The Economic Transitions of Bulgaria

1. The Economic Transitions of Bulgaria By: Kelsey Christianson, Zach Gerasin, Jeffery Russell, Alex D’angelo, Jay Anderson, and Joseph Wood

2. Contents • Introduction/ Overview • Labor Force • Business Statistics • Foreign Direct Investment • Privatization • Imports and Exports • Trade Partners • Media Attention • Bulgaria and The EU • The Future of Bulgaria

3. Bulgaria Overview: • Located in Southeastern Europe, bordering the Black Sea, between Romania and Turkey • Government: Parliamentary Democracy • Lots of Corruption and organized crime • Strong Foreign Direct Investment • Population: 7,606,000 • Communist Collapse: 1989 • Military Expenditures: 2.6% of GDP

4. Economic Overview: • Economic Structure: Market Economy • Economic Downturn in 1996; steady growth of more than 5% since • Commodity Exports: clothing, footwear, iron and steel, machinery and equipment, fuels • Main Imports: food, fuel and energy, and capital goods. • Service Sector makes up 57% of the economy • Currency: Leva • - Exchange Rate: leva (BGN) per US dollar - 1.3171

5. Population Statistics: Current Population: 7,606,000 (In 1985- 8,948,649) Expected: Population expected to decline by 34% from 2005 to 2050, leaving the population in 2050 around 5 million people. Growth Rate: -0.79% per year Fertility Rate: 1.48 children per woman (2.2 is replacement) Life Expectancy: 69 years for men and 76 for women. (EU average: Men 75, Women 82.) Ethnicities: Bulgarian 83.9%, Turk 9.4%, Roma 4.7%, other 2%

6. Median Age: total: 41.4 years male: 39.2 years female: 43.6 years (2009 est.) Birth Rate: 9.51 births/1,000 population Death Rate: 14.31 deaths/1,000 population

7. Labor Force and Business Statistics

8. Employment Statistics Services 57% Industry 30.5% Agriculture 7% Annual wage has risen since 2000 Unemployment Rate: 6.30% Effects of Financial Crisis

9. Unemployment Rates

10. Employment Statistics Services 57% Industry 30.5% Agriculture 7% Annual wage has risen since 2000 Unemployment Rate: 6.30% Effects of Financial Crisis Public Sector vs. Private Sector Employment Standard of Living Lowest in EU 27 Number of Women with practical University degree rising

11. Labor Force Participation of Men and Women in Bulgaria from 2001-2007

12. Bulgaria: A good place to do business • According to the World Bank Bulgaria is one of the most favorable environments to run a business from 2002-2007. • Based on: Corporate governance, business environment, barriers to entry and firing costs.

13. World Bank Business Survey

14. Foreign Direct Investment

15. Historical FDI in Bulgaria In the early 1990’s, FDI was slow and more or less insignificant in comparison to the amount of FDI that was occurring in neighboring central European countries. • From 1991-1996 FDI = $831 million A major decline in the mining industry occurred in this time after a transition away from communism. Bulgaria has huge deposits of minerals that were largely untapped due to a lack of modern equipment and low funding.

16. Challenges The challenges to obtaining a stronger level of FDI in the initial years of transition stemmed from three things: 1. Slow privatization 2. Contradictory tax and investment policies. 3. Bureaucratic red tape

17. Financial Crisis leads to reform In 1996-97 there was a significant financial crisis and one result from that was that the Union of Democratic Forces won the parliamentary elections for the first time since they were created in opposition to the communist party on December 7, 1989. This led to several key structural reforms in the government which helped attract FDI and stabilize the economy. Some of these were:

18. Introduced the IMF currency board system • Privatization • Liberalization of agricultural policies • Strengthen contract enforcement and fought crime and corruption Note: Many of these reforms were aided by an IMF loan in July of 1998 for $800 Million.

19. Introduced the IMF currency board system • Privatization • Liberalization of agricultural policies • Strengthen contract enforcement and fought crime and corruption Note: Many of these reforms were aided by an IMF loan in July of 1998 for $800 Million.

20. IMF Currency Board System • A currency board system combines three elements, a fixed exchange rate between a country’s currency and a anchor currency, automatic convertibility and a long term commitment to the system. • The benefits of such a system are: low inflation, economic credibility and low interest rates. The fixed exchange rate built into the system guarantees a comparatively lower rate. • Bulgaria was in financial turmoil and was facing potential hyperinflation. When the new government was voted into office in 1997 they decided to enact the new system which has proven to be instrumental in stabilizing the economy.

21. From 1991-1996 FDI = $831 million • From 1997-2000 the amount of foreign investment increased dramatically, accounting for nearly $770 million as a yearly average. • From 2000-2005 foreign investment continued to increase. In 2004 alone it accounted for 2.72 billion Euros. By 2005 it had dipped a little bit to 1.8 billion and this is mostly attributed to an end of the privatization of most of the major state owned companies. • In 2007 Bulgaria joined the European Union and they had a significant increase again reaching 6 billion Euros.

22. Infrastructure Foreign Direct Investment has added a significant benefit to Bulgaria’s infrastructure. Some recent projects completed include: • Sofia Airport • An expansion of Burgas Port • Several major highway construction projects • The Danube river reconstruction • Natural Gas infrastructure

23. What sectors of the economy are attractive to Foreign Investment today? • Oil - LUKoil of Russian • Metals - Union Miniere of Belgium • Electronics - China • Vehicles - Daimler Chrysler of Germany • Chemical Fertilizer • Food Processing • Mining industry has increased recently.

24. Privatization

25. Privatization Agency • Established in 1992 • Independent state institution • Responsible for the sale of large and strategic state owned enterprises • Managed by Mr. ZahariZhelyazkov (Executive Director)

26. Start of Privatization • Enacted on April 23rd 1992, however the first big transfer did not take place until May 1993 • Two fold process (denationalize state owned and municipal enterprises) • 1993-1995 development of institutional foundations • By 1995 24,000 entities had been privatized • 22,000 were shops, restaurants, hotels, warehouses, small production enterprises • Assets were passed into private hands through restitution

27. Municipalities • In 1993 only 110 entities went private against cash • From 1993 to 1996 1,650 municipal and 534 medium and large sized state enterprises have been privatized through cash privatization • Municipalities are the most active in the privatization process • Privatization of municipal property creates “real” owners and provides the basis for establishment of small and medium sized businesses in bigger towns.

28. Between 1998-2000 Sale of the Largest Enterprises was Completed • Air Transport • Chemical Industry • Electronics • Ship building • Metallurgy • Mechanical engineering • Defense Industry • Tourism

29. Agriculture • 1991 Privatization of agriculture top priority of Prime Minister Dimitur Popov • Arable Land Law was passed (spring 1991) • Allowed every citizen to own as much as thirty hectares of land (20 in areas of intensive cultivation) • Land was to be privatized quickly • Agriculture encountered stout resistance from local Zhivkovite officials. • Pre-collectivization land ownership records were destroyed and farmers were threatened or bribed to remain in collective farms rather then seeking private farms • In early 1991 staples (sugar, olive oil were unavailable in many areas) • Western firms expressed interest in joint agricultural ventures but were hesitant because of political and legal conditions.

30. Coal Plants: • Most of coal consumed in Bulgaria is used for power production. • Underwent a gradual shift toward privatization in 2004 • Focus of change was on privatizing and complying with environmental standards • Privatization has encouraged foreign direct investment.

31. MARITSA (unit 1) • AES Corporation (USA) took over operations of the Maritsa Unit 1 in late 2008 • Aes will finance the construction of a 2 * 300-MW lignite-fired power plant • One of Bulgaria’s largest foreign investment projects and helps the coal industry comply with European Union Environmental Standards

32. Imports, Exports, and Trade Partners

33. Imports / Exports • Import: • Clothing, Footwear • Iron, Steel, Machinery / Equipment, and Fuels • Export: • Machinery / Equipment, Metals and Ores • Chemicals, Plastics • Fuels, Minerals, and Raw Materials

34. Trade Partners • Import from: • Russia 14.6%, Germany 11.8% • Italy 7.9%, Ukraine 7.3%, Romania 5.6% • Turkey 5.5%, Greece 5.4%, Austria 4.1% • Export to: • Greece 9.9%, Germany 9.2% • Turkey 8.9%, Italy 8.5%, Romania 7.2% • Belgium 5.9%, France 4.1%

35. Problems • Central Planning: • Trade Imbalance • Increased Quantity; Decreased Quality • Property Rights • Artificial Price Levels • Corruption = Loss of Export Demand

36. Problems • Deficits • Outstanding Debt: • 1987: 8.26 billion • 1997: 11.1 billion • 2006: 20.9 billion • Trade Imbalance • 1998: 316 million • 2003: 2.872 billion • 2007: 8.869 billion • Inflation • High during initial transition. Lower post 2001

37. Recovery • Devalued goods > Became more competitive > Increased exports. • Further help: • Recovery of EU markets (post 2000). • Slowly increasing Bulgarian prices. • FDI: • 1996: 0.109 billion • 2000: 1 billion • 2007: 8.97 billion

38. Media Attention, EU, and The Future of Bulgaria

39. Recent Media Attention of Bulgaria • “Bulgaria Still Stuck in Trauma of Transition”- November 11,2009 New York Times. • “Bulgarian Who Is to Lead Unesco Advocates Political Pluralism”- September 24, 2009 New York Times. • “E.U. Reports Finds Bulgaria and Romania Beset with Problems”- July 23,2009 • “Bulgaria lost 430 million Euros - roughly $600 million - in European Union funds last year because of poor government administration and a failure to clean up graft. An additional 300 million Euros in European Union funds for Bulgaria had been frozen.” • “Everything in Bulgaria looks fine formally: the free market, human rights, free speech, the multiparty political system, membership in E.U. and NATO,” Mr. Sugarev said. “But that’s only a facade. Behind it there is nothing.”

40. Bulgaria’s Ascension to the EU • Bulgaria became a member of NATO in 2004 and a member of the European Union in 2007. • “Romania and Bulgaria, now the EU's poorest members, hope that membership will help them raise per capita wealth, which is one-third of the EU average. Their accession, the EU's second wave of enlargement into formerly Communist Eastern Europe, also will give the Union a stable political and economic anchor in a region surrounded by unstable neighbors.”- New York Times 2007 Q. Are Romania and Bulgaria really fit for Europe? • A. The two countries have a long list of requirements to fulfill. Both countries have to increase their fight against corruption. Bulgaria has to fight against organized crime, fraud and money laundering, and reform its judicial system.

41. Bulgaria’s Ascension to the EU Continued…. • “Romania expects to receive as much as €1.7 billion in the first year after entry, while Bulgaria, with a smaller population, would be entitled to €661 million.”- New York Times 2007 Q. What do the member states say? • A. France and Germany, two countries that have traditionally encouraged a deeper rather than a wider Europe, remain skeptical of Romania's and Bulgaria's accession and insist neither country is ready for admission. Britain, a stronger supporter of a wider, looser union has unconditionally backed the two eastern European countries on their bumpy road to EU membership. However, neither of the old member states will honor EU's principle of free movement of people. Britain, one of the few countries that opened its labor market two years ago for the 10 mew member states is prepared to impose a cap on Romanian and Bulgarian workers.

42. The Future of Bulgaria • According to the New York Times, “Despite its political and military achievements, Bulgaria is still the poorest country in the European Union, with monthly wages averaging €300, or $450. The country also suffers from a huge image problem in Europe and years of criticism by the European Commission for failing to fight corruption and organized crime.” • According to the Pew Global Attitudes Project, “Bulgaria appears the most dissatisfied with democracy and nostalgic for Communism of all the former Warsaw Pact members.”