Activism back in fashion

What is the difference between active government and central planning? It is hard to make a clear distinction between them in contemporary Bulgaria. Both active government and central planning are based on unrestricted control over "other people's money", collected coercively through government taxation. They both accrue bills to be paid by future generations and take for granted that the government knows better than citizens and private business what to do with their money. The difference is indeed in the fact that pure central planning completely abolishes freedom.

It is still not clear that various ideas for public assets active management will result in central planning. However, those ideas will significantly worsen the business environment in Bulgaria.

Our major concerns arise from the following developments:

(1) Discretionary public debt management. After the government abandoned monetary policy with the introduction of the currency board, we now witness an increased activism in public debt management. In November 2001 the government undertook a € 250 million Eurobond issue, and in March 2002 it made a $ 1,327 billion debt-swap.

(2) Avoidance of transparent public procurement rules.

(3) Equity swaps in state-owned companies. In April 2002, the government ordered the state-owned Bulgarian Commercial Fleet to buy the assets of Varna Shipyard for BGN 35.5 million. The shipyard is currently in a bankruptcy procedure. What happened in fact was that the government subsidized the loss-maker through another state company's money (part of it – borrowed). Other similar deals are listed in the table below:

(4) Construction of a second nuclear power plant in Belene. The financing will have to come from two sources – new public borrowing, or increased taxes. We expect that the annual cost of construction will be 16-20% of the external debt payments, about 50% of the national defense reform, as high as the cost of public education, and a little bit higher than the deficit of the pension fund. Consequently, the fragile economic stability of Bulgarian economy will hardly be maintained. If the government enforces such a policy, the Bulgarian economy may follow the path of the Argentine development from 1999 and 2001. Unfortunately, the prime minister publicly declared that the debate on the construction of a second nuclear power plant is over.

(5) Maintaining privileged position of state pension and health funds and discouraging private insurance.

(6) Renationalization of the "national" air carrier Balkan that in fact carries about 1% of the traveling "nation" and has only one air plane, which fortunately for Bulgaria carried the pope back to Rome.

(7) Protection tariffs for local manufacturers of fertilizers, shoes, bread, and vegetables (except fertilizers, others will hopefully remain in the realm of ideas).

(8) Ideas for active investment and trading with the accumulated reserve of the health fund.

Unfortunately, these developments and ideas are just the top of a long list.

The table below summarizes provisional costs of the nuclear power plant construction and other systemic risks for the economy.

Government priorities related expenditures, including Belene nuclear power plant 2002-2005 (in million USD)

Source: National statistics, Ministry of finance, IME estimations and forecast

As far as we could understand from the explanations and justifications of these developments and ideas, the active state intervention in the economy has been undertaken because economic activity does not happen when it is left on its own. The goals are fostering the home industry, creating jobs, elaborating national competitiveness, and protecting "the national interests". However, the fact that more state action leaves less action opportunities for the business seems to be forgotten. Of course, the intentions of the government may be to transfer the management of certain assets to private entities. It can be done either through public tender or through privileged deals with clients of the government. Both can happen without the preliminary increase of the volume of the assets managed by the state. The asset exchange among state companies that has taken place so far is equal to 1/8 of a potential income tax cut or 1/2 of a potential profit tax cut.

What is it all about?

The new wave of state activism during the last couple of weeks has several peculiarities.

On one hand, the reasons for activism get minor, and on the other they get seemingly closer to the concerns of the "average citizen". Since the reasons are now more in number and less under control, the consensus about them is practically impossible, and the detail orientation is called upon to create the illusion of care. The result will not be that the state safeguards the prices of shoes, bread, etc. State activism will rather block any opportunity for monitoring what the government is doing. The unsuccessful attempt to solve the "small things" will be the reason for the discretionary use of power regarding the big activities. However, the public opinion will be again misled. It is likely that the fiscal reserve management and change of the CBA will be added to the long list above.

And what about business? It is part of those who cry for activism. This activism may result, just like in 1995, in short-run dynamic domestic demand and high long-run price paid by the Bulgarians who cannot vote with their feet. The same story already happened back in 1996 and 1997.