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Economic breakdown
Bulgarians queuing in front of a shop in Sofia in 1996

To understand how much progress Bulgaria has made in the last decade, one must remember where it was less than one decade ago: that is, in the midst of hyperinflation, bread riots, and a banking system collapse. As an August 1995 report by Salomon Brothers, an investment bank, explained, "Bulgaria is as different from Poland as Ecuador is from a larger, more aggressively reform oriented Latin American country like Argentina." In the country tables of "Institutional Investor" Bulgaria had fallen from 43rd place in 1990 to 93rd in 1995, trailing Bangladesh and Syria. Its FDI per capita was the lowest in Central Europe. In 1997, Bulgaria's GDP was 37 percent lower than in 1989: seven years after the fall of the Berlin Wall, it seemed as if the Bulgarian transition was failing.

Indeed, no population in Central Europe was as pessimistic about the direction of social change as the Bulgarians. As social scientist Vassil Garnizov points out:

"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. During 1994 popular faith in the basic tenets of the reform process hit its lowest point."

The reform process had produced few structural changes. 93 percent of industrial production was in state hands; nearly half the prices of basic consumer goods were set by the government; all major banks were still state owned. By December 1996 the debt of Bulgarian companies amounted to 59 percent of GDP. A third of public expenditures had to be used for debt servicing.

Elections in December 1994 brought the ex-communists under Zhan Videnov back to power with an absolute majority. Nostalgia for the past was omnipresent. 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-run economy; and nearly 60 percent wished for wide reaching price controls. Approval for the communist economic system went from 48 percent in 1992 to 71 percent in 1995. Traditionalists in the Bulgarian Academy of Science argued that the economic decline of the 1990s was a result of bad foreign advice and an "indifferent, verging on hostile, treatment of Bulgaria by Western Europe." With Videnov in power, these very intellectuals reasserted their influence as advisers to the government.

The government brought back price controls. It distributed "production credits" for loss-making state-owned companies, but in the spring of 1996 75 percent of all credits were no longer serviced. Bulgaria witnessed an economic meltdown of extraordinary proportions: the national currency nosedived; the average salary dropped from $120 in January 1996 to $28 in December. By the winter of 1996 hyper-inflation had set in, triggering a run on the banks. As the banking system and the currency collapsed, 17 banks had to close. Week-long street protests, with protesters manning barricades all over the country on icy winter nights, finally brought down the ex-communists. Foreign donors began shipping in humanitarian aid and financing soup kitchens. A visitor to Bulgaria at the time could be forgiven for assuming he or she was in a third-world country.

October 2008

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