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Research Article

The Bulgarian Economic Growth and Transition Project



Executive 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, 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 would present a comprehensive written report to the newly-elected government that fall.

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

Dr. Hill is professor of economics at Wheaton College and a free-market environmentalist, a field he describes as “looking at environmental problems through the lense 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 Orange Company, was known for fighting against subsidies and marketing orders in addition to possessing a practical knowledge of agriculture desired by the NCF. [DT: Add mention of Carl Pescosolido’s death in 1992?]

The Environment

In his report, Hill analyzes 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 industrial emissions. Hill identifies three major factors:

  • Due to a lack of 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 production 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, 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 is to create and enforce private property rights, which will generate accountability and reduce environmental damage that comes with the overuse of common property.

Agriculture

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

  • Returning land to its pre-regime owners through a process of restitution designed to limit corruption

  • Selling land, machinery, and livestock through bidding, with scheduled payments to go to the original owners

  • Cutting price controls of all agricultural outputs and inputs

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

Speaking recently, Dr. Hill recalls the inadequacies of the farm cooperatives that predominated the sector from 1945–1989: “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 government in late 1990. According to Dr. Rahn, “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 free market economy, Bulgaria has benefited from its currency board system, introduced in 1997. The agriculture sector has also been highly privatized. “Property rights are well established,” continues Dr. Rahn. “The tax reform process has been ongoing, and two years ago they put in a 10 percent flat tax based on personal and corporate income. Inflation has been relatively low because of the currency board. They’ve been making considerable progress over the years.”



NATIONAL CHAMBER FOUNDATION

A Proposal for a Bulgarian Economic Growth and Transition Project

June, 1990

Introduction

At the request of the Government of Bulgaria, the National Chamber Foundation (NCF) proposes to conduct 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 will be 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.

Last November, 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 has been endorsed by all of the major political parties. Parliamentary elections are scheduled for June 10, with run-offs on June 17, 1990. Some important economic reforms have already been made, including edicts on the right to own property and to allow foreign investment. Much more remains 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 has 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 will be produced and published, and distributed in Bulgaria and the United States.

Plan of Study

Structure of the Mission: To conduct the study, the NCF will select and invite, in consultation with the Government of Bulgaria, a team of experts drawn from U.S. economic research organizations and businesses. Team members will be selected for their expertise in areas of importance to the Bulgarian reform process and will make at least one visit to Bulgaria with the rest of the Mission. The Government of Bulgaria will arrange 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 should require no more than five days and will take place in late August 1990. During the visit, team experts will consult 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 is properly focused and coordinated.

Upon return to the U.S., team members will prepare a first draft of their written report. These reports will be edited by NCF staff and/or NCF contractors, in consultation with representatives from Bulgaria. A review meeting will be held in Washington to allow all team members to meet with representatives from Bulgaria to review the initial findings and make comments. The report will be released in Washington and at a major conference in Bulgaria with team members in attendance to make brief presentations and answer questions.

Proposed 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 visits Bulgaria to meet with Bulgarian experts and to collect information.

D. September 10: First drafts of chapters in Sections II and III are written and submitted by U.S. team members, reviewed by NCF staff/contractors, and rewritten as needed.

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

F. October 1–3: Final meeting 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 will be followed immediately by a major conference in Sofia where members of the team will present and discuss 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 will meet 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 will be 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 will consist of nearly two dozen chapters compiled into four main sections. Section I will consist of three chapters—an introduction which describes the structure and purpose of the mission, a lengthy chapter describing the background and current situation of the Bulgarian economy, including all of the relevant institutional arrangements, and a chapter which discusses the reform process to date, including the recommendations of the government/opposition roundtable. Representatives of the Government of Bulgaria will provide necessary materials for these chapters which will be compiled and edited by the NCF.

Sections II and III will comprise the main body of the report and will include nineteen chapters covering public policies and specific economic sectors essential to a successful transition. Section II will discuss the necessary institutional changes that will have to be made to foster and encourage a productive market economy. Section III will focus on issues that relate to specific industries that are of interest to Bulgaria.

The first chapter of Section II will be a broad overview on the market process and how it functions to create jobs and rising living standards. Included in this chapter will be a discussion of deregulation, flexible prices, open trading, and the importance of minimizing government intrusion. This chapter will be prepared by NCF staff and will set the stage for the dozen or more chapters that will follow in this and Section III, each of which will be completed by a member of the team drawn from U.S. research organizations or businesses. Specific chapter subjects in Section II should include: 2.) Tax reform; 3.) Monetary and financial reform, with separate subsections on monetary reform, with additional emphasis on effective anti-inflation problems, currency convertibility, banking/intermediation, foreign debt relief, and capital markets, each to be done by separate individuals working in cooperation; 4.) Privatization; 5.) Creating the proper accounting system; 6.) Establishing and maintaining a commercial code, property rights, and joint ventures with foreign firms; 7.) Creating 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.) The development of a social welfare system that provides for those in need while providing the proper incentives for work, saving, and investment. This chapter will cover such topics as health care, unemployment compensation, retirement programs, welfare for the indigent, and redeployment of redundant labor. 10.) The final chapter in this section will make 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 will include chapters which review and recommend reforms in specific industries that the Bulgarians deem essential to their economic development. These are 11.) Telecommunications; 12.) Agriculture policies, food processing, and agro-based industries; 13.) Transportation; 14.) Energy/Chemicals; 15.) Insurance; 16.) Tourism; 17.) Heavy Engineering; 18.) Electronics; and 19.) Light Industry. All chapters in Sections II and III will follow similar formats. They will begin by describing the situation in Bulgaria for that particular industry, describe reforms now underway, and then offer 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, will include two chapters, the first of which will be a summary of the report’s findings and recommendations, including the pros and cons of alternative policies. The second (and last) chapter will review both the reform experiences in Poland, Hungary, and Yugoslavia to draw lessons that Bulgaria might learn from as it begins the reform process that others have already embarked upon, as well as the experiences of the successful newly industrialized countries (NICs) in Asia which have made dramatic gains in economic growth and competitiveness over the past two decades. This chapter will also cover 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. This will be done by NCF staff or by an NCF contractor.

Financing the Mission: The NCF expects to fund the costs associated with the field visits, contractors, printing, and distribution by way of contributions from the American corporations that will be members of the team. More than a dozen team members will be drawn from American businesses which will help fund the study, produce the individual chapters, and pay their transportation costs for the study mission and the September presentation. The Bulgarian Government has agreed to cover all of the in-country expenses, including meals, lodging, and local transportation.



The Environment

by

Peter J. Hill

Executive Summary

Environmental problems loom large in Bulgaria. However, it is difficult to know just which reform measures to suggest because the centrally planned economy of the past exacerbated the environmental difficulties.

There are three reasons why the old system led to substantial ecological problems. The lack of free press meant that information was difficult to come by and government officials were not held accountable for their actions. The absence of private property rights made it easier for pollution to occur because no one had an enforceable claim when resources were despoiled. Finally, the subsidization of certain heavy industries furthered pollution. As each of these problems is remedied, Bulgaria should see an improvement in the environment.

However, not all environmental problems will be solved by the proposed economic reforms, so a structure is needed for dealing with remaining difficulties. Seeing pollution as a property rights problem is a necessary first step. Common property is always overused; ecological difficulties arise because of the absence of private property rights. Therefore, reform measures should be directed at better defining and enforcing property rights. People need to be held accountable for their actions and private property rights do that.

Where property rights are absent, as is often the case with air and water, government needs to take steps to allow rights to be created within those resources. These rights need to be transferable so markets can develop and the optimal amount of pollution can be determined through the interaction of producers and consumers.


I. Statement of the Problem

Bulgaria faces immense environmental problems. By one estimate, 85 percent of river water is polluted with industrial waste and 70 percent of farmland has been damaged by industrial emissions. There is a significant amount of air pollution, and in some areas the emissions from factories are significant enough to cause both short-term and long-term health problems. Environmental problems in Bulgaria have been exacerbated by the rapid move to industrialization over the last several decades, particularly through the use of large-scale smelters, refineries, and factories.

However, some of the pollution problems are not because of internal production conditions; in one instance, a Romanian factory on the Bulgarian border is responsible for significant pollution in Bulgaria. Also, irresponsible actions in other countries have contributed to danger from nuclear radiation. For instance, the Chernobyl incident in the Soviet Union created potentially significant health problems in Bulgaria. The high level of pollution and other environmental problems in Bulgaria have created a significant outcry by the Bulgarian citizens and have been an important impetus for economic and political reform.


II. The Necessity of Reform

Despite the massive environmental problems facing Bulgaria, there is considerable hope for improvement in the future. Bulgaria, like other Eastern European countries, faces far worse pollution problems than other industrialized countries in Western Europe and North America. Because the Eastern European societies are changing rather rapidly and are looking more like the democratic, market societies of Western Europe, the U.S., and Canada, there is a good chance that a significant proportion of the pollution problem will be ameliorated in the process.

Therefore, it is somewhat difficult to know how many environmental reforms should be put in place immediately and how many should wait until the economy has undergone the transformation foreseen over the next year or two. Although the Bulgarian people have good reason to be deeply concerned about the level of pollution that they face, some patience may be necessary as economic and political reforms will change some of the environmental conditions rather dramatically.

There are three basic reasons why a centrally planned economy, as Bulgaria was for the last forty-five years, is likely to face significant environmental problems. First, such economies rarely have a freely functioning press that provides good information to the population about environmental problems and also brings pressure to bear upon governmental officials. Also, in the Eastern European economies, governmental officials have been reluctant to release information about existing environmental difficulties and, in fact, have repeatedly lied about pollution and health problems. The recent move to democracy in Bulgaria will make government bureaucrats much more accountable to the population, and the development of a free press has been and will continue to be an important contributor to the process of understanding and dealing with pollution.

Second, Bulgaria has chosen to subsidize some of the most polluting forms of industrial production and, in fact, its heaviest subsidies have gone into some areas where the most significant environmental difficulties have occurred. Mining and nonferrous metals are the source of some of the worst environmental problems in Bulgaria, and these have had some of the largest subsidies from the government. If Bulgaria moves to a truly free market economy where production is not subsidized and prices reflect economic reality, many of the worst environmental offenders will be eliminated by market forces.

Third, the fact that Bulgaria has been governed by an ideology that has denied the importance of private property has significantly exacerbated environmental difficulties. Private property rights are at the heart of a solution to the environmental crisis and are important mechanisms for holding people accountable for their actions and for offering rewards for sound environmental stewardship. For instance, under a regime of private property the owners of mines and oil wells recognize that the resale value of their property declines as they deplete their resources. This is especially the case in a world where future resource prices are expected to increase. In such a situation the too-rapid use of resources faces property owners with a significant decrease in their wealth, and they are much less likely to waste those resources when not under a system where their wealth is not connected to the rate of use.

The disposing of waste is also much easier in a world where no one owns resources since there is nobody that can claim harm under the legal system. It is true that in the centrally planned economies government officials were charged with protecting the national interest, which supposedly included environmental quality. However, bureaucratic incentives are such that more often than not the government officials maximized their job security and income by producing as much as possible and by ignoring environmental problems. Again, as Bulgaria privatizes the ownership of resources, a means of securing environmental protection will be in place.


III. Reforms to Date

A considerable part of the original pressure for political change in Bulgaria was due to concern for environmental problems. The environmental movement has been responsible for slowing down or stopping certain government policies that promised significant environmental damage. The government has also promised to close some of the worse polluting plants in the next year or two. However, much more needs to be done to secure environmental quality for all Bulgarian citizens.


IV. Options for Reform

Because of the dramatic political and economic changes taking place in Bulgaria at the present time, it is difficult to also institute major new environmental policies. As suggested above, the development of a free press, the removal of subsidies for certain types of production, and the privatization of the ownership of resources are all things that will lead to greater environmental quality. Nevertheless, one needs a framework for thinking about the pollution problems that will continue to exist. The economic reforms that are being proposed in other sections of this report will not solve all environmental problems, so additional measures will be necessary.

Pollution is most appropriately viewed as a cost imposed upon others without their willing consent. Many actions entail costs, but what distinguishes polluting actions from others is that the people who bear the cost do so without giving their permission. For instance, if a factory purchases iron ore for use in its production process, it is imposing a cost upon society in that those materials are not available for alternative uses. However, under a regime of private property those materials will only flow to the factory if the factory owners adequately compensate the resource owners. The cost is not imposed unwillingly on those that own the resources. In contrast, however, the factory can put effluent out of its smokestack, and this is deposited in the air or on the soil downwind. Using the air as a waste disposal medium imposes a cost save on people in the way that using a resource in production does. However, these costs are not willingly born by the people downwind; they did not give their consent to having the pollutant in their air or on their soil.

It is because of the differences in the property rights structure that the using of iron ore is not defined as pollution while using the air is. It is the lack of well-defined and enforced property rights that allows the factory to pour its waste products into the air without securing consent of those downwind. In contrast, because property rights are defined, enforced, and transferable, the factory adequately compensates the owners of the iron ore. It is in this sense that it can be said that all pollution problems are property rights problems.

Sometimes the term “common property” is used to refer to the resources that are owned in common, meaning by a large group or by the society as a whole. The seminal treatment of the common property problem is Garrett Hardin’s 1968 article in Science, “The Tragedy of the Commons.”1 Since then, a large literature has developed on the problem of “the tragedy of the commons,” but they all lead inexorably to the same conclusion that if property rights are not well established, overexploitation of the resources will occur. In a very real sense the severe pollution problems of the Soviet Union and Eastern European countries are a prime example of this phenomenon.2

The statement of the problem in this way is also very helpful because it focuses on the appropriate types of reforms that are necessary to secure environmental quality. Since pollution occurs when property rights are not well-defined and enforced, reform efforts should focus on defining rights when they do not exist, on enforcing those rights where they are presently poorly enforced, and on allowing for the transferability of those rights so that resources can flow to their highest valued use. The present efforts to privatize the productive resources in the Bulgarian economy are a move in the right direction. However, some innovative reforms will be necessary to solve some environmental problems because in several areas property rights are not traditionally defined or the cost of definition or enforcement can be quite high.

Air and water are the two resources that face the most significant environmental problems because both have traditionally been a part of the commons. However, in both cases there are ways of moving closer to a system of private property rights that hold decision makers accountable. If property rights were established for current users of water, then they would have a basis for action against a polluter. Two examples would be for municipalities to have property rights in their drinking water and farmers in their irrigation water.

Even in the case of fishing, rights can be established. For instance, in Great Britain many fishing clubs have property rights in streams and reservoirs.3 Because the members of the clubs care about quality fishing, they also care about pollution. The legal system allows people to sue when damages can be proven and has proved to be a ready defense against pollution. In fact, the quality of the fishing streams in England and Scotland is superior to that of many other Western economies where the water is owned by the government.

It is also important in cases like this to have the property rights to water transferable so that if the higher valued use is as a carrier of some pollution, such a transaction can occur. If a factory wishes to pollute a stream that is owned by a fishing club or another recreational entity, it can purchase the rights to put a certain amount of effluent in the water. However, under a regime of well-defined and enforced property rights no costs are imposed upon people without their willing consent; therefore pollution does not exist. Just as the owner of iron ore can sell that product to a factory, the owners of water can sell the right to use that water as a waste disposal facility.

The above scenario has several distinct advantages over other public policies alternatives. In policy discussions it is usually assumed that only either/or solutions are possible. Either the polluters get their way and can foul the air and water to the extent that they want, or the environmentalists get their way and zero pollution is allowed. Reasonable people find both solutions unacceptable since pollution is a significant problem, but a world of zero pollution is unthinkable in modern, industrial economies. A system of well-defined and enforced property rights allows one to escape the dilemma. If water in the above example is of more value in a highly pristine, completely pure state, then the factory will not be allowed to pollute at all. In that case the consumers have spoken; the river is truly in its highest and best use with zero pollution in it. In many cases, however, such a solution is not likely to occur.

Removing some pollutants from the discharge of the factory is usually not terribly expensive and, when faced with the alternative of buying the rights to pollute downstream, the owners of the factory will choose instead to clean up. However, getting rid of every last bit of pollutant can be quite expensive, and at that point the factory might choose to purchase some pollution rights from downstream owners. In such cases the mutually agreed upon solution is satisfactory to both the factory owners and the people that have the rights to the water. The solution is also optimal for society. The other development that occurs under such a situation is that some streams may maintain an absolutely pure level of water quality and others may gradually accept more effluents. Again, if property rights are well defined and enforced, such an occurrence does not represent a problem to society.

It is also important to note that under a system of well-defined and enforced property rights, liability laws must be in place. These allow property owners to use the courts to seek redress when their property rights are violated. Thus, those people that face significant health problems from a polluting factory would have a claim in the courts for either monetary compensation or having the polluting stopped. Since compensating for major health damages is very expensive, it is likely that in most cases the business or person that is the source of pollution would choose to stop rather than to pay damages.

Because of its transitory nature, air is one of the more difficult resources in which to establish property rights.4 A well-functioning liability law solves some of the problems. However, when the source of pollution cannot be proven beyond a reasonable doubt or when there are numerous polluters, such a solution may not prove satisfactory. In such cases, using the property rights paradigm can be very helpful in ameliorating these problems. A government entity, perhaps a local municipality or some other form of local government, can establish transferable pollution rights which represent the right to discharge a certain amount or type of air pollution. Through the democratic process the degree of pollution that an area is willing to accept is agreed upon. Again, this is unlikely to be zero, since the process of pollution accompanies many economic activities that have positive benefits.

Once the acceptable degree of air pollution is agreed upon, these rights should be made transferable and can be sold or granted to existing factories. Then, if a factory can reduce its pollution below the level for which it has a permit, it has a salable right. If a new factory wants to enter the area it must purchase the right from existing owners. By making these rights to pollute transferable, new development is not prevented, and yet the level of air pollution is stabilized.

It is important to contrast the concept of transferable property rights with the command and control techniques often used in industrialized economies. These techniques usually specify the actual type of pollution control technology that should exist. However, technology is not static and therefore efforts to determine the best pollution control methods by law are likely to lock a society into technologically outmoded techniques. Also, such command and control methods leave little room for entrepreneurial innovations and little incentive for producers to do more than simply install the mandated technology. It is far better to recognize that it is the pollution itself that one wants to control and to do that through establishing property rights rather than by mandating particular technological fixes.

The water and air case studies are but two examples of how the property rights paradigm can work. It is important in all of this to remember that what one wants is a set of rules that hold people accountable for their actions. Such rules allow people to capture benefits when they make decisions that advantage others in society, and also hold people accountable when they impose costs on others. A legal framework that defines, enforces, and makes transferable property rights accomplishes these goals. Therefore, as Bulgaria moves to a regime of private property rights, it must think seriously about extending those rights into areas where environmental problems exist. Some patience is in order because until the private property market economy is in place, it will be difficult to know exactly which pollution problems that have come into existence in the past will continue in the future.

Despite the need to wait for a restructuring of the economy, it may be necessary to institute some immediate measures dealing with pollution problems. In some cases the air and water pollution represent such a danger that it is probably not appropriate to wait for all economic reforms to take place. It may also be important to institute some reforms to indicate to the population that the government views pollution as a significant issue that will be dealt with effectively. In the short term it might be wise to simply deal with a certain number of the most pressing sources of pollution immediately. For instance, Parliament could establish a commission to determine the five most significant sources of pollution in Bulgaria and then close them. Since there is an excellent chance that these will be subsidized forms of production, such a closing may actually also advantage the economy.

In the privatization process these factories could be sold with the understanding that they could only be reopened with a specified level of emission. In other words, some of the air pollution rights that are created could be attached to these factories, but they would not be allowed to return to their previous level of pollution.

Finally it is important to remember that with regard to the environment as with all other aspects of life, trade-offs exist. Neither maximum production without attention to pollution problems, nor maximum safety or complete environmental purity, is possible. Instead, a mechanism must be put into place that allows the Bulgarian citizens to effectively choose both environmental quality and the appropriate level of goods and services. Extending property rights to all resources including air and water, and then allowing the market process to move those resources to their highest valued use, accomplishes this goal.



Agriculture

by

Peter J. Hill and Carl A. Pescosolido

Executive Summary

Bulgarian agriculture has the potential to be very productive but is presently plagued with massive inefficiencies. For both equity and efficiency reasons it is important that private property rights be established. Prices must also be allowed to fluctuate freely to perform their information and incentive functions.

In privatizing the assets of the existing cooperatives, the legitimacy of the claims of the original landowners must be acknowledged. However, the necessity of moving to efficient modern forms of production must also be recognized.

We recognize that one option is to give the land back to the original owners or their heirs. However, we also recommend a process of selling the assets through bidding. Under this proposal anyone can purchase land, machinery, and livestock. The money from these sales would then be used to compensate the original landowners. Because of capital shortages the payments would be made over a period of years.

There is also a need to immediately decontrol the prices of all agricultural outputs and inputs. Too many distortions and incorrect signals exist in a world of partially decontrolled prices. We recognize the hardship that rising food prices could bring upon certain members of Bulgarian society. However, this problem is best dealt with through a social welfare program rather than through attempts to keep food cheap with price controls.

The lack of young people in agriculture is best dealt with by the establishment of a free market and secure private property rights. This will offer ample opportunity for profits and will provide incentives for the young to return to farming.

Likewise, the problem of monopoly in the distribution and marketing of farm produce will be removed if true freedom of entry is allowed.


I. Statement of the Problem

Agriculture is an important sector of the Bulgarian economy, employing about 20 percent of the labor force. However, this percentage has decreased substantially in the last decade.5 Using the measure of net material product, the growth rate in agriculture has been negative for the last several years and agriculture is, in fact, the poorest performing sector in the economy.6 Other measures confirm the fact that the production of food and fiber is very inefficient. Bulgarian agriculture has the potential to be an important source of foreign exchange earnings and can also produce large amounts of quality food for the domestic population. However, it is not doing that at present.

There is also evidence of a crisis in confidence in the agricultural sector as manifested by the failure to attract young people in the last several decades. In fact, out-migration has occurred.

II. The Need for Reform

It is clear that if agriculture is to contribute to economic growth in Bulgaria, significant and lasting reforms must occur. The centralization of land into agricultural cooperatives and the setting of the prices of agricultural outputs and inputs have wreaked havoc in this sector. Agriculture is not amenable to central planning and collectivized ownership because so many of the important productive decisions depend upon the special knowledge of the particular circumstances of time and place.7 Day-to-day and moment-to-moment decisions must be made that reflect weather conditions, the availability and the price of alternative inputs, expectations of consumer preferences, and demand for various agricultural products. Therefore, it is essential that an institutional structure be in place that allows the decision makers to process information rapidly, provides them with adequate and accurate information, and, perhaps most important of all, provides them with meaningful incentives. These incentives should reward the person controlling the resources (if he or she does a good job of satisfying consumer preferences) or should result in a financial penalty when consumer preferences are ignored.

The system that assures each of the above is based upon private property rights and a regime of free prices. Private property rights insure accountability by allowing the property owner to be rewarded for using his resources in a way that benefits society. Private ownership also holds the property owner accountable should resources be used in a wasteful way. Prices are an important link in the communication network between consumer and producer and between different parts of the production chain. They also are the means by which incentives are provided to producers.

III. Reforms to Date

Agriculture has gone through numerous reforms in Bulgaria starting with the first large-scale collectivization of the land in the 1940s. The cooperative farms have moved from being medium-sized units to very large ones and now back to more moderate sized ones. However, many of the existing cooperatives appear to be too large for economic efficiency and, because of the lack of private property rights, do not provide adequate information or incentives to producers. A recent decree, Number 922 (May 22, 1989), emphasizes small-scale farming, and other recent reforms have expanded somewhat the size of the private plots available to farmers. In the last few months, the possibility of further privatization has been explored and a portion of agricultural prices have been allowed to fluctuate freely.

However, these partial reforms have not moved agriculture a significant distance toward efficient production and have, in some cases, exacerbated the problems. It is necessary that the reform movement continue rapidly to privatize all resources used in agriculture and to free the prices of all inputs and outputs. The following section outlines our recommendations for such a privatization process.

IV. Options for Reform

A. Privatization of Land

Since much of the farmland is presently in the hands of the farm cooperatives, a major goal must be its privatization. We believe that there are several principles that must be operative in the privatization process. First, the ultimate goal is to have all farmland, natural resources, livestock, and agricultural structures and equipment in Bulgaria in private hands. This means that private property rights must be well-defined and enforced and secure under the new constitution.

Second, these property rights must be fully transferable in order that economic efficiency can be achieved. Any barriers to the transfer of property will impede the effective working of the market and the creation of wealth.

Third, the process of privatization must occur in a manner that is fair and just. That means that restitution must be made for the legitimate claims to property that were violated by the Communist government. It also means that the privatization process should function openly under clear and simple rules with little opportunity for corruption or the operation of special privilege.

Finally, we consider it of utmost importance that the privatization process takes place rapidly. The agricultural sector is in such bad shape that it would be tragic if another production season were wasted because of the failure to carry out privatization. Therefore, we recommend that March 1, 1991, be the deadline for having all agricultural property (land, structures, livestock, and equipment) in private hands. That would enable decisions to be made about cropping before the beginning of the new planting season. If privatization is delayed much beyond that date, the present inefficiencies and misallocation of resources will plague agriculture for another season and will sharply reduce output. We are aware that the justice considerations (to whom the land should be transferred and by what mechanism) are difficult to resolve and may mitigate against a rapid privatization. However, we strongly urge those who are structuring the privatization process to accept a fact: perfect justice cannot be achieved; if complete privatization is postponed, justice is also postponed.

There are several other considerations that must be recognized in the privatization process. First, it is important to acknowledge that the land was illegitimately taken from its owners in a series of “reforms” in the 1940s and that those owners have a legitimate claim to it. Second, it is also important to remember, however, that the economies of scale of agriculture have changed dramatically in the last forty-five years, and small landholdings in their fragmented form of 1945 would, if imposed upon today’s agriculture, create enormous inefficiency. Finally, some of the land on which there are legitimate private claims has undergone considerable transformation, such as the addition of structures, the building of roads, and its transfer to non-agricultural use. This further complicates the process. Also, some of the land has been dramatically altered by farmers who have intensively developed small private plots.

We do not find any single simple solution to the privatization problem. We propose several options with a discussion of the advantages and disadvantages of each.

1. Privatization through Direct Reversion to the Former Owners

This is an important option because it probably comes the closest to satisfying peoples’ inherent sense of justice. The land was illegitimately taken from its owners in the late 1940s and, where possible, should be given back. The transfer is made easier because of the fact that many of the farmers still have documents that record the exact amount and boundaries of their land that was collectivized by the national government. Memories of the bounds of “their land” seem quite good. Under such a process, if the original owner were deceased, the direct heirs would receive the land. Even in the cases where documents are not available from which to determine ownership, it may be that memories are good enough that some of the elderly people in the village can attest to the ownership of undocumented parcels.

This option has another significant advantage in that it makes a clear-cut statement to the population that the former government acted illegitimately and that wrongdoing is to be redressed. Because of the simplicity and direct nature of such a land reversion, such a program may also have the effect of increasing the confidence of the population in the sincerity of the reform movement. We found considerable skepticism, particularly among the rural population, that effective reform is really going to occur, or if it is, that it will be a permanent change. Such lack of confidence means that people are very unwilling to invest or commit their private resources to agriculture. It is important to alleviate those fears as quickly as possible.

However, attempting to give the land back directly to those who owned it in 1945 does have some very real problems. First, if ownership claims cannot be easily resolved, land may not be in production while litigation occurs. If uncertainty about ownership exists for a significant portion of agricultural land, this will seriously impede the movement to a modern, efficient production. Second, some of the land now has structures on it or has become a part of someone’s private parcel. In such cases it is not fair to simply give the land and the improvements to the original owner. A new owner could compensate the government or other individuals for those improvements but the process of arriving at a mutually satisfactory value could be quite difficult and time consuming. That is particularly the case when the land has moved completely out of farming for such things as roads, housing, and factories.

An even more significant disadvantage of direct privatization to the original owners is the time period that will lapse between the giving of the land to the legitimate owners and its recombination into efficient sized farms. Holdings were generally small and fragmented in 1945. For that reason few owners would have enough land on which modern farming techniques could be applied on an efficient scale. As long as the land is made fully transferable it would become concentrated in efficient sized units over time, either through sale or leasing. However, such a process would undoubtedly take several years and agricultural output would suffer and prices would be higher in the meantime.

2. Sale of the Land to the Highest Bidder and Compensation of Owners

Through use of a procedure of purchase and compensation, it is possible to honor the legitimate claims of the previous owners of the land and simultaneously not impede modern agriculture. Under such an option, the land would be sold in whatever size parcels for which an individual, group of individuals, or other legal entity wanted to bid. For instance, if a wheat field consisting of twenty hectares looked like a good investment for a farmer, he could announce that he wanted to buy it. At that point, those twenty hectares would be the unit on which others would be invited to bid. It is important that the purchase and sale be open and above board. Advertising and public announcements would be required. Such announcements would simply indicate the field that was being offered and would set a date on which the land would be sold. If the process was by sealed bid, on that date the bids would be opened publicly and the winning bid announced. On the other hand, if the process were to be done by auction, on that date all interested parties would be invited to bid openly, with the highest bidder given title to the land.

After the sale, the revenue from the land would then be available for compensation of the previous owners who would file their claims with an adjudicating agency (land court) to determine the rights of former ownership. Since some of the bids will be for structures and equipment, it would seem appropriate to divide the money from the sales in some arbitrary but reasonable fashion, with a major portion going to the previous owners and the rest to the government. Seventy percent to the owners and 30 percent to the government seems fair. This 30 percent payment to the government could also be in lieu of taxes for five years so that farm output would not be restricted by taxes, and yet the government would still have a source of revenue.

Capital may be in short supply for the purchase of land, improvements, and machinery. Therefore, payments would be made over a five- to twenty-year period,8 with the government carrying its proportionate percentage of the mortgage and the previous owners their percentage. The interest rate and length of time for the credit mortgage would be specified in the reform legislation.

Such a process, we believe, will encourage buyers to bid on efficient size units, as they would not be constrained by previous ownership patterns. However, legitimate claims of the previous owners are still recognized, and these claimants are compensated. To maximize efficiency there should be no restrictions on who may purchase the land. We expect that those persons presently involved in the cooperative under which the land is managed would be knowledgeable and interested bidders. However, a significant flow of capital from other, non-farm sectors could occur as non-farmers find it advantageous to invest in land.

We would also extend the bidding/transfer process to all assets owned by the cooperatives since we believe that by March 1, the present agricultural cooperatives should own nothing.9 If someone wished to purchase a truck or a combine that is presently cooperatively owned, they would simply announce that they want to submit a bid on that item. In order to avoid the favoring of any individuals or interests, the opportunity to bid should then be made available to all people, with the sale occurring on a specified date. Structures would also be sold to the highest bidder. In some cases that might not be an individual, but instead a group of individuals. For instance, a large part of a cooperative might want to come together to bid on rather large capital items, such as irrigation equipment or large land parcels. Some mistakes will be made in the bidding process so it is crucial that the property be fully transferable as soon as the down payment is made. Whenever there is a resale, the new owner will assume all of the then-existing obligations to both the state and the previous owner.

Determining exactly who originally owned what part of each sale may be time consuming, so we suggest that the entire proceeds of the sales of a cooperative’s assets be pooled. Seventy percent of the income from the sales of land, equipment, livestock, and structures would go into a general fund to compensate previous owners. The money from this fund would be distributed on a pro rata basis, with the previous owners share determined by their percentage of ownership of the former land holdings of the cooperative. The enabling legislation might include a provision for the establishment of a land court to adjudicate claims, disputes, and distribute compensation as found to be appropriate. If some people had their land expropriated for uses other than farming, their claim would be attached to that of the nearest cooperative, with each successful claimant receiving a prorated share of the total pool of funds generated from the sale of each cooperative’s entire assets.

This process for privatizing the land has the advantage of leaving the farms in efficient size units and attracting outside capital for farming. Agricultural production will respond quickly to incentives because people will bid on assets in the form and size which they think most useful. Some errors of judgment will occur in the process, but an arbitrary structure that is not conducive to efficient production will not be imposed upon agriculture. The market will be the determinant of farm size, location, and output decisions.

This method of privatization separates the process of determining exactly who formerly owned the land (which might be long and complex in some cases) from the need to return the land to private ownership and productive agriculture. All receipts would be held in a compensation fund. The highest bidder would receive immediate clear title, with no waiting while claims are litigated. If, for instance, on a particular cooperative 90 percent of the previous owners’ claims could be promptly determined, then 90 percent of the former owners’ portion of the fund would be paid out immediately. However, the other 10 percent would remain in the fund until the claims were adjudicated. In the meantime, however, agricultural production could go on and the new owners could be assured that their rights were secure.

Such a process also has the greatest chance of attracting young, capable Bulgarians into agriculture since it offers the immediate opportunity to put together productive farm units with a strong potential for profit. Young people are much more likely to enter farming under those circumstances than would be likely were there a long period of time before profitable production could occur.

However, this option does have one significant disadvantage. It is not quite a straightforward return of the property to the previous owners. Some of the population may see this option as simply another scheme by which they are denied their rights. It may also be easier for those who oppose privatization to obstruct or delay the process under this option. Therefore, if such a process is adopted it is important that efforts be made to educate people as to the compensation that will occur. It is also important to assure that payments will be made as soon as possible to the previous owners. The rules under which sale and compensation are made must be straightforward and simple and must be designed so as to expedite the return of property to private ownership. It should be stressed that anyone who wishes to purchase his original landholdings can do so and, in effect, make payments to themselves.

3. A Combination of Direct Return of the Land and Compensation

If it is decided that a direct return of the land to the previous owners is desirable, it still becomes necessary to devise a plan to divest those lands for which ownership claims cannot be determined (or may not be made) and for the selling of livestock, structures, equipment, and other permanent improvements. It seems to be inappropriate to return to the previous owners lands that are now part of private plots. Therefore, if land is to be given back to the previous owners, we suggest that the bidding process be used under certain circumstances.

For instance, all equipment and structures could be bid as outlined above. This money would go into the fund to compensate owners of land on which the structures now stand. If a structure is privately owned, it might be best to simply charge the existing owner a per decare fee for the land, the value of which is determined by sales of immediately adjacent land.

It would also seem appropriate for the person operating a private plot to be able to purchase the land and compensate the previous owner.10 A method of determining value is necessary, whichever means is used for privatizing the land in such cases. If it is given to the original owner then all of the post-confiscation improvements must be purchased. If the person with the private plot is allowed to keep the land then the original owner must be compensated. A land market will come into existence immediately once the land is privatized. That will determine both the land value and the value of the existing structures and improvements. Therefore, the operator of the private plot or the owner of the building could compensate the original owner on the basis of values for comparable adjacent property.

4. Summary of Privatization Options

Several points need to be emphasized. First, the creation of private rights does not predetermine the actual future structure of agricultural production. For instance, the cooperatives will have opportunities to purchase land and improvements identical to those available to all others. However, if cooperatives develop under privatization it will be because the farmers have voluntarily chosen to associate with that form of productive organization. Under a regime of private rights there is no barrier to group production since the owners would be free to acquire their land in any manner that they wished. We expect numerous types of ownership and production to occur: sole proprietorships, partnerships, joint ventures, cooperatives, and corporations are some of the possibilities.

Second, if agriculture in Bulgaria is to become efficient it is crucial that all property rights be fully transferable as soon as they are private. If there are social goals to be sought, or justice considerations to be realized, those should be accomplished during the initial privatization rather than through subsequent restrictions or regulations. Any restrictions to land transfer of any kind seriously impede prompt development of an efficient agricultural sector. This is of particular importance in a dynamic, ever-changing economic enterprise such as modern agriculture. It is virtually impossible to predict the form, scale, and scope of agricultural production over the next several decades. Therefore, it is vital that people be able to recombine resources as they see new needs and opportunities and acquire new technology. There is little danger that “land speculation” will keep land out of production for any significant period of time. It is also unlikely that absentee ownership will seriously impede efficiency. That is true because in a free market economy owners will necessarily seek a fair rate of return on their invested capital. Not all owners will live on their land, but because it is private property they have a substantial incentive to see that it is well-managed. Therefore, any attempts to restrict land ownership to those persons or entities who plan to dwell on it will be a very serious restriction to economic efficiency.

Finally, we reemphasize the fact that the privatization process must take place very rapidly. If agricultural output is to be increased, people must have secure property rights and adequate and unrestricted incentives. The longer that the privatization process takes, the higher the cost imposed upon society. We recognize that difficult questions of justice must be resolved in the privatization process, but we urge all those involved not to seek “perfect justice,” but rather to adopt simple, straightforward legislation that achieves equitable results and completes privatization promptly.

Bulgarian citizens hold strong positions on issues of justice and fairness. We respect the sincerity of those positions. However, we urge all involved to think seriously about the length of time that will be involved if privatization is delayed until all justice considerations are resolved. Due to the changed facts and circumstances since the 1940s, there is no present means to achieve a fully just and fair redistribution of farm assets, so we urge policymakers to accept that as a truth and to proceed promptly.

B. The Liberalization of Prices

During recent months, prices for many agricultural commodities have been liberalized. This is an important step in the freeing up of agricultural markets and has provided improved incentives for farmers to increase their production. However, there are still a substantial number of prices that are set by the government, especially those for basic commodities such as meat, cereal grains, and dairy products.

We understand and are sympathetic with the policy goal of protecting the retired, the unemployed, and others with low and/or fixed incomes from substantial price increases for essential food items. However, it would be far better to assist these people through some sort of income supplement, or food stamps, rather than by attempting to keep food prices low. We believe the policy goal of a safety net for low-income people must be developed and implemented separate and apart from regulation of food prices.

Prices serve both important information and incentive functions. Embodied in the price of any food item in the retail store is data about the resources that are presently available in agriculture, the cost of attracting other resources into agriculture, the abilities of the farmers to produce, the expectations about future weather and crop conditions, the price of other alternative food items, the preferences of the farmers for working in particular types of production, the desires of consumers for the particular item relative to other goods and services, and many more factors too numerous to mention. A change in any one of these circumstances or values causes the price to change and thereby conveys all the new information to all members of the society. It is inconceivable that regulated prices can come anywhere close to approximating, let alone including, the relevant data contained in a market price. Controlled prices cannot and do not respond in the way that market prices do.

Prices are also the basis of the incentive information network that enables consumers to communicate their desires to producers by rewarding those producers (through a higher price) who do the best and most rapid job of satisfying the consumers. Prices serve to insure that resources are attracted to the area where they are most demanded and to insure that people devote their time and energy to the most important endeavors. Through a free-market reward structure, those who do the best job of satisfying consumer preferences are rewarded the most through increases in their income.

Given the fact that prices play such an important role in achieving efficiency in the economy, it is absolutely crucial that they be allowed to function freely. Any impediments to freely adjusting prices mean that the flow of information is hampered and that consumers no longer have a mechanism by which they can rapidly convey their desires to the producers.

Because all prices are closely interrelated, any partial decontrol causes enormous distortions in the economy. This is especially true in agriculture because there is a vast array of opportunities for substitution in production and consumption. Many agricultural products can serve either as final consumption items or as inputs into another part of the production process. The possibility of substitution means that if the prices of some commodities are free and those of others are controlled, the farmers will tend to rapidly decrease their production of the controlled items and increase that of the uncontrolled items.

It is likely that the controls will be on the prices of the basic commodities. This will further exacerbate the problem of production of important food items that are of special importance to the poor. Partial decontrol also means that the farmers will face a distorted set of prices in terms of their inputs and that shortages will develop for items that are important in the production process. We found a great deal of frustration on the part of certain private farmers because of their inability to buy feed for their animals that is high-quality and consistent in content. Only under a regime of completely free prices will agriculture be able to operate efficiently to feed the people of Bulgaria and to earn foreign exchange.

It is also important to note on the basis of historical experience in other countries that the longer that some prices are left controlled, the more difficult it is to free them. At this time there is a general sentiment for economic reforms in the economy and, if appropriate social welfare measures are in place to protect the poor and those on fixed incomes, it may be politically possible to free up the prices of basic food items. However, the longer that price decontrol is postponed, the more difficult it will be to accomplish later. When prices are kept low through government fiat it is almost certain that political pressure will build to maintain those controls.

In some cases, when prices are kept below the market clearing level, the consumers come to feel that they have a right to those commodities at that price and will exert considerable political pressure to maintain them. On the other hand, if the controlled prices are set and maintained above the market clearing level, farmers who produce the product will organize into a political pressure group and will exert considerable influence on the government to maintain their privileged position. One only has to look at the difficulties that governments in most countries of the world have in freeing up their agricultural markets for support of our position.

Therefore, we recommend that prices be freed completely for all agricultural output and inputs and that this occur as soon as safety net measures have been initiated. The freeing of prices should occur prior to the privatization of land. Free-market prices would also give farmers important information about the prices that they can bid for the land and other productive inputs.

C. Other Issues

1. The Age Structure in Agriculture

There is considerable concern by people in Bulgaria about the maldistribution of age in agriculture and the present inability to attract young people to the sector. However, any attempts to subsidize young people or to introduce special incentives for them to return to agriculture are fraught with all sorts of problems. Any such programs will raise numerous issues of equity and efficiency and are unlikely to be very effective. But, if land is private and transferable so that people can put together profitable farms, and if prices are free, there is every reason to believe that young people will be attracted to agriculture. The simplest and most effective way to encourage younger people to enter this part of the economy is simply to offer them the opportunity to make profits and free them from unnecessary constraints.

2. Regulation in Agriculture

In most economies of the world, agriculture operates under various price and/or output regulations. Restrictions abound which constrain who can farm, and there are numerous regulatory impediments that affect the form and type of agricultural productive units. All of these restrictions impose heavy burdens on economic efficiency.11 The evidence is overwhelming that in every country where these regulations exist, overall wealth in the society is lower because of these market impediments.12 Nevertheless, because of political intrusions such regulations do exist.

In many of the wealthier countries of the world, these regulations are sometimes the most onerous. However, these economies are already quite productive, and the inefficiencies that are caused are often at first glance not obvious. Bulgaria cannot afford such a mistake. Inefficiency in its agricultural production is a luxury that is too costly. Agriculture in Bulgaria must operate at maximum capacity, both to feed its people and to develop an important source of exports. Virtually no one claims that agricultural regulations around the world increase efficiency. Bulgaria would do well to avoid such regulatory inefficiencies.

3. Agriculture and Egalitarianism

Agricultural policy seems particularly susceptible to egalitarian sentiments. Policymakers often favor land redistribution to satisfy particular social goals, and restrictions on landownership are often instituted in order to maintain equality of wealth. However, such egalitarian goals have a high price in terms of agricultural productivity. Property rights must be complete and fully transferable so that operating units can be of an optimum size. The restrictions on property rights that are often proposed in the name of social justice are serious impediments to efficiency. With the present need for high levels of food and fiber production in Bulgaria, Parliament should be very cautious about using the privatization process to do anything more than establish clear-cut and transferable rights.

4. The Structure of Capital Markets and the Financing of Agriculture

We recognize that in the short term, capital may not be readily available to finance all the adjustments that are necessary for productive agriculture. Therefore, as outlined above, we suggest a financing plan where the government and the previous owners would be receiving time payments for agricultural land and other inputs over a period of years. However, beyond its initial financing, we would suggest that there be no other attempts to structure capital markets for agriculture. If the land is fully privatized, there will be considerable capital flow into agriculture from other sources within Bulgaria as well as from foreign investors. Any further attempts to intervene in capital markets will create economic inefficiencies. There is also the danger that subsidized credit will prove very costly and put further strain on the government budget.

All of the misallocations of resources in Bulgarian agriculture are a very real problem. However, it should be recognized that such misallocation represents a significant opportunity. Entrepreneurs will see that such misallocation creates the potential for substantial profit. Under a free market with fully transferable property rights, entrepreneurs will invest both capital and effort to bring the agricultural economy into equilibrium. Therefore, we believe that both the capital shortage problem and the age structure problem will be alleviated by the realization of profits once prices are free and property rights are secure. It is also the case that ordinary capital markets will operate in agriculture as banks, savings and loan institutions, insurance and pension plans, and agricultural cooperatives become important sources of funding for agricultural operations.

There is the problem of existing debt in agriculture. A portion of that debt has been written off, but some remains. We recommend that this existing debt not be attached to any of the property that is privatized. There are two reasons for this recommendation. First, in many cases the debt exists because of poor management decisions in the past. Therefore it seems inappropriate to require that purchasers of assets be responsible for that debt. Second, we expect the cooperatives to be broken up into numerous smaller units through the bidding process, and it would be difficult to equitably assign a portion of the cooperative’s debt to each asset.

5. Insurance

Like the problem of the shortage of capital, the need for insurance in agriculture will take care of itself once markets are free. The provision of insurance against weather and other hazards is a normal market function that will develop as people see the opportunity to do so. No additional reforms other than those proposed in another section of this report for the insurance industry will be necessary.

6. The Crisis of Confidence in Agriculture

A significant impediment to economic efficiency in agriculture is the fact that many people do not believe that the reforms are real or will be permanent. We are struck by a significant number of people who said that they were going to wait and see if the government was true to its promises. Until people come to believe that property rights are secure and that prices will not be interfered with, they will be reluctant to invest resources in agricultural production or involve themselves in the process of putting together optimal sized productive units. Therefore, everything that the government does in its reforms designed and intended to increase the confidence of the citizens of Bulgaria (and of outside investors) is of crucial importance. Confidence, therefore, is another reason why all agricultural prices should be freed immediately and why further regulations should not be imposed.

We also suggest that “constitution-like” guarantees of security for property rights be included in the enabling legislation that privatizes agricultural land. We understand that any statements like this are not truly a part of the new constitution, but they will have the important potential for reassuring market participants that the reforms are permanent. We would suggest something like the property rights language that is a part of the constitutional revisions suggested by Professor Bernard Siegan.

7. Defining and Securing Property Rights

In a free market economy the government has an appropriate role to play in terms of defining and enforcing rights. Therefore, there should be an adequate court system in place for adjudicating disputes over property. The government should also provide means and mechanisms for the registry of deeds. The registry of deeds should not in any way impede market transactions but should simply be a repository for property descriptions which record ownership.

8. The Problem of Monopolies in the Distribution of Food

Privatization of the distribution network is dealt with in other portions of the composite report. Therefore, we shall only note that competition must be promptly introduced into the distribution and marketing sectors to insure that farmers will not be selling to monopolies that pay artificially low prices for agricultural products. Permitting firms in the food distribution network to handle any commodities is an important first step in introducing competition. Also, freedom of entry (removal of all regulatory barriers and impediments such as onerous licensing requirements) means that other distribution firms can begin to offer alternative market opportunities to farmers. If freedom of entry truly exists, it is doubtful that monopoly elements can remain very strong in the agricultural sector.

9. Free Trade

Although there would be initial painful adjustments, the long-run health of the agricultural sector will be far better under a regime of external free trade rather than one with trade restrictions. Farmers need to be able to purchase inputs from other countries and must have access to new technology. Taxes or import quotas on these inputs will artificially raise the cost of production. Bulgaria has a significant potential for sales of its agricultural goods in international markets, and any restrictions on export will reduce this potential. We propose the Hong Kong or Taiwan models as useful guides.

10. Large-Scale Factory Farms

There are some productive units in agriculture that do not lend themselves well to being split into smaller units. For instance, there are some very large hog farms that might well be more profitable left as units rather than being broken into smaller units. Since these large-scale units come close to being factories, the recommendations in other parts of this report for the privatization of factories are applicable. However, the simple process of bidding that we have outlined in option two under privatization could quite well be applied to these units also. An individual could offer to bid on the entire unit or might believe that a portion of it could be operated productively. In either case, he would indicate his intention and whatever sized unit he was interested in would then be put up for bid. Again, bids would be accepted from an individual or from groups of individuals.

11. Forests and Other Non-agricultural Resources

A considerable portion of Bulgaria is forested, and these lands offer a significant potential for agricultural production and for recreational uses. However, experience in other countries has shown that government ownership of these types of resources leads to massive inefficiencies.13 Likewise, there are some very attractive hunting preserves in Bulgaria that are also owned by the government. In all of these cases, private ownership offers greater flexibility, more incentives for efficient production, and greater attention to the changing needs of consumers than does government ownership. We recommend that all forestlands and hunting preserves be made available for sale through the bidding process outlined under option two above. Since the privatization of existing agricultural production is of the highest priority, the privatization of forestlands could be undertaken as Phase Two, perhaps a year hence. These lands are important economic resources so private ownership should be in place very soon. If the forestlands are privatized as proposed above, compensation should be paid to previous owners whenever their claims can be determined.

The fact that we recommend the privatization of forest and recreational lands for efficiency reasons does not mean that we believe that the highest and best use of these lands is always for the direct production of agricultural commodities. In many cases, the best use of these lands is for recreation and the provision of environmental amenities. However, the market can satisfy consumer demand for these goods and services better than the government can, and the privatization of these lands is an important first step in providing the incentives for recreational and environmental demands to be met.14 The overexploitation of government lands in many Western countries is of increasing concern, and numerous environmentalists now recognize that a private marketplace is their best way of securing protection of the land for the provision of environmental amenities.


Endnotes

  1. Garrett Hardin. 1968. The Tragedy of the Commons. Science, 162: 1243–1248.

  2. Marshall I. Goldman. 1973. Growth and Environmental Problems of Noncapitalist Nations. Challenge, July–August.

  3. Jane S. Shaw and Richard L. Stroup. 1988. Gone Fishin’. Reason, August–September.

  4. However, this depends on whether the pollution is from point or nonpoint sources. If it is from point sources then the problem is much more tractable. Technology makes it possible to require each polluter to identify their effluent with a particular inert chemical tracer. Then it is possible to estimate the amount of damage from each source.

  5. Marvin Jackson. 1989. A Crucial Phase in Bulgaria’s Economic Reform. Bundesininstitut fur ostwissenschaftliche und internationale Studien 72: 7.

  6. Jackson, A Critical Phase in Bulgaria’s Economic Reform, 16.

  7. Friedrich A. Hayek. 1945. The Use of Knowledge in Society. American Economic Review, September: 519–30. Reprinted in Friedrich A. Hayek. 1972. Individualism and Economic Order. Chicago: Henry Regnery Company.

  8. The length of time for the contract should be specified by law. The choice of that time is not an easy one. In stable economies land contracts usually run for fairly long periods, and it is in that sense that a twenty-year period would be appropriate. However, this is not a contract being freely entered into by the previous owners and they may prefer a much shorter period. Also, if major inflation occurs, the longer period could reduce the value of the payments to the previous owners substantially.

  9. This does not mean that agriculture cooperatives are undesirable. We recognize that Bulgaria has a long history of successful cooperatives, and these may be important structures of production in the future. However, such cooperatives should arise voluntarily from farmers who choose to associate in such a manner. This is far different than the present cooperatives which represent a coerced arrangement.

  10. If the operator of the private plot has purchased the land, then the title should be immediately transferred to that operator with no farther payments required.

  11. For instance see: James Bovard. 1989. The Farm Fiasco. San Francisco: ICS Press.; Bruce L. Gardner. 1981. The Governing of Agriculture. Lawrence, Kan.: University Press of Kansas; Clifton B. Luttrell. 1989. The High Cost of Farm Welfare. Washington, D.C.: Cato Institute; E. C. Pasour, Jr. 1990. Agriculture and the State: Market Processes and Bureaucracy. Oakland, Calif.: The Independent Institute.

  12. Even what appear to be rather innocuous regulations such as specification of quality and grade standards turn out to have a negative impact on efficiency. Such regulations become quantity control mechanisms that restrict entry and competition.

  13. John A. Baden and Richard L. Stroup, ed. 1981. Bureaucracy vs. Environment: The Environmental Costs of Bureaucratic Governance. Ann Arbor, Mich.: University of Michigan Press; Richard L. Stroup and John A. Baden. 1983. Natural Resources: Bureaucratic Myths and Environmental Management. San Francisco: Pacific Institute.

  14. Terry L. Anderson and Donald R. Leal. 1988. Inside Our Outdoor Policy. Cato Institute Policy Analysis 113.; President’s Council on Environmental Quality. 1984. Special Report: the Public Benefits of Private Conservation. Environmental Quality, The 15th Annual Report of the Council on Environmental Quality, Washington, D.C.: Government Printing Office.


Appendix

Bulgarian Economic Growth & Transmission Project

Bulgarian Advisory Team


Professor Ivan Angelov
Chief Economic Advisor to the Prime Minister

Ventsislav Antonov
Karl Marx Higher Institute of Economics

Roumen Avramov
Institute of Economics
Bulgarian Academy of Sciences

Valeri Borisov
Legal Advisor
Ministry of Economy and Planning

Dr. Ventsislav Dimitrov
Institute of Economics
Bulgarian Academy of Sciences

Dr. Gentcho Dimov
Chief Economist
Ministry of Foreign Economic Relations

Stoyou Dulev
Deputy Minister of Economy and Planning

Dr. Nikola Galabov
Institute of Economics
Bulgarian Academy of Sciences

Professor Ilia Georgiev
Institute of Economics
Bulgarian Academy of Sciences

Dr. Roumen Georgiev
General Manager
Mineralbank

Dimitar Kostov
Deputy Minister of Finance

Dr. Ivan Kostov
Lenin Higher Mechanical and Electrical Engineering Institute

Emil Harsev
Karl Marx Higher Institute of Economics

Tatyana Hubenova
Institute of Economics
Bulgarian Academy of Sciences

Dr. Dimitar Ivanov
Institute of Economics
Bulgarian Academy of Sciences

Professor Lilia Karakasheva
Director General
Ministry of Foreign Economic Relations

Dr. Nayden Naydenov
Deputy Minister of Economy and Planning

Dr. Neviana Krusteva
Research Fellow
Ministry of Foreign Economic Relations

Georgui Pankov
Deputy Minister for the Economic Reform

Professor Ognian Panov
Director
Institute of Economic Management

Athanas Paparizov
Director General
Ministry of Foreign Economic Relations

Dr. Ognian Pishev
Chief Economic Advisor to the President

Dr. Nan Pushkarov
Institute of Economics
Bulgarian Academy of Sciences

Professor Dimitar Shopov
Vice Chairman
Committee on Labor And Social Security

Boyan Slavenkov
Institute of Economics
Bulgarian Academy of Sciences

Professor Stefan Stoylov
Minister for the Economic Reform

Professor Milcho Stoymentov
Karl Marx Higher Institute of Economics

Professor Todor Valtchev
Institute of Economics
Bulgarian Academy of Sciences

Hristina Vutcheva
Scientific Research Institute
Ministry of Finance



Bulgarian Economic Growth & Transmission Project

U.S. Advisory Team


Dr. Richard W. Rahn, Co-Chairman
Vice President and Chief Economist
U.S. Chamber of Commerce; and
Executive Vice President, National Chamber Foundation

Dr. Ronald D. Utt, Co-Chairman
Vice President
National Chamber Foundation
(Former Associate Director for Privatization, Office of Management and Budget)

Jill Bezek Jones
Project Manager
National Chamber Foundation

Dr. Allen E. Abrahams
Executive Director
Southern Agronomics, Inc.

John G. Bertram
President
FCB/InterMarketing

Mark Bloomfield, Esq.
President
American Council for Capital Formation

John L. Bowles
Vice President, Sales and Marketing
American Spring Wife Corp.

The Honorable Mary K. Bush
Chief Operating Officer
Federal Housing Finance Board
(Former Vice President for International Finance, Federal National Mortgage Association; and Former U.S. Alternate Executive Director, International Monetary Fund)

Mark C. Frazier
Chairman
The Services Group

The Honorable Mark S. Fowler
Senior Communications Counsel
Latham and Watkins
(Former Chairman, Federal Communications Commission)

Willard R. Gallagher
Vice President, International Operations
Textron Inc.

Gordon A. Graves
Vice President
Global Technology Resources

Dr. Peter J. Hill
Research Fellow
The Independent Institute; and
Bennett Professor of Economics, Wheaton College

Michael F. Hoynes
Executive Vice President and Group Management Director
FCB/Leber Katz Partners

Frederick B. Krieble
President
Management Limited

Dr. Robert H. Krieble
President
Krieble Associates, Inc.
(Former Chairman, Loctite Corporation)

Lawrence A. Kudlow
Senior Managing Director and Chief Economist
Bear, Stearns & Co. Inc.
(Former Associate Director for Economics and Planning,
Office of Management and Budget)

M. Kay Larcom
Associate Director
Office of Central and Eastern Europe
International Division
U.S. Chamber of Commerce

Clayton L. Lescalleet, Jr.
Senior Consultant
Teleconsult, Inc.

Bowdre P. Mays
Senior Vice President
CIGNA Worldwide, Inc.

Dr. Charles E. McLure, Jr.
Senior Fellow
Hoover Institution on War, Revolution and Peace
(Former Deputy Assistant Secretary of the Treasury for Tax Analysis)

Ambassador J. William Middendorf, II
Chairman
Middendorf & Company, Inc.
(Former President and Chief Executive Officer, Financial General Bankshares;
Former U.S. Ambassador to the European Communities; and
Former Secretary of the Navy)

The Honorable James C. Miller, III
Chairman
Citizens for a Sound Economy; and
Co-Chairman, Tax Foundation
(Former Director, Office of Management and Budget; and
Former Chairman, Federal Trade Commission)

Dr. Charles Murray
Bradley Fellow
American Enterprise Institute for Public Policy Research; and
Author, Losing Ground: American Social Policy 1950–1980

Grover G. Norquist
President
Americans for Tax Reform

Carl A. Pescosolido
President
Sequoia Enterprises

Gordon C. Seybold
President
Global Technology Resources

Dr. Bernard H. Siegan
Director of Law & Economics Studies
School of Law
University of San Diego

Eugene L. Stewart, Esq.
Stewart and Stewart

Graciela D. Testa
Editor
International Health & Development

Marco Terribilini
Manager, Bulgaria and Romania
Philip Morris, Europe

Dr. George M. Vredeveld
Professor of Economics, University of Cincinnati; and
Director, Greater Cincinnati Center for Economic Education

Wayne A. Wittig
Deputy Associate Administrator
Office of Federal Procurement Policy
Office of Management and Budget


Peter J. Hill is the George F. Bennett Professor Emeritus of Business and Economics at Wheaton College.






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