The Economy - Economic Policy and Performance

The Economy - Economic Policy and Performance

Bulgarian postwar economic development can be divided into four phases: the revolutionary period (1944 through 1948); the development of socialism (1949 through 1960); the age of intermittent reform (1961 through 1989); and the transformation to a market economy (beginning in 1990).

Postwar Economic Policy

After the BCP came to power in 1944, the transition to socialism began slowly. Before World War II, the Bulgarian economy had been agrarian and decentralized, so the industrial base was relatively undeveloped. Following the Soviet model, the BCP first sought control over as many facets of the economy as possible. Thus, restructuring included collectivizing agriculture, confiscating private enterprises, nationalizing industry, and enacting various fiscal and monetary measures.

In the 1940s, the BCP viewed the agricultural sector as a major obstacle to the transformation of the economy. Although collectivization proceeded slowly at first, state power in the agricultural markets was quickly established by nationalizing internal and foreign commodity trade. To accomplish this, the BCP used the wartime organizations that had overseen distribution of major crops.

Industry continued to decentralize from 1944 until 1947. In those years, the majority of labor leaving the military and the farms entered small factories and unmechanized artisan shops. These small enterprises were quite the opposite of the modern, largescale industry that the BCP was committed to creating. Small enterprises also competed with state enterprises for scarce raw materials and skilled labor. Labor discipline also was a major problem during this phase; unexcused absences, sporadic strikes, and high labor turnover plagued the new state enterprises. In September 1947, a decision to accelerate the nationalization of industry was taken at a meeting of the Communist Information Bureau (Cominform). As a result, in December 1947 trained groups of party members entered all the approximately 6,100 remaining private enterprises, seized their capital, and announced their immediate nationalization. This act effectively erased Bulgaria's small class of private industrial entrepreneurs. Also in 1947, government monopolies were established over all items of retail trade. By the end of 1948, 85 percent of the means of production were run by the state.

Although Bulgaria had few private banks when the BCP came to power, by December 1947 those few were merged with the BNB. The BCP also enacted a series of fiscal and monetary measures to gain control over Bulgaria's financial resources by the end of 1947. Monetary reform froze all bank accounts over 20,000 leva, and a tax was imposed on the remaining accounts. These actions reduced the money supply by two-thirds. The new policy also levied high taxes on private income and high profits to absorb any potential new deposits.

This first phase of postwar economic development included a tentative Two-Year Plan (1947-48) that foreshadowed later policies. Aimed principally at speedy recovery from wartime stress, the program began large-scale industrialization and electrification; it sought to raise industrial production by 67 percent and agricultural production by 34 percent over prewar levels. In the event, the first plan disproportionately allocated funds away from agriculture and encountered severe organizational and technical problems, mistakes by inexperienced management, and shortages of energy and production equipment--problems that would continue in ensuing development phases.

The First Five-Year Plans

The next phase of Bulgarian postwar economic development included the First Five-Year Plan. This plan made an important contribution to the pattern of Bulgaria's socialist economic development by creating the institutional apparatus for long-term industrial planning. Already in 1945, the wartime Directorate for Civilian Mobilization had been replaced by a Supreme Economic Council that extended the previous organization's authority over resource allocation. Now the state's existing economic ministries were subdivided into one ministry for each branch of production. By January 1948, a separate and politically powerful State Production Committee (SPC) was established. By October 1948, representatives of the new SPC and the existing Main Directorate for Statistics had set out the criteria for calculating plan fulfillment.

The announced targets for the First Five-Year Plan (1949-53) confirmed the economic priorities indicated by the previous TwoYear Plan. Agriculture was to receive 17 percent of new investment and industry 47 percent. Gross industrial output was to grow by 119 percent, primarily because of a 220 percent increase in heavy industry. Light industry and agriculture were to raise output by 75 and 59 percent, respectively. The rapid collectivization and mechanization of agriculture was expected to achieve the last target while freeing labor for industry, construction, and transportation. Because about 25 percent of the country's national income was invested in the economic infrastructure, the standard of living remained low.

In 1952 the plan was declared fulfilled a year ahead of schedule, but statistics on the period were too incomplete and contradictory to evaluate its actual results. Substantial bottlenecks existed in material inputs and outputs. Agriculture received less investment than planned (only 13 percent), and showed no growth through the period. The effect of low agricultural output rippled through other sectors of the economy, hindering production in related industries. Substantial material and technical aid came from the Soviet Union, but with a steep price: Bulgaria was expected to sell products to the Soviet market at below-market prices, and the arrogance of Soviet economic advisers caused serious resentment.

Continuing problems with excessive labor turnover forced the regime to cut back the targets for heavy industry in the Second Five-Year Plan (1953-57), and average annual industrial growth fell from 20.7 to 12.7 percent during that period. This was the first of several dramatic swings that characterized Bulgarian economic development throughout the postwar period. The average annual growth rate of agriculture increased from negative 0.9 percent to 4.9 percent in the Second Five-Year Plan, but the same indicator for the overall NMP dropped from 8.4 to 7.8 percent. The industrial share of the NMP exceeded that of agriculture for the first time in this period.

Two important economic events occurred at the Seventh Party Congress of the BCP, which met in mid-1958. The party declared that Bulgaria was the first country besides the Soviet Union to achieve full collectivization of agriculture (estimates put the figure at 92 percent at this time), and it announced the goals for the Third Five-Year Plan. That plan, which began in 1958, set relatively moderate initial quotas that included substantially more production of consumer goods. In 1959, however, a BCP decision to make a "Great Leap Forward" (borrowed by the press from Mao Zedong's concurrent program for the Chinese economy) drastically raised quotas: by 1965 industrial output was to be three to four times the 1957 level, and by 1961 agriculture was to produce three times as much as it had in 1957. To achieve the latter goal, agriculture was again reorganized. Amalgamation of collective farms cut their number by 70 percent, after which average farm acreage was second only to the Soviet Union among countries in Eastern Europe. The grandiose Zhivkov Theses, as the quota program came to be known, were tempered noticeably by 1961, when the economy's inability to achieve such growth was obvious to all.

Meanwhile, throughout the late 1950s urban unemployment had been a major problem. The new collectivization drive brought another wave of peasant migration to urban centers. Compounding this problem was a cutback in Soviet imports of industrial inputs, which created some excess capacity in heavy industry. Thus, the intensified industrialization of the Third Five-Year Plan also aimed at absorbing surplus labor.

Trade relations with the Soviet Union and Eastern Europe also played a large role in the investment priorities of the Third FiveYear Plan. Food processing and agriculture were earmarked for greatest growth, because these sectors, together with chemical fertilizers and small electric equipment, were now areas of Bulgarian responsibility in the plans of the Council for Mutual Economic Assistance (Comecon) for greater East European trade. After a reduction in 1955, Bulgaria faced greatly increased export obligations to the USSR, Czechoslovakia, and the German Democratic Republic (East Germany) in the late 1950s. The latter two could provide badly needed industrial machinery in return, and the USSR provided vital raw materials and energy.

The party leadership initially resolved to fulfill the third plan, like the first, within three or four years; although none of its goals were reached, the party declared fulfillment in 1960, and Zhivkov survived the popular disillusionment and economic upheaval caused by his totally unrealistic theses. At that point, the twelve years of the second phase of Bulgarian postwar economic development had wrought major structural changes in the Bulgarian economy. Industry's share of the NMP increased from 23 percent to 48 percent as agriculture's share fell from 59 percent to 27 percent. By 1960 the value produced by heavy industry matched that of light industry, although food processing for export also grew rapidly. Throughout the second phase, budget expenditures consisted primarily of reinvestment in sectors given initial priority. Meanwhile, the completion of collectivization had shifted 678,000 peasants, about 20 percent of the active labor force, into industrial jobs. The average annual increase in industrial employment peaked at 11.5 percent between 1955 and 1960.

The Era of Experimentation and Reform

The first full five-year plans proved the Bulgarian system's capacity for extensive growth in selected branches of industry, based on massive infusions of labor and capital. In the first postwar decades, that system was much more successful in reaching goals than were the command economies in the other East European countries, largely because Bulgaria had started with a much more primitive industrial infrastructure. By the early 1960s, however, changes to the system were obviously needed to achieve sustained growth in all branches of production, including agriculture. Specific incentives to reform were shortages of labor and energy and the growing importance of foreign trade in the "thaw" years of the mid-1960s. Consequently, in 1962 the Fourth Five-Year Plan began an era of economic reform that brought a series of new approaches to the old goal of intensive growth.

Industrial Decentralization

In industry the "New System of Management" was introduced in 1964 and lasted until 1968. This approach intended to streamline economic units and make enterprise managers more responsible for performance. In June 1964, about fifty industrial enterprises, mostly producers of textiles and other consumer goods, were placed under the new system. Wages, bonuses, and investment funds were tied to enterprise profits, up to 70 percent of which could be retained. Outside investment funds were to come primarily from bank credit rather than the state budget. In 1965 state subsidies still accounted for 63 percent of enterprise investment funds, however, while 30 percent came from retained enterprise earnings and only 7 percent from bank credits. By 1970 budget subsidies accounted for only 27 percent of investment funds, while bank credits jumped to 39 percent, and retained enterprise earnings reached 34 percent. The number of compulsory targets for the Fourth Five-Year Plan was cut to four: physical output, investment funds, input utilization, and foreign trade targets. The pilot enterprises did very well, earning profits that were double the norm. By 1967 two-thirds of industrial production came from firms under the new system, which by that time had embraced areas outside consumer production.

Another distinctive feature of the Bulgarian economy during the 1960s was the high level of net capital investment (total investment minus depreciation). The average of 12 percent from 1960 to 1970 was the highest in all of Eastern Europe. As in the past, investment in heavy industry received the lion's share--over 80 percent of total industrial investment. Capital accumulation (net investment plus net inventories) averaged 29 percent from 1960 to 1970, also a very high level.

Industrial Recentralization

Before the end of the 1960s, however, Bulgarian economic planning moved back toward the conventional CPE approach. Many Western analysts attributed the Bulgarian retreat from the reforms of the 1960s to tension caused by the Soviet invasion of Czechoslovakia in 1968. International events may well have played a role, but the timing of the retreat and the invasion suggest another component: dissatisfaction among the BCP elite with the results and ideological implications of the reform. For example, in July 1968, one month before the invasion of Czechoslovakia, Bulgaria's unorthodox, three-tiered pricing system was eliminated. The party leadership had never accepted the concept of free and flexible pricing for some products, which was an important Bulgarian departure from centralized planning in the 1960s. Resistance to reform was further encouraged by a series of cases in which major enterprise directors used newly decentralized financial resources to line their own pockets.

Despite the general retreat from reform, two important measures remained intact, one each in agriculture and industry. The first involved new operating procedures introduced on the larger collective farms in the early 1960s. To better exploit the new equipment introduced during the consolidation of the late 1950s, farms were assigned more agronomists and labor was specialized by establishing fixed brigades. Production target negotiations between the Ministry of State Planning and the agricultural collectives also were simplified.

The industrial reform that survived retrenchment in 1968 gave associations, not ministries, responsibility to supervise the new system of supply contracts between enterprises. This system continued to grow, with prices determined on the basis of enterprise bargaining rather than ministerial fiat. Interenterprise allocations clearly functioned more efficiently with this arrangement.

Larger Economic Units

Just as most reforms were being rescinded, the BCP began the last phase of postwar agricultural restructuring. Prompted by the labor shortage, the new streamlining of collective farms that began in 1969 introduced the so-called agricultural-industrial complex (agrompromishlen kompleks--APK). The new structure was to industrialize agricultural production, boost the value-added component in Bulgarian exports by processing more agricultural goods, and raise the food supply to cities without diverting labor back from industry. In the late 1960s, relatively poor agricultural performance under the existing structure had prevented those goals from being reached.

The idea of combining existing enterprises into a smaller, presumably more manageable number of units spread quickly from agriculture to industry. By the end of the 1970s, the number of associations into which industrial enterprises were grouped was reduced by half. The sixty-four new, larger associations were granted the authority to make decisions for their enterprises about new investments, bank credits, and budget subsidies. Within an association, the larger enterprises (called subsidiaries) still could sign their own supply contracts and maintain their own bank accounts, but they ceased to be legal entities. Smaller enterprises (called subdivisions) became fully dependent on their association.

The main advantage of this streamlined organization was seen as economy of scale through increased specialization and a simplified flow of information. Associations also were assumed to be better able to make investment decisions and oversee material and labor distribution than either a small number of ministries or a large number of enterprises. The new structure would link specific industrial enterprises with scientific institutes in the same way as the agricultural complexes had linked them.

These reforms proved disappointing. Reformed planning techniques continued to leave unused industrial capacity, and quality control failed to improve. Both Western and domestic customers remained dissatisfied with the quality of many Bulgarian manufactures. New planning indicators that set norms for cost reduction actually reduced quality in a number of cases. Individual members of institutes could not convey their ideas to associations or ministries, where decisions to import or to invest in new technology were made. Thus the new framework only accentuated the dangers of socialist monopoly. Party meetings and the press criticized monopolistic abuses resulting from irrational decisions at the top and poor implementation of rational policies at the enterprise level. By the end of the 1970s, a new set of reforms was prescribed.

The New Economic Model

Initiated in 1981, the next program of reforms was designated the New Economic Madel (NEM). This program involved both agricultural complexes and industrial enterprises. Goals of the NEM included updating the technical infrastructure of Bulgarian industry and improving the quality of Bulgarian exports to raise hard-currency income. Centralized planning now was relegated to setting gross profits and overseeing the national scientific program. In 1978-79 and 1982-83, the NEM's principal instruments were financial incentives and accounting regulations aimed at all levels of management, but especially at the smallest unit of labor, the brigade. Brigades, each containing thirty to fifty workers, now would set labor and material input levels and dispose of finished products. In an effort to remedy the chronic distribution problems of the central economy, higher economic institutions became financially accountable for damage inflicted by their decisions on subordinate levels.

Several important initiatives were launched in 1978. The longstanding limits on enterprise investment were lifted. In their place, a new investment plan was based on the enterprises' contractual obligations and credits with the BNB. The bank monitored the cash balance of enterprise contracts with customers and suppliers, granting credits only when required. Three separate reinvestment funds received first claim on the net income of the enterprise. Although budgetary subsidies were not eliminated, the NEM directives assigned responsibility for financial losses to all levels of enterprises. Self-financing became the watchword for all economic organizations.

Another major change eliminated the automatic first claim of salaries and wages on gross enterprise income. This meant that wages could rise only after an increase in labor productivity, and then only by 50 percent of that increase. Moreover, management salaries could be cut by as much as 20 percent if the complex or enterprise failed to meet its norms for production and productivity. The formula for sanctions against management salaries changed several times. Finally, binding performance criteria were limited to five financial indicators for agricultural complexes and industrial associations, and to four for individual enterprises. Profit criteria were set only for the complexes or associations. Complexes or associations were given explicit freedom to sign their own contracts with suppliers and customers at home and abroad.

The BNB was granted some flexibility in restricting its terms of lending and in charging interest rates above the nominal 2 percent. These measures were designed to bestow greater rewards for efficiency and to reduce the number of unfinished or unprofitable new projects. The latter accounted for 57 percent of all Bulgarian investment as late as 1976. A provision for joint ventures with foreign firms met little enthusiasm from abroad.

The Last Round of Zhivkov Reforms

By 1982 economists and the party leadership admitted that the NEM had not led to the anticipated upturn in overall productivity and efficiency. Even upwardly skewed official statistics indicated that aggregate economic growth had dropped to its lowest postwar level. Under the NEM, enterprises could still get approval from state pricing authorities for price increases with marginal or nonexistent quality improvement--an important factor in evaluating official figures.

The differences between the Western concept of gross national product (GNP) and NMP make performance comparisons problematic. However, a Western economist who calculated growth rates for the Bulgarian economy according to the conventional GNP standard used in market economies determined the official Bulgarian growth rates between 1961 and 1980. The calculated rate for 1981-2 was 2.9 percent.

The Bulgarian response to declining growth rates under NEM was to initiate a second set of NEM reforms. Measures in 1982 and 1983 concentrated almost exclusively on financial incentives and prices. Net income was identified as the major basis for judging plan fulfillment. The only other targets were tax payments, domestic and imported input limits, and minimum export levels. The emphasis on self-supporting net income was extended downward to the brigade and upward to the associations. Guarantees of a minimum wage were removed for workers and all levels of management. Ministers themselves now were subject to salary reductions if their industrial association failed to meet the streamlined list of targets. Ministry access to budgetary subsidies for new investment was drastically cut and limited to a fixed term. Most investment capital outside net income had to be procured from the BNB. The bank's increasingly independent guidelines included the authorization to hold regional competitions for investment funds. Interest rates remained low however, ranging between 2.5 and 8 percent.

All these reforms did little to invigorate economic growth. In the Eighth Five-Year Plan (1981-5), the NMP growth rate dropped to 3.7 percent, its lowest postwar level. Officially, industry grew at a rate of 7 percent and construction at 5.4 percent, but agriculture declined by 3.9 percent per year.

In 1985 Mikhail S. Gorbachev visited Bulgaria and reportedly pressured Zhivkov to make the country more competitive economically. This led to a Bulgarian version of the Soviet perestroika program. New Regulations on Economic Activity took effect in January 1987. These directives, intended to stimulate "socialist competition," allowed enterprises to retain a much greater share of their profits and also required them to compete for investment capital from newly formed commercial banks. In June 1987, in response to widespread dissatisfaction and confusion over the measures, a decree on collective and individual labor activities made it possible for state economic organizations to lease small trading and catering facilities to private individuals by offering contracts at public auctions. The auctions were an abject failure, however, because of high taxes, high rents, restricted access to capital, uncertain supplies, the short duration of the contracts, and legal insecurity. The idea was quietly abandoned.

Finally, in January 1989, the party issued Decree Number 56. This decree established "firms" as the primary unit of economic management. Theoretically, four types of firm could be created: joint-stock firms, firms with limited responsibility, firms with unlimited responsibility, and citizens' firms. The differences among the first three types of firms were small. But citizens' firms offered the potential of individual, collective, and associative ownership arrangements. In a fundamental departure from the socialist prohibition of private citizens hiring labor, as many as ten people could now be hired permanently, and an unlimited number could be hired on temporary contracts. A wave of reorganizations produced new, larger firms, depriving numerous enterprises of their self-management status. Nonetheless, hundreds of private and cooperative firms were authorized by Decree Number 56.

Other elements of the decree allowed firms to issue shares and bonds and pay dividends, with a number of restrictions. Other clauses sought to encourage foreign investment in the country. State-owned enterprises that were transformed into joint-stock firms now could have foreign shareholders. Although tax incentives and legal guarantees were provided for joint ventures, little foreign investment was stimulated. In 1989 and 1990, only 117 joint ventures were consummated, totaling US$10 million in Western capital. In all probability, low labor costs were not enough to attract foreign investment given remaining organizational disadvantages, poor infrastructure, low political credibility, the nonconvertability of the lev, and close economic ties to the Soviet Union.

This last round of reforms by the Zhivkov regime confused rather than improved economic performance. Statistics on growth for 1986-88 indicated a 5.5 percent annual rate, up from the 3.7 percent rate achieved during the previous five-year plan. However, these statistics were internally inconsistent and widely disputed in the press. Expert observers speculated that they were the minimum growth the regime could tolerate given the 6 percent target rate in the five-year plan.

Ultimately, the reforms failed to radically change the economic conditions in the country. Public discontent increased and finally, emboldened by revolutions throughout Eastern Europe, a popular revolt ousted Todor Zhivkov in November 1989. By early 1990, the first attempts were being made to establish a market-based economy.

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