From The Bulgarian Economic Growth and Transition Project

I recently returned to Bulgaria after three trips there in 1990 and 1991. Although I was only able to be in the country for a week on my most recent trip, I am impressed by the progress that the economy has made, but also believe that there are several areas that will require substantial attention if the country is to become a well-functioning society that is respected among the nations of the world. First, my positive reactions.

It is clear that Bulgarians understand much better than in the past the process of wealth creation and are actively involved in that process. I was impressed by the much wider availability of goods and services in the stores, by the flourishing of private restaurants, and by the general understanding that it is possible to create wealth through hard work and vision. There is a general flourishing of an entrepreneurial spirit which bodes well for the future of Bulgaria. I was also encouraged by the general openness to ideas and by the knowledge of the people I interacted with. I met some very sophisticated economists who are the equal of those in any other country and I found the Bulgarian intellectual community to be vibrant and flourishing. Nevertheless, despite these very positive steps toward a mature and open society, there are several issues that must be dealt with if Bulgaria is to continue to make progress.

The openness and wealth creation that I found in Bulgaria is a very positive sign, but economic opportunity must now be extended to all members of the society. Several things are important for this to happen. First, the country needs to be governed by the rule of law, and it must be equally applicable to all members of the society. This means that there needs to be predictability and stability in government policy and that the dignity and worth of all individuals must be respected. The clear definition and enforcement of property rights is an essential condition for the rule of law, and the government should continually focus on establishing such a legal regime. There should be a rapid move to restrict economic crime and to provide opportunity for individuals and businesses to operate without fear of threats from others. It also means that the government should dramatically reduce its favor granting activities. Privilege seeking is both wasteful and unjust and is the bane of many developing economies. It rewards a particular group that learns how to use the political process and also causes the expending of a vast amount of resources that could be better used to create wealth.

In some cases, efforts to try to achieve complete justice in the economy are doomed to failure because of the difficulties of articulating and applying precise concepts of fairness in a modern democracy. In these cases, recognition of the difficulties of doing exactly what is appropriate should be recognized and alternative processes should be instituted. For instance, the process of selecting which firms will be on the mass privatization list is bound to be subject to immense political jockeying, will probably result in some delay of privatization, and will also consume a considerable amount of resources. It might make more sense to simply use a random process to choose the firms that will be privatized at particular times, recognizing that this will not always result in the optimal choices for privatization, but also recognizing that this may be far better than the laborious process of choosing through political lobbying and posturing.

As most Bulgarians are aware, a second prerequisite of a well–functioning society is monetary stability. Instability works against the saver and the industrious and rewards speculators. In the short run these speculators are assisting in the coordination process in that their arbitrage activities move resources from places of lower value to activities of higher value. However, in the long run, the effects on the moral climate and economic activity of continued inflation are pernicious. People spend more of their time attempting to protect themselves against decreases in the value of the currency and they also become reluctant to make decisions for which rewards are spread over a long period of time. An inflationary economy has been characterized as one where everyone lies to everyone else, the government to’ the people and the people to each other, in that economic transactions are represented by a unit of account that is unstable and unpredictable. The uncertainty of such a regime means that neither economic nor moral rectitude are rewarded.

Bulgaria also needs a tax system that is characterized by low rates and a very broad base. Attempts to solve the government’s revenue problems by continually devising new taxes and raising rates are doomed to failure because of the incentives that are created for tax avoidance. High marginal tax rates also impose a severe penalty on wealth creation, the very activity the country should be encouraging. Bulgaria needs to bring all economic activity into the tax system, and that can only be done by relatively low taxes that are administered through a system of simple and easily understood rules.

Bulgaria must also continue the privatization process. The proposed mass privatization is a move in the right direction, but, as discussed above, it probably will be plagued with a large amount of uncertainty and privilege seeking. The difficulties in privatizing agricultural lands need to be resolved, and agricultural resources brought back into production. Overall, the privatization process has become too political and too drawn out. So long as there remains political control of resources, limits on transfers of private rights, and uncertainty as to the long-term viability of private property, it will be difficult for entrepreneurs to take actions that enhance the wealth creation process.

Finally, the very success of the wealth creation process can be dangerous in that it can lead to the belief that this wealth creation is all that is important in life. Bulgarian citizens face a dilemma in that the appropriate spread of the market into many aspects in life can lead to an inappropriate minimization of the cultural and moral heritage of the country. There is much about the human condition that is not resolved through economic success, and Bulgarians would be wise to be aware of the general moral breakdown in many of the Western economies. The disintegration of the family, rising crime rates, and rampant hedonism are characteristic of many modern societies that are successful by economic measures. Bulgaria needs to move towards a more robust market economy, but it must maintain a continual awareness of the limits of markets in producing human happiness.

Nevertheless, despite the necessity for continual reform and for a moral awareness of some of the dangers inherent in capitalism, Bulgaria has a promising future. It has made much progress since the fall of communism and central planning. It has an educated population, a long history of entrepreneurship and hard work, and an amazing resilience developed through centuries of oppression and hardship. Continuation of the economic reforms is crucial in ensuring a better life for Bulgarian citizens.