Investment Options Are Already Less Dependent On The Government And More In The Responsibilities Of The Private Sector

There is no tangible indicator for neither negative nor positive change in the business environment in Bulgaria during the past year. This is probably a good constellation, so far. If the incumbents were to fulfill their pre-election promises the budget deficit could have been above 5 %, and the much-praised stability could be gone.

If there is a change, it is in the aspirations of the business community. The cabinet announced five priority sectors (transport, tourism, energy, agriculture and high-tech), thus, in fact, invited everybody to beg privileges.

Objectively speaking, these five "priority" sectors represent 80 % of GDP, i.e. priority is everything, and therefore priority is nothing. What remains as an outcome is competition for privileges on somebody else's expense. The impact of this mood is difficult to measure but is very dangerous.

The next steps

In a country like Bulgaria, distinguishing between domestic and foreign business makes very little sense. Prior 2002 FDI performance is mostly due to technical delays in privatization, to some extend fulfilled absorption capacity (investment that could utilize comparative advantages did, in fact, already take place) and overall slowdown and global economy. These are constellations outside the scope of the government, but there are things to be done.

The first is to reduce entry barriers, licensing and permit regimes, which cost the economy a fortune to comply with – I believe, as our studies show, that the compliance price equals 12 % of GDP. These are preliminary control procedures described by 17 legal notions in about 4 000 provisions in laws and cabinet regulations. The pace of reducing these numbers is lower than rhythm of introducing new barriers, often with the excuse of the EU accession. Eventually, the available income is less and capital is not accumulated to produce more prosperity. Who suffer most are the so-called poor in whose name political leaders are being elected.

The second is to avoid longer-term risks that go beyond the mandate and the lifespan of the incumbent government. The few risks to be mentioned are: a) the pension system, namely the pay-as-you-go pillar , currently more than ten times bigger than the alternative private funds; b) municipal debts which grow by 0.2-0.3 % of GDP per annum; and c) the slow adjustment in energy prices.

The third thing is to enlarge to possible extent the domestic market; i.e. liberalize the trade further and make sure those alternatives to EU market via free-trade agreements and lower tariff barriers.

The economy competitiveness

Bulgaria used to be the country with most unsuitable trade and industry at the beginning of 1990s: more than 60 % with the ex-Soviets and COMECOM-supplied heavy industry leading both exports to the West and economic structure. Those times are over; the reorientation and restructuring have been fairly costly in social and political terms.

Regarding competitiveness, the current situation is rather balanced, without leading sectors and such, with both good and poorly performing companies across the board. What is obvious is that there is none or little concentration of good companies in the "leading" sectors of 1980's (ferrous and non-ferrous metals, petrochemicals, fertilizers, energy, etc.). These are for memoirs not for investment. At the same time, there were and still there are available opportunities related to specific endowments (e.g. American Standard, Solvey, etc. in the past), which are currently out of government hands, controlled by private companies that are easy to cooperate with. If we discount, the energy sector and issues of the general business environment, investment options are already less dependent on the government and more in the responsibilities of the private sector.

Necessary constitutional amendments

In order to improve investment climate, there are few necessary amendments: a) to discontinue the ban on foreigners to purchase agriculture land – this is an amendment (Article 22.1) that will force owners calculate optional use of land as capital; b) Radical redrafting of Article 7, which current limits the responsibility of the government for damages induced by government actions to personnel liability and, in fact, make impossible to suit government bodies for material losses; c) put an order in the ways government introduces entry barriers. The latter is not a constitutional amendment as such but is a very important constitutional making that will prevent abandoning constitutional protection of private property right (Article 17) and free enterprise (Article 19).

There other needed profound changes to remove the accent from the current preoccupation with Rechtsstaadt (which presupposes that the government can do to you anything, if there is a law) to the rule of law that assumes equality of all potentially affected parties.