WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

As part of a wiiw series of events, essays and analysis to coincide with the 30^th anniversary of the fall of the Iron Curtain, we interviewed our Bulgaria Country Expert Rumen Dobrinsky. He looked back at the main historical events and developments in his country, and shared his view on the country’s current prospects. wiiw’s special report on 30 years of transition and convergence was published recently and is available here.

What triggered the change in Bulgaria in 1989?

The first demonstration took place in the city of Ruse where the population was suffering from chronical air pollution, presumably coming from Romania. But the Bulgarian authorities didn’t want to spoil their political relations with their neighbours and were not keen to raise their voices against them. This went along with a general mood and desire for change.

The actual change occurred when the politburo decided to oust Zhivkov (the General Secretary of the Bulgarian Communist Party) on 10th November 1989. This is considered as the start of these processes. After that, developments took a fast course. People saw what was happening in Romania, Germany, Hungary, Poland, Czechoslovakia, principally everywhere. Very soon, there were big demonstrations in Sofia, calling for major political changes. They resulted in roundtable discussions with the ruling communist party and representatives of the opposition. In June 1990, the first free elections were called.

How would you characterise the economic situation in Bulgaria in 1989?

At that time, the economy was in ruins. Bulgaria was heavily indebted in foreign debt. This debt was unfortunately mismanaged and kept accumulating. In March 1990 Bulgaria defaulted on its foreign debt, and was the only transition country to do so. This was an enormous additional shock for the economy which added to the transformational recession. The default was followed by rising inflation and unemployment. People were queuing for basic food.

The first free elections for the Constitutional Assembly held in June 1990 were paradoxically won by the Socialist party, which had emerged from the former communist party. That was one of the big surprises. However, this situation lasted only for one year until the adoption of the new constitution. In any case, the opposition won the parliamentary elections in 1991 and formed its government. However, at that time, the opposition was a very heterogeneous group of all those who were against the communist party. It had no common ideas, notwithstanding a plan or strategy for what an alternative system could look like. Due to this, its governments were unstable and could not last for long.

In 1994, the elections again brought to power a socialist government. However, its disastrous macroeconomic management in a situation of full isolation from the international financial markets led the country into the biggest crisis in transition history. Two years later, the country was hit by a very deep transition crisis, the most dramatic one among the former communist countries. It was a ‘triple drain’ crisis, combining fiscal, banking and exchange rate crises. It resulted in hyperinflation, something that had never happened before in Bulgaria.

In short, the unfavourable legacy of the past, in combination with macroeconomic mismanagement during the transition period as well as the lack of consensus within the society as to the needed course of reform, brought about a second big shock for the whole population.

How did Bulgaria manage to overcome its ‘triple drain’ crisis?

After the crisis, the IMF helped Bulgaria to cope with the macroeconomic situation. The country established a currency board and inflation was put in order. The IMF also helped to reform the banking sector, to implement important new reforms and to reshape the macroeconomic management of the country.

In course of these reforms, the EU signalled that Bulgaria could aspire to EU membership. This became the single most important reform driver during the transition period. The period between 1998 and 2008 was a decade of key reforms after which the economy started recovering. As part of the pre-accession negotiations the legislative and regulatory framework in the country was aligned with EU acquis.

This was also appreciated by foreign investors and Bulgaria experienced a massive inflow of FDI. It was a period of reconstruction and modernisation of the economy, of reintegration with EU and world markets. It was also a period of relatively high growth and catching up. These were the good years. They lasted until the global financial crisis.

What die EU-membership bring the country and what expectations were associated with it?

People’s key expectations associated with EU membership were those of rising prosperity. However, there is some irony that the year when Bulgaria joined the EU was the year when the world was hit by the global financial crisis, so the first years of EU-membership turned out to be a recession and a lack of catching up. A period of meagre growth and slow convergence followed.

In any case, if one compares economic performance over the last 30 years, you see that the average incomes have risen considerably. GDP grew by some 40% compared to pre-transition years, GDP per capita is now by 60% higher.

The manufacturing industry underwent a complete overhaul driven by FDI. However, total gross industrial output is nowadays still lower than in 1989 as most of the old industry did not survive the transition. But at that time, Bulgaria was very over-industrialised. Actually this reflected a distorted economic structure for a country of this level of development. But along with the country’s de-industrialisation, the services sector has grown substantially. Today, Bulgaria is a net exporter of ICT and business services. It is one of the most flourishing sectors of the economy today. Another positive feature is that this sector enjoys European wage levels and even attracts foreign job seekers from the EU.

At the same time, one of the regrettable outcomes of the economic transformation is that income inequality has grown enormously. This is a major cause of disillusionment for large parts of the population that cannot benefit from the overall raising prosperity. Together with Romania, Bulgaria is one of the two countries with the highest income inequality in the EU.

And what about the massive population decline in Bulgaria?

The exodus of more than two million people is one of the most disappointing aspects of transition. People were too impatient to see a better life in their country. Their expectations did not match with the country’s reality which was changing very slowly. But currently, net-migration has fallen to zero. Return migration took off some years ago, especially university graduates who finished their studies abroad are now returning to Bulgaria.

How would you assess Bulgaria’s institutional convergence with EU-levels?

Organised crime was a problem in Bulgaria for quite some time but thanks to successful counter measures at present it has been largely suppressed. The main remaining problem in this regard is the low credibility of the judicial system. That’s the key problem that I see in terms of institutional convergence to EU good practice. Otherwise, the country’s institutions work properly and in accordance with EU acquis. Until now, Bulgaria and Romania are still under the EU monitoring mechanisms and are still not part of the Shengen zone. But in my view, this is not so much because of lack of institutional convergence, but because of problems within the EU itself.

What would you recommend the government to make people’s lives better?

Bulgaria is a small economy, open to the world and thereby also vulnerable to external shocks, as are many other countries. Under these circumstances, the economy is functioning relatively well and the macroeconomic management in general is in order.

There is obviously room for improvements. One such area is the country’s fiscal policy. Over the past two decades it has been persistently conservative and excessively tight. There is room for much more proactive fiscal policy to support economic growth and development. This is not being done by the government for reasons which are not clear to me.

Another policy area that calls for a change is Bulgaria’s huge income inequality, as it impedes social cohesion within the society. Without social cohesion, it is not possible to agree on any longer-term objectives within a society. However, I don’t see any intentions by the authorities to address this problem. These are, in my view, the two most important policy challenges at present.