Since 1999 IME regularly monitors the business environment in Bulgaria. The main criterion is whether the newly adopted legislation and the economic policies encourage or impede competition and economic freedom. Macroeconomic Environment and Finance 1. Macroeconomic dynamics The macroeconomic development in 2002 was positive. Most of the main indicators show that the positive dynamics after 1998 persists. Particularly important is the fact that the productivity growth in the private sector reached about 9%, which is faster growth than 2001. The private sector continues to be the only engine of economic growth - and it can hardly be otherwise - as the values added there increased by 9.1% in 2002. The capital formation for the first 9 months increased by 7.4%. Meanwhile, the shadow economy's share seems to be growing, since the government statistics show productivity growth in the private sector of only 2.5%. It may well be the case that there is a divorce between the economy and the politics - despite the bad economic policy in 2002 there was a significant economic growth, though at the price of increased informal sector. Main macroeconomic indicators 2001 2002 Value added growth in the private sector (%) 7,3 9,1%* Value added growth in the public sector (%) - 4,5 - 4,3%* Private sector share in value added (%) 69,4 71,5 Public sector share in value added (%) 30,6 28,5 Y-o-y inflation (%) 7,8 6,0** Private sector productivity growth (%) 7,3 9,4 Productivity in the private sector if productivity in the public sector = 100 108 111 Real wage index (1997 = 100) 127 129 Notes: * IME forecast. ** First 11 months. Source: IME, incorporating data from NSI and BNB. 2. Capital Market The active government intervention on the Bulgarian capital market gave the following results in 2002: 1/ Complaints from manipulations, although the amendments in the Bulgarian Law on Public Offering of Securities were oriented towards protection of the investors' rights. After the adoption of the amendments in the law, the complaints from manipulations were even more in comparison with the period before the amendments. On other hand, the manipulations had decreased, but the number of the Bulgarian publicly traded companies had decreased as well. The announcement of the manipulations as illegal would not lead to their disappearance; the guarantee of the protection of the investors' rights by the government could not be resolved by the law. The basic problem is that the minority shareholders are not active enough in protection of their rights by themselves. Currently in Bulgaria there are about 98 investment intermediaries and only 10 actively traded public companies, which do not see the point in being public companies. 2/ The compensatory instruments (bonds and receipts) are traded on the Bulgarian Stock Exchange - Sofia (BSE-Sofia) since September 2, 2002 - practically, before and after this date, the prices of the instruments were strongly affected by the government. The difference is that before September 2, 2002, the government issued and stopped the issuance of large nominal compensatory instruments, now the government includes and excludes companies from the list for privatisation for compensatory instruments (Bulgarian Telecommunication Company, State Insurance Institute, Plovdiv Fair), envisages an automatic transformation into public entities of the companies, scheduled for privatisation with compensatory instruments, according to the amendments in the Bulgarian Privatisation Law. The changes in the prices of the compensatory instruments reflected the reality in the Bulgarian capital market more precisely than the index of the BSE - SOFIX, which have been affected by the sales and purchases by limited number of investors. Only for information, from the beginning of the trade of the compensatory instruments on the BSE floor to December 19, 2002, the turnover of the compensatory instruments was approximately 34 % of the whole turnover of the BSE. The actions of the state concerning the Bulgarian capital market in 2002 probably would have the following effects in 2003: 1/ The Financial Supervision Commission could not begin its operations as it was expected. To the united supervision is given power that is coping the power of the Bulgarian National Securities Commission, State Insurance Supervision Agency, Insurance Supervision Agency, but granted to a commission this power would hardly limit the corruption and the bureaucracy in the state supervision. 2/ More public companies will transform into private companies. The companies, included in the list for privatisation with compensatory instruments will automatically become public entities, these companies will be traded for compensatory instruments for a short term and then the owners of these companies will close them. As a result of this process, the price of the compensatory instruments would increase for a while, probably to 26-28 % per face value and after this the prices would decrease to the average level of 23.25 % of the nominal for 2002 or even lower. Microenvironment and Sectoral Policies 1. Activism, Central Planning and Knowledge In 2002 the government has a record of "good" results in the field of activist policy. Some of the measures that it undertook are: 1. It granted 100 million levs for the creation of a state-owned venture capital fund 2. It actively managed the foreign debt 3. 30 million levs of the taxpayers were used for establishing a state-owned airline company in the place of the bankrupt "Balkan" airlines 4. The building of the nuclear power plant "Belene" is being restored 5. Active measures on the labor market were undertaken 6. It continued granting subsidies 7. "Protective tariffs" were imposed for different merchandises 8. The redistribution planned in the 2003 budget increases - the non-interest-payment-related expenditures grow from 35.2% to 36.2% of GDP, and the total expenditures grow form 38.2% to 38.6% of GDP 9. It actively attempted to maintain the centralized pension, health and energy systems The government de facto makes decisions concerning a large part of the taxpayers' money; it decides where it must be invested, which sectors are important and must be supported and protected (even if they produce loses), it manages the centralized monopolies (pension, health, education and energy systems) and determines almost everything concerning the budgets of the municipalities. Besides, through the numerous regulations it has control and commands every field of the economic reality. In short the government acts as some kind of omniscient central planning body. It conceives itself as a strategic actor, which possesses some unique knowledge that gives it some advantage over the other people. Probably that is a fallacy, created by the fact that some economists think about the optimal allocation of the resources starting from the hypothesis that all the information is given (as in the mathematical problems). Assuming all the information to be given they show that the person, whom the information was "given" to, can efficiently manage the resources. However as the Nobel Laureate Friedrich Hayek points in his famous article "The Use of Knowledge in Society" (American Economic Review, XXXV, 4, 1945, available in English on www.econlib.org/library/Essays/hykKnw1.html and in Bulgarian on www.easibulgaria.org) "the "data" from which the economic calculus starts are never for the whole society "given" to a single mind which could work out the implications and can never be so given. …the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess". Therefore the problem is not how to allocate "given" resources, but it is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Practically the question is whether to have central planning or decentralized planning and competition. If the conditions were static and nothing changes there would be no need for decisions to be taken frequently and then the central planning would do some work, but there are always some changes and the best and fastest way to meet them is to leave the decisions to people who are familiar with the changes and the circumstances of the specific place in the specific time. Thus it will be appropriate to use some form of decentralization. However, at this point arises the problem of communicating to individuals such further information as they need to fit their decisions into the whole pattern of changes of the larger economic system. Anything that happens anywhere in the world has effect on the decisions of the individuals, but there is no need (and it is impossible) for them to know for all these events, their causes and consequences. What is significant is the change in the relative importance of the different things, how much more or less difficult to procure or produce they have become. And here comes the help of the price system, which communicate exactly that kind of information between people - information which goods have become scarcer, more demanded or more abundant. Without the need everyone to know everything that is known by the others, through the price system everybody obtains exactly the information he needs for making a decision. So in a case like that of a scarcity of one raw material the people start to use the material more sparingly without an order being issued by someone who commands which is the case of the central planning. All the above-mentioned measures can be summarized as an intervention in the negotiations of the prices and the transaction costs. The theoretical reasoning a la Hayek make clear that the above-mentioned measures are in fact based on the erroneous presumption that the government can have enough information and the corresponding incorrect assumption that the central planning is possible. Now, when it is clear that the decisions must be decentralized in order to use all the relevant information it is a matter of elementary logic to conclude that the government does not have such place in the economy and the active measures, which it undertakes, necessarily make things worse than make them better. 2. Subsidies and Protectionism Policies in 2002 In its economic program the Bulgarian government announced five priority sectors (transport, tourism, energy, agriculture and high-tech) representing about 70-80% of GDP. Declaring this, the government in fact invited everybody to seek privileges and subsidies. What remains as an outcome is competition for privileges on somebody else's expense. Chronology of new subsidies in 2002 " Decision to purchase 200 000 tones of cereals at fixed price of BGN 160 per tone; " Transfer of BGN 100 million for encouragement of alternative agriculture in Rodopi Mountain etc.; " Protection tariffs for local manufacturers of various vegetables; " Protection tariffs for local producers of fertilizers; " Protection tariffs for local producers of steel (to be implemented in the near future); " Transfers towards state owned companies. Such examples are the increase in equity of the state owned Balkancar and Promotional Bank with the amount of BGN 4.2 million and BGN 9.9 million respectively; " Equity swaps in state-owned companies. For example in April 2002 the government ordered the State-owned Bulgarian Commercial Fleet to buy the assets of Varna Shipyard for BGN 35.5 million; This is just the top of the list and could be continued. The explanations and justifications of these intervention and protectionist measures include: " to stimulate economic activity and growth, i.e. economic activity does not happen when it is left on its own; " to safeguard domestic supply and to foster the home industry; " to elaborate national competitiveness; " to protect "the national interests"; As a result rent-seeking behavior becomes dominant. At the same time the interested parties (recipients and beneficiaries of subsidies and protectionists measures) proofed to be successful in mobilizing support, usually using as arguments specific objectives formally benefiting (or sounding like beneficial for) the electorate. However, the fact that more state action leaves less action opportunities for the business seems to be forgotten. Subsidies are envisaged to boost development in particular sectors and therefore to promote the overall economic growth; administrative regulations pretend to secure sustainable development. However the real meaning of all preferences granted to some groups by the government is re-distribution of income taken by other groups. So, is it possible to make the nation wealthier re-distributing income? The answer is that those who are deprived of income have less incentive to produce more, and those who receive transfers have less incentive to innovate, which means lower economic activity and lower growth. More transparent and efficient decision for the government when the goal is improving business climate is to lower taxes providing entities with the opportunity to invest higher part of disposable income and thus granting equal treatment for everyone. 3. Labor market and social policy The so-called 'social' policy - what is done primarily by the Ministry of Labor and Social Policy and the National Social Security Institute - seems to be a failure exactly from a social stand-point. The effects of that policy have been antisocial at least in two directions. First, keeping the barriers (moreover, the promised increase of the barriers in 2003) before hiring labor means less chances for official employment as well as lesser growth of the productivity and the incomes in Bulgaria. Secondly, the high tax on hiring labor has most devastating impact on the low-income employees. The tax-insurance burden stayed unchanged - it is about 41% estimated on the basis of the average wage. In its composition, a pension pay-roll tax has particularly huge share - about 23% of the average labor costs. The tax-insurance burden on labor costs continue to be a major obstacle before the labor market functioning. Its effects include increasing share of informal employment as well as less chances for improved productivity. Here is a short example of how the labor costs' structure looks like: if the gross wage is BGN 283 per month, the total labor costs are BGN 376 per month, and the take-home pay is BGN 220, so the tax wedge is BGN 156 or 41%. In its 'fight' for more employment and less shadow economy, the government has concentrated primarily on the active measures - those include state employment programs, as well as subsidizing 'socially-important' companies (including private ones). Instead of removing some of the barriers before the official employment creation, the administration has decided to create even more barriers as it focused on the barriers before low-productivity job destruction. The government has stuck to those policies though most of the recommendations coming from foreign observers as well as from IME), have been for reducing the tax wedge of labor costs and abandoning some of the burdensome regulations of the Labor Code. Productivity growth is to a large extent a result of the job turnover, i.e. the flow of workers from some companies to other of higher productivity. In the period following 1998, the labor force flows were running primarily from the ex-state owned firms to the de novo private sector. The year 2002 shows change on that trend; some studies (http://www.ime-bg.org/pdf_docs/papers/labor-market.docmore) show that now the flow is taking place primarily within the sector of SME. Thus, the entry and exit barriers - not only those before hiring and firing - are major barriers before the productivity growth in Bulgaria. Administrative Environment 1. Administrative regimes A typical feature of the Bulgarian administrative environment in year 2002, was the exuberance of declared good intentions and not so much implemented ones. 1,232 legal rules were promulgated during the year 2002. 817 of them were newly introduced and 415 for amending and suplementing of already existing rules. 195 of the new introduced laws content the word "protection". The state wanted and tried to protect everybody from everybody else and from himself as well - starting with the protection of consumers, investors, minority shareholders and finishing with the protection of animals from bad atmospheric conditions on their way to the slaughterhouse. As a result of this, the prommised by the ruling majority reduction of the administrative intervention into the economy had no chance to happen. In February 2002, the Bulgarian government brought back to life the idea of the former cabinet for intra ministerial working group for counting, assessing and reducing the administrative regimes. The revival of the group was initiated by the Deputy Prime Minister and Minister of the Economy Nikolay Vassilev, but it happened mainly because of the pressure made by the World Bank. The main and so far the only result of this effort was the creation of a report. According to that report there are 361 administrative regimes in Bulgaria. The working group suggested 73 of them to be repealed and another 118 to be benign. Nevertheless the fact, that since May 2002, the government has started to present those recommendations as an already completed reform. Until the end of November 2002 there were no drafts for any regulatory changes in this direction. At the same time, using the already became standard argument "the harmonization with the EU regulations", the government continued to introduce new administrative regimes. The data from the table below shows the number of the regimes introduced by law since 1991. Year Number of newly introduced permissions Number of existing permissions Till 1989 6 6 1991 3 9 1992 1 10 1993 5 15 1994 6 21 1995 21 42 1996 13 55 1997 10 65 1998 21 86 1999 20 106 2000 12 100 2001-2002 19 102 It is important to be mentioned, that only one third of the administrative regimes in the country are introduced by law. The rest are based on secondary legislation, which means that reducing the laws, imposing regimes, does not mean that such regimes will not be presented in the secondary legislation. In addition to this, instead of the already became unpopular word "license", words like "authorization" and " accreditation" started to be used very often. It is quite obvious, that only counting and assessing the regimes cannot make positive impact on the business environment. It is also obvious, that the problem cannot be solved by "piece meal reform". What is needed is a systemic approach. Therefore, the proposing in the Parliament of the Draft Law on Reducing Administrative Control on Economic Activity could be assessed as a positive step towards improving the business environment in the country. The main goals of that draft are the following: 1. To settle in explicit way the implementation of Art. 19 of the Bulgarian Constitution, namely the cases when the constitutionally guaranteed freedom of economic initiative is allowed to be restricted; 2. To define the boundaries of the administrative control over the economic activities as well as the possible ways of exercising such control - the kinds of regimes; their implementation boundaries, the obligatory procedures for receiving permission, refusing to give permission or appealing against decisions; 3. To define in explicit way the authorities of the administration and to reduce the administrative discretion in the decision making process. Unfortunately, some of the best conceptions of the preliminary draft are missing in the final draft version (such as it was proposed to the Parliament). What is missing: - The requirement for preliminary impact assessment before introducing new regimes, including examining the possibility for not introducing them; - The obligation of the administration to make office verification of those facts and circumstances, which are already part of another public register. This would transfer the implementation costs of the regime from private sector to the administration, would made those costs transparent and measurable and could lead to repeal of many costly and not so much effective procedures and regimes; - The institution of "the silent consent". Introducing the "silent consent" could drastically change the way in which the administration works and behave of the administration and would speed up the process of entering in business. However, if the ruling majority wants to achieve a considerable improvement in the local business environment, this law should follow its genuine goal and philosophy, i.e. to serve as basis for change. It should not be complied and adjusted to the existing rules and procedures, but contrariwise - they should be changed and adjusted to it. The law should not consider the present capacity of the administration to implement the current regimes under the current rules, because the idea is namely to change them towards qualitative reduction and simplification. 2. Privileges and Administration Among the challenges before the government is still the willingness to avoid the political pressure imposed by different interests groups. In the past year the trade unions imposed a pressure to the government on some specific policy areas. This happened several times. Among legal rules they did not approve as a policy approach were those rules in the labor legislation which might restrict the impact they have on the government policy agenda. These are especially the provisions of the consultative committee to the Council of Ministers, the so-called Tripartite Council. 3. Public Procurement and Competition There were two bad practices in the public procurement for the past year. The first was to protect special interests with special procurement conditions. An example is the legal changes which will give special preferences to those applying in a public procurement procedure with local companies as subcontractors. The other example is the privilege to participate with an offer even with public or/and private debts. In both cases the expectations are for more political pressure to prefer one competitor before another not on a market basis. The second bad practice was that administrative staff engaged in a selection procedure usually applies the legal rules case-by-case. The last year even high-level decision-makers -- the members of the Council of Ministers -- were looking for a way to avoid opening a public procurement procedure for the customs management. It was clear that external management expertise is needed and the offer of those selected would be the most competitive even in an open procedure. However, there was not such. 4. Access to information and public registers Only public registers might make clear the impact of government decisions. Since 2002 the government has hosted a website with an on-line database of all private and state-owned companies which were subsidized with a state aid. The electronic version of opened procurement offers is also a good practice. However, there is much to be done. First, public registers are updated after the final decision of the public administration. Thus, all interested parties could not provide their critical remarks to the drafts in the pipeline. It is not clear who has been applying for what, how and why the decisions have been taken and it is the right way to solve the policy problems indeed. For example, there is no information about the companies which have been requesting for a state aid and none of the interested parties' positions have been publicized. The contract with Crown Agents made clear that the access to the government intention is not open enough. The law on the protection of information classified as a state secret violates democratic standards and principles with a list of information which might not be revealed. For the economic policy of the government the part on the economic secrets is extremely important. There is a separate list of secrets which are important for the national security of the country. Four out of seven so-called secrets are far apart of the national security but even the lasing three do not respond to market-led reforms. Two out of these seven secrets are defined with terms which are not clear even for lawyers. These are: "all documents related to the negotiation processes before signing a financial contract extremely important for the country" and "information -- about technical and/or organizational decisions -- which might hamper economic interests of the national economy". next |
