343. Bulgaria's First Year in the European Union: Progress, Problems and Pessimism
John R. Lampe is Professor of History, University of Maryland-College Park and Senior Scholar at the Wilson Center. He spoke at an EES Noon Discussion on December 19, 2007. The following is a summary of his presentation. Meeting Report 343.
Western attention in Southeastern Europe is focused on Kosovo, Bosnia and the surrounding Western Balkans. But, I ask that some attention also be paid to neighboring Bulgaria. This core state of the historical Ottoman Balkans is completing its first year as a member of the European Union and its fourth year as a member of NATO. I resist the temptation of dwelling on how unlikely this prospect seemed when I first went to Sofia as a young Foreign Service Officer some 40 years ago. Now, with the same special interest in wider economic prospects and the same domestic pessimism about its own political process that has repeatedly surfaced over the past century, Bulgarians should nonetheless be looking back with satisfaction on their initial year as a full member of the largest common organization in European history. On a personal level, a Bulgarian friend traveling to Italy welcomed the smile and a wave that replaced a scowl and a Schengen visa check at the Rome airport. Some 60 percent of Bulgaria's foreign trade is now with the EU, and as a new member, it is expecting 11 billion euros of adjustment assistance over the next six years. But before turning to the clouds that I found gathering over Sofia, let me first address the silver lining.
Already, it has been good first year for the Bulgarian economy, at least by most of the key macro-economic indicators. There are significant signs of domestic progress, signs connected to the most favorable set of international relations in Bulgarian history, relations with the US included. They deserve to be mentioned before I turn to three sets of problems: 1) the economic problems of convergence, corruption and demographic decline; 2) political divisions in the absence of an established majority party; and 3) public pessimism about what long-term advantage Bulgaria can take from EU membership.
Progress and sources of strength
For the third year in a row, the real GDP growth has exceeding 6 percent, with export growth leading the way. The Bulgarian economy is recording these overall advances in 2007 despite an early heat wave and prolonged drought this past summer that cut the yield from specialty crops, such as roses and lavender, by half and kept overall growth in agricultural output to 1 percent. The state's budget revenues continue to generate a surplus equivalent to 3 percent of GDP, with income and corporate tax rates cut to less than 15 percent. Unemployment has fallen by more than one half since 2002 to barely 7 percent, as some 400,000 new jobs have been added to the legal work force. Sofia has grown in the process to 1.3 million people, with another half million coming in to work there during the day.
Foreign direct investment is again approaching the 4 billion euros received in 2006, equal to 10 percent of GDP, despite the virtual end of large-scale privatization with the subdivision of Bulgartabak, the former state tobacco monopoly. Property sales from the booming real estate market have stepped in to account for a third of foreign investment. Buyers first from the UK and now from Russia and the rest of Europe are pushing up prices for new holiday, retirement or business housing in Sofia and the along Black Sea coast. These prices are still, according The Financial Times of November 10, cheaper than elsewhere in the former Eastern Europe. Sales are expected to continue growing in 2008 by at least 20 percent.
A major contributor to domestic manufacturing, services and construction has been the new commercial banking sector, dominated by the foreign banks that line the former Ruski Bulevar. Primarily Austrian, Italian and Greek, they provide 80 percent of the more affordable and accessible credit, mortgages now included. Lower interest rates, falling under 10 percent, have also fed the aforementioned construction boom and allowed Bulgarian enterprises and individuals to join in. Many small and medium-sized enterprises (SMEs) have also benefitted from this new credit market, some of them now going on to raise capital from Initial Public Offerings (IPOs) on an expanding stock exchange. The most recent IMF judgment praises this financial sector as the strongest structural feature in the Bulgarian economy, strong enough to keep supporting the Currency Board's exchange rate fixed to the euro at 2/1 and to manage a rate of inflation which has now advanced from a projected 4 percent for 2007 past 8 percent.
Problems with the economy and education
Helping to inform Bulgaria's public opinion is a set of domestic NGOs that cannot be equaled in any of Yugoslavia's successor states. They join a range of published media which only Croatia and Serbia can match. Here I cite only the weekly economics newspaper Kapital, the weekly magazine Tema, and a couple of daily newspapers, Sega and Standard. As for NGOs, I cite the Center for the Study of Democracy, the Center for Liberal Strategies, and the Centre for Advanced Study. They pay special attention respectively to the political process, the economics of the market mechanism, and interdisciplinary scholarship. All of them pay attention to the historical record and join in the wider debates about how to appraise the Ottoman and Muslim legacies and the interwar and the Communist periods. Advocates on different sides are agreed on one point—the need for the wider connection to Southeastern Europe that has repeatedly surfaced in Bulgaria's aspirations, then failed and left the country regionally isolated over the past century.
This regional interest is now well represented in official Bulgarian policy, most recently in concern for the accession prospects of the Western Balkans and in support for Turkey in the long term. Most striking during my visit was mounting anxiety about the pending independence of Kosovo. More specifically, it is the potential of unconditional independence for destabilizing an already turbulent Serbia and Macedonia that is worrying officials and observers in Sofia. Adding to Bulgarian worries about the years ahead, are a series of long-term economic problems and short-term political divisions that are causing more concern in Bulgarian public opinion than Kosovo's pending independence. Underlying the major challenge to the Bulgarian economy is the huge gap, slightly wider than Romania's, between its per capita income and the EU average, which is three times larger.
Although not interconnected as in some of the Western Balkans, legal credit and illegal business raise serious difficulties heading into 2008. The otherwise invaluable appearance of European banks has fed the easy access to commercial credit by drawing on their home-base resources. While the higher inflation that appeared in 2007 may well be manageable, the huge import surplus that this credit boom has helped to fund may not be. Despite the rise in direct foreign investment, remittances and tourist income, the current account deficit climbed to 19 percent of GDP, now amounting to two-thirds of Bulgaria's foreign debt. Now the credit squeeze spreading through European banks may reign in those home-based resources, and the squeeze may threaten foreign investment as well. The more obvious threat to foreign investment and domestic business in general is the continuing burden of the grey economy. It removes an estimated 30 percent of income from regulation or taxation and feeds corruption, particularly in the judicial system. Crime-related cases catch the most headlines, with no convictions yet recorded in a lengthening series of hired killings or in corruption charges against high level officials. While the EU remains most concerned about the courts' failings in these cases, the wider economic problem is tax evasion and related smuggling, particularly now that the VAT, already 20 percent, must add extra EU excises on alcohol and tobacco. Upwards of one quarter of all publicly funded procurement is lost to corruption, according to Ognyan Shentov, long-time head of the Center for the Study of Democracy. At least the police-connected protection rackets no longer confront any successful new SME, as they did in the 1990s.
In addition to the current international credit squeeze and persistent corruption, the longer-term problem facing the Bulgarian economy is demographic decline. Still slipping at over half a percent a year, a population of 8.9 million in 1981 has fallen to 7.6 million. A low birth rate is partly responsible, combined with (first Turkish and now ethnic Bulgarian) emigration. The number employed is shrinking down toward the number of pensioners. A widening income disparity means a declining access to the far greater range of consumer goods that have become available over the past decade. The shrinkage of the active labor force, if continued, will force the country to import labor from the Ukraine and elsewhere: shock estimates put the impending number of needed laborers at half a million after 10 years. Even if these projections are exaggerated, increasing the productivity of existing labor may be the only way to reduce this prospect and also continue the growth rates needed to begin closing the gap between per capita income and the member average in the EU. That is the conclusion of the latest World Bank report of prospects for Accelerating Bulgaria's Convergence: the Challenge of Raising Productivity (July, 2007). It argues that the 2 percent annual increase in productivity recorded for 2003-5 will only widen the gap, but it adds that the 5-6 percent rate for 2000-2, if recaptured, would indeed reduce it significantly.
The Report (no. 38570) sees two unsurprising ways to reverse course. One priority is to promote the same more flexible labor market, with easier movement between full and part-time employment plus "life-long learning," that France, Germany and other EU members are now trying to promote. The Report adds that sufficient social support must also be included, speaking of "flexicurity." More concretely, the Report places its second priority on improving primary, secondary and university education, just as we find in the EU's Bologna Process for higher education, to which Bulgaria has also signed on but which the Report does not mention. It does mention expanding vocational and other alternative education (VET), pointing out that Bulgaria's VET enrollment is by far the lowest in the EU compared to the university total, barely 3 percent. But as Ivan Ilchev, a former Wilson Center Fellow and the newly elected President of Sofia University, explained to me, the shift in funding needed to make up vocational ground would severely handicap a university system already short of funds. Sofia University's budget is beset with a huge heating bill for a main building protected from renovation as an historic site and also with paying the largest number of senior professors in a system where state funding flows only from projected student enrollments. The many smaller universities and institutes (50 in all) are not only staffed with junior faculty but also fall short of their targets on students actually enrolled. Even Sofia University's curriculum neglects science and information technology, and hence the potential to close the gap with the EU in supporting research and development. Bulgaria's overall enrollment is less than 30 percent of the age cohort, well below the EU standard unless we count the 20,000 Bulgarian students studying abroad. They are currently the largest foreign contingent at the University of Leipzig for instance. But we should not count them since most of them do not plan to return to Bulgaria after graduation.
Meanwhile, the crisis in education at the primary and secondary levels spilled over this Fall into a teachers' strike that lasted nearly six weeks. Demanding that all salaries be doubled from unlivably low levels of $300 a month (even per capita GDP is now $500 a month), the teachers were eventually forced to accept the Education Ministry's offer of a one-third increase with higher raises for superior performers. Ivan Ilchev, sounding like a school reformer in the US, looks beyond initial merit raises and the consolidation of rural schools to a smaller but well paid cohort of better trained professional teachers as the only way forward. Here is the same blueprint for the smaller, more efficient and less corrupt public administration that EU guidelines are demanding of Bulgaria and Romania.
Political parties and public pessimism
The lack of public confidence in the current political spectrum to respond to these economic and administrative challenges underlies the pessimism that pervades opinion surveys as well as opinions expressed to me personally. Two specific problems emerged in the clamor surrounding the recent municipal elections, held on October 28, 2007. Although the number of parties running was down by almost half from the last elections in 2003, they still totaled 88, versus only 16 for the European Parliament balloting in May. Too many local special interests are still running, ready to reward supporters accordingly. The second problem is their readiness to reward supporters in advance by simply buying their votes. Originally focused on the community of several hundred thousand Roma, the practice has spread with the cell phone to many of the contests involving these strictly "local interests." Payments reported ranged up to $100 and included voters bused in from Turkey and Macedonia. The National Democratic Institute joined in with Bulgarian NGOs last Fall in a campaign to discourage it called: "Ne prodava glasa si" (Don't sell your vote). But the major change since the 2003 balloting was that voter turnout fell still further from 47 percent to 42 percent, evidence that public confidence in the political process has fallen. The major parties also bear their share of responsibility, with none of them enjoying even a near majority of public support. Where do they stand after these local elections, still a long way from parliamentary elections in 2009 and presidential elections in 2010? There are some signs of promise, if not yet perceived by a public that has a reputation for pessimism. Two lesser parties stayed roughly in place. The relatively new party Ataka, ill-famed for its anti-Roma and now anti-Turkish rhetoric, remained between 7 and 8 percent of the national vote, electing no mayors in a major municipality, and winning only 3 percent of the vote in Sofia. The larger and longer standing Turkish party, the Movement for Rights and Freedoms (MRF), also held its ground at 14 percent of the vote. Its original leader Mehdi Dogan remains in place as a partner, yet again, in the coalition government headed by the Bulgarian Socialist Party (BSP). His Kurdjali region of heaviest Turkish settlement is distinguished by more newly paved roads and other public facilities than other rural areas. At the same time, delays in EU agricultural subsidies to all of rural Bulgaria that have dragged on through most of the year are blamed, fairly or not, on his party's Minister of Agriculture.
Both the Socialists and still more their minority partner in the ruling coalition, former King Simeon's National Movement for Stability and Progress (NMSP), appear to be losing ground. Projections for the parliamentary elections based on the recent local balloting suggest that their declining shares, even when combined with MRF's constant share, would leave the coalition short of a majority in the Subranie. For the Socialists, the slippage seems less on the side of President Georgi Parvanov (despite some initial furor over pages missing from his pre-1989 Security Service file) than for Prime Minister Sergei Stanishev, whose disapproval rating approaches 60 percent. Compounding the failure of his heralded Corruption Commission even to meet in recent months was the July assassination of a figure close to Socialist campaigning and married to its Minister for Sport. The influence reputedly still retained by dismissed Energy Minister Roumen Avramov adds to the perception of a party operating behind the scenes. The nomination of the former Security Service intelligence chief as the BSP candidate for mayor of Sofia seemed to support the impression of a party still too little changed, despite its having led the way to NATO and EU membership and despite launching a surprise initiative to start the movement toward a flat income tax. In the event, Brigo Asparuhov won less than 16 percent of the vote in the Sofia mayoral race, and the BSP total fell to under 25 percent.
As Simeon himself steps further back from the political stage, NMSP has struggled to find new leadership. Teachers held the NMSP Minister of Education particularly responsible for rejecting their demands, however reasonable that rejection in fact was, during the recent strike. The aforementioned elections put parliamentary projections for the party in 2009 under 10 percent.
Hopes that a revived Union of Democratic Forces (UDF), in combination with the small Democratic Party, might step forward to fill the space vacated by NMSP failed to materialize in the local elections. The results support the pessimistic arguments I heard in Sofia to the effect that the UDF split prompted by former Prime Minister Ivan Kostov remains a fatal blow. Victories for five mayors in the 27 major municipalities would not seem to compensate for an overall showing under 5 percent.
Stepping into the space in the political spectrum vacated primarily by the UDF is the newly created Citizens for the Democratic Development of Bulgaria (CDDB). It won the largest number of local votes, if we aggregate those received separately and in coalition, exceeding the comparable BSP aggregate by 8 percent. The CDDB scored its greatest success in Sofia, winning 53 percent of the votes cast, albeit based on a reduced turnout of barely 35 percent. For the first time in the capital, a Roma candidate nominated by CDDB was among the local councilors elected.
CDDB burst on the scene last May by winning the largest single share of votes in the EU parliamentary elections. Its leader, Boyko Borisov, has used his frequent and telegenic presence before the public as Mayor of Sofia to appeal to a public weary of the established parties. His pre-1989 experience as a police general seems to count for credentials in law and order without the onus that service in the surely interconnected DS would carry with it. Beyond Borisov, the party's ideological identity seems a curious combination of populism, with ties established to the European Populist Party, and a program that reads like an EU prescription for a liberal market economy. Its 36-page "New Rightist Treaty for Bulgaria" ticks off an ambitious agenda reportedly put together by a number able economists. Among the proposals are a fully flat income tax of 10 percent, combined with a VAT cut from 20 to 15 percent, a comparable reduction in state expenditures to 30 percent of GDP, a choice of health plans and schools to include new private options and a reduction in the number of ministries. This last proposal, combined with one to route all EU funds through the Ministry of Finance, seems the one most likely to have a positive impact in the short run.
But to do that, and to advance the rest of their agenda, the CDDB will have to count on coalition partners in the new parliamentary framework that seems likely to emerge in 2009. Then, and before then, we may hope that the surprisingly little difference in the economic programs of CDDB, UDF and the present coalition will allow them to overcome their otherwise partisan divisions and focus on the serious problems identified here, problems that Bulgarian public opinion increasingly acknowledges. Progress in addressing them will be crucial to the reputation that most of that same public opinion now wishes to establish as a full and equal member of the wider European community, a reputation to which the bulk of Bulgaria's twentieth century history has not been kind. Let us hope that another Bulgarian reputation familiar to regional specialists—a reputation for hard work and special attention to practical economic issues— will serve it well.