The known unknown Institute

The Institute for Market Economics (IME) is part of the history, if of nothing else, than at least of economic policy and the mind set against the Bulgarian economic phenomena. Many things about the Institute are unknown, others are forgotten and its biography is becoming mythical.  This year during January and March IME was celebrating its 15th anniversary.  This is a suitable occasion to try to explain part of its peculiarities and successes.

The necessity

Of an economic brain trust, which would follow the values of the individual freedom and the non-intervention of the state in the economy was felt since the mid- 80's. It became apparent during 1989 and extremely urgent during 1991-92.

During December 1989 in one of the large auditoriums of the University a meeting took place of about 720 people to discuss "what to do" with the economy. This was a meeting of intellectuals, economists and simply people dreaming of freedom and prosperity, with odd ideas, floating between the absolute lack of understanding and utopia to the rational premonition about what was to come.

Few days before that, on the 4th or the 5th of December, Zhelyu Zhelev has included as an objective in the declaration of UDF (The Union of Democratic Forces) "the market economy". But two of the founder organizations in the Union were arguing whether or not to drop it out from the declaration. The arguments were something of the sort: "wait, weren't we with a left orientation?" In UDF for a long time after that there was no agreement about this principle, may be up until 1997. An attempt to describe what was necessary to do with the economy appeared in February-March of 1990, one small book of "Nauka & Izkustvo" publishing, with a title "Pluralism". (After that almost all of the authors participated in drafting of the UDF's program.)

The lack of political outlook in defense of the market reforms became visible in the "Great Parliament" and all of its acts. This lack of orientation was particularly clear when the views about the reforms of Richard Rahn, Ronald Utt and their colleagues were announced. I became a friend with many of them at that time and during the years they helped a lot to the Institute. But neither the socialists, nor the democrats, with few exceptions, could comprehend the complexity of the problem for systematic passing of market reforms, but both were apparently afraid from it. From March until August of 1991, the success of the first start of the reforms proved that the road is appropriate. This was done by a small group of advisors from Richard's group, which President Zhelev kept as his economic advisors team during 1990 (as fare as the old Constitution gave him such grounds) and which set up later the Agency for Economic Programming and Development – the Government brain trust, initially led by Ventzislav Antonov and Rumen Avramov, broken up by minister Gechev and restored during the next government under a new name.

The setting up

Even the Agency could not do much for the change of the public and political disposition towards the reforms, to form and disseminate alternative to the government market decisions. And it was not its task. The economic universities and institutes were sleeping in the economic utopia of the mid-20th century. They also could not be an alternative.

The idea to set up an independent brain trust took shape after the unsuccessful attempt of Richard and Ronald and was implemented mainly due to the persistence of Ognyan Pishev. He was not only connected to the above mentioned groups, but was already ambassador to Washington, where he had an opportunity to see for himself the working of such trusts.   Initially my role was to facilitate the setting up with advice and organization.

The task to raise funds for the future Institute was undertaken by Margot Machol, former secretary of President Reagan's Economic council. She was convinced by Richard and Ognyan to take it and set up a special corporation – "Chesapeake Associates" and won the necessary funds from the Agency of International development of the USA. The usual expected leaders of the reforms were already either government employees or wanted to get the money, provided by Margot, for their organizations. Since I was convinced that there is a need of such institute, I accepted the proposal to take responsibility of it. 

The founders were not only economists, those among them, who today are little known are Andrey Evtimov, Rayna Kircheva, Racho Petrov и Fransoa Frizon-Rosh. The Institute was established on January 31st 1993 in the office of Ivan Krastev and Chavdar Kuranov.

The Institute was named by Ognyan Pishev. My ideal was the "American Enterprise Institute" or the "Institute of Economic Affairs" – the first contemporary brain trust established on the basis of the idea of Friedrich Hayek. The names which I proposed did not state clearly the mission of the Institute, which then and until today is "to develop and protect the market approaches for overcoming the challenges which face the people of Bulgaria and the region".

IME's income

The initial grant was 46 thousand US dollars – in equipment for three-four work places and average salary of approximately 250 US dollars per month. The founders decided that IME would not use any privileges from the Government of Bulgaria, regardless who is in power, or under any form. Margot Machol put additional conditions: within a year to raise some additional 46 thousand US dollars.

The mission of the Institute and the reputation of the members of the board of directors and the consultative board of IME (I would say a few things about them later) presumed that we could not accept gifts, acquired by force or theft. When one of these days I was making a balance, the total amount of such proposals of gifts, during the years when I represented the IME (until 2007) came out to the equivalent of about 2 million Euro.

One sixth to the required additional 46 thousand was provided by the foundations "Open Society" and "Friedrich Naumann". The execution of the agreement with Margot was possible only by sale of knowledge and consulting services.

During the periods of economic instability our customers were the investment banks, after 1997 – anybody who was looking for (on a competitive basis) free market solutions in Bulgaria, on the Balkans and Europe in general. For the pragmatic direction of the Institute the work for the investment banks was from particular importance, regardless of the complexity of the macroeconomic statistics and analysis, everything we did for them was expected to end with one of the three words: "buy", "sell" or "wait".

The ideas of IME

They were influenced by the choice of name, the mission and the carrier of Margot. The Consultative Board of IME for a long period of time consisted mainly of reformers from the Reagan and Thatcher governments. Here I would mention the names of Dr. Allan Meltzer, William Niskanen, Michael J. Mussa, Sir Alan Walters, Beryl W. Sprinkel и Dr. Allan Meltzer, as well as the names of Richard and Margot themselves and naturally – Dr. Friedrich Bauersachs.

The Board of Directors – which always consisted of at least half the people from the private sector (Martin Zaimov, Levon Hampartzumian, George Zahariev, Andrey Evtimov and Frank Bauer), but it always united reformers, – defined the priority topics from the point of view of the private property and market solutions.

In addition they wanted the Institute to be an ideal of corporate management. In the foundations of its work were and still are three rules:

  1. It is not a property of the people who work their, not of the executive director; such is the Board of Directors.
  2. The members of the Board do not get compensation from the Institute.
  3. The executive director has the right to spend in one payment not more of today's six thousand levs.

Under the urging of Mariana Todorova all annual balances of IME are audited by reputable auditors and are available to the public.  

The innovations

The list of pioneering endeavors of my colleagues and myself in the area of economic analysis and economic policy in Bulgaria and the new Europe is quite long – 25 themes and approximately 30 initiatives for reforms. To these we have to add approximately 500 analyses of the possible impact of various policies and legislative acts. Here I could give briefs about some of them and how they were our analyses and recommendations developed.    

During the periods of macro-economic instability we were dealing with micro-economic policy and statistics, privatization and analysis of the political risk. Those were the years until 1997, but protection of private property and economic freedom was our permanent task. Taxes and quasi-taxes, elimination of the obstacles to doing business and prosperity in general are predominant for the period after 1997. The studies, supporting arguments and solutions in that direction, including such which led to change in the policy and the thinking are also our continuous task.

Without too many details I could mention the following initiatives and their results.

  1. Our studies about the rules of the capital markets (1993-1995) helped (at that time we were partners with "Capital") to destroy the "pyramidal" investment contracts.  
  2. The first study in Bulgaria of the costs of setting up and functioning of the private sector (1996, initially published by "Capital") led to the creation of methodologies for observation of the quasi-taxes and the "strange" economic phenomena such as racketeering and the gray economy, what was new 20 years ago, is now applied by everybody including the journalists.    
  3. Our analyses of the political risk (until 1997) assisted the investors in the Bulgarian loan instruments, protected the country from a second moratorium on the dept and facilitated the acceptance of the currency board system,
  4. The compiling of an alternative to the Government's budget (after 2003) led to the introduction of the flat tax of 10% and reduction of other taxes, because George Angelov discovered the suitable instrument for bringing them around.

The methods of work of IME are also innovative. Besides the above mentioned values and the mission, which are part of the agreement to work in IME, these methods could be formulated as the following maxims.

  • Do not trust well intended dictators.
  • When you write about the "good king" – publish that which you gave him.
  • 25% of your time should be set aside for the press and the mass-media.
  • In economics we are talking about relations between people, not about the things outside of these relations.
  • Economic development is measured first and foremost with the expansion of the freedom of choice.

Protecting the reputation

The above mentioned mixture of values and methods of work allowed the Institute to contribute to the prosperity of the people and at the same time to educate a generation of free thinking talented analyzers. They are already emitting their own light, not a reflected light. The reputation of the Institute had not been tarnished by actions or appearance of some of the connected with it persons during these fifteen years. IME is the first brain trust in the new Europe which outgrew its founders and really became a well managed non-profit corporation.

 


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