Economic Policy Review ISSN 1313 - 0544

The Development Pact - Few Good Ideas and Many Wishes

Author: Dimitar Chobanov / 29.01.2007
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On 26th of September of the current year, the government together with the two largest trade unions and employer organizations signed the Economic and Social Development Pact, which regulates the development in Bulgaria up till 2009. It contains the directions for conducting the economic policy until the end of the current government’s mandate considering the interests of both workers and employers. However, the character of the document predetermines the lack of particular suggestions for measures in many of the spheres it refers to, which makes it all too similar to a pre-election program. Again, there are too many promises and it is not clear whether they will be kept.

In the document there are some terms, which are rather controversial. The realization of the basic principles of the European social model, (for example) is presented as a major challenge. Discussing such a model is incorrect, considering the great differences within the European Union, where the systems in Ireland and England are significantly different from those in Sweden and Denmark. Following the example of Ireland, which relies to a great extent on individual responsibility and economic freedom and achieves much better results concerning the increase of incomes, employment and welfare, or (following) the example of Germany, where economic growth during the last few years is considerably lower, and unemployment is higher, are two types of policy, which could not be put together under the name European social model. For this reason such texts should be clarified before adopting the final version.

The priorities set out are catch-up development, accelerated judicial reform, high quality and accessible education and healthcare, continuation of privatization, etc. They are by themselves good and should be realized. But for this purpose some criteria which allow comparison and measurement of the of eventual progress are necessary. The only quantitative measurement instrument mentioned among the priorities is economic growth, which should be about 6% per year. Probably this number corresponds to the Bulgarian socialist party’s pre-election program and reflects the current rate. According to the last available data of the National Statistic Institute, the real growth of the gross domestic product for the 6 months compared to the corresponding period last year is 6.1% and probably for the whole year 2006 a value close to this will be achieved. Therefore the policy of the government will rather be oriented towards keeping this pace, than towards its acceleration.

The engagements for achieving the goals are the essential part of the text. A substantial emphasis is put on increasing the effectiveness of state administration, and also the possibility for transferring activities towards the private sector has been mentioned. Some measures included here are reducing and facilitating the regulatory regimes, e-government, tacit consent, public-private partnerships. They would have a positive impact on the work of the administration and would improve business environment. Only these ideas aren’t new at all - they have been discussed for quite a long time, but their application has either been postponed or has been incomplete. Mentioning them in such a pact does not change the situation – i.e. it is clear what has to be done, but it is not clear whether there will be enough will and capacity for carrying it out.

On the other hand, the transferring of the administration of some of the regulatory regimes towards branch organizations can be used for setting greater barriers to entering the market by new subjects and for reducing the competition. For this reason, first of all these regimes have to be limited to the maximum possible extent, and only then should such actions be taken.

In the Pact there are many texts, which envision an increase of the state expenses, such as the suggestions for higher expenses for healthcare and education, for better technical servicing of the administration, for higher wages of budget employees. All these measures have to be more closely bound to optimization and cutting of other expenses and to more concrete reforms.

In the sphere of healthcare, no significant change is envisioned about the monopolistic position of the National Health Insurance Fund, although some mechanisms for better control over its expenditures are suggested. In the sphere of education a more specific text about the implementation of the voucher system also is missing.

Suggestions concerning taxes and the fisc are also not stated clearly enough, and the only marginal rate which is mentioned is 18% of the Value Added Tax. For the rest of the taxes it is mentioned that reductions are envisioned, which will not be adequate implied without supplementary measures. Furthermore, the intentions of the government are related to keeping a low budget deficit, which means that there will be a substantial change in the fiscal policy. In the last years some surpluses on the consolidated budget have been realized, but it seems that the envisioned increases of expenses with keeping the relevant size of incomes will lead to such deficits. This may have a negative impact on economy by displacing the private sector, decreasing the trust of foreign investors and may have an impact on the stability of the monetary fund.

A basic moment in the Pact is the introduction of a rule for increasing the salaries in the economy, which should also give an indicative percentage for the private sector as well. This idea is an attempt for interference of the state in the free contracting between employer and employee and causes confusion about how the business organizations accepted it. Negotiating such percentage is pointless, even at branch level, because the factors which are used, like growth of GDP, productivity of labor and expenses are different for each company, therefore such aggregation is inappropriate and there is no need for it.

On the whole, it can be said that most points of the Pact lack concreteness either in the suggested actions, or in the way of measuring their results. The envisioned additional documents will probably have the same deficiency, as it is characteristic for the numerous strategies and programs worked out by the executive power. There is uncertainty left about to what extent will this pact influence the government’s policy during the next 3 years and whether only the things which might have negative effects won’t be put into practice and the Pact – used as an excuse – not clear.