The Bulgarian Economic Growth and Transition Project: Independent Institute

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The Bulgarian Economic Growth and Transition Project

October 1, 1990

Contents

Summary
Overview
Advisory Teams
Research Articles
- The Environment in Bulgaria, by Peter J. Hill
- Agriculture in Bulgaria, by Peter J. Hill and Carl Pescosolido, Jr.
Commentaries
- Why Foreign Banks Should Not Be Restricted from Entering the Bulgarian Market, by Peter J. Hill
- Bulgaria: Past and Future, by Peter J. Hill

Summary

History

Following the end of forty-four years of communist rule and the removal of dictator Todor Zhivkov in November 1989, the interim government of the Republic of Bulgaria looked toward upcoming elections and, critical for the country’s recovery, the establishment of a free-market economy.

Drawn to the work of Dr. Richard W. Rahn, then-vice president and chief economist for the U.S. Chamber of Commerce and then-executive vice president of the National Chamber Foundation (NCF), the Bulgarian government requested a formal economic study mission and report from the NCF in March 1990. After visiting the country to examine the economy and a number of influential industries, the National Chamber Foundation’s select team of economists and other experts presented a comprehensive written report to the newly-elected government that fall.

Two Independent Institute research fellows, Dr. Peter J. Hill and Carl A. Pescosolido, Jr., were selected by the Institute and invited to join the study, contributing reports on environmental reform, authored by Hill, and on the country’s agricultural economy, co-authored by Hill and Pescosolido. These experts granted their time to the project, with funding provided by their home organizations.

Hill is Professor of Economics at Wheaton College and a free-market environmentalist, a field he describes as “looking at environmental problems through the lens of property rights, markets, and incentives, and using these better defined and enforced property rights to solve them.” Pescosolido, a California citrus grower and founder of Sequoia Enterprises and Tropicana Energy Company, was known for fighting against subsidies and marketing orders responsible for higher prices of fresh fruit in addition to possessing a practical knowledge of agriculture. (He was tragically killed at the age of 56 in an automobile accident in Texas in 1992.)

In the first trip to Bulgaria by Hill and Pescosolido (August 19–25, 1990), they met with numerous people, including the Minister of Agriculture and Foods. After spending a morning with the Minister discussing why Bulgaria needed a free-market agricultural sector, they broke for lunch, and as Hill has noted, “I don’t recall his exact words but it was something along the line of ‘Your arguments are quite interesting, but I still don’t understand how you can guarantee that enough chicken feed will be available for chicken farmers under your free market system.’ I discovered the difficulty of explaining the spontaneous order of the market to someone who had never experienced it. In fact, my explanation was probably a bit lame—it was on the order of ‘Trust me. It does work. Markets provide the inputs needed for production, even though there is no ministry dedicated to seeing that it happens.’”

Upon their return to the U.S., Hill and Pescosolido completed two reports on the need for economic liberalization and privatization of natural resources, environment, and agriculture. The reports were then presented to the Bulgarian Grand National Assembly in Sofia in early October.

Hill made a second trip to Bulgaria ten days later from October 13–19 and then again from January 10–17, 1991, with a team headed by Rahn that included some members of the original team along with new members. Subsequently, Hill was hosted in another trip from March 2–8, 1996 by the Institute for Market Economics in Sofia. With the assistance of Ognian Pishev, former Bulgarian Ambassador to the U.S. (1990–1994), Hill presented a number of lectures on the new institutional economics and the importance of the rule of law at the New Bulgarian University and Sofia University. At this time, the government had just shut down a number of Bulgarian banks that were not allowed to open branch banks in the country. Hill argued that as an example of the need for free-market reforms, foreign banks should instead be allowed to enter the market in order to increase competition and reduce unsavory banking practices and concentrated economic power.

The Environment in Bulgaria

In his report, Hill analyzed the causes of the many environmental difficulties plaguing Bulgaria at the time, which included profoundly polluted water as well as air pollution and farmland damaged by government industrial emissions. Hill identified three major factors:

Due to a lack of a free press during the communist regime, information about environmental problems was not easily attained—and without general public knowledge about the problems, government officials were not held accountable or pressured to make sound environmental decisions.
Bulgaria’s most heavily subsidized and government-owned and operated industries were also some of its most polluting, such as mining and non-ferrous metals.
Because they lived under a regime that prevented private property ownership and competitive markets, people were more likely to deplete their resources than, for example, a private mine or oil well owner dependent on the resources for income.

The initial step in addressing these problems was to recognize and enforce private property rights, which would generate accountability and reduce environmental damage from the overuse of common property.

Agriculture in Bulgaria

In their study of Bulgaria’s agriculture, which at the time employed about 20 percent of the country’s labor force, Hill and Pescosolido determined areas that could improve the sector’s negative growth rate and repair massive inefficiencies. They also wrote of the importance of initiating private property rights during the government transition, suggesting:

Returning land to its pre-communist-regime owners through a process of restitution designed to limit corruption.
Selling land, machinery, and livestock through competitive bidding, with scheduled payments to go to the original owners.
Eliminating price controls of all agricultural outputs and inputs.

A free market and enforced private property rights would create profit incentives, which could attract a larger amount of young people back to agriculture. Their decreasing involvement was an additional employment problem affecting the industry.

Speaking in July 2009, Hill recalls the inadequacies of the farm cooperatives that predominated in the sector from 1945 to 1989: “With the large-scale collective farms, they clearly were not able to respond to price signals to allow for individual entrepreneurial action. They were not able to be flexible in terms of what one was going to produce; they were centrally managed, and each collective farm was given an output quota. In some ways you could say it was worse in agriculture because agriculture is much less responsive to large-scale planning than other sectors of the economy.”

Outcome

The 600-page report of the Bulgarian Economic Growth and Transition Project was accepted unanimously by the Bulgarian Grand National Assembly in late 1990. According to Rahn in July 2009, “Privatization was a success—an uneven success, but one they started almost immediately. They also got rid of most price controls right away, enough to free up the market, which was one of the key things we emphasized.”

Now a relatively free-market economy, Bulgaria has benefited from de-socialization as well a more market-oriented, currency-board monetary system, introduced in 1997. The agriculture sector has also been highly privatized. “Property rights are well established,” continues Rahn. “The tax reform process has been ongoing, and two years ago they put in a 10 percent flat tax on personal and corporate income. Inflation has been relatively low because of the currency board. They’ve been making considerable progress over the years.” Much more needs to be done to eliminate the remaining vestiges of socialism and corporatism in the country, but the Bulgarian Economic Growth and Transition Project was the crucial influence at just the right time in order to make the enormous and rapid progress possible for the people of Bulgaria.

Overview

Introduction

At the request of the Government of Bulgaria, the National Chamber Foundation (NCF) conducted an economic study mission in Bulgaria to develop a comprehensive series of policy recommendations to guide and encourage the economic transition process from a largely statist system to one that relies on private ownership and free, competitive markets to achieve a high rate of economic growth. The study and report were done with the support of and in cooperation with the Government of Bulgaria, and under the direction of Dr. Richard W. Rahn, Vice President and Chief Economist for the Chamber of Commerce of the United States, and Dr. Ronald D. Utt, Vice President of the National Chamber Foundation.

In November 1989, the Bulgarians ousted the communist leaders who had ruled for more than four decades. The interim leaders announced their intention to change Bulgaria into a functioning democracy and establish a market economy. This policy was endorsed by all of the major political parties. Parliamentary elections were scheduled for June 10, with run-offs on June 17, 1990. By then, some important economic reforms had already been made, including edicts on the right to own property and to allow foreign investment. Much more remained to be done. In seeking assistance and guidance in making this difficult transition, representatives of the Government of Bulgaria invited NCF’s Executive Vice President, Richard W. Rahn, to visit them in Sofia in March 1990 to discuss alternative courses of action. A subsequent meeting took place in Sofia in late May 1990 to finalize the agenda as contained in this proposal. As a result of these discussions, the Government of Bulgaria formally invited the NCF to create a study mission that would come to Bulgaria, study the economy and select industries, and advise them on the proper course of action. A comprehensive written report was produced, published, and distributed in Bulgaria and the United States.

Plan of Study

Structure of the Mission

To conduct the study, the NCF was selected and invited, in consultation with the Government of Bulgaria, a team of experts drawn from U.S. economic research organizations and businesses. Team members were selected for their expertise in areas of importance to the Bulgarian reform process and made at least one visit to Bulgaria with the rest of the Mission. The Government of Bulgaria arranged for meetings with domestic experts and for all scheduling of visits to factories, offices, farms, universities, etc. to allow team members to acquire the necessary information to make their reports. This visit took place in late August 1990. During the visit, team experts consulted frequently with other members of the team, the team leader, and appropriate officials from the Government of Bulgaria and other Bulgarian institutions to assure that all work was properly focused and coordinated.

Upon return to the U.S., team members prepared a first draft of their written report. These reports were edited and a review meeting was held in Washington to allow all team members to meet with representatives from Bulgaria to review the initial findings and make comments. The report was released in Washington and at a major conference in Bulgaria with team members in attendance to make brief presentations and answer questions.

Project Schedule:

A. June–July 1990: Selection of team of U.S. and Bulgarian experts. Press conference in Washington to announce the project.

B. July 15: Preparation of Section I of Report by Bulgarian and U.S. experts.

C. August 20–24: U.S. team visited Bulgaria to meet with Bulgarian experts and to collect information.

D. September 10: First drafts of chapters in Sections II and III were written and submitted by U.S. team members and revised.

E. September 17–18: Team met in Washington with Bulgarian delegation to discuss preliminary findings and recommendations. A draft report was then prepared and distributed to both U.S. and Bulgarian participants before the October meeting.

F. October 1–3: Final meeting was held in Bulgaria among the principals from the Bulgarian and U.S. teams to discuss and finalize the report and formally present it to the government. This was followed immediately by a major conference in Sofia where members of the team presented and discussed the report’s key findings and recommendations to an audience of government officials, business representatives, academics, press, and members of the country’s many political parties. The next day, U.S. team members met individually with the Bulgarian experts in their fields to discuss the many components of the report in greater detail. Following this, a major press conference was held in the U.S. to promote both the report and Bulgaria’s intention to engage in fundamental economic reform.

Structure of the Report

The report consisted of nearly two dozen chapters compiled into four main sections. Section I had three chapters—an introduction which described the structure and purpose of the mission, a lengthy chapter describing the background and situation of the Bulgarian economy, including all of the relevant institutional arrangements, and a chapter which discussed the reform process to date, including the recommendations of the government/opposition roundtable. Representatives of the Government of Bulgaria provided necessary materials for these chapters which were compiled and edited by the NCF.

Sections II and III comprised the main body of the report and included nineteen chapters covering public policies and specific economic sectors essential to a successful transition. Section II discussed the necessary institutional changes that had to be made to foster and encourage a productive market economy. Section III focused on issues that related to specific industries that were of interest to Bulgaria.

The first chapter of Section II was a broad overview on the market process and how it functioned to create jobs and rising living standards. Included in this chapter was a discussion of deregulation, flexible prices, open trading, and the importance of minimizing government intrusion. This chapter set the stage for the dozen or more chapters that followed this and Section III, each of which was completed by a member of the team drawn from U.S. research organizations or businesses. Specific chapter subjects in Section II included: 2.) Tax reform; 3.) Monetary and financial reform, with separate subsections on monetary reform, emphasizing effective anti-inflation problems, currency convertibility, banking/intermediation, foreign debt relief, and capital markets, each of which was done by separate individuals working in cooperation with one another; 4.) Privatization; 5.) Creation of a proper accounting system; 6.) Establishment of a commercial code, property rights, and joint ventures with foreign firms; 7.) Creation of an environment conducive to small businesses and entrepreneurship, with emphasis on the trade and service sectors; 8.) Creation of environmental policies compatible with high rates of economic growth; 9.) Development of a social welfare system that provided for those in need while providing the proper incentives for work, saving, and investment. This chapter covered topics such as health care, unemployment compensation, retirement programs, welfare for the indigent, and redeployment of redundant labor. The final chapter in this section made recommendations on how to change the educational system to provide more and better training in modern management techniques and other business-related skills.

Section III included chapters which reviewed and recommended reforms in specific industries that the Bulgarians deemed essential to their economic development. These were 11.) Telecommunications; 12.) Agriculture policies, food processing, and agro-based industries; 13.) Transportation; 14.) Energy and Chemicals; 15.) Insurance; 16.) Tourism; 17.) Heavy Engineering; 18.) Electronics; and 19.) Light Industry. All chapters in Sections II and III followed similar formats. They began by describing the situation in Bulgaria for that particular industry and the reforms underway at the time, and offered a series of recommendations as to how improvements could be made by way of market solutions and greater private sector participation.

Section IV, the final section, included two chapters, the first of which was a summary of the report’s findings and recommendations, including the pros and cons of alternative policies. The second (and last) chapter reviewed both the reform experiences in Poland, Hungary, and Yugoslavia, as well as the experiences of the successful newly industrialized countries (NICs) in Asia, which had made dramatic gains in economic growth and competitiveness over the past two decades, to draw lessons that Bulgaria might learn from as it began the reform process. This chapter also covered the “technology of transition,” focusing on the sequence of the reforms, the interrelationships among the reforms, and the speed with which the transition should be accomplished.

Advisory Teams

U.S. Advisory Team

Richard W. Rahn, Co-Chairman

Ronald D. Utt, Co-Chairman

Jill Bezek Jones

Allen E. Abrahams

John G. Bertram

Mark Bloomfield

John L. Bowles

Mary K. Bush

Mark C. Frazier

Mark S. Fowler

Wlliard R. Gallagher

Gordon A. Graves

Peter J. Hill

Michael F. Hoynes

Frederick B. Krieble

Robert H. Krieble

Lawrence A. Kudlow

M. Kay Larcom

Clayton L. Lescalleet, Jr.

Bowdre P. Mays

Charles E. McLure, Jr.

J. William Middendorf, II

James C. Miller, III

Charles Murray

Losing Ground: American Social Policy 1950–1980

Grover G. Norquist

Carl A. Pescosolido

Gordon C. Seybold

Bernard H. Siegan

Eugene L. Stewart, Esq.

Graciela D. Testa

International Health & Development

Marco Terribilini

George M. Vredeveld

Wayne A. Wittig

Bulgarian Advisory Team

Ivan Angelov

Ventsislav Antonov

Roumen Avramov

Valeri Borisov

Ventsislav Dimitrov

Gentcho Dimov

Stoyou Dulev

Nikola Galabov

Ilia Georgiev

Roumen Georgiev

Dimitar Kostov

Ivan Kostov

Emil Harsev

Tatyana Hubenova

Dimitar Ivanov

Lilia Karakasheva

Nayden Naydenov

Neviana Krusteva

Georgui Pankov

Ognian Panov

Athanas Paparizov

Ognian Pishev

Nan Pushkarov

Dimitar Shopov

Boyan Slavenkov

Stefan Stoylov

Milcho Stoymentov

Todor Valtchev

Hristina Vutcheva

Defense and Foreign Policy Economic Freedom Europe Global Finance International Economics and Development Trade

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