Economic Policy Review ISSN 1313 - 0544

Alternatives to EU Money

Author: Adriana Mladenova / 08.08.2008
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During the past few days there has been no way not to ask the following question - to what extent is the role of the EU funds decisive for the Bulgarian economy? We could be more extreme in our assessment - do we really need of the European taxpayer's money in order to develop our economy and to increase the standard of living of the population? In contemporary scientific literature there is no proof aid assists in economic growth and makes the people richer. Quite the opposite, it is a source of corruption, biased economic incentives, and creates a culture of dependence. A small group of people may actually gain from the subsidies and funds, but for a short period of time and at the expense of the others, since during redistribution someone always gains at the expense of others.

In one of the scientific research papers[1] about the effect of the structural fund, a conclusion is made that the EU money distorts the market signals and the market mechanisms and in some cases has negative effect. The EU programs lead to the establishment of businesses which require high scientific and technology base into regions with predominantly unqualified labor force. The result is lower economic development than could be achieved in these regions if other types of sectors have been developed, which require less qualified laborers. From its end, the market directs the resources according to the competitive advantage of the regions and hence the scarce resources are used optimally.

At the same time we must agree that in Bulgaria we need better roads, a better qualified labor force, more effective agriculture and more effective administration. What is the alternative of the suspended "European" money in order to be able to solve the problems in these sectors?

Agriculture

Alternative: more free market and economic freedom and fewer interventions. Although, it is the most subsidized sector of the Bulgarian economy (through State Aid, European programs, etc.), agriculture remains significantly behind the remaining sectors. Reduction of the added value and the negative contribution of the sector to the economic growth of the country was reported not only last year (when the drought led to a record breaking low harvests), but this is a trend, which is observed during the last three years. In the country dominate the small, family farms, which operate ineffectively, with high labor intensity and often rely on subsidies in order to survive. For example, only 1.6% of the dairy farms in the country have more than 20 cows

However, is the handing of aid an answer to the problems of this sector? Unfortunately no, in the long run they even worsen the situation. The anti-market mechanisms such as handing out aid and price fixing do not help the people, they do not teach them entrepreneurship, but make them dependent, limit in their thinking within the framework of bureaucratic procedures and teach them the wrong behavior and thinking. Under these conditions including protectionism, interference and assistance, the ones who are more successful are those who can respond to the administrative requirements. And very often these are not the entrepreneurs who are seeking to satisfy the market in the most effective way. 

Infrastructure

Alternative: public-private partnerships and attracting capital from the private sector for building and reconstruction of roads, airports and other infrastructural projects. There are different forms of public-private partnerships - concession, privatization, operating leasing, green investments. In this way part of the market risk is transferred to the private sector, which provides the financing but the profit remains for it as well. The use of private capital leads to stimulation for more effective spending of funds and higher quality of the product or service.

According to data from the World Bank, annually between 60 and 100 billion dollars are invested in the developing countries by private companies into infrastructural projects in the area of transportation, telecommunication, energy, water and sewage. In some regions (Latin America, East Asia) these represent about 40% of the total investment into infrastructure.

Scientific investigations and human capital

Alternative: reform of the educational system. It is necessary to create incentives for improving the quality of education, which can take place only by competition. In order to look for students and to cooperate with the business, the universities must define alone the tuition fees and the number of students, as well as the specialties which they would offer. The centers for research and development and innovation must become the universities which should seek financing from the private sector. The first steps in the right direction have already been made in the area of school education with the delegated budgets, providing greater autonomy of the directors, the introduction of matriculation and the principal "the money follows the student".

The scientific achievements are also moved by the market forces and the business interests of the entrepreneurs. The world experience shows that the largest scientific institutions are financed to a large extend by donations of private persons and companies, orders by large corporations, non profit organizations and universities The data indicates that private resources represent a significant part of the funds spent on scientific development. During 2003 over 63% of the funding for research and development in the USA come from business, while about 5% came from nonprofit organizations and the universities. 

Administrative capacity

Alternative: Less redistribution and a smaller State means a more effective administration. When the role of the state employees is not to distribute someone's money (or to determine who deserves financing and who does not), but to protect property rights, create laws and rules, which apply to all and serve to create a more effective business environment, then the capacity of the administration would increase and there would be funds for higher salaries.

Instead of conclusion

Unfortunately, for a lack of an effective judiciary system, a dismal reputation, and widely spread corruption there are no alternatives! Those are the real issues which must be on the agenda of society. The reports by OLAF and the actions of the EC are not as dangerous because they threaten to stop the European funding, but because they indicate that in Bulgaria the laws do not apply to everyone and there are no mechanisms for protection of property rights, while these are the prerequisites for the existence of market economy.  



[1] Look up: Henry Overman and Karen Midelfart-Knarvik, Delocation and European Integration: Is Structural Spending Justified?, Economic Policy, October 2002