Economic Policy Review ISSN 1313 - 0544

Protests and Their Economic Impact

Author: Krassen Stanchev / 11.04.2013
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Review of some of the protester’s requests from economic theory and rational choice perspective

 

 

 “Common knowledge tells us that a common person will think mainly of the people, because he is a part of them, rather than thinking only of himself, for the sole reason that he is a part of the people; such a thought, however, can only occur to a common person.”

- Ivo Berov

 

Some of the main reasons for the protests that took place in February 2013 were wrong ideas and economic ignorance. This illiteracy is characteristic not only of the protesters but also of Bulgaria’s government, which has greatly, and rightfully, upset the people.

 

The February revolutions

Many historical analogues can be made; however, what happened in Sofia and throughout the country is extremely similar to February 1917 events in Saint Petersburg. The two events coincide in time (the revolution there started on February 27th), and they are similar in the character of public opinion: discontent with everything, change of the system with rule of citizen councils (granted by the protesters), shortsightedness of leadership, the worst people come forward, manipulation of disillusioned people and financing of radicalism by invisible interest (Lenin and his comrades were financed by the German government), abdication of the government and resistance against the first temporary government.

The common denominator when it comes to ideology is the protesters’ desire to seize power and to expropriate, at first just some enterprises and income. Here, however, is where similarities cease; even though the rhetoric used is quite similar at times (proven by basic historical reference).

The paradox of these protests lies in the differences. Russia had lost one and was close to losing another war, its frontline victims were about six million. Feeding the army brought shortages of food, inflation and a drastic decline of living standards. The abdication of the emperor gave birth to a constitutional monarchy, a type of political normality. The “creative rule” of the undereducated soviet leaders in the field of economic and social governance is basically a leap of faith into the unknown. Capitalists are presented as slave owners, and workers and farmers – as slaves.

Bulgaria is in a period of economic development. It has continued for the last fifteen years with one small exception (in 2009). Development indicators are not too impressive, but still better than those of many countries. Real income has been growing by 8-9% per year since 1998, even in 2009. For this period the national income has grown almost twice. Unemployment is about 1/3 lower than the worst years in 1999-2001 when many state enterprises went bankrupt. In 1997 36% of the population lived below the poverty line (1 USD per day)[1]. In 2013 a similar criterion can be the number of people living of social security; according to it, 2.8% of the population in Bulgaria is poor[2]. In comparison those who qualify for child benefits (about 7.3 USD per day) are about 8% of the population. Not to mention the fact that the savings of the population are three and a half times bigger than in 1998.

Unlike Russia in February 1917, today’s Bulgaria has a constitution which meets all democratic standards. I signed it myself with some reservations regarding some of its provisions which later proved to be problematic. One of my dissents tuned out to be unproblematic – the temporary government appointment procedure. Since 1991 the country has had two such governments and they allowed not only the normalization of the political process, but also of the economy. The 1996-1997 crisis was caused entirely by the government elected in 1994 with a vast majority.

From the point of view of social experience, the most important difference between February 1917 Russia and February 2013 Bulgaria should be that Russian experience is known to have caused irreparable damage to Russia itself, to mankind in general, and to Bulgaria in particular. Of course, if after the May elections Bulgaria somehow manages to repeat Russian revolutionary experience, the consequence will be only at the expense of its own population.

 

Perceptions are reality

Reality is not always relevant to political attitudes.

The February revolution in Bulgaria is a good illustration of this statement.

Citizens are not statistically average units; they are not obliged to compare their state to the dynamics of GDP and are free to view what they wish as something the government should deliver to them. The explanations of the protests should be sought within the reasons for discontent. Without any pretence for being complete, the following hypotheses appear as probable explanations to what happened.

The feeling that those who benefit from social processes in Bulgaria do so not because of their merits but as a result of social positions, “connections” and government “banditry” has accompanied the Bulgarian voter ever since the end of the 1980’s. This makes the public seek messiahs which offer to get rid it of this problem once and for all. This cannot and does not happen, but the discontent of the voters with themselves transfers to those they elected.

The last two governments can be defined by the fact that they constantly tried to convince the voters that they can live at the expense of everybody else and their own clique will help reach that goal. The processes spun out of control when the former prime minister let the voters know that the harder they ask for something the more like he is to “provide”. Redistribution of the state budget became a tool of fruition of the prime minister’s empathy and the provision of privileges by the prime minister to the rent seekers at someone else’s expense.

A slight obstruction on the way to this state of “perfect happiness” is the fact that the majority can never live at the expenses of a minority, as pointed out by Frederick Bastia. What always happens is quite the contrary: a minority manages to live relatively well, taking parts of everybody else’s earnings.

Basic common sense should have taught voters that the prime minister has no funds of his own. What prevented them from reaching that conclusion is their own opportunism – the desire to reach the common feast before everybody else. The opposition to the prime minister’s policy also falls in line with opportunism. Almost everyone said that he has been giving out too little and hinted that they will give more or at least do it in a “fairer” way. So opportunism and promises of a living at someone else’s expense tend to multiply.

 

Ignorance as a driving force

Overall, everybody is discontent with everything and everyone else. And so they wanted to change everything, without knowing what to change it with.

The occasion, as we all know, were

Electricity bills

The reason for this was pointed out to be the monopolies – for some reason electricity companies were perceived as monopolies. Electricity companies, however, are not monopolies, but regular operators that deal with supply and distribution of electricity and measurement devices. They cannot define prices, their profit is set by others and forms only a modest portion of the bills paid by their customers; it’s not their fault that customers have no right to choose between different electricity suppliers. The real monopoly is the Bulgarian Energy Holding (BEH), which accounts for 63% of electricity production and the entire supply of energy resources, and which, together with other government structures, sets prices and cross subsidises various segments of the system. In current prices, the “profit” of electricity companies does not exceed 10%. The largest portion of the difference between the supplier price of electricity from all energy sources – 0.085 BGN – and the final price paid by end-users goes to the National Electricity Company (NEC) and BEH. In this “electricity mix” the most expensive energy comes from heating companies’ cogeneration (0.30-0.32 BGN), solar and wind power energy follow at half the price and the cheapest one comes from NPP – Kozlodui. The reason for this is that the expenses for construction of the N-plant were paid by taxpayers in those years that nobody remembers anymore, even though Bulgaria is still repaying the external debt which this and other projects helped accumulate.

What is hidden in this story? The first thing everyone misses is the invisible monopoly. The monopoly here is BEH and the cogenerations, while the “exclusivity” of electricity distributors for each territory is required by law (a requirement passed by parliament in accordance to the line procedure)[3]. The second thing is the lack of understanding of the concept of “a monopoly”. A monopoly is a conspiracy with political authority. It is BEH and the cogenerations that take part in this conspiracy, and not the electricity distributor companies and “American” power plants. Then there are the true reasons for the current situation. They lay in the lack of liberalization of the electricity market, the reason behind it being the plan of the authorities to build big, expensive and useless power plants like “Tsankov Kamak” and “Belene” (which cannot be accomplished unless the buyer also has control over price regulation and administration).The reason for at least half of last year’s electricity price increase is the need to cover NEC’s losses incurred under one of these projects.

The demand for “transparency” in electric company’s contracts is actually caused by lack of knowledge and laziness. These contracts are available on the parliament’s web page due to the efforts of non-government organisations like the Access to Information Program (AIP) and the Economic Committee of the dissolved parliament[4]. The problem here is the lack of transparency in BEH and NEC, especially when it comes to the redistribution of the energy mix. When it comes to “American power plants” and the price of electricity produced by them, especially Maritsa Iztok 1, the explanation is a) the impossibility to secure other financing at the start of the project; b) the obvious fact that 1/3 of this price comes from air cleanliness standards, which c) allows all other state and private power plants to pollute more than they would be allowed to otherwise. Outside the part, which tolerates pollution and redistribution towards ineffective thermal power plants, putting blame on the governments that signed these contracts –is completely nugatory.

The suggested solutions for resolving high electricity bills are also based on nescience and laziness.

Nationalisation

Nationalisation is against the protesters’ own goals, and not only because the blame will not be found where it is currently being sought.

The majority of the energy sector is actually public – 63% of production and supply of electricity is held by BEH, licenses (“green energy” ones, for instance), cross subsidies and prices are responsibility of the government and SEWRC (State Electricity and Water Regulatory Commission). Adding 8% more production and the entire electricity distribution to an already ineffective system will not make it more efficient and will not lead to a price drop.

An extremely popular “solution” is decreasing electricity prices by decreasing the distribution companies’ spread (this “spread” is not really “profit” in the economic sense of the word), which will bring losses to the companies. The possibilities here are as follows:

  • Default and suspension of electricity supply to certain regions or the entire country,
  • Lawsuit-related expenses in international courts,
  • Loss of the said lawsuits and more price increases.

This comes in the context of the existing situation, in which Bulgaria generates as much electricity per capita as Russia and two and a half times more than Romania and Turkey, twice more than Croatia, 45% more than Serbia and 18-19% more than Italy and Greece.

All these possibilities can be assessed as degrees of probability as well as expenses, but nobody bothers with this simple math exercise. Neither is such an exercise done regarding the very idea of nationalisation. It can happen in two different ways – by law or by force (the army and the police or the people’s militia come and take over the much hated electricity distribution companies). The latter option seems quite unlikely despite the prosecution’s threats and the bravados of the acting prime minister. If nationalisation happens legally, the assets of the electricity distribution companies should be bought. Their price, as I estimate, is around 4 billion BGN – 5% of the projected 2013 GDP– and it can be covered only by electricity price rises or tax increases.

Nationalisation is considered as an option in other fields as well, including some concession contracts, and also as a way to preserve the sacred state of some state enterprises such as BDŽ (Bulgarian state railways) and VMZ – Sopot (Vazov’s engineering plant in Sopot). The list of such ideas is seemingly endless and as of now it is impossible to assess what the price for their implementation will be.

The consequences, however, are quite obvious and clash directly with the discontent with poverty:

  • Money redistribution via budgetary spending will have to grow, which will lead to a decline of employment and income and worsening of absolute (World Bank) and relative poverty (Eurostat) indicators, which the protesters and political parties claim to oppose;
  • Access of Bulgarian citizens and enterprises to foreign capitals (foreign direct investments) will be limited further; these investments have declined since the world record in 2007 (9.05 billion euro) to a 1.4 billion in 2012 (about 350 million less in comparison with 2011); this would mean less jobs, lower wages and less tax revenue, while it seems that everyone aspires to the opposite;
  • Foreign investments in general is the reason for the “good years” between 1998 and 2009; they are one of the reasons for the triple decline of unemployment and the double increase of wages (including average wages and pensions); deliberately or not, the demands for nationalisation block this completely legal and most profitable source of welfare for the people of our country.

All in all, the nationalisation idea contradicts to the discontent of protesters with politics itself: there is discontent with Bulgarian governments but in the same time these solutions would mean putting more responsibility in the hands of the state and allowing corruption to spread further.

Here I arrive at the connection between

Political and economic illiteracy

One of the ideas proposed to address the aforementioned conflicts is to impose the control of people’s councils over the government. The fact that such control is proposed does not mean that it was never there; neither does it mean that the citizens will manage to elect better specialists than the ones that they previously elected as their representatives in the elective bodies of the government. By the way, expansion of controlling bodies also means increased expenditure for the state budget, whose administrative expenditure is the sole source of budget cuts and redistribution by the interim government before a new budget is adopted.

More importantly, economic theory has described quite comprehensively the following paradox of collective action – each small group expecting certain benefits can organise better than any group which is not seeking such benefits and which in the end loses and has to pay for the benefits of the first group.

The majority which is currently dissatisfied with the current state of affairs is ignorant not because it’s undereducated, but for other reasons. It is ignorant because: a) it expects from its elected representatives to “do their job”, b) one has to spend quite a bit of time to acquaint himself with the legislation, the details of its implementation and its invisible consequences - this sacrifice of time and energy, can be spent on more pleasant activities and to one’s own benefit and c) often the “game is just not worth it”, i.e. the expenditure on financing a certain benefit is much smaller than the cost of its removal, regardless of how unfair the benefit is and how it was achieved.

Simply put, people are usually ignorant for very rational reasons; they are ignorant just because they are not imbeciles who want to know and get engaged in everything.

Another idea which has become popular as being (apparently) rational is the reduction of parliament to a half of its current members. As far as I understand it, the core concept is reduction of expenditure on the state’s powers. Currently there are 25-26 thousand voters elect one Member of Parliament. The weight of one’s vote is one in 6.1 million. If the number of representatives is reduced, the weight of one’s vote will not change. Yet one Member of Parliament will then represent 50-52 thousand voters; thus the possibilities for control will also be reduced twice. The goal of the protests is quite the opposite.

Similarly, protesters cannot give a rational solution for control over the redistribution by state authorities, not because they do not want to or because they cannot, but rather because it is impossible to account for all (and rationally measure) individual preferences, if I may use the economic term for this phenomenon. Political parties it their current – and much hated – state have a very important job to do – they structure individual preferences and differentiate them from politics and economic policy in particular.

 

Liberalisation of the economy is a leftist idea

The reason for “high electricity prices” is the lack of choice for the end user, the lack of competition. The current plans for price decreases, if implemented, will ultimately lead to price increases. Electricity prices are not even that high, if compared to income – according to NSI data, 13-14% of household budgets are used to pay electricity bills. Obviously this expenditure is bigger for poorer families. Competition will first benefit them and then all the rest of the population; those who benefit from the redistributive prices of the energy mix will lose the most.

The reason for the lack of choice in that field – as well as in any other – is the encouragement of rent seeking by the last few governments, i.e. competition about who will live at others’ expenses, as enforced by the authorities and all organizations and groups which seek certain rents – employers, unions and even those who “want a baby”.

All the above is to say that limiting competition for rents cannot happen in any of the currently proposed ways. The only good option for limiting poverty is widening end user’s choice, curbing economic powers of the government, limiting their expenditure and the possibilities to make choices for the people. After all, the economic foundations of such a development are well-elaborated. The fact that they are not known and not discussed presently in Bulgaria is a very big issue.

 


[1] See also: World Bank, Bulgaria: Poverty during the Transition

[2] Stating that “half of the population is poor” or “getting poorer” finds its explanation in the changed calculation method: Eurostat calculates “people at risk of poverty” – the portion of the population which has equalized-after-redistribution income lower than 60% of the country average disposable income, weighted by an OECD modified method per person in a household 

(Details on http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:At-risk-of-poverty_rate ).

Of course, this method has nothing to do with World Bank’s calculation of absolute poverty, which cannot be applied to any of the EU countries (according to which poor people in Bulgaria in the beginning of 1997 are between 30 and 40%). The method used by Eurostat shows long-term reasons for poverty risks, which for Bulgaria can be graded as follows: 1) demography, 2) low employment levels, 2) transfers towards unproductive groups and 4) equalisation towards a low income level in the end of the 1980’s (890 USD GDP per capita) 5) strict following of a policy for such equalisation. It is quite obvious that this risk is not the result of a particular government’s policy and does not show some “rise of poverty” in the last few years as the majority of political parties and protesters claim.

[3] If memory serves, when this condition was coming to be, only IME made an assessment and opposed the idea of a sole buyer of produced electricity at the moment of introduction of the current system. See, for instance:

http://www.mediapool.bg/смисълът-от-съхраняването-на-аец-през-погледа-на-икономиста-news36620.html

[4] Details by Alexander Kashamov on http://www.mediapool.bg/да-искаме-нова-конституция-е-като-да-желаем-нов-калъф-за-счупена-цигулка*-news203229.html