Economic Policy Review ISSN 1313 - 0544

Macro View: The EU reports – cause for speculation

Author: Dimitar Chobanov / 08.08.2008
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More than two years ago, when Bulgaria was still not a member of the European Union, we at the Institute for Market Economics attempted to warn the public in the country, that the effects of the expected subsidies may not be necessarily positive. At that time we could not start a serious debate, since the position not to take money, which is given for nothing, would not be popular. These funds were viewed as the means for fast and easy way to enrichment at somebody else's expense (the European taxpayers), which is possible, but only for a very limited number of people and very often by not very legal means.

After more than 18 months since Bulgaria became part of the EU, there has been no expert evaluation of the total effects on the economic development of the country. However, the negative consequences are present and no one doubts that they exist. Firstly, the funds are connected with the creation of additional possibilities for corruption among the government's employees, which are coordinating, managing and controlling them. The examples for that are numerous - starting with the funds before joining. It is very difficult to discover a financial instrument where there are no indications of corruption and there are no conflicts of interests and suspicion for fraud. Naturally, proving these facts is difficult when in addition the police and the judiciary are not properly doing their jobs.

The next element of influence of the European subsidies is the requirement to build "administrative capacity" which translated into normal language means only to increase the number and the salaries of the government employees which are involved in their management. The numbers in the public administration are growing, which is a requirement of the EU representatives but is also a very convenient opportunity to increase the salaries of the people employed in that sector. The salaries of these employees are approximately two times higher than the salaries of the remaining employees in the government administration, which was expected to increase the incentive for them, but the effect is not clear.  The main part of their task is to learn very complex procedures and rules, set up by the European officers, according which to distribute the funds. However, the procedures employed are not an obstacle for corruption.

The significant problem when implementing the projects is not the pursuit of any good results, but the obtaining of documents. Actually, the only real result from the EU subsidies is a significant increase in the documents which must be filled and submitted by the beneficiaries to the controlling bodies. This is connected to significant growth of the administrative cost in terms of time and money. Respectively, the same applies to the public administration, which after that is accountable to the respective EU institutions. However, the quality of the result from using the subsidies is not important. In other words - you must achieve some result but not necessarily the best. In such case the usefulness of the products is dubious and the true goal remains putting the funds to use. In reality, the percentage of putting into use the funds is the criteria for success in the programs, but not the convergence of incomes, increased competitiveness or more effective production in the agricultural sector. Unfortunately this is a problem on the European level. The officials in Brussels gradually extend their power and the instruments used become more inadequate for the market reality. Naturally the organizations, which succeed in obtaining subsidies, increase their revenues, but the big winners are the European officials and the consulting companies (which are the next place of work for the European officials). A large project for redistribution of wealth is implemented, which as it could be seen, leads to heavy regulations, expensive bureaucratic apparatus and impediment of the development in an enormous economic zone such as the European Union. For that reason certain countries which apply slightly different economic policy, such as Ireland, achieve higher growth and get ahead of the rest.

The next negative effect from the European subsidies is the diversion of resources from their most productive use. This is happening within the framework of the organizations-beneficiaries of these projects. The increased obligations to prepare the necessary reports and forms mandate the use of human and physical capital, instead of for productive efforts, which will be valued by the markets. In this way the value added is also reduced, since the implementation of the projects does not create such value. Besides that the incentive for the participants are skewed, since they attempt to realize income from the subsidies rather than competition with other participants on the market, innovation and production of desirable consumer goods.

The next consequence is the increased dependence of the private sector on the state and European institutions which manage the projects. The subsidies can be used as the means for influence and pressure on the beneficiaries, since approval of the payments depends on the evaluation of the officers, who interpret the general rules.  

A large portion of the European subsidies pass also through the consolidated fiscal program and with that is connected the general increase of the cost for that program. Besides that arises the need for co-financing with funds from the budget. We should not forget the Bulgarian contribution to the EC budget. In other words the European subsidies are not free. What is more - they cost quite dearly to the Bulgarian economy.

Under this situation arises the question: what can be done? On a local level - we must have a serious discussion whether or not the funds are necessary to the country. The costs for their administration are enormous, as well the missed benefits as a result of the distortions of the incentives in the economy. Reducing these subsidies could be the way to limit the possibilities for corruption and would allow concentrating public attention and the Government on important problems to the country.

One of the main priorities of the Government must be to significantly improve the functioning of the police and judiciary systems. The protection of the life, property and freedom of the public are the only real functions of the State. When these functions are not executed properly than the State has failed. The witnesses of this are the creation of private institutions which take over these functions - private security guards, private bailiffs, arbitration when disputes are resolved etc.

If the state concentrates on the execution of the above functions and stop interfering in the remaining aspects, where the need of the State is much smaller or does not exist, than the fight with corruption would be much easier. On one hand the opportunities would be very limited since significantly less funds would be distributed, on the other hand the systems for protection and justice would function much better, which would mean that the rules are obeyed. This will be a real convergence of the country with the EU.

The refusal of subsidies (respectively from non typical for the State functions) and the execution of the real functions of the State would allow for significant reduction of the payments to the budget of EU. Since the country would not be getting aid it would not be necessary to participate in the EU budget. This would allow pushing for similar reforms within the framework of the Union - reduction of the general level of redistribution and respectively the subsidies within its framework. As well, it is necessary to take steps for changes of some very heavy European regulations on business and the public, which are damaging and their execution leads only to reduced economic growth of the country.

Overall the criticism in the EU reports about the progress of Bulgaria and about the management of funds must serve as a clear signal to fight corruption and the misuse of public funds. At present the European Union is playing an important role to control and direct the reforms in the country. But some of the reforms which were not directed from outside authorities, such as the reduction of taxes, are proving to be very successful. When similar initiatives find sufficient political support, the limiting of corruption and the improvement of the business environment will be realized, which will bear the expected fruit.