Regulation and Growth. Case of Bulgaria

The last Index of Economic Freedom (1) was published early in January for the 12 th year in a row. In this year's edition there have been ranked 157 countries (2) against a list of 50 independent variables divided into 10 broad indicators. According to the average value of those ten factors each country finds a respective place in the rating, while the higher the score equates to the greater the level of government interference in the economy and logically the less economic freedom enjoy people living there. Numerous studies have demonstrated a clear and sound relationship between welfare of a nation and the extent to which government bodies are involved in carrying out economic activities.

Studied countries are grouped together in four general categories: free, mostly free, mostly unfree and repressed. According to the index this year Bulgaria ranks on 64 th place (out of 157 countries), getting total score of 2,88 points, which places it into the group of mostly free economies. There is a strong correlation between per capita income and the group a country falls into, which is explicitly illustrated by the next table:

Table 1

One of the indicators composing the index (factor #9: Regulation) measures direct state intervention in service and commodity, financial and labor markets, besides the difficulties one could have starting a business (entering a market) and developing it as well. Following variables are being evaluated within this factor:

•  Licensing requirements to operate a business

•  Ease of obtaining a business license

•  Corruption within the bureaucracy

•  Labor regulations, such as established workweeks, paid vacations and parental leave, as well as selected labor regulations

•  Environmental, consumer safety and worker health regulations

•  Regulations that impose a burden on business

Solely according to the aggregated score of this indicator Bulgaria is far beneath the average level – after the marking system based on five grades that is being used here – gets 4 points which means that a very high level of regulatory burdens is imposed on the economy (the less the score, the fewer the barriers and the easier one tackles with them).

From the point of view of a firm, each form of regulation sucks financial resources out of its budget and thus embarrasses its smooth functioning. Fulfilling administrative criteria implies covering costs, which are not directly connected to its main activity but take effect on its financial results – slash the profit and reduce to the same extent the internal sources of capital. Narrowing the volume of the profit that can be reinvest, leads logically either to less investments or to the same level of investments however burdened with higher risk because funds must be raised partially by taking a credit. Therefore, the stricter the regulatory system regarding entrepreneurs, the harder they carry out business activities and the lower the profitableness they achieve.

Peculiar to regulation is that introducing standards and licenses into one sector or market reflects inevitably others. For instance, according to a World Bank's study, the most usual reasons for dropping or limited creation of jobs are burdensome administration and high costs for starting a business. On the other hand, deep regulations in labor market (established workweek, fixed minimum wage…) influence the FDI level and thus affect a part of the financial market. The more and the more inflexible decrees there are, the less incentives the investors have.

Besides, there is a positive correlation between total regulatory load on business, measured by consumed time and other costs and incentives to go over to the black market or to create corruption.

Bulgaria and neighbor states

Table 2: Regulatory government intervention according to Index of Economic Freedom three years ago and now – scores

Note: Serbia and Montenegro not graded

Results ascertain that over the past three years there have not been any changes made in regulatory system and process either in Bulgaria or in its neighbors. Solely in Greece the regulatory environment is given the next better score, respectively the population there enjoys the highest income per capita in the region.

For the same period of time, according to the index, the general situation in Bulgaria is improving, changing from 104 th to 64 th place, which is undoubtedly a significant advancement. However, this is due to an improvement in all others variables and to no extent to limiting and reducing licensing and registration procedures.

For the same three years disposable income in Bulgaria has not changed much, e.g. has been growing at a much slower pace compared to country's moving up 40 positions in the index, which proves true the statement that there is a positive and a very strong connection between welfare of a nation and the degree to which the government lays control over business and labor force.

Considering all this, having the following as a model should not be wrong at all:

•  Procedure for obtaining a business license in the United States – just mailing in a registration form and paying a minimal fee

•  Procedure for obtaining a business license in Hong Kong – just filling out a single form, which can be completed in a few hours

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(1) The Index is a joint elaboration of The Heritage Foundation and The Wall Street Journal

(2) The Index measures 161 countries but 4 of them have not been graded, namely Serbia and Montenegro, Sudan, Democratic Republic of Congo and Iraq