Transition to market capitalism in Bulgaria

 
by Vassilis Andreulakis

 

Bulgaria started its economic reform program in early 1991.  The goals were to put the country in a continuous growth path, increase the living standards and to have a fully functioning market economy.  Such changes though in economic behavior and structure do not come easy. Besides, Bulgaria had a centrally planned economy for 40 years.

In 1990, the year before the implementation of the stabilization program, the economy experienced three external shocks.  Firstly, exports and imports were reduced because trade with CMEA declined and moreover, the supply of oil from the Soviet Union was reduced.  Second, due to political developments in the rest of Europe, banks decided to change  their policies on loans, along with the foreign financing that compressed. Thirdly, the price of oil went up due to the Middle East crisis and therefore, Bulgaria stopped trading with Iraq and Kuwait.  The total result of these shocks can be added up to give us a 9% decline in output that year.

The decline in output increased budget deficit.  Tax revenues were greatly reduced and interest payments on foreign debt were increased.  The payments went from a 6% of GDP in 1989 to a 15% in 1990.  With all that in the background, the Bulgarian government decided to begin the reform in February 1991.

The program had certain macroeconomic objectives, such as the elimination of excess demand through price liberation (prices could now increase).  There was also fear for a macroeconomic imbalance such as price jumps that stem from price liberation.  The targets were set such that the budget and monetary problems could be solved, leaving room for credit expansion to government sectors.  Initially the targets were:

a) Within their credit target in Bulgaria, credit to non-government was to be increased in the expense of government credit,
b) Great reduction in subsidies, would cause an estimated decrease in expenditure of 23 percentage points and
c) Minimum wages could be increased by more then 200%.

As in other parts of central and east Europe, results have very often differed from desired targets.  Such were the results in Bulgaria: in 1991 GDP decreased by 17%, inflation had risen to 334% and the current account deficit in foreign currencies was $0,9 billion.  We have to keep in mind though that targets for macroeconomic results are set under great uncertainty.  First of all, behavioral relationships cannot be predicted, so the reaction to economic changes can be a surprise.  Secondly, external shocks are what the word actually means, "shocks".

  It must be understood that such output declines do not mean that it is a one way street from now on.  A turn around is possible.  Bulgaria actually did make progress because even if the people witnessed great declines in their income, the variety of choices and their freedom has increased, a main aspect of better living.

However, it seems that the following years were not good to Bulgaria.  Due to the slow advancement of the reforms decided in 1991, the country experienced a new economic crisis in 1996 despite the GDP increase of 2,6% in 1995.  Inflation rose to 311% and GDP fell by 10%.  Production and foreign trade were reduced.  State owned industries failed to be privatized so there were little structural reforms in order for the IMF  to offer the $580 million loan it had originally planned on giving.  The same year, the IMF proposed that Bulgaria should form a currency board and avoid hyperinflation by eliminating discretionary spending.  They believed this was the only way to restore confidence in the lev.

      The future of Bulgaria seems uncertain, just like Albania and Yugoslavia.  It is logical that foreign investors will avoid putting their money in areas were war is always a threat and moreover, the population is not formed by "big spenders".  Bulgaria has been led to desperate measures in order to decrease its deficit.  Even their most expensive government assets (such as real estate) have been offered to the highest foreign bidder.  It seems that for economic growth to occur in the Balkans, a main condition is for the war to stop.  Until then, predictions favor a further decline in output in the future.

References:
1)Bulgaria, an economic assessment. Published by OECD. Paris, France 1992
2)The economic transformation of eastern Europe: Bernard Katz, Libby Rittenberg. CT USA 1992
3)World Factbook (WEB)   

  

 

 

 

 

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