Conditions for Long-term Growth and Prosperity in the Balkans In Search of Growth: Bulgaria’s Lessons and Policy Options A Report by the Institute for Market Economics October 1999 Assenka Yonkova Svetlana Alexandrova Georgy Stoev Diana Kopeva Yordanka Gancheva Latchezar Bogdanov Tzveta Dimitrova Georgy Ganev Krassen Stanchev Zora Blagoeva This report was made possible with support from Freedom House, under the auspices of the Regional Networking Project, which is funded by the U.S. Agency for International Development. CONTENTS I. TRANSITION AND RECESSION II. FOREIGN TRADE LIBERALIZATION III. EXCHANGE RATE REGIME: DOES IT CONTRIBUTE TO GROWTH, OR NOT? IV. DEVELOPMENT OF FINANCIAL MARKETS V. PUBLIC DEBT DYNAMICS VI. DEVELOPMENT OF THE PRIVATIZATION PROCESS VII. BUSINESS ENVIRONMENT VIII. SOME INSTITUTIONAL ISSUES • PROPERTY REGISTERS IN BULGARIA: PROBLEMS AND PERSPECTIVES • PUBLIC PROCUREMENT • BANKRUPTCY PROCEDURES • COMMODITIES EXCHANGES AND WHOLESALE MARKETS IX. WHERE THE PROSPERITY COMES FROM? THE MARSHALL PLAN AND THE STABILITY PACT 2 INTRODUCTION 1999 is a year displaying the end of a decade of economic transition experienced in former communist countries in Central and Eastern Europe. In a broad sense, the first phase of transition implies liberalization of economic activities, macroeconomic stabilization, structural reform, privatization, improvement of enterprise management and efficiency, establishment of new institutional and legal framework, imposition of clear and transparent market-entry regulations, etc. The economic performance of Bulgaria during last decade of transition, similar to the other post-communist countries in the Balkans, has been worse that in Central European countries. The major factors contributing to such a performance were lack of political consensus and weak (or undermined) institutions. Bulgarian economic reforms started in February 1991, a delay of 15 months after the communist regime fell. A political consensus was achieved on the following main economic reform targets: · monetary and fiscal policies: financial stabilization, inflation curbing, money aggregates and budget deficit regulation; · structural reform: changing patterns of economic behavior through prompt privatization; · effective economic governance: exercising pressure on enterprises to adjust to the changing economic environment, and setting up fundamental market economy institutions in the country; and · effective general economic policies: attempting to follow coherent economic policy. The philosophy of this agenda, and even the wording, have been very similar to that of that of Poland, expressed in the “Government Program of Economic Stabilization” of October 1989.1 The difference between the two programs has nothing to do with their content. It lies in the political setting. Bulgaria’s reform goals have never been publicly announced as a part of any of the political parties agenda. Moreover, they have never been included in a written government statement. The initial consensus was based on the effects of the unilaterally announced moratorium on the country’s foreign debt payments in March 1990. The implementation of market reforms proceeded successfully until October 1991 elections. The democratic minority cabinet of 1991-1992 attempted to follow the same philosophy, without daring to scrap price controls and promptly privatize. The emerging private sector grew on decapitalization of the state -owned enterprises (SOEs), and especially of large and constitutionally protected2 monopolies. With parliamentary support eroded, the democratic cabinet resigned. The cabinet of experts succeeded in signing, in mid-1994, a Brady plan for Bulgaria, restructuring its foreign debt by 47%. In order to fulfill foreign debt payment schedules, the government had to achieve growth rates of 4-5% of GDP in 1995 and 1996. Technocrats, backed by ad hoc majorities in the legislature, failed to promote the private sector and an investment-friendly environment. Their successors, the socialists, not only gave up 1991’s reform ideas, but introduced opposite economic policies. Zhan Videnov’s administration, backed by an absolute majority in the Parliament, attempted a sort of second edition of the central planning,3 supported loss-making public 1It included: “a) return to a monetary economy with stable money understood as the criterion, rather than narrowly as an instrument, and with money recognized as a measure of value, convertible, universally accepted and balancing the market; b) return to the market mechanism as the main mode of functioning of the economy, ensuring equilibrium of supply and demand, abandonment of economic function, genuine prices and a hard mechanism of verification of production influencing allocation decision; c) return to private ownership as the condition of microeconomic rationality and the basis of work on one’s own account and responsibility” Waclaw Wilczynski, Five Years of the Polish Transformation: 1989-1994. In Five Years After June: the Polish Transformation, 1989-1994, Ed. by Jan Winiecki, London, The Center for Research into Communist Economies, 1996, p. 24. In Poland, the initial reform stage was interrupted by general elections as well, however, the reform philosophy was consciously and publicly pursued even after ex-Communists’ turnover in 1994, and managed to produce its main results. 2 Article 18 of the Bulgarian Constitution establishes 12 exclusive government monopolies: on energy, communications, mineral, natural and water resources, coastal area and transport; the constitution, however, stipulates that execution of these exclusive rights should be regulated by a specific law; such a law was adopted in November 1995, the Concessions Law, which is still not implemented. 3 In 1991, price liberalization left only 10% of prices (those on fuel, communications, electricity and public 3 sector, at the price of draining the banking sector and causing severe macroeconomic disequilibrium, and brought the country back to the brink of defaulting in mid-1996, this time with a Brady deal in place. As a result of delayed structural reforms, several failed attempts to implement a coherent stabilization policy and a chronic lack of financial discipline, Bulgaria experienced the most severe financial crisis since the start of reforms: a paralyzed banking system, undermined credibility of key institutions, substantial depreciation of the Bulgarian currency and several months (December 1996 - February 1997) of record hyperinflation. A consensus was reached again, this time concerning a combination of policy measures to overcome the crisis. Among policy measures was adoption of a Currency Board Arrangement (CBA) in 1997. The CBA had an enormous stabilizing effect in the span of relatively short period of time. Since 1997, Bulgaria has managed to achieve sound macroeconomic stabilization. The main challenge in the next phase of Bulgaria’s transition is to attain sustainable growth. The objective of this paper is to examine some aspects of Bulgaria’s economic development during last decade of transition and to determine possible pro-growth policies. transport) under government control; by 1994 price controls grew slowly to 16% of the consumer basket to reach 49% in 1996. 4 PART ONE TRANSITION AND RECESSION Preliminary Remarks When starting to examine the aggregate output dynamics in a post-socialist transition country, one must be extremely cautious in the use of indicators, such as the gross domestic product, for any comparisons. If an analyst makes cross-country or time-serie s based comparisons of different GDPs, it is his or her duty to specify the reliability level of the provisional conclusions. In the case of Bulgaria (and probably also in other European transition countries), the following clarifications should be outlined before we embark on our analysis of GDP dynamics and other comparisons in this report. 1. The official statistics provide only aggregate figures. They do not always reflect real economic processes in the economy, as they are based on formal reporting. The methodology is changed often, making temporal comparisons quite problematic. 2. Although there are no precise estimates of the scale of the informal economy (they vary from 30% to 50% of GDP), it is reasonable to assume that the fall in output registered by the official statistics is to some extent compensated for by “shadow” output. 3. It is difficult to use real GDP growth as an indicator of welfare improvement and prosperity as accurately as for developed countries. This is especially true in the case of comparisons of the pre-1989 period with the post-1989 period. The imports used to come from other socialist countries, which had similar structures of output in terms of utility. The price system did not reflect consumer preferences and official statistics registered GDP increases, which did not necessarily mean an increase in the overall utility from consumption. After 1989, the market itself eradicated production in the face of no demand, which resulted in a registered decrease in aggregate output. At the same time, however, it brought a greater variety of products (either domestically produced or imported), which could not compensate in the money-measured GDP indicators, but marked additional utility. Below, paying necessary attention to growth dynamics, we concentrate on developments in GDP structure with regard to: · demand side (final consumption, investments, government expenditures and net exports) · supply side (shares of the main