The state and the market have long been in a tug of war in East-Central Europe. The Communists were not the first political force to recommend that the state play a much larger role in the economy. During the inter-war years, for instance, democratic visionary Tomas Masaryk acted much like FDR by supporting state intervention when the market failed to protect the interests of the economically weak in Czechoslovakia. Further north, Jozef Pilsudski presided over a Polish state that launched a number of major industrial projects. And, of course, several para-fascist regimes – Horthy in Hungary, Antonescu in Romania – favored strong corporatist states. The Communist governments that took over after World War II established their five-year plans on a pre-existing tradition of state intervention.
The pendulum swung the other way after 1989. An unencumbered market was held up as the solution to the economic ills of the region. It would sweep away the inefficiencies of the Communist era through “creative destruction,” empower a new class of entrepreneurs to spur innovation, and provide a new foundation for interacting with the global economy. Some countries, like Poland, preferred to administer “shock therapy” and enter this new era as quickly as possible. Other countries, like Slovenia, preferred a more gradual transition.
People in the region had a love-hate relationship with this new market reality. As consumers, they were generally enthusiastic. As workers or pensioners, they were less thrilled about the rate of unemployment or the reduction of government benefits. And so the tug-of-war has continued, as a variety of governments have tried to adjust the mix between state and market, and the voters have swung back and forth between more liberal and more socialist options, with the occasional foray into strong-arm nationalism.
Krassen Stanchev has not swung back and forth. An economist, he remains as committed to free-market economics as when I met him in 1990 if not more so. At the same time, he has maintained his commitment to environmentalism. In the late 1980s, he was one of the leaders of Ecoglasnost, perhaps the most important Bulgarian opposition movement. He believes that the two approaches go hand in hand: the green of capital and the Green of environmentalism are complementary.
Privatization and the bankruptcy of firms, he points out, eliminated many of the worst polluting firms in the country, and the air, soil, and water quality has improved as a result. Then there’s Bulgaria’s decision back in 2002 to resurrect plans for a second nuclear power plant at Belene. Stanchev continues to oppose it, for both environmental and economic reasons. “We did a cost-benefit analysis of the nuclear power station, which basically proved that it is not needed,” he told me. “HSBC Bank came to a similar conclusion, using a somewhat different methodology. Another government think tank came to this conclusion, and so did Russian nuclear energy specialists. But against all odds, the project continues.”
He believes that there is still much work to be done to liberalize the Bulgarian economy, and he sees two forces working against this project: Russia and the Bulgarian Socialist Party. Neither is particularly interested in a greener Bulgaria or a more independent Bulgaria. “The empire,” he concludes, “is fighting back.”
When you look back to 1989, and you evaluate everything that has taken place since 1989 here in Bulgaria, how would you evaluate that on a spectrum from 1 to 10, with 1 being most dissatisfied and 10 being most satisfied?
Over the same period, when you look at the situation in your own personal life, how would you evaluate it from 1 to 10, again with one being most dissatisfied, 10 most satisfied?
That’s more difficult. In terms of status, income, and that sort of stuff, it’s pretty satisfactory, more satisfactory than the social or political situation.
And when you look into the near future in Bulgaria, how would you evaluate the prospects on a scale from 1 to 10, with one being most pessimistic and 10 being most optimistic?
Below 5, probably 4. But let me explain why.
We’ve seen a repetition of problems we were dealing with 20 years ago or more. These problems are across the spectrum, of course, but the most disturbing probably is a second edition of an anti-democratic and anti-market economy public mood. The sources are different, but many things resemble the previous situation. In the last probably four or five years there’s been the rise of populism and the resurrection of central planning. To some extent it’s related to the economic downturn, but not only that.
Also I see the very negative influence of the European Union, in terms of political rhetoric and expectations. The most negative aspect is probably the false expectation that everybody can live at somebody else’s expense. From this you get a political system in which the government plays the role of policeman in the prisoner’s dilemma. And this is not only in Bulgaria, but in Bulgaria it’s very visible. The government consists first of all of former policemen, and second of all, they play the game of policeman in the prisoner’s dilemma very well by making Bulgarian citizens compete against one another. Their typical behavior is to create a competition for the privileges that come from redistribution. And they incentivize individuals and groups in the society to work against each other, which creates the phenomenon of free riders. It’s morally unacceptable, but it also fuels somehow the expectation of a good king or a benevolent dictator, and that’s why we have this current system of government.
It’s not only Bulgaria. Hungary is very similar, and so are Serbia and Russia. The current system in Russia serves as a role model for the current government in Bulgaria as well as the previous government.
Here’s another example of the repetition of problems. In the late 1980s, we managed to stop a second nuclear power station from being built in Bulgaria by the then Soviet Union. I was part of that effort as the chairman of the environmental committee of the constitutional assembly, and we managed to stop it in 1991. But in the last two 10 years, since 2002, that project is being prepared again—with all the costs including the legal corruption, the risks to the entire energy system, and so on. I found myself in the last three years once again leading a group against the project. We did a cost-benefit analysis of the nuclear power station, which basically proved that it is not needed. HSBC Bank came to a similar conclusion, using a somewhat different methodology. Another government think tank came to this conclusion, and so did Russian nuclear energy specialists. But against all odds, the project continues. So this explains my pessimism.
Why do you think that there has been this return of populist-style politics? It’s not just here in Bulgaria. We’ve seen Viktor Orban and FIDESZ in Hungary. We’ve seen something similar in Romania, something similar in Serbia. Why now? At some level it’s counter-intuitive because Bulgaria and Hungary are members of the European Union and Serbia is entering into negotiations over accession.
I think the phenomenon is rather new. One of the most important reasons is the impact of the EU on the domestic political landscape in the member states. The EU forces political parties—especially in the accession period—not to think. The parties simply have to comply by checking the right boxes, and the electorate gets bored. In this situation, newcomers who are somewhat nationalistic and somewhat skillful writers are able to get public support. Plus, in Bulgaria, Romania, and Serbia, the Russian influence is quite aggressive.
For Bulgaria, there was a lot of disappointment in the beginning of this decade with King Simeon’s government. And there was a lot of disappointment with the coalition government of the monarchists, the ethnic Turkish party, and the Socialists. The electoral ticket of “we will fight corruption and put everybody in jail” gained some support. The peculiarity in Bulgaria is that this is a minority government, and for this reason they have to be more populist than would be the typical case for any other political establishment.
One question I ask everybody is if they remember where they were and what they were thinking when the Berlin Wall fell.
I remember it very well. I was at the convention of the Bulgarian Philosophical Society. On November 9th, nobody even talked to me. I had just won an assistant professorship at the Academy of Sciences, and despite the undisputed results of the competition, I was not hired. All the members of the scientific council, all 17 of them, came to me and told me that only one person voted in favor or me. And all these 17 came to me and told me, “I was the one who voted in favor of you.”
The next day, November 10th, it was announced even officially that I will be working at the Academy of Sciences, which was very funny. But then on November 11th, I left for Berlin to discuss economic reforms in Eastern Europe at a colloquium organized by one of the dissidents in East Berlin, Michal Brie, who would become number two in Gregor Gysi’s Party of Democratic Socialism. We arrived there on the 11th, at night, and we immediately went to West Berlin. What I was thinking of the future then must be somewhere in the files of the state television station. I was interviewed on the street, and they asked for a 30-second interview, and I basically said the following: “In less than a month from now, we will have all of the opposition parties registered. There will be a strong move toward free elections, probably next year in the spring. Then, the most difficult situation will be to meet the economic challenges and somehow establish the rule of law and a market economy.” That was not broadcast. The person with me was interviewed too. He is now a professor in Australia, a political scientist, a decent guy. He talked about 5 minutes without saying anything, and they broadcast that instead.
Before I ask you specifically about environment and economics, and what has taken place in Bulgaria, is there anything that you believed in or you felt strongly about in 1989 that you have subsequently changed your mind about?
There are some things related to environmental policies, since they changed very fast. They changed by mid-1990, when I assumed the chairmanship of the environment committee of the constitutional assembly. Otherwise, no.
I think I now better understand economics. Before, I used to teach the history of economic ideas and that sort of stuff, and like everyone else I didn’t have my own personal experience in a normally functioning economy. Now I manage a company of my own. I was the manager of the Institute for Market Economics. Although it is a non-profit private foundation, it operates in the market environment. It supports market economics. It’s not about the economy, but rather about the values, policies, analyses, and that sort of stuff. This led to my better understanding of economics.
It also led to many contacts. I had the privilege of knowing most of the non-communist political leaders of the region because of my involvement in the Bulgarian opposition in the late 1980s. Then, through parliament I got to know everyone else in Eastern Europe, and through the Institute for Market Economics, I basically kept in contact with the same group of people. Obviously this led to deeper, more profound contacts with the global economic community. I’ve had the privilege of meeting, talking to, and being in correspondence with at least 10 Nobel Prize winners in economics. I am a member of the Mont Pelerin Society.
I did not expect some sort of revolutionary change in 1989. I knew that the major direction of the political reform would return the country to normalcy. I used to think that the social costs would be paid because most of the resources were spent or misallocated. I knew that the worst affected would be the generation that was older than me—I was then 35—but it would also affect my generation. I didn’t believe that it would be possible to change things overnight. It was obvious that the ex-communist establishment had already become the economic establishment. I understood it was not physically possible just to wipe those people out, for may reasons but most of all because when you come in with the idea to return the country to normalcy, your first priority is the rule of law. Imposing an institutional arrangement that arbitrarily changes peoples’ economic and social positions would not have been possible.
The resources to maintain normalcy in the economy and the social life were not available. Bulgaria was a bankrupt country, similar to Greek bankruptcy today. The difference between Bulgaria then and Greece today is that the Greek electorate today knows what the situation is, but we didn’t have any idea until the late 1980s. Bulgaria, in fact, was effectively bankrupt in 1988 and formally in 1990, before the first elections. It was the third default for the Bulgarian communist government. There were previous defaults in 1976-78 and in 1960. So that’s a second difference with Greece, which last defaulted at the end of the 1880s.
What has been going on in the economy of Bulgaria since then has just been compensating for the destruction caused by the communist regime. There are two additional payments remaining on the foreign debt from 1990. One is next year, and the other is in 2015. Bulgaria is still paying.
Paying to the IMF, or private debtors?
That’s why I said it’s similar to Greece. The Bulgarian government defaulted with the London club of private banks. Then, of course, the debt was renegotiated, there was a deduction of about 47%, and then the new trade instruments were issued. They’re now owned by different banks, but Bulgaria is paying it.
People tell me that of all of the countries in Eastern Europe, Bulgaria’s economy is the most stable. It may be stable at a low level, but…
Yes, it’s very stable. But stability does not necessarily mean that the country is rich. And the level doesn’t matter. Not rich compared to what? Luxembourg obviously, or Germany. The question is: why? One of the reasons is the compensation for the destruction made 20 or more years ago. The next reason is to some extent the policies that have prevented people from getting richer. And there were lots of such policies, especially in the 1990s. But since 1998, Bulgaria has enjoyed an effective fiscal surplus of more than 1% a year. Very often the government used to spend the surplus at the end of the year, to please the population and friends, but that’s what every government does. It’s better to give such presents at the end of the year, when you have a surplus, than when you have a deficit. But since 1998 — except for one year, 2009 — there has been no deficit, and the economy has grown by roughly 5% per annum.
That’s actually quite remarkable. For a country like Russia, which has enormous energy exports that it can use—
Yes, they dig up the land and they have money.
But Bulgaria doesn’t have that. And as you’ve pointed out a number of parties have tried to appeal to populist sentiments here in Bulgaria. So to what do you attribute this rather unusual fiscal rectitude?
Yes, Bulgaria is poor, as you say, when you’re talking about a low level of income. Compared to rich countries, Bulgaria is poor. But compared to itself, it’s not exactly poor. The average GDP per capita in 1990 was $850. Now it’s above $8,000. Since 1998, Bulgaria has had remarkable proof of good economic performance, and that’s foreign investment. Foreign investment for the period after 1998, compared to the period between 1989 and 1998, is 49 times higher. In several years, especially 2007 and 2008, Bulgaria had the world record in foreign investment. Foreign investment in 2007 was 32% of GDP, which is an enormous amount. And now the problems are related to a lack of that access to foreign capital, or foreign savings.
So the stability is to be attributed to the three crises that happened under central planning and one after that, which basically taught the populace to be relatively reasonable in its expectations. The last default on Bulgarian government debt—it was domestic debt—was in 1997. The negative effects were increased debt, hyperinflation, and radical pauperization. In 1994, before the reelection of the Socialist Party, the level of poverty was about 9-10%—measured by the World Bank standard of a dollar a day per person. By the beginning of 1997, the World Bank made another assessment of the poverty level, and it was already 36% of the population. After only two or three years of that government, there were 2.5 times more poor people.
That basically led to the elimination of the central bank. It’s now a currency board and a fixed exchange rate with some checks and balances: not an entirely pure system. Fixing the exchange rate proved to work, and people know this. In 1997 the collection of taxes was about 20% of GDP, but for the period after 1998, but after 2000 especially, it’s at the level of 40%. Because under high inflation no one paid taxes, the only way to collect more taxes, even when governments obviously want to be populist, especially the King’s government and the Socialist government, was to reduce them, which effectively created surpluses. Currently Bulgaria enjoys a 10% corporate and personal income tax. The only progressive tax is the contribution to the state pension system.
Another good thing about Bulgaria is the banking system. The banking system never followed any government-sponsored scheme. It’s not like the United States, with subprime mortgages and that sort of stuff. The banking system is almost totally private and totally foreign-owned. The structure of ownership basically coincides with the trade partnerships of Bulgarian companies. The Bulgarian banking system, if measured by the capital adequacy ratio, is three times healthier than the EU average. Even the Greek banks are part of that stability since about 25% of the credit and 30% of the deposits are with Greek banks in Bulgaria. They’re Greek-owned, but they’re local enterprises. So, no Bulgarian institution is a creditor to Greece. In fact, these Greek banks have to collect money from Bulgaria, so for this reason they behave reasonably. And of course when you have one segment of the economic system fixed, like the exchange rate, the rest must be relatively free.
In terms of what happened after 1990, where do you think Bulgaria went wrong, in terms of economic reform?
In fact we are talking about two Bulgarias. The regional reform push was very strong, and between December 1990 and the end of 1992, Bulgaria basically behaved like Poland, Czechoslovakia and to some extent Hungary (though Hungary didn’t default on its foreign debt). Then the situation deteriorated again at the end of 1994 through 1995 and 1996. I’ve mentioned the hyperinflation and the poverty. But the real reason was a second round of central planning and the government’s deliberate dismantlement of the rule of law, for instance by prohibiting enterprises from paying off their debt to the banks. So the economy was by and large still in government hands. The private sector between 1990 and 1995 compensated for the decline of the public sector. But when the public sector was banned by the minster of the economy from paying off its debt to the banks, the banks had to rely on private savings. They financed part of their misallocations with private savings, and eventually they went bankrupt. About 50% of the banks disappeared, along with the savings of the population in local and foreign currency. Savings fell to about 11% of GDP (now it is about 40% of GDP.)
So, in this Bulgaria, aside from those good years, the development was rather negative. The average annual inflation was about 60-70%, with a couple flashes of hyperinflation. For the period between April 1996 and February 1997, the inflation was 242% a month. The inflation tax for the entire period between 1989 and 1997—on average per annum—was about 56-60%. Which basically means that for every dollar, the government uses 56 cents for some idiotic reasons.
The second Bulgaria, after 1998, has been just remarkable. Real personal income has grown at least 10% per annum. In some years, like 2006, 2007, and 2008, the real personal income was growing like 20%. That’s because the basics were reestablished in terms of rule of law, property rights, and that sort of stuff, but also because of the access to foreign savings and because of the foreign investment, which was related to the entrance into the European Union.
Another positive factor was privatization, which unfortunately was stopped by the King’s government. But privatization was positive, irrespective of its manner. Very often the way state-owned assets were privatized was unacceptable from a moral standpoint, but even the most unacceptable way of privatizing was totally within the framework of the law. The privatization law was amended exactly 29 times between 1992 and 2004, to accommodate the idiotic ideas of economists that were favored by incumbent politicians.
Between 1989 and 1997, until the government that took over in 1997 and remained in place until 2001, the country was relatively unstable politically. Bulgaria had three presidents, five parliaments, and 11 prime ministers. After 1997, there was political stability. There was no social unrest, no government stepping down and calling elections. So I think part of the reason for the populism, besides the effects of the European Union, has been the exhaustion of the classical post-communist political leadership. The second reason for the current situation is that Bulgarians were simply living very well, compared to 1997 and before that. Of course, they compared themselves with their neighbors and with other EU countries, so they’re still dissatisfied. They look for better opportunities to live somewhere else, but the good thing is that they have this opportunity. [KS adds in an update: 2013 is the first time (since 1997) when we will have fresh elections. The government resigned four months ahead of the end of its term, hoping not to be associated with the negative public mood. When everyone competes for privileges no one is satisfied.]
When you said “two Bulgarias,” I thought you were going to talk about the reasonably successful cities like Sofia and the situation in the countryside, which is poorer and has become depopulated. I’m curious what you think about these two Bulgarias, and whether there was anything that could have been done after 1989 to ensure that the countryside or the smaller cities could have shared in the prosperity of the last decade.
That’s a fact of life. People have the freedom of movement, and they move from villages to towns, from towns to bigger towns, and from big towns to Sofia.
And from Sofia to other countries.
Not necessarily directly from Sofia. Some villages have more emigrants than residents. And there are other villages where the most spoken language is Portuguese or Spanish. The reasons people emigrate are pretty obvious. The difference between Bulgaria and other countries in terms of income, employment, business opportunities, and careers is visible. If you’re a nuclear physicist, you’re better off working in CERN in Switzerland than in Bulgaria. Otherwise, for the rest of the Bulgarian emigrants, the average monthly income in Bulgaria was more often below the tax brackets in other countries. If you go there and receive about the same income or even more, you won’t pay taxes and you can save everything for yourself. And of course this was better than not having a job in Bulgaria. The unemployment level at the end of the 1990s was about 20%.
As to the crisis, I don’t think it was as deep as people say. The average decline of GDP, although concentrated in the period between 1989 and 1997, was about 5% per year—with several shocks especially in 1996 and 1997 but also at the beginning in 1990 and 1991. The only decline registered after ’98 was in 2009, and it was by 5%. Since 2009, the economy is growing. Of course, it is compensating for the previous decline. But it is growing—which is not the case in neighboring countries.
What could have been done? Well, lots of things, of course. Number one, it was important not to compromise the rule of law at the beginning and then to stick to the reforms rather than reintroduce central planning. One of the most positive impacts on family income was the restitution of land, though it could have been done faster and better. Also, the property registries could have functioned better, particularly with the properties owned by the government. If you have a segment of the land ownership that is not clear, for example regarding a forest area, it can create a lot of problems throughout the entire transaction system. This lack of information creates lots of opportunities for embezzlement on the government side. But it also affects the transactions and prices on the private side.
There was a constitutional prohibition—Article 22 of the Bulgarian Constitution—against foreigners owning agricultural land in Bulgaria. I signed that constitutional provision with a special opinion. I signed several parts of the constitution with a special opinion and that was one of them. I fought for removing that ban as soon as possible. Eventually, in 2005, it was removed, but in a very strange manner. So Bulgaria, in fact, followed the example of the other new EU member states of retaining the ban for several years after accession. This basically meant that Bulgarians had fewer opportunities than the Czechs, Poles, and Hungarians for a period of 10 years. In Bulgaria everybody owns land, and 56% of the urban population has a second house. The private home ownership of flats and houses is 98%. So people could’ve pursued different strategies for increasing their wealth.
This system led to two things. Those who had cash were buying or renting at a very low price. And second, if you don’t have an opportunity to turn your land into capital, you try to use the land in some other way. This led to senseless construction around environmental reserves, on the seacoast, and in the mountains. There were no such huge bubbles like in Spain or Latvia because there were no government-supported loans, even for mortgages for disadvantaged groups.
Another thing that could have been done was to increase the competition of the economy and privatize more. Competition basically improves quality and decreases prices, which is good for the poor. But this would have meant that the governments — leftist or rightist, it does not matter — wouldn’t have had anything to do!
An example of the misallocation of wealth was government policy around the pension system. In order to be elected, a series of governments after 2001 forced the redistribution of income to pensioners from those who are younger, more competitive, and working in the private sector or in non-subsidized government enterprises. They did so through a very special policy—which exists in Europe only in Switzerland—by which each profession has a threshold of income on which they pay social taxes. These thresholds are increased every year with the consent of the trade unions. We at the Institute for Market Economics measured the costs of the increase of these thresholds in 2008, and they happened to be at the level of 7-8% of GDP. This was just for one year! And this has been the policy since 2004, so every year there is a negative effect, which basically keeps productivity and competitiveness low.
The eventual beneficiaries, obviously, are the pensioners, but the burden falls on the healthier, the younger, and more entrepreneurial part of the population. As a result, this segment of the population started declining. Five years ago, these net creditors were around 2 million (plus .8 million self-employed people) out of a population of 7.5 million. This means that every young, working competitive person is responsible for two and half beneficiaries. Three years ago, this number declined to 2.5 million, and this year it’s down to almost 2.2 million. In 2013 one net creditor of the government redistribution will be financing three beneficiaries.
There are too many things that need to be done. If you read Bulgarian, you can go to the webpage of the Institute and you will see a subpage, “what needs to be done to increase prosperity.”
On the environmental issue, many countries in this region experienced a decline in heavy industry that led to an improvement in the environmental situation. It’s not exactly something that people planned, but I’m curious whether—
I expected this to happen. I was the chairman of the environment committee of the constitutional Assembly and also a member of the economic committee. One of my major preoccupations was to understand what would happen after we started sorting out the economic challenges. One obvious result was the bankruptcy of firms that should be bankrupt, which immediately led to less environmental pollution.
Have there been other factors behind an improvement in the environmental situation in Bulgaria?
Yes. One of the very good factors was the price of electricity. It’s still not liberalized, but at least now it’s at the level of recovering the costs. Environmental regulations were sufficiently effective — and effectively implemented — to contribute to the current state of the environment. But the major energy efficiency reason was the cost of electricity.
It’s a somewhat similar situation in most of our countries, the new EU member states. The inherited economic structure was artificial. There was a heavy accent on industries, most of them polluting. Privatization helped a lot. Bulgaria used to have an even more artificial economic structure than other countries, which was the fault of the communist government in the 1960s. Since the 1960s, the Bulgarian economy—in order to pay the debt to the Russians and to Comecon—was recycling cheap resources, including energy resources, and reselling them to the international market. For this reason we had a huge energy system, and we did a lot of trade with the Russians. In 1990, with the dismantling of Comecon, the Bulgarian economy stopped functioning from one day to the next.
We had a strange situation then with a huge installed energy capacity and malfunctioning industry, which explains to some extent the new edition of central planning in 1994. With such a strange economic structure, you just use the energy in order to subsidize inefficient enterprises. But after privatization everything changed. Some segments of the industry — especially non-ferrous metals and mines, which were the most polluting – turned around.
I was elected chairman of the environment committee on August 10, 1990. On August 11, I had to deal with arsenic pollution from a factory located in the mountains that was polluting down through the Thracian Valley, jeopardizing livestock and agriculture. That factory, which polluted the rivers of southern Bulgaria, was the worst globally out of 105 such factories. Now it is one of the best. It’s probably the second in the world in terms of environmental protection. Something of this sort happened with most industries, with a few exceptions. With some enterprises it happened earlier rather than later.
There was even a World Bank case study from 1995 written about one such enterprise in Bulgaria—it was a lead and zinc factory—which discussed the importance of autonomous decision-making at the enterprise level and skillful marketing of the produce on the international market. The computer industry and other industries were growing, so the demand for such products was growing. I know that enterprise. It was the most polluted, from probably the biggest constituency in the country: it was banned (by the Communist authorities) from investing in purification equipment in order to have more cash for computers and electronics. There were lots of members of parliament who wanted to close it down. We closed the gold mine that was polluting, but we didn’t close this one. It took about three years for the factory to get cleaned up. They changed the equipment, changed the technology, and became one of the best globally. It was managed by state-appointed managers from the late 1980s. Eventually they privatized the enterprise about two years ago.
I think the environmental regulations here were very good. Part of these regulations was copied from international standards. Our regulatory system is similar to the Environmental Protection Agency, but with less involvement from the central government—or at least this used to be the case before Bulgaria became a member of the European Union. There’s a clear division of rights, duties, and responsibilities. And there’s no responsibility for past environmental damages. This allowed new technology to be implemented, and new owners eventually started cleaning up.
How do you feel about the latest environmental movements that have emerged here in Bulgaria: the forest actions, the protests against development along the Black Sea coast, the movement against the nuclear power plant….?
The activists didn’t do anything about the nuclear plant. It was us economists. They were totally irrational. They didn’t know how to talk about that sort of stuff. Eventually, cooperating with the environmental activists, we independent economists managed to introduce some rational elements and influence their action in the proper direction.
I know most of the people involved. They follow Jean-Jacques Rousseau. And very often they are very selfish. They organize protests about the Black Sea – and these are individuals who love those places — but at the expense of the people who own land there and were not so well organized. This disrespect for property rights is one of the characteristics of the current activists. Of course, there are exceptions. All of them are reasonable when you talk to them in a normal setting. They understand the economics of most of the challenges, and they understand property rights if it’s their own property and their own rights. But when they go into a collective campaign, the rhetoric changes to socialist extremism.
With regard to the forest, it’s complicated. One of the reasons for the current problem is that, besides the restitution of forest that happened in 1997, there was a strengthening of government controls seven or eight years ago, which led to very high user’s rights—construction rights — especially in resorts in forest and mountain regions. Those involved in resorts—ski resorts especially—tried to avoid those costs, and they started behaving outrageously. So the protests were correct when targeting those who were behaving outrageously, but they were not correct when ignoring those who imposed these regulations in the first place. At the end of the day you have some sort of communist green movement, which claims that everything should be state-owned, and everything private should be killed. I don’t accept this rhetoric. I have lots of friends in the environmental movement, and I try to talk to them. I still have some sort of authority, and from time to time they listen to me—mostly because of those first environmental regulations that I drafted back in 1990 and because of the work around the second nuclear power project.
There are a number of issues where economy and environment come together and there’s no friction. You mentioned the study of the nuclear power plant that showed that economically it didn’t make any sense.
The environmental risks are huge as well, especially having this nuclear fuel in a seismic region. But now you can observe one of the deficiencies of the Greens. Bulgaria is the only country in the world to have a referendum, motivated by a public mood in favor of nuclear energy. The Socialists were collecting signatures, telling the populace that nuclear energy is free. Even though Bulgaria produces twice more electricity than it consumes or exports, the Socialists want Bulgaria to be a Russian nuclear country.
Unfortunately, we have the same problem in the United States. We have a number of old nuclear power plants located in seismic zones. We even have some nuclear storage facilities located on seismic zones. Back to the question of the intersection of economics and environmentalism: How do you reconcile the inevitable tension between the two, when you have to choose between market efficiency and environmental protection, specifically here in Bulgaria?
Part of the environmental central planning comes from the European Union. It’s counter-productive for all the countries, not only the new member states. I don’t think there’s the right balance at the moment. For instance, the current anti-carbon movement is very expensive and creates lots of distortions in the country systems.
The carbon tax?
Yes. The carbon quasi-tax, the subsidization of renewables, wind, solar, biomass, and that sort of stuff. The most important feature of the current situation in Europe and Bulgaria is that the prerequisites of adjustable choices and decision-making—even at the level of national policy—are inefficient because the basics are not there. The system is not sufficiently liberalized. Property rights are not well diversified. Some countries have done better; some countries are at a very low level of liberalization, like Bulgaria and Romania. For Bulgaria, this is to be explained by the huge capacity already installed in the communist years. The average excess capacity is about 20% for the entire period since 1989. This explains the energy waste and energy inefficiency. The Central European countries managed to diversify and, between 1992 and 1995, linked up their electricity grids. This is not the case with Bulgaria or Romania.
Is that on the agenda?
It’s been on the agenda from day one.
But there’s no money for it? There’s no EU support for it?
No, I think this is a result of Russian influence. They basically buy politicians and regulators and executives in the energy companies, which are still state-owned, to ensure that they are not paying attention to the need for such diversification.
Because they want Bulgaria to continually dependent on Russia…
Yes, Bulgaria, Romania, and any others. It’s the same with the pipelines. By 2003, the Central European countries managed to diversify their pipelines. They have delivery points between countries around the center of Europe and these pipelines are linked to the West, which is not the case with Bulgaria, which doesn’t even have that arrangement with major clients Turkey and Greece.
My point is the following: before you have a diversity of choices, it’s very difficult to make the right choices on the right balance between renewables, nuclear, carbon, coal, and so on. The end users are basically hostages of the system and the political decisions being made. I believe that the policies of the recent government to stop the Russian nuclear and pipeline projects have motivated Russian state-owned companies to work against Bulgaria’s independence.
My last question is about Bulgarian nationalism, and the situation of ethnic minorities. Some people argue that political nationalism—in other words, the political power of parties like Ataka and so forth—has declined significantly over the last few years, but the level of social racism or discrimination remains quite high in society. Other people say that Ataka’s platform has been absorbed by the ruling party. What do you think?
I think that chauvinistic sentiment is growing, and it’s no accident that parties like Ataka emerged. And it’s no accident that the political parties are behaving nationalistically. The Socialists were nationalists from the very outset. Their slogan in 1990, during the first election, was “Bulgaria above everything else.” Bulgaria uber alles! To some extent, the nationalists from the big parties were crowding out the small and really ridiculous chauvinist parties, but that was until the elections of 2005. In 2005, the political behavior and preferences of the electorate changed. The reasons are the following. The big parties dominating political life between 1989 and 2005—until the formal accession to the European Union—had become really dull. You know, “we’re heading into the European Union, and it’s paradise on earth.” In this situation, if you have political ambition, you see what is not talked about. This nationalism—with some support from outside—sprang up on Bulgarian soil. But the rise of Ataka and some other movements behind it comes first of all from the dull nature of the political establishment before 2005-2007.
The second reason, which is very important right now, is the effect of EU membership on the voters’ psyches. Many Bulgarians suddenly realized that they were not sufficiently educated. They didn’t have language proficiency. They were not competitive. They were provincial, in European terms. And there emerged a compensation for this: a kind of complex.
And probably the third factor has been the total misunderstanding of the Gypsies. Ataka and other parties have used them as a scapegoat for everything. There’s a lot of bad education here, a lack of knowledge of history.
Perhaps there is a fourth factor. The current prosperity of Bulgaria was fueled by access to foreign savings. So in this situation, when obviously not everyone is a beneficiary of foreign investment, it’s very easy to identify those who had no chance to use this opportunity, and start blaming foreigners. The current situation in Bulgaria is that the recent government, trying to be as populist as possible, has been paying Ataka for its support in the parliament. So the government has been rhetorically very negative about foreign investment, although they still beg companies to come.
And the government, in my point of view, provoked the current trial in Pazardzhik against the 13 imams. Why select 13 imams? Why not 12? I mean, the indictment is totally fake. There is no crime: one may disagree with many things in radical Islam, but this case is totally against the law. It can be explained by the involvement of the unreformed secret service. They would like to be important, so they compile this fake evidence. This is a dangerous situation when you have law enforcement agencies, who must protect the population, now creating problems. And it’s because they’re unreformed.
We had fights on the streets in 1989-90 over this question. I know most of those people who were fighting with us by face. Some of them were promoted through the system, like the previous Bulgarian president, Georgi Parvanov. He was one of the leaders of the Socialist Party, and he was also one of the founders of the Committee to Protect National Interests that was fighting against returning the original names of the ethnic Turks (renamed by the Communists in 1984-1985). He was himself a collaborator of the secret service, writing nasty things about Turks. Out of the 120 ambassadors appointed by him, 85 of them were members of the Bulgarian KGB or collaborators. The empire is fighting back.
Sofia, September 28, 2012
A recently-elected member of parliament representing the Union of Democratic Forces, Kracen Stanchev is responsible for Ecoglasnost’s positions on nuclear energy as well as economic development. A soft-spoken man in his thirties, Stanchev lived not far from where I was staying in Sofia. We met at an outdoor cafe in his district where every ten minutes a constituent would approach, shake hands, talk briefly about a problem, make a comment about the current political situation, or simply wish Stanchev luck in his new job. An economist by profession, Stanchev had concentrated on economic reform in Eastern Europe, reform that is in every country except Bulgaria (Bulgarian economic reform, in the days of Zhivkov, was understandably a controversial topic). He has been involved in the ecological movement since 1988 and has been an executive spokesperson for Ecoglasnost. I asked him first about the process of setting up laws for environmental protection in Bulgaria.
There are two approaches, he answered. In the first, the European continental tradition, a set of separate codes are developed applying to air, water, soil and so on. The Anglo-American tradition, on the other hand, establishes a general law on the environment and then develops out of that law various acts on land use, waste production and so on. In parliament, Stanchev is presently trying to establish legislation based on the second model. Also necessary, he noted, was the development of both state and non-governmental institutions capable of enforcement and monitoring.
I asked about the classic conflict between ecological protection and economic development, a conflict Stanchev is particularly well-placed to observe. There was a consensus in parliament, he answered, on an individual basis. But in the committee on economic issues, disagreements have emerged. After all, the very industries which can help Bulgaria repay its foreign debt are the industries most harmful to the environment. For instance, the lead and zinc processing plant near Plovdiv, Bulgaria’s second largest city. Although extremely profitable, the factory is located in the middle of an agricultural region, rendering the farm products too contaminated to be sold to the West. Stanchev thought the solution to this problem should be twofold: restructure the industries to be cleaner and restructure agriculture to produce products not so easily contaminated. For instance, switching a tomato or cherry crop into cotton or roses. Roses are profitable on the international market while cotton could be produced for domestic consumption.
I asked about joint ventures. There have been some, but very few in manufacturing. Most have gone into trade and tourism. The largest American joint venture is between Honeywell and Chemimport. The Plovdiv plant mentioned above is actually a joint venture with the Greeks. Greece has some of the strongest environmental standards in Europe. The Greek company therefore extracts lead and zinc in Greece and processes it in Bulgaria.
Stanchev spoke of the deep contradictions within Bulgarian national culture. The country historically is agricultural but the Communists emphasized heavy industry. Now, he suggested, was the opportunity to switch back to agriculture. Even the attempt in the 1970s to turn the Bulgarian economy high-tech was a failure, neither producing competitive products nor protecting the environment. One of the largest sources of hard currency for Bulgaria at this time was the reexport to the West of petroleum products bought cheap from the USSR. This was done from 1976 to 1979 and temporarily in the beginning of the 1980s. That source of income is now gone. In terms of agricultural reform, a formal act on private ownership has yet to be developed. Many previous owners of the land (before collectivization) now live in the city and the peasants will not easily agree to give up their lands. Furthermore 12-15 per cent of the former land is now occupied by industry. 41 per cent of Bulgarian soil is now polluted. State farms control about 10-12 per cent of farmland; the rest is held by cooperatives. He is leery of the Socialist party plan to turn land over to those who presently work it.
We turned to the question of general economic reform. The government so far has tried to allow workers in small enterprises become the owners of these businesses. The problem, however, is that this process has not, according to Stanchev, brought out the hidden capital into circulation. To accomplish this, opposition economists maintain that a fast privatization must take place. The government has pursued two different tracks: selling state properties directly and subjecting privatization to the decision of the Council of Ministers. The opposition favors the second approach, arguing that the Ministers should not determine how an enterprise is to be divided and who it should go to. The government supports the creation of a single holding company that would then issue shares to be bought by the public. The opposition argues that there should be at least 6 such holding companies devoted to specific sectors. How serious were these disagreements? In parliament, where legislators must show their public faces, division is common. At the level of commission, however, the party lines do not have as strong a pull: “It is a pleasure to work on that level: there is no theater, only concrete discussions.” He mentioned that many of the bankers affiliated with the Socialist party have a good deal of experience and side with the opposition on the topic of privatization. The red capitalists? The economic crisis in Bulgaria is so deep, Stanchev pointed out, that only a compromise between the opposition and these red capitalists would create a stable situation. The old Bulgarian opposition, however, wants revenge and this compromise will be hard to achieve.
On specific ecological questions:
* Rousse: Romania will be asked to relocate its chemical complex away from the border at the beginning of September. A decision on this will be very difficult given Romania’s present economic situation.
* nuclear power plant: construction of the new one was halted in March. The existing plant is still a problem, however. The reactors are quite old and Bulgaria will ask France and the Soviet Union to replace the units. If this plant can be salvaged and ensured with a high degree of security, Stanchev thinks it should be kept: Bulgaria has few recourses for supplying its energy needs. Because of its proximity to the Romanian border, Romania is not pleased with this existing plan.
* Black sea: the government has yet to do anything concrete about the pollution here. A five country project (Turkey, USSR, US, Bulgaria and Romania) is in the works for monitoring and perhaps even improving the situation.
We then talked about the social situation. Of Bulgaria’s 9 million population, 2.3 million are pensioners who live under the minimum standard. A parliamentary commission ahs been set up to look into unemployment benefits and other social guarantees. Inflation continues to rise, 10-15 per cent monthly. State subsidies will be removed after December, probably sending prices on essentials up. He considered the indexation agreement unworkable.
What about a political compromise between the Socialists and the opposition? His scenario: a contract. The opposition will try to exclude the key people responsible for the last 45 years; it will try to enact laws to make it impossible for the nomenklatura to retain key positions, especially in the regions. He expects new laws on property, trade and taxation by November. In exchange for this, the opposition would participate in the formation of government.