The hot questions are the ones of industrial privatization, and these, correspondingly, have been the ones systematically evaded. Moreover, after the privatization of small business establishments proved not very successful in terms of financial benefits for the state, the politicians who see privatization solely as a mechanism for raising revenue, are likely to hold the process back. The dangers ensuing from the plans of the government of Luben Berov to postpone privatization until 1996 and complete land privatization only can hardly be overstated. The hidden privatization and the money laundering, the rapid emigration from Bulgaria due to the worsened economic conditions (estimated at about 70,000 a year), the lack of stimuli for small business development will lead to a major contraction, far worse than the current 70% decrease in GNP compared to 1989. Instead of focusing on business development, the government will be engaged with bailing out the inefficient state companies, thus promoting economic stagnation and unemployment. INDUSTRIAL PRODUCTION AND GNP The contraction in the Net Material Product started in 1989, when it decreased by 0.4%. This decrease was mainly achieved in the last months of the year, after the fall of the communist government. Of course, the NMP had been declining prior to 1989: even with the tight state planning machine under operation, the reported growth in NMP had been about 2-3% annually, the assumption being that "inflation is non-existent under socialism." But as Luben Berov has calculated, inflation had been in the range of 5% annually during most of the 80's, a trend that suggests real NMP declining at 2-3% before 1989. During 1990, NMP was down by more than 12% compared to 1989. For 1991 the figure is 26%, compared to 1990, and for 1992 - 21%. The compounded contraction is about 70% compared to 1989. Without doubt, the main reasons for the decline are related to the dissolution of the socialist integration mechanisms, the rapidly reduced trade with the CMEA countries (recall that their share in Bulgarian exports was between 80-86% of the total Bulgarian exports), the slashing of government subsidies for state companies, the high interest rates (50-60%), and the increased emigration from Bulgaria. However, the lack of a coherent program for privatization, macroeconomic stabilization, and growth enhancement reaching beyond the price liberalization initiated in 1991, has contributed to the increased business pessimism, domestically and abroad, and has decreased the chances for economic recovery. FOREIGN DEBT, THE EXCHANGE RATE, AND OVERVALUATION Some economists point out that the Bulgarian currency is one of the few in Eastern Europe that has been floating freely. Had the Bulgarian National Bank declared that it would formally fix the exchange rate of the lev to the dollar, a comparison between Tables 4 and 5 would have indicated the high overvaluation of the Bulgarian currency. With more than 500% inflation in 1991 and almost 80% in 1992, the exchange rate has been rising slightly from 22 to a little over 25 leva per dollar. The current situation is unexplainable if the assumption that the currency is freely floating is maintained. It is an example of how central banks, using the specificities of the economic development, keep the exchange rate overvalued until it is too late. Thus, although no intent of fixing the exchange rate has been announced, prof. Todor Valchev, the head of the National Bank, has had disagreements with the former finance minister, Ivan Kostov, concerning the bank's interventions in maintaining or lowering the exchange rate of the lev to the dollar. The Ministry of Finance has pressured for appreciation of the exchange rate in order to be able to buy cheaply the currency needed for repayment of interest and principal due on the foreign debt, amounting to more than 12 billion dollars. The National Bank, on the other hand, favors a stable exchange rate, claiming that the pursuit of such a policy has stimulated exports, totalling more than 2 billion dollars by the end of 1992. Also, the National Bank asserts that the maintenance of such an exchange rate has helped increase the reserves of the bank form an estimated 50 million dollars at the beginning of 1991 to 1.4 billion by the end of 1992. Thus, regardless of the formal side of fixing vs. free floating, the Bulgarian National Bank has been operating on the foreign exchange market in a way which has resulted in a stepwise fixing of the exchange rate. The problem, therefore, is in the interrelatedness between capital mobility and international trading of the domestic currency, on one hand, and the role of the central bank in deciding on an exchange rate policy that is consistent with the domestic currency market and the domestic economic conditions on the other. Domestic trading in dollars is still meager enough; Bulgarian imports have been declining for a third consecutive year, and inflation, although declining after the price liberalization in 1991, is still 80% annually. Thus, an exchange rate that has been maintained at 22-25 leva per dollar during the past three years suggests an overvaluation, which contributes to the creation of money illusions even amidst the government and bank officials, making them extremely optimistic about the pace of the economic reform. THE FUTURE The fall of 1992 was marked by the worst political crisis in the post-communist history of Bulgaria. After more than three months of endless parliamentary debates and a vote of no- confidence, the UDF government led by Philip Dimitrov resigned. The new cabinet, headed by Luben Berov, was backed by the other two political parties in the National Assembly: the Socialist party and the Movement for Rights and Freedoms. It is unlikely that this government will reverse all decisions of the UDF cabinet. However, the new finance minister has proposed delaying the privatization process until 1996, has expressed disapproval of the IMF demands, and has asserted that if a compromise on the increase of the budget deficit is not mutually agreed, the Bulgarian government might end the talks with the international organization. This decision is indicative of the administrative methods used by the Bulgarian governments to halt the decline in production, amounting to more than 70% since 1989. However, no mention at all has been made of the necessities for stepping up the privatization program, or stimulating private entrepreneurship through a government fund, export subsidies, tax breaks, or some incentives for new businesses. The new government has projected 70-80% inflation for 1993, thus, in effect, leaving no doubt that the interest rates are not going down from their present levels of about 50%. According to the National Bank, by the end of October 1992 the bank loans reached 493 billion leva: 257 billion was the amount of the consumer loans, 100 billion went for deficit financing, 119 for the state enterprise financing, and only 17 billion were lent to private firms. That is, although the private sector contributed 20% to the GDP, it received 12.5% of the commercial loans. But even with the high loans, the state sector has not been able to keep unemployment low. With a work force of 4.5 million, Bulgaria's unemployment has increased from 250,000 (5.56%) in mid 1991, to 350,000 (7.78%) in October 1991, to 600,000 (13.3%) by the end of 1992. Employment has fallen by more than 5% in 1990 and 15% in 1991: more than in Poland (4%, 6%), Hungary (2%, 6%), Czechoslovakia (1%, 7%), and Romania (up 1%, 11%). And these figures are before any massive restructuring or privatization has taken place. In the light of the populism of the Bulgarian politicians, the high unemployment could be a severe burden for the budget if privatization and economic growth stimulation programs are not initiated. The new cabinet of Luben Berov has just announced that 9 of the 15 enterprises selected for privatization last year will be up for sale in 1993. In addition to that, 100 other industrial enterprises will be privatized in 1993. But as their residual value is below 10 million leva, they will be sold without the intervention of the Privatization Agency. That is, the new Bulgarian government has pledged allegiance to the "case-by-case" privatization scheme, to spontaneous privatization "on the initiative of the buyer." No visible efforts are made to approach the economic reform and privatization in a comprehensive way that would utilize the spillover effects from sectoral changes to boost growth. Instead, the partial, one-sector-at-a-time approach dominates the economic agenda. For example, many Bulgarian economists claim that Bulgaria's future prosperity is closely linked to tourism, service industries, and agriculture. Thus, the reforms in the tourist sector are more advanced than in any other: the industry, according to the Chairman of the Committee for Tourism, has converted all tourist state-owned enterprises into joint-stock companies, awaiting prospective buyers. But carrying on structural reforms in one sector without reforming the others is likely to create disproportions which the economy might not be able to handle in the future. The leitmotif of these last lines is the need to carry on a privatization program distributing claims, not selling them. The arguments for this are numerous, but even the necessity to hurry before it is too late is sufficient. In conclusion, it seems that the biggest stumbling block for economic recovery in Bulgaria is the lack of political will to break with the totalitarian models of society, for the paternalistic tradition of economic management is continuing under different political auspices, claimed to be anti-communist and pro- market, but in reality both populistic and authoritarian. But as the experience of the Eastern European and Latin American countries shows only too well, populism and authoritarianism have never been a successful strategy for economic development: they just make things worse. TABLES TABLE 1: Origins and Utilization of the Net Material Product (NMP), 1989. ORIGINS OF NMP NMP UTILIZED Agriculture 11.2% Consumption 75 4% Industry 58.9% Accumulation 24.6% Construction 9.8% TOTAL 100.0% Productive Services 20.1% TOTAL 100.0% Source: Country Report: Romania, Bulgaria, Albania, N3, 1991. TABLE 2: Intra-CMEA Exports As Percent of Totals. Country All CMEA Soviet Union as % of Total Bulgaria 80.9% 77.6% Czechoslovakia 73.0% 59.0% Hungary 44.6% 63.1% Poland 40.7% 60.2% Romania 40.8% 58.8% Source: Kennen (1990), as quoted in Blanchard, O., et al., Reform in Eastern Europe, MIT Press, 1991. TABLE 3: Main Destinations of Imports and Exports, 1989. Country Exports Imports Soviet Union 65.8% 53.6% East Germany 5.6% 5.8% Czechoslovakia 4.4% 5.0% Poland 3.9% 4.8% West Germany 4.9% Socialist Countries 86.3% 75.9% Developed Countries 7.3% 17.0% Developing Countries 6.4% 7.1% TOTAL 100.0% 100.0% Source: Country Report: Romania, Bulgaria, Albania, N3, 1991. TABLE 4: Consumer Price Index, monthly data. 1990 1991 1992 January 113.6 February 222.9 March 150.5 April 102.5 May 100.8 June 104.1 105.9 July 103.5 108.4 August 110.9 107.5 September 104.5 108.0 103.4 October 104.1 November 104.9 December 110.4 104.6 Source: Wyzan, Michael, Bulgaria: Shock Therapy Followed by a Steep Recession, RFE/RL, V1, N45 (November 13), 1992 for 1990 and part of 1991; Country Report: Romania, Bulgaria, Albania, The Economist Intelligence Unit, for August and September 1991; Democratzia and 24 Chasa, selected issues, for the rest of the table. TABLE 5: Exchange Rate, Leva per Dollar. 1991 1992 January 2.825 23.953 February 20.740 24.141 March 15.170 23.281 April 18.250 22.954 May 17.550 23.204* June 18.692 July 18.692 22.763 August 17.637 22.223 September 18.634 22.636 October 20.528 23.942 November 18.370 24.702 December 21.811 25.024 Source: 24 Chasa, selected issues. REFERENCES Blanchard, O., et. al., Reform In Eastern Europe, MIT Press, 1991. Country Report: Romania, Bulgaria, Albania, The Economist Intelligence Unit, N1, 1990 ----, N4, 1990. ----, N3, 1991. ----, N1, 1992. Democratzia, editorial, December 15, 1990, p.1. ----, interview with Alexander Bozkov, September 4, 1992, p.3. ----, September 27, 1992. ----, December 8, 1992, p.1. Duma, August 21, 1992, p.1. Eastern Europe, FBIS, November 4, 1992, p.5. Izvorski, Ivailo, "Information Society: The Bulgarian Logic," Futures, February, 1993. "Looking Up," The Economist, V325, N7790 (December 19), 1992, p.50. "The Private Entrepreneur is Not Wanted At the Credit Table," 168 Hours Bulgarian Business News, December 30, 1992, p.21. The Rahn Program, US Chamber of Commerce, 1990. Tarr, David, "Problems in the Transition from CMEA: Implications for Eastern Europe," Communist Economies and Economic Transformation, V4, N1, 1992. Wyzan, Michael, "Bulgaria: Shock Therapy Followed by a Steep Recession," RFL/RL Research Report, V1, N45 (November 13, 1992), p.34. 24 Chasa, January 23, 1992, p.1. 168 Hours Bulgarian Business News, V3, N3 (January 18), 1993, p.1. ----, V3, N4 (January 25), 1993, p.16. --------------55064033A47--