COUNTRY COMPARISONS     

 

 

Comparative analysis
of Greek and Bulgarian
Economies




By Kristina Raevska, April 2002

 

 

 Greece and Bulgaria are both located in South-East Europe, on the Balkan peninsula. The two bordering countries have relatively low endowment of natural resources, similar mountainous relief, very small size difference and almost identical climate. Because of the very important location (the Balkans are the main rout from Europe to Middle Asia) and also the common border the historical record of the two countries is quite similar with identical prevailing periods and constant land disputes often resulting in wars. It all prompts to a similar economic development but this is where the similarities stop. After WWII the two countries undertook completely different economic and political systems. Bulgaria embarked on a path towards centrally planned economy, while Greece went on to develop a market economic system, under a parliamentary government with a multiparty system, which was disturbed from 1967 until 1974 by a military dictatorship. After 1990 Bulgaria also joined the other Eastern European countries in trying to reform what seems to be an outdated, utopian system of central planning into an up-to-date, proven effective market economy. The transition is still ongoing and so far it has been very painful and the country has suffered enormous losses. The difference between those two systems and yet the similarities of the two countries are thebasis for this comparative study.

Greece was inhabited as early as the Paleolithic period by 3000 B.C. Early in the 2nd millennium B.C. on the island of Crete was established the Minoan empire, predecessor of the Greek small city-states. The empire collapsed around 100B.C. Despite the separation between the “polis” they all shared a common cultural and historical legacy.

After the Persian invasion in the 5th century B.C., Greece entered its Golden Age, under the leadership of the Athenian Pericles. This era was marked with the creation of “democracy” – rule of the people, which left long lasting traits in Western culture. Because of internal conflict between Sparta and Athens during the Peloponnesian Wars, Greece was weakened and fell under Macedonian control. Later, under the leadership of Alexander the Great it regained power and its influence spread beyond the Mediterranean region.

In 146 A.C. Rome conquered Greece and set the stage for a new empire, rooted in the city of Byzantium. Christianity began proliferation and by the 11th century the eastern and western centers (Byzantium and Rome) officially split.

In the 15th century the Byzantine Empire collapsed under the pressure of Ottoman Turks. Greece managed to regain independence in 1830. It established itself as a monarchy with the help of England, France and Russia in 1833. In 1917 Greece entered WWI on the side of the Allies. Between the two world wars the country was turmoil by the struggle between republicans and monarchists, which led to the proclamation of Greece as a republic in 1924.King George II returned to his throne in 1935. At the end of WWII Greece found itself in the beginning of a civil war, which lasted from 1944 until 1949. From 1952 until 1967, Greece was governed by freely elected parliament. In 1967 a group of colonels seized power in a coup d’etat. The rule suppressed civil liberties and the country was under military dictatorship until November of 1974. Finally on 12/08/1974 a referendum established the republic. As a last addition to the country’s establishment on the international scene it was accepted in the European Union on January 01, 1981.[1]

 
Bulgaria, as well as Greece has a quite extensive historical record. Around 11th – 6th century B.C. Thracians state units appeared in what is now Bulgaria. In the 1st century B.C. their land was conquered by Rome and later, in the 5th century included in Byzantium. In the 5th –6th century Slavs settled on the Balkans, soon followed by Proto-Bulgarians. The constant threat in the face of Byzantium cause the tribes to unite and in 681 to form the Bulgarian state, which expanded quite a bit in the next several hundred years and gained political standing. In 864, under Knyaz Boris I Mikhail the country adopted Christianity as its official religion. At around the same time students of Cyril and Methodius- the founders of the Slavonic alphabet came to Bulgaria. The was the beginning of the country’s first Golden Age, which lasted until the first decades of the 11th century, when Bulgaria was conquered by Byzantium. In 1186 an uprising overthrew Byzantine reign and the country headed into its second Golden Age under the Leadership of Tsar Kaloian (1197-1207) and Tsar Ivan Asen II (1218-1241). The second Bulgarian Kingdom reached its cultural and economical peak, establishing political hegemony in South-East Europe.

Separatist tendencies led to splitting the state and making it an easy prey for the Ottoman Turks, who conquered it in 1396. In 1876 Bulgaria saw the April Uprising, which while unsuccessful, attracted the world’s attention to the Bulgarian national issue. As a result of the Russo-Turkish War of Liberation Bulgaria gained independence on March 03, 1978, but national integration was not attained. A congress of the major western powers in Berlin diminished the original size of the country by more than half. After several uprisings in 1913 Bulgaria finally established itself to its present size.

The two world wars were quite devastating to the country, which always sided with Germany and had to bear quite harsh reparations. In August 1943 Tsar Boris III died and the baby Simeon was put on the throne. A year later on September 05, 1944 the government of the fatherland Front took power and four days later the Communist party government was officially established. Two years later Bulgaria was proclaimed a republic, which was governed according to socialist ideology, with a centrally planned economy for more that 45 years. November 10, 1989 marked the democratic changes in the country. A new constitution was adopted, multiparty system established and the country embarked on a painful transition from a centrally planned to market economy.[2]

Both countries have plenty of memorable personalities, who have left a major trace in the state development. For Greece one such figure is Eleftherios Venizelos- prime minister from 1910 until 1933 with a few interruptions. Born in Crete in 1864, he studied law in Athens and became the leader of the Liberal Party of Crete. In 1905 he became the first independent prime minister of the island and five years later he was appointed prime minister of Greece. He supported the Balkan League against Turkey (1912) and Bulgaria (1913), as a result of which Greece doubled its population and territory. During the early years of his ministry he revised the constitution (1911) and instituted military and financial reforms as well as thoroughly revamping Greece’s economic and social institutions. His modernization programs were interrupted by a series of wars between 1912 and 1922. In WWI he favored an alliance with the UK, France and Russia against the Central Powers. After a few years of losing and re-gaining power due to his conflicts with Constantine I on the country’s involvement in the war, he returned in 1923.By signing the treaty of Lausanne he provided for the exchange of Greek and Turkish minorities, thus dramatically enlarging the country’s population. Venizelos’s institutional reforms along with the new sills brought by the refugees and increased demand, promoted a period of economic growth and industrialization. His last administration (1923-32) led to another era of modernization in the country’s economic institutions. Financial reforms included the establishment of the Agricultural Bank of Greece and the National Bank of Greece. The institutional changes were aimed mainly at improving resource allocation and diminishing income inequalities by regions. Still, despite the growth widespread poverty persisted, which led to decline of Venizelos’s popularity and eventually, by 1933 he lost power. After his participation in an unsuccessful Cretan revolt he was forced to flee to France, where he died in 1936.[3]

If I have to chose a figure from the Bulgarian history, which really made an impact on the country’s development, I’d select Stefan Stambolov. Born in Veliko Turnovo in 1854, he developed his political career after the national liberation, as a champion of national revival. In the first post-war years he passionately struggled against the unfair decision of the Berlin congress and displayed a strong opposition to Prince Alexander’s absolute power. After the Prince’s abdication he was chosen first regent and eventually appointed Prime Minister on August 20,1887. His rule was responsible for Bulgaria’s modernization in economic, political, administrative and cultural aspects.[4] He built a complex transport network, created laws promoting agriculture, provided government protection for locally produced goods and signed favorable trade contracts with the developed European states. He established national institutions in education, health and culture. His protectionist measures for domestic production were kept by the following governments, as a result of which, in less than 25 years the country developed an industry quite considerable for that time and for the size of the state. Bulgaria’s GNP significantly exceeded that of its neighboring countries, liberated decades before. His main flaw was his authoritarian way of governing and violent treatment of political opponents. That eventually led to his assassination a few years after his resignation on May 05, 1894.[5]

After WWII the countries of Southeast Europe with the exception of Greece all adopted the Soviet model of socioeconomic planning; the pre-revolutionary market economy was replaced with a centrally planned bureaucratic system. Greece on the other hand emerged from the war with a devastated economy and serious social and political problems; enhanced by a civil war, that occurred shortly after the end of WWII. The period between 1945 and 1953 was characterized mainly as a struggle for survival, aided by a tremendous foreign and domestic recovery effort. The foreign aid though, and especially American, which covered 68% of Greek imports, caused real inflationary problems, which lead to currency devaluation, in order to stabilize future economic development. Political instability of the multiparty regime also had its impact on every major economic decision.

Greece concentrated its attention on its long-term economic development once the immediate problem of recovery from the war, including the civil war, had been accomplished, but a national development plan was not initiated until early 1960s. One of the main aims of this program was the gradual elimination of disparities among the various regions of the country. The country had used monetary policy as its major weapon in pursuing a policy of economic development based on market demand and supply. Government policy was used to boost economic growth and specifically industrial development. Generally the private sector has met with a little state interference, and Greece’s fiscal structure is based on providing incentives for private and foreign investment.[6]

The period between the late 1950s and late 1960s has been characterized as the era of the “Greek Economic Miracle”, during which GDR grew at the fastest rate in Western Europe, averaging 7.6 % annually throughout the 60s. Industrial production grew at an average annual rate of 10% and in 1960 manufacturing exports surpassed agricultural for the first time in Greece’s history, partly because large foreign investment boosted capital-intensive manufacturing activities. Economic growth, industrialization and urbanization caused a lot of social tension in the 1960s due to the uneven distribution of income, an issue that remains a problem even nowadays. The ” Greek Economic Miracle” era ended in the early 70s, when it became obvious that the problems that have been put off for such a long time could not be avoided anymore. There was a deficit balance of payments; the competitiveness of the industry was quite damaged due to high energy costs, pressures for higher wages and a rising inflation rate. [7]

The crisis conditions of the 70s affected not only the private but also the public sector of the industry. The public sector is the economy was growing proportionally faster than the overall economy, which is the case in most market economic systems. Thus government expenditures increased from 18% of gross domestic product in 1960 to 25% of GDP in 1980, a result of the increasing demand for governmental services. The private sector still remains far larger that the public, but the rapidly growing public institutions slowly moves Greece towards a dual economic system, with some form of joint partnership between private enterprises and government. The private sector concentrates on the production of material goods, while the government provides a wide range of services, such as social security, health, education and community projects.[8]

Despite the problems in the public sector, the Greek economy contains elements of dynamic development. Firms in foods, textiles, telecommunications equipment, banking, and business services have made impressive progress in the early 1990s. Greek financial markets have gained volume and liquidity. Private economic initiatives in neighboring countries in transition from planned to market economies have flourished and Greek investments rank among the largest in those countries.

 Bulgaria, on the other hand, followed closely the Soviet model for economic development. It implemented a huge bureaucratic apparatus, through which it hoped to achieve a very rapid sectoral growth in the production of key industrial products. Industry received the highest possible priority in investment planning and location decisions for investments in it became an important part of state and Party policy-making. Planned investment allocations in Bulgaria in the early postwar period, had already spread industrialization to an increasing number of regions and communities. Employment in the industry increased more than 100% mostly in the form of surplus agrarian laborers being absorbed into the existing manufacturing industries. Predominance of small industries made recovery from war damages much easier and facilitated a quicker return to production. By the end of 1948 the recovery process was ending and the first long-term plans were launched.

Efforts were concentrated on the expansion of industry, specifically heavy industry, which was relying heavily on imports, mostly from the Soviet Union. In the period 1948-58 the metallurgical, chemical, metal-using and electrical industries had received more than 88% of the total investment for the country. Industries were concentrated in huge complexes, nonexistent before the war. As a result of the one-sided industrial building program, great structural disproportions arose and were bound to have negative effects in the future. For example the important food processing industry, for a country that was mostly agrarian just decades before, was completely neglected during the 1950s. Bulgarian central planning was imitating very closely the Soviet one, which lead to the so- called great leap forward in 1958, meant to coordinate Bulgarian and Soviet plans. As a result investment increased even further, but the important consumer industries were still neglected (for total 74% investment increase, agriculture had allocated only 2.4% investment increase). Anticipated progress in standard of living did not materialize and left large parts of the country backwards and undeveloped.

The results of the experimentation were devastating for the country’s economic progress. Very few targets were met and the economy experienced a general slowdown in growth during the early 60s. Overall growth rates had declined from 11.6% in the period 1956-60 to 9.6% between 1961-65.  As a result of the slowdown on the 8th Congress of BCP (Bulgarian Communist Party) a new system of economic planning and management was introduced, including the creation of mid-layer decision –making bodies to coordinate the works of enterprises.1 The reforms did not accomplish much due to the general inflexibility of the system and the unwillingness of the central planning government to accept loss of authority in a complicated process requiring plenty of information.

A new reform was initiated in 1981, called the New Economic Model, involving both agricultural complexes and industrial enterprises. NEM was supposed to update the technical infrastructure of the industry and improve the quality of Bulgarian exports. Its principal instruments were financial incentives and accounting regulations aimed at all levels of management. This was to be yet another reform which was unsuccessful. That eventually led to another set of reforms implemented in 1989, similar to the soviet peresetroika. It was a basic departure from the fundamentals of socialism, because it allowed for private citizens to hire permanent labor, which cause confusion rather than any improvement. By the end of the year the communist government was taken down and the country embarked on a painful transition from centrally planned to market economy.

 If we decide to break up the economies of the two countries, we can see the differences that stem from their basic form of organization- planning or market.

Greek manufacturing and industrial activity in general underwent great expansion in the 1960s, but the sector has been slowing ever since and has virtually stagnated in the early to mid 1990s. The manufacturing category includes a variety of sub sectors and activities, the four largest being foodstuffs, textiles, chemicals and processed nonmetallic minerals. These have been leading contributors since 1977, when they totaled 45% of overall manufacturing value added. Greek manufacturing is concentrated mainly in small and medium –sized enterprises, mostly private property.

Bulgarian centrally planned economy differs quite a bit in the structural organization of its industrial sector. The emphasis on heavy industry and neglect of consumer goods can be seen in its industrial growth. For less that 50 years, from 1939 to 1988 industrial production rose 1.9 to 15%, while the drops in the output of food and textile industries were from 51.2% to 23.3 % and from 19.8% to 5.1 % respectively for the two. Bulgarian heavy industry is concentrated in large industrial complexes meant to utilize the economies of scale advantage, concentrating production and research. These enormous enterprises though were inherently uncompetitive and further reduced flexibility.

Another important sector of economy is agriculture, which is again quite different in terms of development for the two countries. The Greek agricultural sector is traditionally formed by small- scale landholdings, which was even further reinforced by the application of state land distribution programs that divided national lands to endow landless peasants with holdings of their own. The small size of the holdings is one of the major reasons for lower agricultural productivity, due to the non-utilization of economies of scale offered by the new technology. Consistent with the decline of the importance of the sector in the economy, employment in it has also declined by around 5% from 1981 to 1991. Government is supporting agriculture by income and price supports, special credit conditions and organizational aid. There are propositions for land consolidation or formation of agricultural cooperatives. Those have enhanced greatly under the last socialist government, due to the great incentives the government offers for joining.

Agriculture was a leading economic sector before WWII in Bulgaria, contributing 65% of GDP. After the communist government took power things changed quite drastically. By 1958 the BCP had collectivized a high percentage – 92% of arable land, voluntary or not, which had a major effect on productivity. There was no more incentive for agrarian workers to seek for profit maximization, since all of the production went to the government and they were getting a fixed monthly salary, which led to drastic falls in production. In the late 60s, using Chinese example, Bulgaria started the consolidation of collective farms into bigger agrarian complexes, which were to be the basis of linking agriculture with manufacturing. Priority was given to live stock, mostly for exports and also to fruits and vegetables as opposed to industrial crops. That later on resulted in great shortages, especially in wheat.

 A third one of the major economic sectors, on which I would like to pay a little more attention, is foreign trade and its role in the development of the two countries. It is generally expected that foreign trade plays a large role in small open economies such as the ones in Greece and Bulgaria.

The Greek economy for example is highly internationalized and quite sensitive to developments in foreign trade, since the sum of exports and imports constitutes around 40% of its GDP, whereas in a larger economy, such as the USA the sum of exports imports ration to GDP is only 20%. The high degree of internationalization in the Greek economy is demonstrated by the fact that besides exports and imports, the nation’s foreign economic relations include a large component of so-called invisibles, such as revenues from tourism, merchant shipping, etc. These amount to roughly 25% of Greek GDP, proving the degree of internationalization of the Greek economy to be even higher than its trade figures suggest.

Greece is an import-dependent country, importing substantially more than it exports. A relatively small industrial base and lack of adequate investment in the last 15 years have restricted the export potential of the country. As a general trade pattern, Greece exports primarily light manufactured goods and agricultural products and imports more sophisticated machinery.[9] The country is the largest EU member aid recipient, averaging around 4% of its GDP, most of which is allocated for major infrastructure projects. The country’s entry in the EU meant that it had to abolish a lot of it’s protectionist trade policies, which affected a lot of the small scale enterprises, but it also brought some good changes. Greece receives a considerable amount of financial aid from the EU. EU member countries are its main trading partners (Germany – 15%, Italy –13%, UK –6%) and it enjoys all the benefits a membership in that organization could give to a country[10].

In terms of direct foreign investment Greece has often been criticized for giving too many privileges to foreign investors. By 1978 foreign direct investment in Greece amounted to $1.3 billion, despite the criticism that such corporate investments influence and even threaten the economic and political life of the country. While that might be true to some extend those direct investments provide technological innovations, managerial expertise, capital investment and employment.

Foreign direct investment is accepted in all of the Balkan countries, even in the planned economies. Those countries, a representative of which is Bulgaria, are willing to forsake certain controls over incoming foreign investors in return for hard currency, needed to buy Western equipment and technology. That was one of the many effects on international trade after the adoption of the Soviet model, which included severance of any dependence on western products. In order for that to be achieved strong import substitution policies to bolster domestic production of goods, that were previously imported. Postwar economic policy also included re-orientation from Western European trade partners  (Germany) to central and Eastern European and primarily to the Soviet Union. The policy of promoting heavy industry required huge imports of machinery and raw materials, which by the mid 1950s constituted more that 50% of total imports for machinery and around 25% for raw materials.

As in every other economical aspect the state was the foreign trade regulator. Trade decisions were also based on central planning or negotiated with other members of Comecon, without any consideration for market supply and demand. Comecon was an attempt by socialist countries to simplify their planning process by synchronizing the five-year plans of member countries and achieving international division of labor. The member countries enjoyed in general prices much lower than the world ones and that was very beneficial to the members especially when it came to oil prices.[11] Bulgaria’s major export partner was the Soviet Union and the major exporting goods, in accordance with the composition of its GDP were machinery, electronics and agricultural goods. The country imported from the USSR mainly energy and raw materials. The low prices allowed Bulgaria to re-export oil to Western countries and this way acquire hard currency in order be able to upgrade its outdated industry infrastructure.[12]

This high dependency on Soviet raw materials was one of the reasons for the great fall in Bulgarian economic production during the past decade. After the radical political and structural changes of 1989, USSR announced cutbacks in energy exports to Eastern Europe, which forced Bulgarian industry to curtail sharply, causing severe shortages of gas and fuel endured by consumers. Bulgaria has oriented itself toward more western partners. Its larger share of exports goes to Italy-14%, Turkey -10%, Germany- 9%. In terms of imports, the country still depends heavily on Russian raw materials, which constitute 24% of its total imports.[13]

 From the data and analysis provided we can see that there are some major differences between planned and market economies. Two countries with roughly the same amount of natural resources, same climate, as a whole very similar natural endowment, differ quite a bit in their economical performance due to the fact that they are implementing two considerably different ways of navigating their economies. Greece has chosen the market economy style, which has brought it much closer to the rest of the industrialized, developed nations of the world and has contributed to its membership in EU. Even though it is the poorest member of the organization, Greece still ranks top among the rest of the world. Bulgaria, after WWII embarked on the path of socialism. The idea, while quite appealing, was very much utopian and impossible to implement, but it took the governments of the former Socialist countries more than fifty years to figure that out. Right now the country is going through an extremely painful transition from a centrally planned to market economy, with very little success so far. It lacks the necessary resources, the industrial infrastructure, the experience and the technology for a smooth transition. In addition it needs to prove itself as a good place to invest in, which will be quite hard until the laws for foreign direct investment are not updated. As a whole we can say that Bulgaria has a lot of catching up to do with Greece and if we use the EU membership as a measure- Greece was accepted in 1981and Bulgaria is hoping to be accepted in 2007, which is quite a distance.


[6] Regional Development Strategy in Southeast Europe. A comparative analysis of Albania, Bulgaria, Greece, Romania and Yugoslavia; Hoffman, George W.;1972.

[7] http://memory.loc.gov/frd/cs/grtoc.html Library of Congress Federal Research division

[8] The Economies of the Balkan Countries; Gianaris, Nicholas V. 1982.

[11] http://memory.loc.gov/frd/cs/bgtoc.html       Bulgaria- A Country Study;  Library of Congress Federal Research division

 

 

OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses:

okyn@bu.edu --- okyn@verizon.net

This website contains the following sections:

General  Economics:

http://econc10.bu.edu/GENEC/Default.htm

Economic Systems:  

http://econc10.bu.edu/economic_systems/economics_system_frame.htm

Money and Banking:

http://econc10.bu.edu/Ec341_money/ec341_frame.htm

Past students:

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

Czech Republic

http://econc10.bu.edu/Czech_rep/czech_rep.htm

Kyn’s Publications

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

 American education

http://econc10.bu.edu/DECAMEDU/Decline/decline.htm

free hit counters
Nutrisystem Diet Coupons