“SHOCK WITHOUT THERAPY”:

THE UNAVOIDABLE ECONOMIC CRISIS OF BULGARIA

IN THE LATE 90’S

By Angela Buck  

With the fall of communism in 1989, Bulgaria was freed from the forces of the Red Army, but there was still much support for the communist movement.  This was evident in the rise of the Bulgarian Socialist Party through a democratic election, based on universal suffrage.  The BSP was in power in Bulgaria from 1990 to 1996.  This seems to have been the reason for Bulgaria adopting a policy of gradualism, unable to totally denounce the Soviet system, yet at the same time, having already attempted to make changes prior to the fall.  This turned out to be rather tragic for Bulgaria. In a sense, she was only dragging out the inevitable. 

Bulgaria was noted to be slightly different from the other Balkan states just before the fall.  It diverted from the basic Soviet type economy by having a high level of foreign trade, specifically with the countries in the CMEA block but also with it’s biggest western trading partner—Libya (The Economist, 81-April 89).  Another aspect was its desire to decrease governmental control of the industries, but this was not as market orientated as it seemed. 

Bulgaria, like most other Eastern European countries acquired a huge foreign debt that only added to the difficulties of making the transition from command economy to market economy.  At the end of 1988, Bulgaria’s debt was around seven billion dollars (81). One idea the government had to solve this debt was to attract foreign lenders through the practice of paying back loans, not necessarily at the depreciating currency of the Bulgarian “lev,” but at a currency which had appreciated.  This practice was also bound to be disastrous (81).

Despite the huge foreign debt that ailed Bulgaria’s transition, privatization was difficult all around.  In the beginning, starting in 1990, it seemed as though there would be more competition among the firms, but the new owners seemed to be nothing more than “old communists” still benefiting from the old system.  There was also, and still is, large evidence of what the Bulgarians called “mafiaisation,” meaning that those who were in power under the Soviet system remained in power under the Bulgarian Socialist Party and a seemingly adjusting market orientated economy (The Economist, 43-Jan.95).

    Another problem highly characteristic of the Bulgarian struggle was it’s poorly managed banking system. Two major laws were passed by Parliament in 1991 in regards to the banking system. The first being the general transition of power over the Central Bank from “the executive power to Parliament, in order to ensure the financial and currency stability of the country, and second, the assignment of the duties of the commercial banks”(Institutional Investor, S4).  As mentioned, there was a move to decentralize before the fall in 1989.  This can be shown in the banking system at that time and immediately after.  There was at least “sixty-two lilliputian state banks (the former branches of the Central Bank) and around five to six trade banks, which were an attempt to modernize the system”(S4). “The banks, after ’89, were poorly run, very traditional and lacked innovation.  They engaged in practices that lacked good judgement, such as, the distribution of three billion dollars in bad loans in 1995, and a response of issuing one billion dollars in bonds at below-market rate interest rates”(S4).   In 1992 and 1993, there was a large attempt to consolidate, in order to lessen the banking problems.  The Bank Consolidation Company was created to “govern state participation in banking capital, and at least twenty banks were joined together to create the United Bulgarian Bank”(S4).  From here, a project began to create private sector banks.  In 1995, Bulgaria’s bank composition was as follows.   Of the forty-four banks, twenty-eight were private, five were foreign, eleven were state owned.  As was already mentioned, the banks of 1995 caused Bulgaria to lose over three million dollars.  After this crisis, most banks became members of the Commercial Banking Association. 

In recent years, Bulgaria has seen both extreme effects of this gradual approach to privatization.   Witnessing extremely high and low inflation rates and having to bow down to the direction and guidance of the International Monetary Fund (IMF).  In 1995, Bulgaria was still witnessing growth, but in 1996, growth drastically declined.  Inflation rates were reported to be as high as 311%, but at an average of about 110-150% (The Economist, 95-Sept.96).  While these were extremely high, they were expected to rise up to even 700% in 1997, but this was not the case once Bulgaria began the incredibly strict plan set up by the IMF. It has been reported that inflation dropped from 243% in 1996 to .8% in 1997 under the IMF plan (Milligan, Susan E., 26).  Bulgaria was forced to sell most of it’s biggest assets, including SODI, the world’s largest synthetic soda ash company, MENDO DOBIVEN KOMBINAT, a copper mine, and plans to sell BULGARIAN TELECOMMUNICATIONS, CO..  In 1995, Bulgaria received at least nine billion lev (around $135 million dollars) from these sales.  In the banking sector, Bulgaria sold at least fourteen banks in 1997, and expected to sell at least thirty-five.  The sale of Bulgaria’s largest bank in 1997, United Bulgarian Bank, sold for $48 million dollars”(26).

LUKANOV’S REFORM PROGRAM
Lukanov was the Bulgarian leader after the Zhivkov government in 1990.  Under this new government, a program of reform was adopted that, in retrospect, seems to have been very superficial.  One critic of the Lukanov reform program, and it’s Decree no. 56, was Ed Hewett, who labeled it, “‘shock without therapy.’”   (Sjoberg and Wyzan, 97).  This seems rather appropriate, in the sense, that there was not much structural change taking place, just a lot of ideas on paper.  In an essay by Michael Wyzan, in 1991, many of the problems in the reform program are pointed out.  He cites the incredible devaluation of the lev as a problem, because while every other nation was devaluing their currency, Bulgaria retained “highly unrealistic and premium rates.” (94).   He goes on to further predict, what has already been shown in the first half of this analysis—the inevitable result of high inflation.  He was, of course, very correct. We read, “It should also be noted that Bulgaria has not undergone a period of very high open inflation . . .”     (95).  He goes on to explain how the plan does not attack macroeconomic problems enough.  He discusses the country’s attempt at privatization through vouchers, but comments on how research has shown that employee ownership of companies has not been that effective in the sense of increasing competition.  He further explains there dismal economic situation by explaining that there is no stock market, virtually no understanding of business law or management.  He of course finds this to be a huge source of economic problems in the future.  For this, Wyzan suggests hiring foreign managers to come in and start off the companies and banks.  If not, he believes there will be no one who can read the signs of a changing market any way. 

In an article by Ognian Pishev, the Lukanov’s reform program is further criticized.  It starts out by stating:  “The programme was based on the assumption that by administrative pressure, a smooth and gradual transition to a market system could be achieved while maintaining the standard of living” (105).  This is a follow up statement to his critique of the BSP and its superficial claims to adjust to the market.  In his take on the government’s claim to help small businesses, he discusses how under Lukanov, it was actually harder than it was before to start up or to compete.  We read:

“The Lukanov government stated its intention to help the fledging small business sector but this remained largely on paper.  Instead of tax incentives it introduced unrealistically high tax rates that only served to stifle private initiative . . . Nor is free trade possible on the external market since individual enterprises must obtain an export/import permit from the Ministry of Foreign Economic Relations” (107).
This is followed up with the author’s belief that the BSP did not fully accept full property rights, in theory, therefore, only truly allowed “leasing.”

All of this shows the reasons why the Bulgaria did not truly progress.  Of course, their understanding of the market economy was very premature, but the government seemed to purposely mislead the public in thinking that it did understand the market and was working within it’s framework in order to maintain the status quo prior to the fall.  Fake institutions were set up, but there was never any follow up or know-how in the first place.  Real economic problems, such as debt and inflation were inevitable and typical of this region after the fall of communism in 1989, but it seems that the intensity could have been slightly minimized if there would have been true political commitment to economic reform.  Hence, the case of Bulgaria is not a very pure case in analyzing the effects of an Eastern European country that chose gradualism as a method of achieving privatization after the fall of communism.  This appears to have been primarily due to it’s governmental reform plans that were apparently rooted in a political agenda which hoped to maintain the status quo rather than achieve a new economic program. 

BIBLIOGRAPHY

1.      McIntyre, Robert.  BULGARIA, Politics, economics, and Society.  Printer Publishers.  London.  Ed. Bogdan Szajkowski.  1988.

2.      Milligan, Susan.  “At last, some good news from Sofia; Bulgaria’s democratic and economic reforms.”  Information Access, Co..Athomson Corporation, Co., Institutional Investor, Inc., Institutional Investor International Edition. Sept. 1997. Vol. 22.  Pg26.

3.      Sjoberg, Orjan and Wyzan, Michael.  ECONOMIC CHANGE IN THE BALKAN STATES.  St. Martin’s Press.  New York.  1991.

4.      Institutional Investor, Inc., Institutional Investor.  Aug. 1995.  International Edition.  A Special Sponsored Section.  “Banking in Central Europe.  Bulgaria.  Halting Progress Toward Modernization.” Pg. S4

5.      The Economist Newspaper, Ltd.  “Bulgarian foreign debt.”  The Economist.  1989.  April 29, 1989.  Finance. Pg. 81.

6.      The Economist Newspaper, Ltd. “Bulgaria; By popular demand.”  The Economist.  1995.  Jan. 7, 1995.  Europe.  Pg.43.

7.      The Economist Newspaper, Ltd.  “Bulgaria; Into the hole.”  The Economist.  1996.  Sept. 28, 1996.  U.S. Edition.  Pg. 95.

 

 

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