Author: Roumen Avramov
Published by the Institute for Studies of the Recent Past, Open Society Institute and Ciela Publishers
Sofia 2008
This book is result of the extensive research of Roumen Avramov conducted as part of the Communism Research Project.
ISBN: 978-954-28-0339-3
Summary
The book deals with monetary and stabilization policies implemented by the Bulgarian communist regime. Relevant files from the archival collection of the Bulgarian National Bank (opened to the public in 1999) are explored systematically for the first time. Thus the text attempts to contribute – through a series of factual case studies – to the recent “archival revolution” concerning communist history: a scholarly trend, which permitted to re-think many clichés, to re-formulate old questions, to introduce formerly inexistent nuances among the personalia of the regime, to perform subtler periodizations, and to detect hidden institutional conflicts. In this instance the aim is to examine previously unknown facts about the policy-setting process of the monobank, its conceptual principles and implementation practices.
A detailed account of the specific mechanisms generating flows of automatic credit in the economy is presented. It is shown how the Planning agency and the branch Ministries induced substantial amounts of credit in order to fulfill the targeted quantities. Considerations about profitability were completely disregarded and numerous ad-hoc decisions validated virtually every demand for “easy” money, thus spreading soft budget constraints across the economy. The cooperative sector is focused as one of the most indomitable sources of losses and as a remarkably strong lobby. The documents reveal strategies adopted by the authorities to curb the demand for credit and their failure, due to the reluctance to revise the basics of the socio-political system. Aspects of the money supply’s mechanism are outlined. Designed according to communist dogmas and to the requirements of the monobank, the machinery controlling narrow money was based on the presumption that strict monitoring of personal incomes and spending is feasible. Documents attest that the system never worked properly and that the chronic deficits of consumer goods engendered permanent excess demand. Forced savings performed the role of buffer and were systematically re-channelled to budget deficits’ financing. In the absence of a consistent monetary theory, the income/spending scheme was the main frame utilized to explain inflation. Under communism price increases did not take open forms but subsisted as persistent consumer markets’ disequilibria. The term itself was barely utilized in the experts’ reports until the late 1980s.
Two episodes of stabilization policies are considered in the light of the newly accessible archival evidence. Both of them boiled down to severe balance of payment problems and external debt crises. As trade and debt flows in convertible currencies were affected, the planning authorities had a very limited room for manoeuvre in their adjustment efforts. Policies were restricted to administrative measures of import-cutting and, ultimately, to attempts to squeeze domestic consumption.
The first crisis stroke in the early 1960s. BNB’s documents allow to reconstruct in details the steps taken by the Bulgarian Government vis-à-vis the Soviet London and Paris-based banks, which acted as the main creditors of the country. A series of reschedulings and political compromises permitted to postpone the immediate threat. By the end of 1962 and in 1964, however, Bulgaria was not more in a position to honour its maturing debts. The “final solution” was to sold out the entire amount of the gold reserves, pledged as collateral to the loans and already rebased in Moscow in 1959. The circumstances of this story are presented for the first time to the public.
The second episode relates to the “terminal” economic crisis of the regime. Since 1985 the Bulgarian economy was trapped in a vicious circle of pseudo-reforms that exacerbated instead of alleviating the imbalances proper to the untouched fundamentals of the centrally-planned system in place. The gradual opening of the economy towards Western imports was accompanied by expanding exports and credits to unsolvable Third World countries, thus building a debt burden in convertible currencies that rapidly attained unsustainable levels. Subsidies to domestic producers were soaring due to widespread inefficiency and soft budget constraints. Credit to enterprises continued to be de facto automatic (at least for the objectives fixed by the plan). Deepening budget deficits were financed through growing monetization of central bank’s resources and large-scale decapitalization of enterprises. The newly created commercial banks (1987) were no more than simulacrum they rapidly became an additional source of quasi-fiscal resources and generated unmanageable flows of bad credits. When the political regime collapsed (November 1989) the country was at the verge of defaulting on its foreign debt (default was actually declared in March 1990). The economy had accumulated a huge inflationary potential that, however, was kept implicit due to the still maintained fixed prices. The reverse side of the phenomenon was hoarding on commodities with the resulting deficits and the flourishing “grey” markets.
The scale and the character of the crisis were unprecedented for the Bulgarian communist regime. The ruling elites’ answer to this challenge was twofold. From one side they developed a frenetic “reform’ rhetoric and launched sets of intrinsically inconsistent, palliative measures. On the other, the growing awareness for the need for radical changes motivated the search of new stabilization policies and instruments. While the first path is relatively well documented in the “visible” steps of the authorities, the latter one has remained quite opaque until recently. It is only with the opening of important segments of the communist archives that it became possible to reach a more precise understanding about the then ongoing debates inside the governing circles. The BNB documents reveal how the technocrats informed the Communist party leadership about the most pressing economic issues such as the fast building up of foreign debt, the default in sight as early as 1986, or the accumulation of huge domestic debts. The professional slang of the bank’s experts allowed to raise new issues that were completely forbidden (omitted) in the public debate: mounting inflationary pressures; monetization of the budget deficits and its effects; flows of funds from the households and enterprises, captured by the fiscal authorities. Despite the clear warning signals, however, the stabilization measures taken were extremely limited in scope. Easy credit to the economy continued; roll-over of the foreign debt despite its increasing costs – was sought as the only solution.
It is shown how the most “radical” proposals of the BNB consisted in futile appeals to cut down inflationary deficit financing, to devaluate the national currency through a “correction” of the unrealistic fixed exchange rate (the term “devaluation” was never employed even in confidential documents), and to eliminate the multiple rates’ system. Actually, the measures adopted were much delayed and entirely inconsistent. Several factors, outlined by the archives, contributed to this weak response. One of them was the classical conflict between the Central bank and the Ministry of finance where fiscal considerations largely prevailed over monetary targets and thus maintained the status-quo. Personal rivalries also played a role. But it is apparent that the main barriers came from conceptual deficiencies. As it is pointed out, even the more “illuminated” experts were alienated by doctrinal dogmas and taboos, by a lack of the professional knowledge required to design a stabilization program, and by the missing adequate monetary data/national account statistics.
Their imagination did not transgress the plan, the dominance of state ownership, the “socialist market” and regulated prices, the (slightly amended) monobank system, the bailing-out of enterprises. Beside, the party leadership was paralyzed by the instinctive fear from bold economic measures that could provoke social and political unrest. The result was a set of completely incoherent and devastating steps. The archives demonstrate that the debacle of the communist regime in Bulgaria was the outcome not only of its built-in biases, but of its intellectual deficits as well: ruling elites remained encapsulated in the confidence that the economy could be stabilized within the existing political and economic framework.
Alternative ideas on stabilization formulated by non-government economists during the second half of the 1980s are reviewed as well. Until early in the decade the economics profession in Bulgaria was characterized by a dominance of the “soviet style” thinking and by an almost complete isolation from mainstream economic theory. The climate began to change slowly with the outset of the Soviet “perestroika” and the concomitant development of a truly critical stance. Without producing radical dissident positions, a group of economists started to question fundamentals of the economic policy. The dogmas of the “inherent to socialism” high growth rates, of the leading sectors’ driving force, and of the mandatory export expansion “at any cost” were sharply criticized. It was demonstrated that policies based on those assumptions produce profound imbalances, recurrent cycles, and structural balance- of-payment deficits. A corollary of those views was the need to cool down the economy in order to restore basic equilibriums: a precept that completely contradicted the official position.
Critical stance developed further by highlighting the incompatibility between a planed economy and genuine market-oriented reforms. This well-known mainstream conclusion was based on general equilibrium assumptions and empirical research: they demonstrated the departure of factor prices from factor productivity, and the negative discount rate of the capital. By the end of the 1980s monetization of the economy was explicitly set as an unavoidable goal and the inflationary potential was quantitatively assessed. Those conclusions revealed, in particular, the magnitude of a would-be stabilization shock produced by price liberalization. The very formulation of the problem contrasted sharply with the Party/Government gradualist point of view on economic stabilization.
The review reveals that this handful of strong critical impetus confronted conceptual barriers of different kind. The voice of those economists was by no means majoritarian and even among them vagueness about stabilization policies were common. They stressed mainly the structural inconsistencies in the Bulgarian economy and only on a latter stage turned to the core inflation and monetary issues. “Critical economists” came much closer to the roots of the problems and to their macroeconomic features, without being able, however, to design ex-ante a fully consistent stabilization package. Above all, nobody was really prepared to imagine and to conceptualize the actual economic and social upheaval to be generated by the transition from overwhelming state ownership to private property.
The missing coherence reflected to a great extent scarcity of mainstream economic knowledge. Although economists who better mastered Western theory and had deeper insight on market economies formulated pertinent assessments, intellectual affinities with the West were only a necessary, but not a sufficient, condition to impose a coherent stabilization package. Eventually, coherence came from abroad and from the aftermaths of a political debacle. The Washington consensus based stabilization programs of early 1990s were masterminded after the fall of the “old guard” communist regime in 1989.