Will Bulgaria Fall a Victim of its Democracy?

Bulgaria held general elections last Saturday, June 16. Two months before she signed EU Accession Treaty to formally join the Union with Romania on January 1, 2007. It still needs to enhance the rule of law, fix the user system for agriculture subsidies and enforce technical and environment standards. The Treaty envisages a delay of one year if conditions aren’t met. The country is closing its 1970-1980’s nuclear reactors. Rushing into the Union, the government failed negotiating grace periods that, according to industries, are mostly needed in the area of environment and the entry costs are higher than for 2004 members. The economy grows steadily at 5% a year. The democracy is e stable; the former king, Simeon Saxe-Coburg-Gotha (69) won elections in 2001 and governs as PM.

Besides the costs, 76 % of Bulgarians approve EU, want a better, less corrupt, more caring and less taxing government to lead them into the EU. But they elected a parliament that would hardly speed up reforms, enhance prosperity and meet EU-requirements. Protecting themselves from imperfect politicians they run into a trouble of kicking themselves away from EU “safe havens.”

Who won?

The largest fraction is Coalition for Bulgaria led by former communist Bulgarian Socialist Party (BSP) – with 82 seats in 240-member legislature. The party Bulgaria Muslims and Turks vote for (MRF) received 34 seats and promised a coalition (irrespectively the fact that Communist renamed Turks in mid 1980’s). This possible coalition is five seats short of 50+1 majority.

The incumbent PM’s party (National Movement Simeon the Second, or NMSS) has 53 seats, i.e. 45% of what it got in 2001 elections. Another 50 seats are distributed between right-of-the-center parties, led by reformist ex-PM’s and former chief EU negotiators of the Union of Democratic Forces (UDF), who, in 1997-2001 stopped the hyperinflation, privatized the economy, closed loss-making industries and set Bulgaria on prosperity, EU and NATO accession path. One is the caretaker PM of March-June 1997, Mr. Sofiansky, who stopped the hyperinflation and set the conditions for recovery. Then there is Mr. Kostov, 1997-2001 PM who brought the country back to the reforms track. And charming leader of the United Democratic Forces (UDF), Mrs. Michaylova, Mr. Kostov’s foreign affairs minister hosting two-previous chief EU negotiators and the successful reformist ex-PM of 1991-1992, Mr. Dimitrov and ex-President Petar Stoyanov (1996-2001).

To complete the picture, the remaining 21 seats are held by the “Ataka” (Attack) Coalition (AC), a grouping that unites opportunists formerly belonging to BSP or UDF or both, allegedly united by common origin from Communist secret police. Whatever the background, they want “Bulgaria for Bulgarians”, re-nationalization of “murky” privatizations, ban on MRF, immediate withdrawal from Iraq, exiting NATO, sending gypsies to labor camps, “beneficial” EU entry combined with hating the West and strong hand justice. AC appeared on the stage six weeks before elections and won 8.5% of the vote, mostly from educated men of all walks of life fed up by political arrogance and hypocracy. Interestingly enough, in its critique of the EU Ataka borrows argument and publications from Libertarian think tanks, as it was the case with recent publication by Cato’s William Niskanen and Marian Tupy article on the draft Constitution

The best of all worlds

After successful start of reforms in 1991 (at the pace of Poland or the Czech Republic), BSP and MRF run the country via ad hoc majorities in 1993 and 1994. Then they kicked out their own Muppet-executive and in 1994-early 1997 the Socialist governed on their own, with a comfortable 53 percent of the seats. The result was regrettable; the country deteriorated to the group of poor reformers, mostly unfree countries (according to both the Fraser Institute and the Heritage/WSJ Indexes), the poverty rose four times and Bulgaria almost defaulted on its foreign debt in 1997. Only the fiscal costs of 1991-1997 banking crisis were 41% of GDP. The following table, which IME uses to monitor reforms in macroeconomic terms, gives an insight on how political parties contributed to the prosperity of the citizens.

Then, the country was rescued by UDF and since 1998 enjoys its longest period of economic growth since 1911 (the eve of the of Balkan wars and the WWI). UDF stopped inflation and economic decline, privatized the industrial sector and gradually built up investors’ confidence, and, according to the World Bank, reduced the poverty three times. Needless to say, the process was far from perfect and everyone expected more. The former king managed to sustain predecessors’ achievements, sealing EU and NATO prospects opened by them.

Originally, he wanted to please everyone with taxpayers’ money but the reasonable finance minister who teamed with IMF cooled down the spending zeal. Taxes were reduced; the income raised 6% per annum; virtually the entire banking industry is foreign owned; only the gas and tobacco (the process was blocked by MRF) monopolies remain to be privatized, while the power sector sales have taken off. There was and still is a consensus that Bulgaria is a success story, with reasonable growth, firm EU accession track record, sound money and profound fiscal stability, meeting all Maastricht criteria by 2009-2010. Why then the electoral failure?

Simply enough, Mr. Saxkoburgotski (the spelling is Bulgarian) is a victim of his own style of power-struggle. In order to appeal to voters in 2001, he pained UDF the immoral and corrupt government, promised ”decency and integrity in everything” and “sensible improvement of the living standard” in two years. He also invited BSP and MRF to join the government. But income improvements were visible only to those who read statistics. The people witnessed, as usually happens, that for some living standard improvements are fast and sizable while for others – negligible or average. The integrity promise failed due to lack of accountability, instances of embezzlement in public procurement and alleged kick back to family, friends and supporters. Against this constellation all incumbents needed a scapegoat and a demon, to highlight own merits in comparison. And the demon was found in the reformist camp of predecessors, they were prosecuted and harassed, the tales of their fortunes were leaked to the press. Hence, the election outcome: the Socialist image is embellished, with 40% less votes than in 1994 they are biggest faction in the legislature.

Final countdown

The election outcome is not the worst possible. The BSP election rhetoric included scary ideas, like “the government is the master, the market is the servant”, skipping or amending the currency board arrangement, increasing government expenditures (currently 42% of GDP highest in New Europe) and taxes, return to progressive taxation (after it was significantly flatten: corporate is 15%, personal income – 10-24%) and “taxing the wealthy”. These ideas are unlikely to materialize. Probable common denominators in post-election policies are in line with low deficit, monetary stability and fiscal discipline.

Given the election results, the Socialists need a third coalition member besides “the Turks”. It might be the King’s or some of the right-of-the-center parties, although all of parties, except MRF, rejected openly BSP. The Socialist-led coalition government might be informal, i.e. NMSS and/or others could support the cabinet in exchange for concessions. Taxes will stop going down expenditures would rise. The same growth rate prospects (5.8-6%) are under question, since domestic policy factors would coincide with lower industrial output in the first quarter, central bank measures to cool credit expansion, higher oil prices and slower pace in public investment.

Bulgarian politicians are bad at joining efforts for common goal, which, in 2005, is meeting the 2007 EU accession deadline. The clock is ticking. The political and economic impact of EU convergence has been unambiguously positive. Bulgaria is benefiting from EU reform supervision and membership horizon renders confidence and stability, while the economy of scale boosts foreign investment flows. This prospect is in jeopardy, due to elections. It requires concerted efforts to pass number of laws to fix the judiciary and even change the constitution. While Bulgaria was preparing for elections, Romania stepped up its accession effort. Beside legislative job, Bulgaria needs efficient administration to implement already adopted acquis. But today it is rather redundant and counter productive. The country is already lagging behind Romania. Evoking the 2008 clause of the accession treaty seems inevitable. At stake is the very prospect of joining EU.

This prospect is not fully recognized and most coalition possibilities have questionable legitimacy.

Left of the center coalition is the first to be attempted; it has two versions – with or without MRF. Mr. Saxkoburgotski repeatedly rejects BSP-NMSS coalition as opportunistic but lead party members, e.g. the finance minister Milen Velchev, are on a different opinion. Socialist face a reputation problem: their government were failing in the last 16 years, they would like to prove they are capable of ruling and they intensively searching for both coalition partners and credible provisional cabinet members. BSP advantage is that as an election winner it has the President, Mr. Parvanov, on its side, elected in 2001 from its own ranks. He would attempt lending helping hand, although his largely ceremonial constitutional powers are rather in time of political crisis. MRF is an undesired teammate due to past instances and habits of blackmailing partners, but a three party coalition is somewhat more li