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Assoc. Prof. Martin Ivanov Bulgarian Academy of Sciences and Bulgarian National Archive.

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Presentation on theme: "Assoc. Prof. Martin Ivanov Bulgarian Academy of Sciences and Bulgarian National Archive."— Presentation transcript:

1 Assoc. Prof. Martin Ivanov Bulgarian Academy of Sciences and Bulgarian National Archive

2  20 years after 1989: communist nostalgia:  It is human to romanticize the past (Plato)  Emotional youthful memories (even with traumatic experiences as military service)  Selective memory of 2000s & 2010s: “cheap bread” and “unemployment free society”  This paper will try to present a more complex picture of Bulgarian centrally planned economy through the lenses of the foreign debt

3  Since mid-1950s Bulgaria intensified its trade with the West  For investment purposes (industrialisation)  For consumption purposes (Malenkov’s drive towards consumption)  Within 5 years (1955-9) Bulgaria incurred a 1 b. leva ( $ 150 m.) deficit on its current account (half of which in 1959)  Backwardness, CPE:  poor quality export

4  The deficit was funded mainly through short-term credits from  Banque commerciale pour l’Europe de Nord (Oerobank)  Moscow Narodny Bank  The debt grew from $ 45 m. in 1954 to $ 200 m. in 1963

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6  This was the first debt crisis for the communist regime in Bulgaria: no tradition in debt reconciliation 1. Bulgaria played the ‘brotherhood card’ approaching its ‘western’ creditors. They, however, were reluctant to forgive BG debts. 2. Short-term bridging credits were received from the Soviet and the Czechoslovak National Banks 3. Funds of marginal size came also from Belgian, W. German, Swedish and Danish banks ($ 10 m.) in 1960-1

7  Moscow unwilling to act as LOLR  selling of gold reserve seemed as the only available option  1962-63 Bulgaria had to sell almost its entire gold reserve of 5.9 metric tons of gold  Operation brought $ 45 m. and the outstanding debt was agreed to be paid in kind with additional export of:  100,000 tons of sugar; 1,000 tons of zinc; 3,000 tons of frozen chicken; 500 tons of cheese; 20 m. eggs

8  Yom Kippur War, 1973 and the oil shock (OPEC embargo)  Oil shock led to price increase by 70 percent and deep recession  The Soviet oil-price umbrella  Until 1974 no change  Until 1978 prices still under wmp  Instead of reorganisation, BG economy continued to be 20-25 percent more energy consuming than the other industrialized countries

9  Bulgarian overstretch: $ 700 m BoP deficit in 1974 reaching $ 1.3 b. in 1975  To finance it Bulgaria had either to slash growth (investments) or consumption  Instead Sofia opted for a growth-cum-debt solution  Between 1973 and 1978 foreign debt increased 5 times: from USD 1.3 to 6.1 b.

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11  By late 1976 it became apparent that Bulgarian economy is unable to productively invest these funds.  Foreign banks: reluctant to lend new money  Possible solutions were again:  Slash investment (arrest import, economic reforms)  Slash consumption  LOLR (Moscow)

12  Sofia attempted modest economic reforms and slightly reduced the growth rates  Soviet by-pass: during the traditional meeting with Brezhnev at his Crimean residence Zhivkov managed extract crucial promise for support:  $ 400 m. annual subsidies to Bulgarian agriculture  New credits  Additional quantities of Soviet petrol earmarked for re-export to the West  Thanks to this generous Soviet support within 6 years Bulgaria was able to reduced its debt from $ 6 to just 1.5 b.

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14  Triggered by exogenous shock but with deep systematic roots 1. US depreciation ( $ 1 = 3 DM to $ 1 = 1.90 DM)  worsening of TOT  Most of Bulgarian trade with the West was in DM which effectively meant that export became 38 percent cheaper and import 38 percent more expensive  Bulgarian foreign reserve of $ 1.4 b. also depreciated by 38 percent 2. Oil prices collapse by 60 percent and the re-export of Soviet oil became far less lucrative. BG incurred losses of $ 300-500 m. annually according to BNB governor Kolarov

15 3. Dollar depreciation put most of the oil exporting countries on their knees.  Many of them had recently contracted large credits for rearmament from Bulgaria (Iraq, Libya, Nigeria).  Total Bulgarian exposure to the Arab world was $ 2.5 b.

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17  Available options: 1. Slash investment 2. Slash consumption 3. LOLR

18  Soviet debt-umbrella was not available any more.  Instead Moscow call off its claims and Sofia had to transfer $ 650 m. annually in 1988 and 1989  Generous oil shipments from USSR were a history  re-export was impossible  When Kremlin refused to be LOLR Sofia approached the western banks.  Most of them extended short-term credits at high interest rates  Bulgaria started building up a debt of $ 1.5 b. annually   Debt overhang: in 1988-90 Bulgarian export was approx. $ 3 b. and the debt transfer was $ 2.5-3 b.

19  Furthermore, new funds were misused:  1984-9 debt grew by a factor of 3.6  GDP grew by a factor of 1.1  Fixed investments grew by a factor of 1.3  Foreign reserves were the last line of defense: within 18 month (1987-88) reserves were depleted by 50 percent ($ 1.2 to 0.6 b.)  Forced migration of Bulgarian Turks in the summer of 1989 only aggravated the grim situation  The Economist wrote about the “disintegrating Bulgarian economy”

20  By late 1988 Bulgarian communist were facing only 2 options:  Consumption squeeze (Chauchesku)  risking social unrest and possibly revolution  Debt default (declared in March 1990)

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22  Chronic trade deficit problems were only aggravated by external shocks  Christina Zloch-Christy: “deep systemic roots”  Endogenous economic imbalances of the centrally planned economies were stemming from the need : 1. To finance the chronic trade deficit with the West 2. To import consumption goods 3. Ineffective investment of the foreign credits

23  ‘Import hunger’ (Kornai, 1981) of growth oriented CPEs  due to the ‘economy of the deficit’: many products were simply not produced or produced in insufficient quantity and quality  to sustain their growth strategies CPEs had to import technologies and materials from the West  Export impotence:  poor quality,  low technology,  inelastic price structure  missing incentives on micro level

24  Heavy industry was always the beloved child of east-block countries at the expense of the squeezed consumption  ‘Consumption revolution’ from 1960s made economic structure obsolete  CPEs industries could not carter this new trend towards mass consumption

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26  Heavy Engineering Complex at Radomir  Soviet experts proved its ineffectiveness  Despite Soviet warnings Zhivkov gave it a go  Expensive equipment stayed misused for years  Total investment bill: 1.4 b. leva  “Soft budget constraints” and subsidies instead of competition and bankruptcy law


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