Economic Policy Review ISSN 1313 - 0544

New Economic Order

Author: Veliko Dimitrov / 26.07.2007
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Petar Dimitrov has already made a vow and is the new minister of the economy and energy. If, as it is stated, he will follow the policies of Rumen Ovcharov, then why was it necessary to have a new minister. Away from this, if the management of the economic ministry and the conduct of its policy do not supply grounds for a change, then the question is entirely political and the (un)realized results have not mattered much.

Judging from the media appearance of the new minister, few interesting ideas immediately draw the attention: the establishment of a bank for development, change in the policy of the regulatory regimes, attraction of foreign investments from ‘a new kind' and increase of the personal income.

In Dimitrov's opinion, a Bulgarian bank for development should be established as soon as possible, which will credit the export, which will lead to decrease in the current account deficit. When discussing the idea for the creation of such a bank, two very important issues should be considered.

First, the model for economic growth in Bulgaria, to be differentiated from that of the Asian countries, which was export-oriented, is based on the attraction of foreign investment. To a great degree this is the reason for the existence of the deficit- the greater the amount of investment, the greater the amount of the deficit. An alternative and surely more successful way for restraining the deficit is to bring to a stop the foreign direct investment- veto for investing in Bulgaria, currency constraints, higher taxes, etc.

Second, but not less important, is the fact that after all somebody should pay for this. More advantageous credits may exist if somebody pays for the differential between the market interest and the interest for the export credits. For example, if the new bank gives loans applying 5% interest on yearly basis, and the bank does not want to go bankrupt, it has to accumulate resources from the depositor given interest lower than 5%(for easiness of computation let's suppose that the fees for different operations cover the expenses of the bank). But who will agree to lend his money for interest lower than 5%, which may not even cover the yearly inflation rate? The answer is - probably nobody. Therefore, for the idea to become reality, budget financing should be ensured. As it has happened many times so far, because of the intellectual exhaustion of the Socialists, again everybody will pay, but only a small group will benefit at the expenses of everyone else.

Besides all this it should be noted that such a national bank actually exists- Encouragement Bank - but instead of decreasing, the deficit actually increases. The establishment of a second bank like the already existent would hardly place Bulgaria among the leading exporters. One thing is for sure- the price the taxpayers will pay, will be huge.

As far as the regulatory regimes are concerned, nothing good seems to be coming-they would not be removed, reduced or facilitated. They would just be "tilted toward the employers' organizations". This would signify that the entry barriers would be removed from the state, upon whose activities some control can be exerted still, to national and regional associations, chambers, and organizations, which absolutely unbothered (especially on local level) will have the right to give or refuse entry ticket to whomever they please. The transfer of regulatory rights away from the state to private organizations has the potential to become a bigger obstacle for the new business.

The attraction of investors of ‘a new kind' is another interesting idea, behind which corruption, "friendly firms" and discrimination are easy to be noticed. Every investor chooses where to go, basing his decision on particular parameters for the country, the field, etc. Given that Petar Dimitrov cannot change the existing macroeconomic or sector indicators, he should promise particular preferential treatment to ‘strategic' and ‘clean' investors, in order to compensate for the lack of better general conditions. This for sure will create inequality between competing companies (those with and without concessions) and as a whole the negative effects will be more. On the other side, the new minister, even though stating he is a ‘corporate orphan', obviously has the goal in his ministry to decide who is good - better - best. How is not yet clear.

And the last one from the new old ideas - increase of the personal income. If mister Dimitrov had in mind the incomes of particular groups employed in the public sector - it is already known how they could be increased, who will pay and what the result will be (the protests of all the rest who have been missed). On the other side, if the new minister meant absolutely everybody, he has to keep his vague allusions that the reduction of taxes and social security contributions are possible and can be put into effect. Well, let's hope not to wait for too long because there are only two years left.