The last century has witnessed an enormous tug-of-war between the state and the market. One hundred years ago, coming out of World War I, three successive Republican administrations in the United States embraced the laissez-faire principle of limited government involvement in the market, a view that found considerable resonance among classical liberal economists and politicians in Europe. In the inter-war period, the state came back in vogue as the engine of economic transformation for movements with widely divergent political philosophies: Communists, Fascists, and New Dealers. After World War II, it looked as though, in the social welfare states of Europe, the military-industrial complex and Great Society efforts in the United States, and the state-led planning in the Communist world, the tug of war had effectively dragged the laissez-faire crowd into the mud.
But the game was not over. The free marketeers dug in their heels. In the late 1970s, the flag started to inch in the other direction, first under Margaret Thatcher in England and then more dramatically during the 1980s under Ronald Reagan in the United States. Their mantra of TINA -- There Is No Alternative - suggested that countries all around the world had no choice but to reduce the size of government services (except the military), privatize state assets, and dismantle regulatory structures. This "neo-liberalism," which pushed for the least amount of state involvement in the economy, spread worldwide as the central gospel of globalization, a process urged on by international institutions such as the International Monetary Fund.
In some ways, the political events of 1989 in Eastern Europe were simply one more inevitable pull in the tug-of-war contest that the free marketeers were clearly winning at that point. One after another, after the dust from those initial protests and regime resignations dissipated, the countries in the region followed a similar template of change. They whittled away at the state and brought in the free market literally overnight.
Bulgaria was no exception. "In general, they suggested quick privatization and no role for the state to play in the economy," recalls Rossitsa Chobanova, an economist who specializes in innovation. "The economists here proposed measures for transforming a command economy into a market economy that respected specific Bulgarian characteristics, such as allowing a variety of forms of ownership dominated by private ones, and the need to renovate in order to be competitive in a globalized world. And now we are in a period when everyone realizes, even in big and powerful economies like the United States, that it's not possible to meet the contemporary challenges of globalization and rapid technology change by ignoring the role of the state."
One role the state has stepped back from has been investments in research and development (R & D). "The state policy stimulated innovations - 'scientific and technological progress' was the phrase we used at that time," Chobanova continued. "The country, mainly the state, invested 2.8% of the GDP into spending for science and technological development in 1986 (compared to the Europe 2020 target of 3%). Most of that spending was for business renovation. At that time 37 state institutes were responsible for developing new technologies and products for state business enterprises in industry." That figure of R & D investment subsequently dropped to 0.6 percent.
In her office at the Bulgarian Academy of Sciences, located just across from the Parliament, we talked about the reasons behind the collapse of the Bulgarian economy, the current lack of market demand in the country, and why so many computer viruses in the early 1990s came from Bulgaria.
The Interview
What did you think about the early discussions about economic change in Bulgaria, in 1989-1990? How would you evaluate those early discussions about economic change?
The necessity of change in the society, and in the economy in particular, appeared in several works of philosophers and economists in the country before and after 1989. The economic topics concerned barriers to innovative entrepreneurship and forms of property. The problem of the implementation of new technologies had two sides. One was to exit from the list of COCOM (the Coordinating Committee for Multilateral Export Controls), which the Western powers established during the Cold War to put an arms embargo on COMECON (the Council of Mutual Economic Development). And the other was to increase the effectiveness of investments in new technologies in order to improve the competitiveness of the national and regional economy. The question was what to do in order to make new technologies attractive for investors.
Before 1989, the country had only one investor - the state. In this respect we worked to improve the normative base - the operating instructions -- for defining which investments were effective. But each new technology needs different instructions. How to proceed? What to do in order not to lose the momentum for renovation? The new instructions took too long time to be implemented. In comparison with firms in Western countries, it was not so easy for Bulgarian firms to compete. Many state regulations hampered innovative entrepreneurship. The conclusion, ultimately, was that something more general in society had to be changed. The ideas and suggested measures were published. The state regulations were published in early December 1988, but they demonstrated ideas were not well enough understood by the officials. So these recommendations had little impact.
Discussions about ownership concerned the introduction of various forms of ownership, as well as mechanisms of privatization and restitution, were also published in thematic collections. We had interesting suggestions. But they were not used by our government. Even when two colleagues from my department became ministers (of economy and of social affairs) they ignored the local expertise. They preferred foreign experts who were familiar only with the big Soviet economy and didn't know the specifics of a small and open economy like Bulgaria.
What were the main differences between what economists here were proposing and what foreign economists were proposing?
I suppose you mean the main difference with the program of the foreign economists, especially Richard Rahn and Ronald Utt, whose ideas were implemented during the transformation of the national economy. In general, they suggested quick privatization and no role for the state to play in the economy. The economists here proposed measures for transforming a command economy into a market economy that respected specific Bulgarian characteristics, such as allowing a variety of forms of ownership dominated by private ones, and the need to renovate in order to be competitive in a globalized world. And now we are in a period when everyone realizes, even in big and powerful economies like the United States, that it's not possible to meet the contemporary challenges of globalization and rapid technology change by ignoring the role of the state.
Has there been any change in the perspective of the Bulgarian government in terms of the role of the state?
Practically there have been no changes in the perspective of the Bulgarian government in terms of the role of the state. In the beginning of the transformation, this perspective was grounded in the state's heavy involvement in the economy and the necessity to transform the command economy into a democratically organized society. As I mentioned before, some of these regulations created barriers to innovative entrepreneurship. But not everything from the policy before 1989 had to be neglected. For example, the state policy stimulated innovations -- "scientific and technological progress" was the phrase we used at that time. The country, mainly the state, invested 2.8% of the GDP into spending for science and technological development in 1986 (compared to the Europe 2020 target of 3%). Most of that spending was for business renovation. At that time 37 state institutes were responsible for developing new technologies and products for state business enterprises in industry.
But after that, it wasn't just that we had a lack of a concept, there was also the collapse of the COMECON market. COMECON was a main market for the Bulgarian producers. We lost our main foreign markets and that was the mean reason for the collapse of our big enterprises and research institutes. It's not easy when you are a small country and a small economy: you are more dependent on outside countries and processes. In this situation the state had to take an active position, but it didn't. Decreased foreign demand for Bulgarian products accompanied the collapse of the COMECOM market, leading to a reduction in demand for their renovation. Many opportunities for good workplaces were lost. The intelligent young people, who are educated here, could not find appropriate jobs in the country and went to find jobs somewhere outside. Even my older daughter is now working in Washington D.C. as a consultant. Along with the lack of internal market demand for higher educated personnel, a lot of people are leaving the country because of the very low level of the salaries. It is not easy to survive when prices are going up. They're now more or less equal to average European prices, and the salaries are three or more times less than the EU average.
The lack of state policy during the transition also negatively affected demographic trends in the country. The aging of the population has combined with a low birthrate and this emigration. Many people have been afraid to have kids because of the difficult economic situation. In conclusion, I'd say that it's time to stop neglecting the role of the state in the economy.
To read the rest of the interview, click here.