The balance for business one year after the general elections

To a certain extent, it is justifiable that the anniversary from the general elections draws the public attention to the personality of the Prime Minister and the promises of his party. However, nobody has estimated the balance for business. Indeed, the work of the cabinet and the Parliament should be central to the assessment of the past year.

The work of this government started with the announcement of its intentions by Mr. Saxe-Coburg Gotha during the third week of August in the previous year (see issue 37, 2001). The Parliament followed suit relatively late, in October, the establishment of which will be remembered as the most sluggish since 1990.

The assessment of the work of the Cabinet and the Parliament should consider the developments in the following areas.

Macroeconomic Environment

As mentioned many times before, neither this government nor the previous one (after July 1997 and especially after signing the three-year agreement with the IMF) has had significant contribution to the overall favorable macroeconomic parameters. If one had considered seriously the intentions of the government from August 2001, not from the pre-election period, the budget deficit would probably have been more than 4% of GDP. Thus, there would have been no sign from the macroeconomic stability. It is possible that now we would have been discussing a change in the currency board system (in other words, fixed exchange rate and no central bank assistance to the public sector or commercial banks). The public would probably have been thinking how to get its money out of the banks. In short, it seems to be a quite good thing that the government and the members of the Parliament did not carry out their intentions. The IMF has turned out to be a better protector of the long-run business and public interests than the government. The contribution of the government is that it agreed with the IMF.

The government has had no other role at macroeconomic level. It is not responsible for the adjustment of fixed prices that actually caused the inflation this year. This development is a result of limiting government subsidies, something that was not done at the proper time by the predecessors.

Debt management started well with the emission of Eurobonds in November 2001. As far as one can assess, by now the operation of optimizing the structure of the debt has had neutral effect and in the long run may have negative effect. (Two of its parameters, the London interbank interest rate and exchange rate of the dollar with respect to the Euro followed trends contrary to what was expected at the beginning of the year.) The "domestic" debt, particularly that of the municipalities and that of the National Social Security Institute, did not attract the ubiquitous attention of the cabinet. This assessment is arguable. By now, the government idea seems to be to consider this debt as non-government and to undertake active transfer of assets among state-owned enterprises in order to make their balance sheets look better. After all this is of considerable importance.

Sector Policies

Except some small preferences here and there, the overall tax policy has remained neutral. The general direction toward flat tax rates established since 1998 has continued in general. The transfer of assets from one state-owned enterprise to another and the activism of the cabinet in this area has raised reasonable suspicion that the decrease in corporate tax rates may be more decisive, up to 10% for all firms, without any substantial change in government revenue.

An interesting novelty of the cabinet is the idea to create a list of ranks in order to raise social security funds, a development that may be analyzed as some kind of micro-sector policy. So far, it is clear that this list will cause a 3,5% decrease in the net income, part of which may be used for consumption and investment.

This part of the government policy is very much interconnected with the macroeconomic stability. There is a profound contradiction between the promise to maintain it and the activist policy toward some sectors. The economic analysts do not notice this contradiction, while business people try to take advantage of it; the media do not pay any attention to the issue. The most alarming aspect of this development is that the ministers and the Prime minister do not seem to care much about it.

Another government novelty is that the government announced five "priority" sectors. If one sum up the share of energy sector, agriculture, tourism, information technologies, transport and communications, he/she will find out that the result equals almost the whole economy. Consequently, priority turns out to be everything. Thus, it means nothing. This development urges business to try to influence the decisions of the administration. Sooner or later, the neutrality of tax policy and other similar (quasi-tax) policies will be abandoned.

Government Attitude toward Business

The above-mentioned facts lead to the conclusion that the government will not be able to resist the pressure that it has inspirited. Since it is not possible to prioritize everything, it will become necessary to form a list of the firms and people who will be favored. Of course, the cabinet cannot initiate such a move: it is not appropriate.

So far, the government tries to show its deep concern about the administrative environment for business activities. This is one of the terms of a $450 million loan stipulated by the World Bank before the government. The interministerial working group addressed this issue by creating a list of administrative regimes for preliminary control over business activities. The goal is to mitigate about 1/3 of the listed regimes. At the same time, the drafted laws that are to be promulgated by the end of the year will enforce new regimes equaling about 1/3 of the mitigated. If this rate remains the same, within three years the business environment will be back in the initial condition. This outcome is clear from the outset of the development from its staring condition.

Another term stipulates for the creation of procedures for preliminary assessment of certain act's effects. By now, the government has not considered such innovations, though there are several drafts of such measures, including a draft with such measures as a part of a supposed new Law for Normative Acts. The cabinet considers the establishment of a Council for Economic Growth chaired by the Deputy Prime Minister and Minister of the Economy as a success in this direction. So far, it has not done anything that deserves special attention and, probably, in the future will be a cover of all that is done or not done.

As mentioned many times before, the government will have reasonable cooperation with business only when the citizenry as a whole, that is every single citizen, have access to information about the intentions of the government in the field of economic policy. Some ministers point out as a sound success the idea to establish e-government. However, the most surprising thing about this project is that even experts discuss only issues related to computers and software and pay no attention to the way the government will use these computers and software and how the project will facilitate transactions and improve the quality of public services.

Rights and Private Property

The proposed amendments of the Commercial Law and the Civil Procedure Code give the impression that there is going to be some improvement in the protection of private property, the rights of creditors, and the execution of contracts. These proposals have long history. As far as their meaning is familiar to the World Bank since 1999, they are part of the stipulated conditions of the big loan. However, the actual protection of these rights remains under question. Private and state owned enterprises do not pay to the Bulgarian State Railroads, the National Electric Company, and the ports. At the same time, the administration goes after households.

The transparency of the new privatization process is good in theory, but the provisions for privatization of Bulgartabac and the Bulgarian Telecommunication Company reveal the intention of the government to retain its control over these companies.

The most outspoken violation of private property rights consists of the intention to limit one's freedom to use his/her income as he/she wants through improvement of the system of payments to the National Social Security Institute. This development will affect the greatest possible number of firms in the country.

Some notorious projects of the government, such as the plan to recover Belene Nuclear Power Plant and the active management of the public sector and the debt will probably transfer burden to the shoulders of future generations.

Some Conclusions

The list of successes and failures can be continued.

If we try to assess the developments in the above-mentioned areas according to the trichotomy negative-neutral-positive influence on business, the balance will be as follows. Being tolerant to a certain extent, one may conclude that the developments at macroeconomic level are neutral. In all other areas, they are more negative than neutral. Therefore, the overall balance is more negative than neutral.

So far, the attitude of business is close to indifference. The explanation is that the so-called sector policies still leave room for the hope to profit at the expense of somebody else through the government policy. With respect to the extent to which there is no difference in the circumstances under this and other governments, the opposition still cannot find an alternative or doubt that the public will believe it, so it abstains from comprehensive criticism. Investment (including foreign) is probably the best possible indicator. They are slowing down.