In its review of political change in 1996 the magazine Transition Online summed up developments in both Bulgaria and Macedonia. The title of the article about Macedonia in 1996 was "moving toward firmer ground"; the article of Bulgaria had the title: "Surviving a dire year". 1996 had been "catastrophic for Bulgaria", "the worst year since reforms began." The year had seen an economic meltdown, a dive of the national currency, and a drop in the average salary from $120 in January 1996 to $28 in December, "the lowest in the region." The country was isolated: relations with the IMF were tense, and there was talk of a default on its international debt. In the country tables of "Institutional Investor" in 1995 Bulgaria was in the 93rd position, behind Bangladesh and Syria. It had the lowest level of FDI per capita of all Central European Countries. In 1997 Bulgarian GDP stood at 63 percent of its 1989 level. Seven years after the fall of the Berlin Wall, it looked like the Bulgarian transition was failing. No population in Central Europe was as negative on the direction of social change as the Bulgarians:
"As the result of unfulfilled expectations, society entered a period characterised by a widespread feeling of loss of orientation, fear of the future, the feeling that much was destroyed and not much – if anything – new attained."
In 1996 93 percent of Bulgaria's industrial production was in the state sector. Nearly half of the prices of the goods in the basic consumer basket were determined by the government. All major banks were still state owned. The government deficit amounted to 15 percent of GDP. In 1994 a clear majority of Bulgarians were of the opinion that the state had to support loss-making companies; 55 percent wanted to see a predominantly state-owned economy; and nearly 60 percent wished for wide reaching price controls. Approval of the (former) communist economic system went from 48 percent in 1992 to 71 percent in 1995. Experts in the Bulgarian Academy of Science made the argument that the post-1990s economic decline was due to an "indifferent, verging on the hostile, treatment of Bulgaria by Western Europe." Elections in December 1994 brought an unreformed ex-communists party back to power with an absolute majority. This brought the crisis to a head. Inflation reached hyper-inflation levels in winter 1996, triggering a run on the banks. Both the banking system and the currency collapsed, leading to the closure of 17 banks. When week-long street protests, with protesters manning barricades all over the country in icy winter nights, brought the ex-communists down in early 1997, a visitor to Bulgaria would be reminded of a third-world county, with foreign donors shipping in humanitarian aid and financing soup kitchens.
However, the crisis of 1997 also marked a clear turning point for Bulgaria. One reason for this was domestic change: elections in 1997 brought a new reform-oriented government under Ivan Kostov to power that linked domestic reforms to a concrete vision of EU membership. In one of his first speeches as Prime Minister, Kostov announced EU membership within 10 years as one of the key policy goals. Vladimir Kissiov, at that time Deputy Minister of Industry and later a Bulgarian chief negotiator, recalls: "Everyone from the other parties said 'you are crazy', but eventually it was a big success, because so much changed in these years."
The other change was in the international climate. In 1997 the EU finally decided to embark on a serious pre-accession process. At the European Council meeting in Luxembourg in late 1997 the Czech Republic, Estonia, Hungary, Poland and Slovenia were invited to open negotiations in spring 1998 along with Cyprus. However, at the same time, the EU presidency conclusions noted that "the preparation of negotiations with Romania, Slovakia, Latvia, Lithuania and Bulgaria will be speeded up" and that these countries were to be treated equally to the negotiating countries in all respects except for the start of negotiations:
"In the light of its discussions, it [the European Council] has decided to launch an accession process comprising the ten Central and East European applicant States and Cyprus. (…) The European Council points out that all these States are destined to join the European Union on the basis of the same criteria and that they are participating in the accession process on an equal footing. (…) A single framework for these applicant countries will be established."
Given Bulgaria's shape in the wake of its crisis in 1997 this approach was remarkable. Given the change that actually took place after this decision was taken it proved farsighted as well.
Outline of a transformation
One decade after its crisis in 1997 Bulgaria has moved dramatically beyond the problems that faced it in late 1996. In international business reviews Bulgaria is presented as a 'Balkan tiger': in 2006 real GDP growth in Bulgaria was forecast to reach 6.1 percent. The state budget posted a record surplus. Inflation was around 6 percent. Unemployment had fallen from 18 percent in 2001 to less than 9 percent in the third quarter of 2006, the lowest level since 1991. In fact, since 1998 Bulgaria's economy has been growing at annual rates of more than 4 percent every year. Investment rose from roughly 15 percent of GDP in 2000 to 25 percent. Capital goods became the fastest growing category in the recent import boom. This increases the competitiveness of companies and lays the basis for continued high growth. Since 2001 average wages have begun to increase significantly.
Table: Bulgarian average monthly wages
There was also a spectacular increase in foreign direct investment (FDI). From 1992 to 1996 the annual average of FDI was 153 million. In 1997, annual FDI rose to 636 million. In 2000 it reached more than 1 billion. Since 2003 annual FDI has been more than 2 billion every year. Most of this has been linked to green-field investment (i.e. new companies being set up), not simply the privatisation of existing companies. Net inflows of FDI reached almost 12 percent of GDP in 2004. The competitiveness of the Bulgarian economy was reflected in its export performance. The value of Bulgarian exports almost tripled over the last decade, from less than $ 5 billion in 1997 to $ 14.4 billion in 2006. By 2004 the value of accumulated FDI per capita had nearly caught up to the level of Poland.