Economic Policy Review ISSN 1313 - 0544

The Bulgarian Crisis – Problems and Opportunities

Author: Yavor Alexiev / 11.04.2013
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Things seem to have finally calmed down in Bulgaria. After a wave of nationwide protests, the cabinet of Boyko Borisov made way for an interim government, headed by the former Bulgarian ambassador to Paris, Marin Raykov.

To the outsider it might seem as if these protests were a lot like the ones that are taking place throughout the rest of Europe. “The Economist” even cited “falling wages” and “severe austerity” as a driving factor of people’s discontent. This conclusion, however, has nothing to do with the reality on the ground, or the facts that surround it.

Despite the crisis and the resulting fall in tax revenues, public expenditures in Bulgaria kept rising. Although some wages in the public sector and most pensions were frozen in the middle of the crisis, no actual cuts were implemented. What’s more – between September 2011 and January 2013 the minimum wage rose by nearly 30%. Even if most pensions were frozen between 2010 and 2012, minimum pensions and supplementary pensions for widows/widowers were adjusted upward. Having the above in mind, these policies by no means fall within the scope of the word “austerity”. Ironically, the 2013 budget foresees a 9.3% average increase in all pensions, as well as higher expenditure on public sector wages and social benefits.

 

So what was it all about?

What started as a protest against high electricity bills and ended as government-toppling series of events, was actually neither. The first was a symptom of low employment and low standard of living, and the second (to a large extent) – a tactical move by the ruling government in the face of possible further loss of popularity.

The true roots of public discontent lie in their lack of faith in the political figures that have plagued the landscape of Bulgarian politics ever since the start of the transition period. Bulgarians are tired of seeing the same faces, hearing the same vague promises and witnessing the same corruption schemes unfolding before their eyes year after year. These typical symptoms of a sick democratic apparatus have led to rising civil pressure on the political class. In Bulgaria’s case one of the two things may be happening: a rise in leftist social moods sparked by the crisis; or a process of development of a genuine civil society, which no longer wishes to be a bystander and a victim of delayed institutional reforms, but an active participant in the decision-making process. As things stand, it’s too early to scratch either of those hypotheses, but while the second option may prove beneficial to the country in the long run, the first bears the threat of compromising what Bulgaria has achieved in the last 23 years.

 

So what is on the table?

A few months back, the Bulgarian Socialist Party (BSP) actually proposed reverting to the old progressive taxation system, by abolishing the 10% flat income tax that they themselves introduced back in 2008. Although appealing to many left-minded voters, the idea of raising taxes on the struggling Bulgarian middle class and high income earners would be so economically unsound in the current Bulgarian context, that it’s more likely to remain a pre-election platform item than become an actual reform agenda of a future government. Bearing in mind the high levels of corruption and still underdeveloped infrastructure, low income taxes are one of the few things that make Bulgaria an attractive investment destination. Furthermore – inner consumption is still struggling and the much needed recovery of foreign investment is yet to materialize. In the current environment, raising taxes in order to fund budget-paid wage and pension increases is something that could well bring Bulgaria’s economy to its knees.

Ironically, much of the people’s anger could and should be targeted at Brussels. The inability of EU institutions to address the true roots of the crisis, the mind-boggling nature of the Common Agricultural Policy, the ever increasing unification of standards of goods and services and the effect of green energy and fuel excise tax requirements are all the things that have stifled the development of businesses in Bulgaria for years. The recently resigned prime minister, Borisov, knew that he could not address most of these issues on national level without being portrayed as an Orban-esque figure. The reluctance of opposition parties to take over the ruling mandate given to them by the president confirmed this conclusion.

 

What lies ahead?

The outcome of the coming elections in May is not easily predictable. Although topics like nationalization of private electrical suppliers and tripling minimum wages are sometimes thrown on the table, the actual intent of political leaders from the entire political spectrum to deliver on such populist promises seems questionable. Most Bulgarian voters realize that. Little or no change can be expected regarding the continued implementation of controversial EU policies and standards and the “let’s wait and see” position on the country’s eurozone membership. The areas where political parties’ policy intentions differ the most remain the energy sector and social policy in general, as well  as the support for key energy projects (like the “Belene” NPP). However, neither of these addresses the main problem of the Bulgarian economy – bad business environment, caused by high levels of corruption, inflexible job market and non-transparent and unpredictable public policy.

 

The Interim Government

In the meantime neither Bulgarian businesses, nor Bulgarian citizens are particularly worried by the prospect of being governed by an interim government. On the contrary – by most accounts the two previous post-communist interim governments (headed by Reneta Indzova in 1994, and Stefan Sofianski in 1997) did a fine job of identifying, drafting and preparing important economic reforms. Some of those were successfully implemented by consecutive cabinets. The selection of members in Marin Raykov’s interim government also points to the same expectations.

Looking at the list of well-known and not so well-known names, the one that stands out is the new Minister of finance, Kalin Hristov. The former deputy chairman of the Bulgarian National Bank is an active proponent of free markets and the Austrian School of Economics. He is probably not the guy that some people out in the streets wanted to see succeed the unpopular, but fiscally responsible Simeon Djankov. Nevertheless, having experienced the threat of political and fiscal destabilization in 1997, most Bulgarians view favorably the appointment of Kalin Hristov, whose job will be to get the country through to the next elections, without compromising the budget discipline. Hristov has so far confirmed these expectations, by immediately pointing out the hollowness of the entire “growth versus austerity” debate, claiming that only sound fiscal policy can ensure the sustainable rise in living standards, which Bulgarians crave.

Although Bulgaria’s problems are serious, they are far from unsolvable. The right amount of political will, combined with the much-needed presence of public pressure may serve as a stepping stone towards the implementation of long-delayed reforms in the labor market, healthcare and education. While the danger of reverting to leftist policies that can quickly ravage the country’s economic stability, the coming elections may prove a decisive moment in the most important fight of Bulgaria’s post-communist generations – the realization of the fact that Bulgarians don’t need another corrupt government to watch over them, but a country in which they can work for their own well-being.