Cause and Effect in European Politics and Law

The government should present a plan for reforms with concrete dates, says Georgi Stoev

Adelina Marini, November 18, 2009

On the occasion of the approval of Budget 2010 and some symbolic statements by the Bulgarian prime minister Boyko Borisov and his deputy the minister of finance Simeon Dyankov, euinside asked the economist and managing associate in Industry Watch Bulgaria Georgi Stoev for his opinion:

euinside: How would you comment on the relatively optimistic data, presented by the minister of finance for the implementation of the budget this year?

GEORGI STOEV: First of all, it should be explained what was the reason for the taming of the budget deficit. My personal opinion is that we have significant spending cuts and not an improved tax collection what you might here in support of the minister. I think that we have a situation which was relatively difficult politically - a budget deficit, they had to react immediately, to cut spending. And from this point of view, we might interpret this as a positive result, something like a success of this government. But let's not forget that those are short-term successes. Next year new demands for money will be raised from different groups, and the pressure over treasury will increase. In other words, in the long-term the problem is still far from solved.

euinside: In this sense is also the statement of the former prime minister and now co-chairman of the small right wing Blue coalition Ivan Kostov who said that the situation would be much harder next year and the Commission autumn forecast shows for Bulgaria that at least 2 years we will have budget deficit. However, the minister of finance boasted that we will be the only EU member state without an excessive budget deficit. But, after all, it is not quite clear how this deficit will be financed and do you really think that next year is going to be worse?

GEORGI STOEV: At the moment I am reading the macro framework of the government which foresees an economic downturn of 2% but what we miss when we analyse these numbers is that the nominal decline - and that is what is important for the budget - in levs is not real. The nominal decline is bigger - 4.8%. At least as far as it is put in the expectations for the GDP. This means that the economy, measured in levs (1 lev=1.95 euro) or euro will be nearly 5% next year and together with this they expect the budget to grow. This is either too optimistic because of the expectation that you will seize larger part of the incomes in the economy and pour it into the treasury or this is some kind of, let's call it a mistake in the forecasts of the Ministry of finance. Traditionally, when an economy is contracting, the expectations for the revenues in the budget should also be in contraction. Against this background of macro economic expectations, maybe the budget is more optimistic than realistic.

euinside: Is it possible that this could play some kind of a vicious game or a revision of the budget would be necessary at some point next year?

GEORGI STOEV: They will definitely have to revise it. It's just the tradition - all expectations usually are more conservative in terms of economic growth. It might prove that it won't be that bad. They might revise some other parametres. But the interesting thing, for example, is if in the first 6 months the budget is negative according to the version in the legislation, what the reactions of the ruling majority would be then? Because this year we saw that in the end of the day the political negative sentiments were put on the account of the previous government. Mr. Dyankov came to power and said here is a chaos, I found a situation for which I don't have a political choice but to cut spending. And I think that people understood this.

The new government did not lose political support during the spending cuts, made in the short-term. The questions is if the government does the same in the middle of 2010, including cuts of administration, some public projects, subsidies, in general the incomes of people who depend on the budget. Let's not forget that these people, after all, formed part of the election vote for the ruling party GERB and the moment when GERB will have to take unpopular measures will certainly come. They will have to cut public spending, including for some of their voters. Then it would be difficult.

euinside: And is there room for more cuts?

GEORGI STOEV: Oh, of course. In an economy where the state represents 40% of the registered GDP, there is a lot to cut. I just do not want to innumerate those cuts as priorities because the decision what to cut first is a political issue. Everyone who comes to power must have a list of 1 to 20 what to cut first if they want to keep the macro economic stability in these conditions.

euinside: In this regard does the new government have a clear vision what to do because, like you said, next year it will not have the excuse of the wrong doings of the previous government?

GEORGI STOEV: The nearly 150 pages, presented almost 3 weeks ago are simply not enough. They can be interpreted as a governing programme bot in those sectors that have a desperate need of reform, starting with healthcare, public services, education, pensions, the presence of the state in the energy, infrastructure projects, transport etc., there is a list of, maybe 5 or 10 things where reforms are most necessary and we need to see more specific things in this direction.

We want, when they talk about a healthcare reform specific dates to be mentioned - when the national healthcare agency will be unmonopolized, when hospitals will be privatized, when people will have a choice where to pay social securities and where to receive medical service. When we talk about pensions they must talk again with dates when the state will withdraw from financing the pensions of the majority of Bulgarians. It is strange when a party comes with a full majority in power without a specific political programme for 4 years. Because t is one thing to put out fires - month per month and is si totally different 4 years - you should know what to do so as to keep the fiscal stability for a longer term. That is at least how I see things from political point of view.

euinside: From political point of view I have the feeling that many governments so far are afraid to undertake reforms in these sectors that we are talking about - healthcare and education and those problems are piling up as an avalanche. Do you think that this government will have to will to undertake something, furthermore it is not entirely a majority government?

GEORGI STOEV: Yes, in a sense it is not but I would say that it is not a majority government formally. In the end of the day, there will always be support for reasonable reforms from any political spectre. So, the issue should be who will start the reforms. So far we did not have such a minister of healthcare keen to present a reformist model. And on top of this he has to gain the trust of the so called professional community - the Bulgarian Doctors' Union which is community that has monopolised the public opinion in this field.

At the moment there is a chance for a breakthrough in the system but I think that the mentality of the minister must also be changed - instead we have a minister who comes from the professional community, because thus he would be tempted to protect the status quo, we need an outsider, a person foreign to the system, with a vision how to change the model. It is not necessary that he is a doctor, of course this story with the professionals in energy, the doctors in healthcare and teachers in educations I thought was history. This is what the current government lacks.

euinside: But then how do you interpret the statement of the prime minister that Bulgarians are more keen on giving more money for their cars than for healthcare? In other words - transfer of responsibility from the professional community to the patients to pay more?

GEORGI STOEV: First of all this is not true. Because if you collect all the expenses patients make illegally, i.e. like bribes in the healthcare system, maybe you will get a larger amount than what you pay for a change of oil or tires. On the other hand, the state monopoly over a large part of the actives of the system, in fact, blocks a large part of the potential for private investments in this field. This means that if an entrepreneur and a doctor unite in the building of a new hospital and they want to buy a scanning machine which costs 1 mn, they will want to make sure that there will be patients that will not only pay for their work but for the amortisation of the scanning machine too.

But our patient choses to go to the state hospital, to pay a bribe to the doctor covering the work of the doctor but not the amortisation of the scanning machine. The state hospital is than recapitalized, it is in deficit after all, a serious lack of finance, a lack of a scanning machine, a lack of access to this highly paid service and the private sector simply does not invest because there is disloyal competition from the state. In other words we have the wish to invest in healthcare and spend much more for healthcare than for our cars but we are just not allowed to.

euinside: Because we mentioned education, there was another scandal here when the finance minister called the scientist at the Bulgarian Academy of Science "a bunch of feudal elders" and that he will not give them money because the economy needs more money. But, in fact the EU talks for years about economy of knowledge, so is the discussion put in the right track?

GEORGI STOEV: I think that to draw a line between science and economy is unreasonable. After all, reasonable science - the one that brings a lot of useful knowledge, will always have its place on the market. In other words, when you have a market of knowledge you could finance applied research as well as fundamental research - those that at a glance do not have an immediate application in the economy and on the market. The difference between our model which is, of course, heavily monopolised by the state, and the model in the US, for example where the universities are those hubs that attract brains and give birth to new science, is mainly in the connection between the university and the economy and the market. And this connection simply does not exist in Bulgaria.

It's just that between the Academy of Science and the economy there is no link at all. Each initiative that can return science back in the economy is welcome. Maybe this will be a simple copying of a model of another country but the increase of financing for universities for research should go hand in hand with cutting of spending for the Bulgarian Academy of Science no matter how difficult this would be for the people there to accept it.

euinside: Well, does this missing link necessarily require the state to interfere by, for example, saying "business and scientists, you can now connect with each other?"

GEORGI STOEV: Not at all. The problem is in the distortion of the labour market for scientific labour. The moment when a scientists takes his PhD from a Bulgarian university he is confronted with the perspective of a warm place in the Academy and the perspective to work in private sector or part-time in the university and the private sector and, maybe, a larger part of people would prefer the warm place in the Academy, which is guaranteed, subsidized ...

euinside: In other words it's a matter of mentality, is that right?

GEORGI STOEV: The problem is that the state subsidy distorts the supply of labour. The moment when I appear as the largest employer of scientists, every small scientific centre will have to compete with the institutes of the Academy. For example, I want to hire two economists and I will have to propose to them not only a better salary but also a salary that is so good that will convince them to work for me in full value, on a full working day and not as it is right now in the Academy, especially with the small budget cuts.

euinside: And the business in Bulgaria has it shown a need for scientists so far?

GEORGI STOEV: I started with this intently that, in fact, the potential is in the applied science - where the science can be immediately applied on the market in the form of goods and services, where the patents simply transform into goods and they are being sold on the market. The value of the goods finances back the research. I am not sure that Bulgaria is that rich a country to afford large investments in fundamental research like quantum physics, astronomy, sciences which would improve the basis for future research then being applied directly on the market.

I am not convinced that someone would provide private or whatever finance for such initiatives in a small economy. From this point of view, all European initiatives are welcome because they finance for example the particles collider and similar projects which at a glance do not have any practical use, but the European taxpayers finance this with the idea that one day the knowledge in the field of physics would improve.

euinside: And what can be done to improve the productivity of labour because, according to the assessments of the European Commission, the productivity continues to be very low in Bulgaria and the salaries are too high?

GEORGI STOEV: Indeed, last year showed an interesting paradox. The official statistics registered a growth in salaries with average 11% by September and together with this we see a drop in productivity of what we call material industries - industry, production and energy - to sum up - of everything without construction, services and agriculture. The interesting thing is that it dropped as productivity with something like 15% by September and the salaries grew with 11%. The only explanation I can think of right now is that the job loss last year was not small - some 120,000 jobs but they were cut mainly in the sectors with lower than the average wages.

This means that the average wage, purely statistically, looked bigger because if we have two workers and the one gets 700 levs and the other 300, the average wage would be 500. But if you fire the one with 300 then the average wage jumps to 700 even without increasing the salary of the one with 700. Even if we diminish the salary from 700 to 600, the statistics would again register salary growth from 500 to 600. This is a little absurd when we measure these average values because, purely economically what is of use for the labour market is the utmost productivity - if I hire another worker how much will he produce and now how much all my workers produce on the average. And I will be keen on paying the new worker a salary that would not be higher than what he would have produced for me.

euinside: Can the state stimulate somehow the increase of productivity or this should be left on the market to do?

GEORGI STOEV: The state should not be an obstacle in the first place. The moment when we have heavily regulated markets with a lot of barriers for entering and leaving of new players like the energy sector or markets which hardly allows old players - those are low productivity markets like metallurgy. In both cases we have a problem with the transfusion of work force from low-productivity sector to high-productivity sectors.

The moment when such barriers are removed, the work force flow starts easily to go through one business or another. It is not an accident if you look at Bulgaria as a level of industry - you will see that the highest productivity in the last years is indeed in the sectors when the work flow is easiest - like furniture, foods, traditionally those we call light industry. And the lowest productivity was in the heavy industry which bears the burden of trade unions, complex political games - everything where if something happens with a factory people go out to protest.

I mean that the little the obstacles the faster the increase of productivity. Let's not forget that Bulgaria from the point of view of capitals still is a very poor country. The capital of 1 person in the economy is tens of times lower than the capital in Belgium of Germany. So, it is hard to compare the person that works in a carpet factory in Sliven with a person that works in the spare parts factory in Brussels. That is why Bulgaria will from now on attract investments much faster than other European economies.

The Netherlands will not stop attracting investments, But in Bulgaria, per capita, we need more to catch up the Dutch, for example. This is what the state can do is to relief as much as possible the access of investors to the Bulgarian market, to try and solve problems which investors find as most complex like: hiring of workers, firing of workers, high taxes, social securities, problems when starting a construction site.

euinside: And the other thing probably is prudent governance - and as it is now the government presents and idea and then leaves it.

GEORGI STOEV: Well, there surely is a need for debate on each idea. As we say measure 3 times and then cut once. This is a much better stance than proposing, approving and in couple of months change of laws. We should think well before making any experimental policies. But, on the other hand, the business environment in Bulgaria is overloaded with problems, so speed is of significance. It is good to have debates, to discuss with employers, trade unions, the so called interested sides but the clock is ticking and someone has to take the political decision what to do in the important fields of the economy.