BULGARIA AND THE EUROPEAN UNION
(Reflections provoked by the invitation for negotiations)
By Prof. Dr. Ivan Angelov
Member of the Bulgarian Academy of Sciences
CONTENTS
3. The Fundamental Philosophy of the European Union
4. A Functioning Market Economy
7. Possible Economic Trajectories
8. What is Necessary for a Lasting Growth of 4%?
9. Bulgaria faces Difficult Negotiations
10. Utilization of Bulgaria’s Intellectual Potential
11. The Catalytic Role of Accession Negotiations
12. The EU Negotiations and the Relationship with the IMF
Bulgaria has received an invitation from the EU for accession negotiations. This is a very important event for the country, but its significance should not be exaggerated because the most difficult is still forthcoming. One should bear in mind, that the invitation was extended for political reasons and not for economic achievements. If it hadn’t been for the tragedy in Yugoslavia there would not have been an invitation.
The EU Commissioner on Enlargement Mr Guenther Verheugen stated on December 23 1999 that Romania and Bulgaria were invited for negotiations on political grounds, but the accession decisions will be on objective criteria only. This is understandable since a gesture for negotiations is much cheaper than a membership gesture. This was confirmed in the accession of Greece and Portugal years ago, although both were better prepared than is Bulgaria today or will be during the next 15 – 20 years.
The Bulgarian economy is in deep recession. The successful structural reform, economic growth, increase of real incomes, etc. claimed by the authorities are not substantiated. There are a number of arguments casting doubt on these statements.
One can no longer trust official Bulgarian statistics. Published information differs sharply from economic realities. Making the Central Statistical Office (CSO) directly accountable to the government (a text book case of conflict of interest) is already producing the desired results. We will learn the technical details of this intervention after a time, but one can already see the growing divergence with reality. A large number of independent Bulgarian economists have already expressed their concern.
The reported economic growth is highly questionable. Even if one assumes that from a strictly formal methodological point of view the economy is growing it is growth of a poor quality due to:
GDP growth with such components gives reasons for concern and not for pride as the authorities claim. The destructive consequences from such a “growth” will be felt over the coming years. They are however obvious to the impartial observer now.
Strange enough, these claims are been supported by the IMF! The IMF disseminates inaccurate and even untrue information about Bulgarian economy, although their experts certainly know the truth. By doing so the IMF does not provide a good service to Bulgarian people and to the transition in CEE.
Bulgaria has no political and economic future outside the EU. There is no rational alternative to accession to the Community, now or in the foreseeable future. EU membership has merits and demerits, but the formers prevail. EU accession is therefore a fundamental strategic goal for Bulgaria.
Accession entails both rights and obligations. This should be grasped properly in this country since very naive ideas prevail at present. The people are being told that Europe is eagerly waiting for us; that it is praising our great achievements in economic reforms; that we have been recognized as a country with a modern European value system, that foreign welfare and investment are incoming. The dissemination of illusions is of no good service to Bulgaria. Illusions generate higher expectations and unfulfilled expectations are followed by disappointments.
The independent Bulgarian experts are more realistic. They support EU accession and at the same time disclose its true nature. They prove that membership entails both benefits and responsibilities, and that the former prevails. The authorities, however blame them for drawing apocalyptic pictures of the future, for disturbing public optimism and considers them enemies of EU integration.
Simplistic black-and-white ideas dominated public life in Bulgaria under all political regimes during the 20th century. They will be continued in the new century. This is not an asset to Bulgarian society. A simplistic approach has never been a positive factor for economic and social development. It is, rather, synonymous with backwardness.
It is most important to pull together human, entrepreneurial, institutional, information, governance and material resources of the country for sustainable high quality growth, productivity and competitiveness. This is the leading way to a better life, which is the major goal of transition.
The official foreign exchange reserves, low inflation and a balanced budget are nothing but means of economic policy. They don’t have an independent economic significance. As far as development objectives are concerned the realities and the foreseeable prospects are gloomy since:
The Bulgarian authorities are confusing means and ends of economic policy, probably under the influence of the IMF. This philosophy generated heavy economic and social consequences during the ten years of transition. If this approach remains unchanged EU accession preparation may be affected negatively.
The EU draws a clear distinction between means and ends of economic policy. The emphasis falls on the ultimate objectives. A humanistic philosophy dominates according to which the achievement of the goals does not justify all means, especially those with a prohibitively high social price and curtailment of democracy.
It is important to be realistic. The initiation of accession negotiations is a major achievement. The negotiations however are only the first step to be followed by many and far more difficult ones on the way toward full membership. Negotiations may start and never end successfully, or may extend for many years if Bulgaria does not conduct genuine reforms; if sustainable and equitable growth is not achieved; if competitiveness and quality of life of the majority do not improve significantly.
Mr. G. Verheugen stated recently that Romania may need 20 years to meet accession criteria. This should be considered an implicit message to Bulgaria as well, since Romania is better in terms of GDP per capita (see Fig. 1). Turkey has been on the waiting list for 30 years although it outperforms Bulgaria in terms of this indicator.
It is important for the Bulgarians to be well informed. As stated above EU membership entails both benefits and responsibilities. It is not synonymous with free welfare. The better people are acquainted with the truth about the EU and the progress of accession negotiations, the more accurate will their knowledge about the Union be and the more realistic their expectations. The politicians and citizens of Bulgaria must be aware that there will be setbacks to adaptation, especially during the early stages of accession. These will, however, be problems of healthy development and not of stagnation.
Bulgaria will be attractive to the EU only when it has achieved a higher level of economic and social development. From a source of instability and problems it should transform itself into a reliable partner with prosperous people. Under such a situation the accession initiative may come from the EU. At present one cannot even dream of such a scenario for Bulgaria in the foreseeable and more distant future.
The economic criteria for EU accession boil down to development of a functioning market economy, capable of meeting the challenges of competition within the Union. The EU leaders were pragmatic enough when they set up the criteria in 1993. These criteria summarize all essentials of a modern market economy, without going into secondary details. At the same time the more general description offers more flexibility for interpretation to the stronger partner in the negotiations. It goes without saying that these interpretations are decisive for the negotiation outcome.
This is not surprising. Neither should one consider it a plot of the rich against the poor applicant countries. The EU is a community of advanced countries established to protect their interests. It would have been unusual had it not been so.
The applicant countries are aware of this and nevertheless are eager to join the Union. The initiative is ours and not theirs. EU member countries insist with good reasons that we adjust to them and not vice versa. The opposite would be in conflict with the logic of economic and social progress. It does not preclude elements of mutual enrichment in other areas, but this is not the most important! There will be a one-way transfer of values in the economic and social area prior to and after accession.
3. The Fundamental Philosophy of the European Union
The high quality of political, economic and social cohesion is a fundamental principle of the EU. This is inherent to each mature integration community, based on intra-industry trade exchanges at very high and sophisticated levels of production specialization. The more advanced the member countries the more efficient their economic relations are. There is no other equally homogeneous integration community in the world. The EU is the largest and the most sophisticated integration community in history.
A group of poor countries cannot make an efficient integration community. Neither can a combination of advanced and economically backward communities. They have nothing to exchange among themselves as they do not possess the most important prerequisites: a high level of economic and social development and mutual complementarity of their economies. There are numerous nominally existing integration communities among developing countries with intra-community trade of 3-5% of their total foreign trade. In the EU it is over 50%.
The disruption of EU cohesion will undermine its foundations. The premature accession of the CEE countries, of Turkey and other applicants may even destabilize it. This calls for caution on their part, which the applicant countries should understand since they would have done the same in their position. The reverse approach would be counterproductive for Europe.
Important changes could take place in the philosophy of the EU during the next years and decades. From a club of the rich it may evolve into a community of advanced and less advanced countries with weaker political, economic and social cohesion in the beginning. The most advanced countries will dominate and impose their standards of political, economic, social, ecological and other behaviour. With their impressive potential, with political, economic and social maturity the most advanced countries will be the driving force for the weaker members of the community.
This type of relationship can be useful if set and implemented through commonly agreed Community mechanisms and compromises meeting the interests of all member countries.
The most advanced countries should assume a larger financial burden by allocating more resources to the less advanced new Community members. The latter should use the resources rationally, combined with a full mobilization of domestic resources for development. If there are not sufficient domestic savings the external flows will cease.
Thus, following the initial deterioration, cohesion will improve gradually. In three to four or more decades the whole region will develop into the most advanced and maybe the largest integration community in the world. It will be one of the world centres of innovation and welfare, which will compete with others elsewhere in the world.
Such a fundamental reorientation is feasible if at least two prerequisites are met:
This would make possible a dispersion of political, economic, social and other shocks over time ensuing from disturbed cohesion. This in turn will make it easier for the EU to absorb the shocks. Some complications are possible, but they can be controlled. The Union has sufficiently powerful stabilizing mechanisms.
Such an evolution of the EU is favourable for the less advanced European countries during the next one to two decades and in the longer term, for Europe as a whole because:
This is easily said but extremely difficult to implement. It presupposes a radical change in the behaviour and value system not only of the governments and the peoples of the applicant countries but also of the EU member countries. This change will affect vital interests of the West European states and people who have achieved high political, economic, social, ecological and other standards through centuries long hard work and entrepreneurship. The attempts to explain their high quality of life with exploitation of colonial and other countries are primitive. If it were so Portugal, Spain, Russia and Turkey would have been among the most advanced countries in the world.
It will be very difficult, if at all possible, to convince the people of Western Europe of the necessity of such a change. Such a shift in resources may freeze or at best delay improvement of living standards for a decade or more in the name of solidarity with the new members of the Union. West Europeans may raise questions in defense of their interests and high living standards, which are difficult to answer.
The leaders of the EU member countries have to solve complex and delicate political, economic, social and other equations over the next years and decades. Issues, as difficult as the problems facing Bulgaria and other CEE applicant countries.
There are numerous and complex economic, social and other problems, which have accumulated over the years in Western Europe. They manifest themselves in high unemployment, low competitiveness, slow innovation, etc. Western Europe is lagging the United States in economic and technological dynamics. This confronts Europe with new problems exacerbating the existing ones.
Under these conditions it is not easy to request and receive hundreds of billions of US dollars from the EU to support the development of the new member countries over the next two or three decades. Even with the full awareness that the resources provided will accelerate overall European development during the next decades.
The above issues deserve thorough consideration by the big optimists in Bulgaria, who believe in the fast accession and count on abundant Western assistance. In spite of a domestic environment dominated by total economic and social chaos; 1.5 million hectares of fertile agricultural land (30% of the total) have been fallow for a decade; poor discipline; scandalous privatization; aggressive mediocrity and tolerance of crime and corruption prevail.
These phenomena are well known to Western Europe. The same Europe on which we count for generous assistance. Shouldn’t we consider whether we deserve it? Will the developed countries reward chaos, poor discipline, lack of hard work, wastage, corruption and crime? Where is the guarantee within such an environment, that the resources provided by the pre-accession funds will not land ultimately in somebody’s personal bank accounts? Nobody can provide such a guarantee in Bulgaria under the present circumstances!
4. A Functioning Market Economy
The first major economic requirement for EU accession is that аpplicant countries must have a functioning market economy. This presupposes:
This in turn calls for much better education and training systems, a new manner of life and work, more European rationality and less oriental emotionality.
The ideas that revising our laws along European standards will automatically transform us into a functioning market economy are very naive. The passage of modern laws is much easier than their strict enforcement, which requires a large number of other preconditions. Even more so that legal nihilism has long traditions and is deeply rooted in Bulgarian society.
Unlike modern machines and technologies the above listed skills cannot be imported from the advanced countries and installed in Bulgaria. They must be developed here with the available human resources, which may require decades and even generations to complete.
Bulgaria does not possess any of the above prerequisites. If one is to be precise, the country is only making the first steps in laying the foundations of a functioning market economy. Moreover, some of these foundations are not reliable.
One of the numerous examples is the emerging private sector with the active involvement of suspicious and in some cases quasi-criminal Bulgarian and foreign economic agents. A crony-capitalism is emerging in this country. This private sector has already demonstrated disloyalty to Bulgaria and more surprises are forthcoming. With such a private sector this country will have problems in facing the challenges of the new century.
The development of an efficient market economy, capable of facing the challenges of internal EU competition is a gigantic objective. This demands a comprehensive structural, technological and market modernization of the economy. In addition it calls for:
Bulgaria does not posses any of the above prerequisites. This is evident from the mediocre techno-economic quality of Bulgarian output. It is four-five times more energy intensive than in advanced countries. Labour productivity is five times lower, and total factor-productivity - six-seven times lower. Output quality is mediocre and production costs are high. Energy intensity of output should decrease and labour productivity – increase at least two to three times over the next 15-20 years. Production cost must be reduced while improving quality and meeting stringent ecology standards. In order to do so one needs huge national efforts and financial resources amounting to many tens of billions of US dollars.
The above also calls for a sharp improvement of skills and working discipline. These changes will require decades to complete. This will be very difficult considering that 48% of the population has a primary or lower education and is increasingly illiterate. At the same time the quality of education is deteriorating and emigration of dynamic young people is on the rise.
The financial system is primitive too. The relationships between the financial and corporate sectors are even more primitive. Bulgarian banks and non-banking financial institutions are a bleak resemblance of the same institutions in the advanced countries. The banks do not perform their raison d’etre – to be financial intermediaries. The Bulgarian financial sector is even more backward than the corporate sector.
Bulgaria lags dramatically in the development of a knowledge-based economy, the weightless economy, in the application of IT, etc. Governance at macro and corporate levels is poor.
The analysis of Bulgarian exports to the EU reveals the difficult journey before us in the development of a competitive economy. Exports by commodity groups are similar to the export structures of developing countries. Raw materials, primary processed and manufactured simple goods prevail, while the share of sophisticated manufactured goods is negligible (2 – 3%) unlike developed countries where these goods amount to 25-30-35% of exports.
The average export prices of Bulgarian goods to the EU by the two- and three-digit industrial classification are 2-2? times lower than export prices of CE countries to the same region and 5-6 times lower than the respective export prices of Swiss goods to the EU. Compared to the exports of CE countries to the EU Bulgarian exports to the EU are the most energy- and capital-intensive, with the lowest R&D intensity and content of skilled labour.
The Copenhagen criteria do not contain an overall quantitative indicator to assess the readiness of the applicant countries. This flexible approach has merits and shortcomings. Each of the negotiating parties will try to benefit from it. It is not difficult to predict who will succeed.
The above deliberations prove that the two most general criteria have to be disaggregated. On the basis of these economic, techno-economic, financial, social, institutional, ecological and other indicators one can derive an overall indicator for objective assessment of the readiness of the applicant countries.
This indicator is GDP per capita at PPP rates. It summarizes to a satisfactory extent all issues, which will be negotiated for accession. The indicator has shortcomings and has been criticized by economists and statisticians. The inadequate reflection of the social, ecological, humane, democratic and other values is one of its major deficiencies. However, no better alternative has been offered so far. Therefore, when one uses this indicator one should bear in mind its shortcomings and supplement it by more specific indicators.
Something else, which is very important. The analysis of a number of developed and developing countries confirms a high correlation between the development of a market economy and its competitiveness on the one hand, and GDP per capita on the other. The only exception are several oil-producing and exporting countries (Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, Oman, Brunei) and financial and commercial centres such as Hong Kong and Singapore. They have a high GDP per capita but do not possess complex, sophisticated and competitive market economies. In all of the other countries the availability of functioning markets and competitive economies boils down to high GDP per capita.
There is no country with GDP per capita of $12000 – 18000 at PPP rates without decently functioning markets and satisfactorily competitive economies. According to World Bank data for 1998 these are: South Korea – $12270, Chile – $12890, Greece – $13010, New Zealand – $15840, Spain – $16060, Portugal – $16380, Israel – $17310, Ireland –$18340.
All countries with GDP per capita of approximately $20000 or more at PPP rates have well-functioning market systems and competitive economies. According to World Bank data for 1998 these are: Sweden – $19480, Australia – $20130, Italy – $20200, Finland – $20270, UK – $20640, Germany – $20810, Netherlands – $21620, France – $22320, Austria – $22740, Japan – $23180, Belgium – $23480, Denmark – $23830, Canada – $24050, Norway – $24290, Switzerland – $26620, USA – $29340.
GDP per capita summarizes a large number of tangible and intangible factors. It is an overall quantitative measure of the political, economic, structural, technological, financial, social, institutional, legislative, ecological, scientific, educational and cultural development of a country.
Within the context of this worldwide background it would be baseless to claim, that Bulgaria has a functioning and competitive market economy with $4600 per capita at PPP rates and $1300 at market rates, or is expected to develop them within 10-15 and even 20 years! Bulgaria is very far away from being such an economy.
All reliable economic forecasts using this indicator place Bulgaria at the tail of EU applicant countries. Figure 1 presents a forecast until 2015 of the Vienna Institute for Comparative Economic Studies:
If GDP grows by 2% per annum in the EU and by 4% in Bulgaria and the other CEE countries at 1998 PPP rates, Bulgaria will achieve 32-33% of the EU level by 2015. In 1998 the least advanced EU members had: Greece 68%, Portugal 71%, Spain 78%. It is difficult to imagine Bulgaria as an EU member at this level of development. Neither is it possible to outpace some of the other applicants.
GDP per capita is an average statistical number. A society with moderate social stratification (such as the EU) and with social polarization (some countries of South America and Africa) could be behind the same number. Bulgaria belongs to the latter. The equal GDP per capita for countries with different patterns of income distribution does not mean that they are at the same level of socio-economic development.
The Bulgarian case deserves consideration from this point of view as well. The gap between the shares of the lowest and the highest decimal groups in income and consumption is increasing. From 22.8% in 1990 the Gini index rose to 39.0% in 1996, not including incomes from the shadow economy. If this sector were included the Gini index would be higher by several percentage points. The CSO did not publish data on this index for 1997 and 1998. There are reasons to expect that the index may have grown over the past three years.
It may be worth looking into some numbers, which disclose details behind the Gini index. 30% of the Bulgarian population has almost no contacts with the market. They subsist from their household output in kind as was the case half a century ago. The share of food, drinks and tobacco in total household expenditures is 50% in Bulgaria, compared to 38% in Greece, 19% in France, 17% in Germany and Austria.
Half of the Bulgarians cannot leave their settlement to visit another one for business or vacation. Not because of administrative constraints, but due to a lack of money to finance it. In this term the country is at 1930 levels. Only one percent of the people in the lowest decimal groups has been on holiday in the past five years. Only 3% of their children have access to computers. 57% believe that they are worse off compared to 1988-1989; 60% say that their living conditions deteriorated further during the past three years; 36% consider the reforms unbearable; 56% live in poverty or misery; 67% have no savings.
The EU member countries have a moderate income stratification, which is normal for the advanced market economies. With its increasing income polarization Bulgaria is moving away from their standards. A socially polarized state with the inherent social, political and ethnic tension would be a foreign body to the EU. These social dimensions may generate additional obstacles to Bulgarian accession to the EU.
Therefore Bulgaria must strive not only to higher GDP per capita but also to equitable income distribution. Equitable does not mean egalitarian, as it was under totalitarian state socialism. Under equitable one has in mind the existing pattern of distribution in Western Europe.
Those who have the courage to integrate us soon in the EU with its present philosophy must be ready to pay a high price. If the EU goes ahead with internal reforms and curtails the resources for the CAP, the structural, regional, cohesion, social and other funds used to support the less advanced members (which is very likely), the issue may arise for some applicant countries whether it is worth joining the Community.
An answer to this question can be given only after completion of the internal reforms of the EU. It is well known that there will be no enlargement before finalization of these reforms, scheduled for completion by the end of 2002. They may take even longer.
On the basis of the available information and bearing in mind the growing speed of globalization it is difficult to foresee a rational alternative for Bulgaria outside the EU. It is almost certain that as a future member of the community Bulgaria will receive much less from the CAP, structural, regional and other funds compared to what Greece, Spain, Portugal and Ireland receive now. However the national interests of Bulgaria will be better protected as EU member.
7. Possible Economic Trajectories
In 1998 Bulgarian GDP per capita at PPP rates was $4600 and more than $20000 for the EU. Bulgaria has no chances for accession at a GDP per capita that is five times lower than the EU average. The gap must be reduced substantially. This is possible only through a higher GDP growth rate compared to the EU. In Figure 2 one can see four scenarios of long-term GDP growth in Bulgaria (3.5%, 4.0%, 4.5%, 5.0%) at 2.0% GDP growth in the EU and the relative levels attainable during the next decades at constant PPP rates.
At a high mobilization of national resources and a favourable domestic and external economic environment the most likely average annual GDP growth rate during the next 20-30 years is 3.5-4.0%. This would be a great achievement for Bulgaria. For the past 30 years (1967-1996) the average annual GDP growth rate in Greece was 3.48% and in Spain 3.40%.
Under an exceptionally high mobilization of national resources, outstanding domestic economic rationality and an ideal external economic environment one could count on a growth rate of 4.5%. Such a favourable combination is however unlikely. During 1967-1996 the fastest growing European economies achieved: Portugal – 4.22% and Ireland – 4.73%. The average annual GDP growth rate during the past 20 years (1980-1999) was: in the advanced countries – 2.4%, the EU – 2.15%, Asia (excluding China and India) – 4.8%, the Middle East – 3.0%, Latin America – 2.7%.
Therefore a lasting growth of 4.5% is not likely, while 5% is impossible in Bulgaria. If no other European country has achieved such a growth rate over the past 20-30 years there are no grounds to believe that Bulgaria will be the pioneer. The post-war development of the economy, the ongoing deep recession and the poor shape of the driving forces of economic growth are reasonable grounds to expect that 4.5 – 5.0% average lasting GDP growth is an overoptimistic assumption.
It follows from the above that Bulgaria has no chance for a substantial reduction of the gap with the EU measured by GDP per capita during the next 25-30 years. One can expect accession to the EU only after considerable modification of the criteria and fundamental internal changes in the Community. This would however not be the EU we know now and to which we are striving. Reallocating resources to new members would reduce the funds available for the less advanced present members of the Community. Greece, Portugal, Ireland and Spain and along the CAP and regional funds - other member countries would hardly accept such a reallocation!
If the EU decides to retain the rules for the funds allocated by the Community and apply them for the new members one must increase the payments of the net contributors to the Union’s budget – Germany, Austria, Denmark and others. Their reaction is categorically negative and will probably remain so. The resistance of the people from these countries against higher contributions is strong. Given an unfavorable domestic situation (high unemployment, income stagnation, etc.) it may even increase. The governments of these countries cannot afford to neglect public sentiment.
8. What is Necessary for a Lasting Growth of 4%?
A complete mobilization of all human, entrepreneurial, institutional, governance, material and other resources is necessary. I will confine myself briefly only to some of them from a macroeconomic point of view.
World experience confirms that other things equal, higher saving and investment rates are a prerequisites for higher growth. For the 30 year period 1967-1996 the average annual investment rate was 38.1% in Singapore, 32.0% in Japan, 30.6% in South Korea, 30.5% in Thailand, 28.0% in Cyprus, 27.4% in Portugal, etc. These countries maintained the highest GDP growth rates.
According to my assessment, in order to achieve a growth rate of 4% during the next 20 years Bulgaria needs an investment rate of 24-25% in 2001-2005, 28% in 2006-2010, and 30-31% in 2011-2020 at low ICORs - between 4.5 and 5.5. The quality of the saving and investment rates should be much better than the present one. The prevailing part should come from domestic saving and 15-17% from external saving (see Fig. 3).
At higher ICORs one needs higher saving and investment rates for the maintenance of the same growth rates. This will increase the economic and social burden.
Positive surprises are possible as a result of the expected impressive development of information and other technologies over the next decades. In this case however the most advanced countries will benefit faster and at a larger scale. This may even contribute toward broadening the gap between them and less developed countries such as Bulgaria.
Employment will have a limited role for future economic growth due to the deteriorating demographic crisis in Bulgaria. Growing employment will contribute to GDP growth only in 2001-2005 if registered unemployment is reduced from the present 16% (12.2% at the end of 1998) to 5-7% by 2005-2006 and stabilize around 4-5% by 2020. During the second five years and especially during the second decade of the new century the manpower drain will suppress economic growth even stronger (see Fig. 4a). This will be due to fast aging of the population, a low birth rate, high mortality rate and a large emigration of industrious young people. These trends have persisted for 15-20 years in this country and their intensity will probably increase during the next years and decades due, among other things, to inappropriate transition policies. If macroeconomic policies improve the negative consequences of the demographic crisis could be slightly alleviated.
The negative effects of the demographic crisis can be neutralized only by higher total factor productivity. This is achievable through radical structural, technological and market modernization of the economy; efficient macroeconomic, institutional and social policies; improved governance at all levels; more active European economic integration; substantial improvement of the quality of manpower.
According to the high scenario, total factor productivity will be the major factor of economic growth over the next 20 years. Productivity will be high over the next five years due to the reintegration of idle resources in economic activity – manpower, land, equipment. This growth will be achieved with low ICORs. During 2006-2010 total factor productivity will decline due to the exhaustion of extensive recourses (land, manpower) and still insufficiently strong intensive resources – information and other technologies.
During the second decade one can expect a new boost to total factor productivity owing to modern technologies, growing integration into Europe, more rational macroeconomic and structural policies, higher-skilled manpower, bottoming out of emigration of young people. If implemented this will compensate, albeit not completely, for the loss of growth from reduced manpower and will contribute to an annual average GDP growth rate of 4% for the whole period (see Fig.4a).
A low scenario is also possible. The deteriorating demographic crisis and the massive emigration may suppress growth more strongly by deducting between 0.6 and 0.9 percentage points on average per annum. An unfavourable domestic environment, insufficiently rational investment, technology, educational and R&D policies; a weak inflow of FDI, a complicated external economic environment may contribute to a decline of total factor productivity and lower saving and investment rates. The overall effect will be lower GDP growth – a 3.0 – 3.2% average annual rate for 2001-2020 (see Fig 4b).
9. Bulgaria faces Difficult Negotiations
Difficult and lengthy accession negotiations with the EU are forthcoming. Even if they are not conducted simultaneously for the 31 issues, but only for a half or a quarter of them, the negotiations will be difficult for two reasons:
First. Bulgaria will be negotiating from a weak position since the country is far removed from a functioning and competitive market economy. As stated above one needs huge efforts, enormous resources and many years to meet the disaggregated Copenhagen criteria.
Second. The people who will conduct accession negotiations on behalf of Bulgaria are weak professionals with weak language proficiency. Between 800 and 1000 professionals will be directly involved in the negotiations on various subjects and at various levels during the coming years. Along with those indirectly involved they will be several thousand. The success of the negotiations will also depend on the capabilities of these experts.
Bulgaria does not have sufficient skilled experts. To the extent it has them they are not in the public administration, because this staff is recruited on the basis of political and personal loyalty and not on professional grounds. They will not be equals to the EU negotiators. The weak Bulgarian negotiators will hardly succeed in submitting and defending the few strengths of Bulgaria as an applicant. It will be even more difficult to negotiate appropriate transitional terms to soften the shocks of adaptation to the stringent regime of the EU at the initial stage prior to and immediately after accession.
The ten years of negotiation experience with the World Bank and the IMF are very instructive in this respect. IMF and World Bank staff drafted all Bulgarian agreements with these institutions. Bulgarian experts only commented and as a rule accepted the readily available texts and the authorized Bulgarian politicians signed them. The Bulgarian people of course were never told the truth.
The scale, the implications of the agreed terms, the skills required by the negotiators and the responsibility to Bulgaria will be much greater in the accession negotiations. The price of possible mistakes will be far larger and will have long-term implications.
10. Utilization of Bulgaria’s Intellectual Potential
The preparation of the experts for accession negotiations should have begun long ago. This was not done. The new situation calls for immediate measures to pull together the modest intellectual potential of the country for the best possible preparation of our positions, their presentation and substantiation at the negotiations.
One should utilize the potential of the Bulgarian scientists during the years of negotiations along with experts from the public administration, the business community, the trade unions and the NGO. Many public research institutions should reorient their activities to provide substantive support to the negotiations. This activity should be coordinated by the government institution in charge of the accession negotiations. One should properly define the responsibility of the research institutions in terms of nature, scope, scale, financing, deadlines, responsibilities, etc.
The most important task of the scientists from the Bulgarian Academy of Sciences and from the Universities is to contribute to faster development of the country over the coming years and decades and successful accession negotiations.
11. The Catalytic Role of Accession Negotiations
In addition to their main objective the accession negotiations will also serve as a training ground for Bulgarian politicians and experts. They will differ from normal negotiations between equal partners. The negotiators from the EU will put forward demands to the Bulgarian side for achievement of higher political, economic, social, institutional, legal, educational, sanitary, ecological and other standards in line with EU standards. The achievement or not of these standards will not be negotiable. Neither will their modification by applicants. These standards are compulsory for all member countries and must remain such.
The subject matter of negotiations will be the speed of achieving the EU standards. It will comprise the necessary transition phases, expertise, training and financial assistance from the EU, specific measures to be taken by the Bulgarian side, deadlines, etc.
Accession negotiations will be an instrument for constructive pressure and will accelerate improvement of macroeconomic policies and instruments. The EU negotiators will demand specific action on macroeconomic, structural, social, institutional, educational, scientific, healthcare, infrastructural, regional, ecological and other policies in great details. They will be submitting specific recommendations on restructuring, technologic and organizational modernization of the corporate sector and improvement of its governance. The same will apply to the financial sector (budget, banks, non-banking financial institutions, financial markets, balance of payments, public debt), education, healthcare system, R&D, central and local administration, improvement of sanitary, living and working conditions, environment protection, combating crime and corruption.
Accession negotiations will last as long as needed to implement the EU recommendations. It is not simply a matter of agreeing that something should be done. This is the easiest part of the undertaking. The key word for the negotiations will be action and not promises. The agreement between EU and Bulgaria may be formalized within a year, but its implementation may take 20 years. Negotiations will go on until after the agreed measures were implemented and the respective EU standards achieved by the applicant countries.
The EU negotiators will certainly pay special attention to social policy, including equitable income distribution and limitation of poverty. As stated above the social landscape of Bulgaria today is in stark contrast with that in the EU. If the trends of the past ten years continue the contrasts will become more pronounced. The EU negotiators will hardly accept these trends. They will probably insist on a modification of the present neoliberal policy and a more active social policy, leading to a moderate income stratification inherent to West European countries.
Therefore in the social area Bulgaria has to solve equally complex issues as those in the economy. Without the resolution of the social problems one may achieve short-term growth but not development. What matters for Bulgaria today is development and not growth as an end in itself. Moreover, sustainable high-quality growth is not possible without solid social foundations.
The past decade confirmed that Bulgarian authorities did not embark on comprehensive reforms without consistent external pressure and even close supervision. By adding EU expert assistance, training and financial support from the pre-accession funds the positive impact of cooperation with the Community will be felt soon and will last as long as the accession negotiations, and afterwards - during membership.
The availability of a timetable for accession negotiations will have a mobilizing effect on Bulgaria for speedy reforms and more economic rationality over the next years. The simultaneous accession negotiations with other applicant countries will introduce additional motivation and expediency to avoid being last again. This environment will contribute toward reducing to a minimum the traditional inclinations for delaying work for tomorrow, inherent in our national psychology. The EU negotiators will keep pushing for action.
One of the most important objectives of Bulgaria over the coming years will be to derive a maximum benefit during the pre-accession period by speeding up economic and social development and negotiate appropriate adaptation terms for the transition period after accession.
12. The EU Negotiations and the Relationship with the IMF
The accession negotiations will be the beginning of the end of IMF guardianship over Bulgarian economic policy. The IMF will be replaced by the EU during the coming years. There will most likely be no more stand-by agreements with the IMF. The on going three-year agreement might be the last one. Only a delay of accession negotiations on financial and macroeconomic issues may extend the active presence of the IMF in Bulgaria.
It would be impossible to maintain the present type of relations with the IMF, while carrying large-scale comprehensive negotiations with the EU, both on conceptual and technical grounds. If such parallel relations coexist differences may emerge between the specific requirements of the two institutions, addressed to Bulgaria. It is sufficient to look into the economic and social philosophies and the current policies of the two institutions to identify important divergences between them. Whose views should Bulgaria listen to and implement in such cases? I believe – those of the EU. The opposite will be illogical and will amount to a violation of fundamental principles of the Community.
Unlike the IMF, EU guidance will be strategic, more complex and constructive. It will be supported by competent expertise and important financial assistance as grants from the pre-accession funds, not credits as it has always been with the IMF and the World Bank. There will be more continuity between the various pre- and post- accesssion stages. There will also be tactical objectives and properly sequenced strategic goals and priorities. This relationship will be more helpful to Bulgaria. It will predetermine the overall development of the country within the framework of United Europe for decades to come.
The economic and social policy concepts of the IMF differ substantially from those of the EU. The IMF imposed upon Bulgaria monetary, fiscal, foreign exchange, foreign trade, income, customs, social and other policies of a North American type within the context of the Washington Consensus. The ten years of transition have proven that IMF policies were not appropriate to Bulgaria and the other CEE countries. In his opening address at the annual IMF/World bank meeting on 28 September 1999 Mr. M. Camdessus stated that the Fund has underestimated the social aspects of development in the emerging market economies and promised important adjustments together with the World Bank.
The historic traditions and present realities in Western Europe are closer to those of CEE, than are the North American ones, which dominate the policy concept of the IMF. One can therefore expect a better understanding of the problems of Bulgaria from the EU than from the IMF.
The above arguments provide ground for two important conclusions:
First. The economic policy-making of Bulgaria will move from Washington to Brussels. It was displanted from Sofia long ago. This policy must increasingly fit the rules, standards and objectives of EU policy-making. Bulgaria will have to give up traditional (already obsolete) understandings of national sovereignty and adopt the modern values of European integration and globalization. This is an objective process, which nobody can ignore. Even less so a small and weak country like Bulgaria. Any attempt to resist this trend is doomed to a failure. Such attempts would only divert national energy in a destructive direction. It does not serve our national interests.
Second. There will be much more continuity in the economic (and any other) policy of Bulgaria. Future post-election changes of governments should not affect the most important principles of economic (and any other) policy. All future governments must stick to the strategic logic and continuity for the sake of faster achievement of accession criteria. Future governments prior to and after accession must strictly adhere to all commitments in accession negotiations.
The present and future EU decisions will be valid for all member countries and not for Bulgaria alone as has been the case in the relations with the IMF. One can expect that EU decisions will be better substantiated and more balanced due to the participation of many competent experts from all member countries. This will be beneficial for Bulgaria. This was not the case in Bulgaria / IMF relationship. All important and even less important economic policy parameters were been imposed upon Bulgaria under the cover of the so called “conditionality” for financial support. The weak Bulgarian negotiators also contributed to this end.
Under the new conditions there will be a constant struggle for compromises, where the largest countries will be better placed, especially under the new decision-making mechanisms. The strength of the arguments, however, will also be critical. Strong arguments are not necessarily a monopoly of the big countries. The smaller EU member countries can use their intellectual potential, particularly if they work together united by common interests. This, however, requires that Bulgaria pull together its intellectual elite in the negotiation teams, rather than civil servants recruited for party and personal loyalty.
Under this new decision-making environment prerequisites will emerge for better macro- and microeconomic discipline, more rational economic and social behaviour. Bulgarian economic policy will be placed in the constructive straitjacket of EU economic policy. This would reduce opportunities for hesitation and mistakes stemming from incompetent or vested interest behaviour. Any deviation from such behaviour by future Bulgarian governments may have unfavourable consequences for the negotiations and on accession itself.
EU membership does not mean equally successful development of all member countries, despite jointly developed policy in Brussels. The outcome will be dependent on appropriate implementation of these policies in the respective countries and their capabilities to boost the working, entrepreneurial and innovative energy of their people.
Bulgaria is too small and weak to behave too independently in the negotiations and later on as a member of the community. Even the big member countries cannot afford to do so because there are efficient mechanisms for preventing violation of the common rules. The Bulgarian national economic policy will be confined to implementation of the common economic policy, adopted in Brussels in our specific economic, social and other conditions.
he differences among future Bulgarian governments will be manifested mainly in their competence in conducting accession negotiations and protecting national interests. And most importantly – in the efficiency in applying the jointly agreed economic and other policies for acceleration of development and improving the quality of life of our citizens.
As stated above, accession negotiations will be long and difficult,. They provide ample opportunities for vision and creativity of future Bulgarian governments. For vision and creativity combined with continuity. It would be inadmissible if any new Bulgarian government attempts to revise commitments made by its predecessors.
It is widely held that the invitation by the EU to Bulgaria for accession negotiations is the first and the most difficult step toward Union membership. This is not true. There are many and far more difficult steps along this journey. The negotiations may start and be unsuccessful if we don’t do our homework – to put the country in order and create an environment for hard work and innovation. Not in order to please anybody, but to improve our life. EU membership should be a product rather than a prerequisite for our successful development. The more people grasp this now, the sooner will Bulgaria be ready for accession.
One should also be prepared for another, though less desirable and less likely alternative. After prolonged and painful negotiations, which may last 10-15 years or more we might be told that one doesn’t need to be a member of the EU in order to be European. The EU Commissioner for external relations Chris Patten said so recently. If Switzerland and Norway can afford it, this can hardly hold true for Bulgaria!
If one comes to such an end future analysts will probably put the blame on Sofia and not on Brussels. And they may be right if Bulgarian economic and other policies continue as they have been over the past ten years. For the time being I consider this scenario less likely.
A comprehensive internal reform of the EU, combined with a modification of the Copenhagen criteria and supported by a full mobilization of the constructive energy of Bulgaria could produce a modified EU membership (with a large number of transitional arrangements) by 2010 – 2015. This might be followed by full-fledged membership (assuming all rights and responsibilities by 2020 – 2025).
Sofia, January 2000