Dr. Krassen Stanchev, Martin Dimitrov, IME

In this paper we assume that a country’s trade potential represents a possibility to participate in the world trade with a share corresponding on its competitiveness abilities. Competitiveness is the capability to generate prosperity by producing goods and services that stand the test of the market place under normal conditions. The critical measure is productivity. Trade potential is correlated with: trade openness, capital and labor resources, regional trade agreements, tariff and non-tariff policies, FDI inflow, economic, financial and political stability and world organizations membership, which influence the framework to regulate trade on the country level. In this paper we make an attempt to cover most of the above circumstances, comparing Bulgaria’s position with that of other countries, mostly from South East Europe (SEE).

The structure of the paper is the following.

First, we briefly look at the beginning of reforms and summarize peculiarities of the initial conditions.

Then, we review Bulgaria’s comparative openness with an attempt to outline what extend it would serve as a factor of higher growth and prosperity.

The third paragraph deals with the external shocks of the period between 1990 and 2000 assess the resilience capacity of the Bulgarian economy.

Next, we pay attention to the factors behind Bulgaria’s trade performance that were either serving as a reason for its reorientation or were merely acting at the backgrounds.

Trade and economic growth potential depends on the development prospects of the major markets. Paragraph five looks at the major trade partners of Bulgaria and compares them with those of countries of SEE. Immediately afterwards we go to issue of the of trade policy reforms, presenting their uneven progress and attempting to establish a link between trade and general economic policies. This is paragraph six of the paper.

This allows for a closer attention to commodity structures and investment performance in order to outline opportunities for future development (paragraph seven), and then to return to broader issues of the SEE context (paragraph eight).

1. Trade and economic structure at the beginning of reforms

Bulgarian exports prior to political and economic reform of 1990-1991 had the highest CMEA-share in comparison to other member countries. Also, Bulgaria (along with Czechoslovakia) was the last to reduce CMEA-export in 1989, while others started as early as in 1986. Another peculiarity was that Bulgaria exported mostly to the ex-Soviet Union while others traded more significant volumes with one another. Roumen Dobrinski calculated that Bulgarian CMEA-trade in the second half of 1970’s and 1980’s averaged around 60% of the total. Closest to Bulgaria was Czechoslovakia, with 51-52%, Romania had a less than 30%, while Hungary and Poland were always between 40% and 50%. In early 1980’s Bulgaria has had an exclusive intermediary position between East and the West, importing cheap row material and resources from the Former Soviet Union (FSU) and selling it recycled to international markets, and trying to resell back to the East COCOM-embargoed hi-tech products and computers. Between 1984 and 1989 it enjoyed virtual CMEA-monopoly in this trade. This pre-history has long-term impacts on the reform years.

Bulgaria’s economic structure in 1989 (59.4% industry, 29.7% services, 12.9% agriculture), although similar to those of other Eastern block was more artificial (including the hi-techs component) and less competitive. It also depended on 90% FSU energy supply, used energy wasting technology and, with COCOM produce becoming obsolete, produced lower value added.

It was, in fact, a rent-seeking position. But in the 1980’s it was interpreted as one of a good borrower, and the government sought financing from private lenders.;

Trade plays a varied role in the SEE economies, with trade/GDP ratios ranging from as high as 91% for Macedonia and Bulgaria, to as low as 30 to 40% for Albania and FR of Yugoslavia (FRY). In terms of trade to GDP, there is a significant difference between Bulgaria, Bosnia and Herzegovina (BiH), and Macedonia with their greatest ratios of trade to GDP, the medium ratios of Croatia and Romania, and the smaller international exchanges of Albania, and FR Yugoslavia (FRY).

Conventionally speaking, an economy is open when the given ratios are more than 50%. In this sense Albania and Yugoslavia would be considered relatively closed economies. In Albania, reasons are to be found in the size of the industries, productivity levels and the wide spread informality of the business environment. In FRY the ratio reflects distort impacts of embargoes, sanctions, closing markets for military conflicts and the contraction of the economy.

At the same time, the greater openness of Bulgaria and Macedonia in SEE comparison does not necessarily means immediate trade potential.

It is an evidence of getting some fundamentals right: established trade directions and contracts, cooperation links and routs with a probability to resist competitive pressures and perhaps cluster internationally. It is likely that a country’s greater openness would correlate to sustained greater output and higher income.

Recently, James Gwartney, Charles Skipton and Robert Lawson, constructed a Trade Openness Index (TOI), designed to measure the interception of basic growth factors with international trade. It has 4 components: a) tariff rates, b) the black market exchange rate premium, c) restrictions on capital movements, and d) the actual size of the trade sector.

The results illustrate the relationship between country`s average TOI rating during 1980-98 and a given country’s 1998 per capita GDP, the correlation is positive and highly significant. The adjusted R-squared comparison indicates TOI explains 52% of the variability in 1998 per capita GDP among the 87 countries. The next equation includes inflation and property rights, which significantly correlate at 95% The TOI remains highly significant (t = 5.96). The R-squared adjustment shows that all three variables explain 65% of cross-country variations in per capita GDP. Equation 3 looks at the relationship between the TOI and the growth rates of real per capita GDP for 1980-98. The t – ratio for the TOI is highly significant with R-squared indexes explaining 14% of the cross-country variation in growth. If we exclude from the equation 5 the high-income industrial countries (21 long standing OECD members) and reran the model the results are quite similar to those for all countries. The TOI remains positive and significant explanandum low-income countries.

For all countries in SEE there were shocks, which distorted trade volumes and routs through adjustments international capital flows or via impacts of military conflicts and embargoes. Bulgaria’s experience is as follows.

There have been five shock waves related to: the disappearance of the CMEA, the embargoes on ex-Yugoslavia and Macedonia, 1997 capital market turbulence, 1998 Russian crisis, and the Kosovo crisis of 1999, plus the hike of oil prices and depreciation of the EURO in 2000. The impact has been of different significance and consequence.

1. As mentioned above the longest-term impact came from the first shock. The disappearance of FSU and ex-Eastern block as market led to under-investment and contraction of GDP: by 31% in `1991 compared to 1989. In 1990, FSU still hold for 52% of Bulgaria’s exports (down from 56% previous year) and 49% of the imports (down from 54% in 1989). As reported by BNB, in 1991, the total export volume contracted by 34.6%. Important imports remain mostly in energy resources, but situation is changing there as well: these import in 1994-1997 were equal to average 10% of GDP, for next three years – to 4.5% of GDP.

2. The impact of the embargoes on ex-Yugoslavia and Macedonia was of a more institutional than of pure structural nature. It contributed to the preservation of high port fees of Varna and Bourgas, making them not competitive even after 1995. In 1992-1994, Macedonia doubled its share in Bulgaria’s trade compensating for the lost markets in FR Yugoslavia. Violation of the UN embargo on FRY had become an important factor to feed the informal and semi-legal economic activities within the country thus implanting longer-term pro-corrupt domestic economic ethics. This period coincided with Bulgaria moratorium on its foreign debt payment. The central bank followed policies of managed floating and base interest rates. Profit and asset repatriation regulations were fairly liberal, interest rates were attractive and this constellation contributed to estimated USD 300-330 million capital flight from neighboring countries to Bulgaria. Cheaper access to financing combined with a cross-subsidy via energy prices, soft loans and postponed liabilities contributed to a temporary improvement of exports in 1994, which was not sustained in the next period. The 1994 Brady Plan with the London Club of private lenders (backed by international financial institutions) required stricter financial discipline. Foreign capital inflow was not linked to investment opportunities due continued until 1997 stalemate in privatization and quasi-fiscal support to loss-making state owned enterprises. On the balance, 1992-1995 embargoes (coinciding with other developments) could create growth, investment and export opportunities for Bulgaria provided there were healthy economic structure and proper policy-mix to utilize those opportunities.

3. Besides its openness, Bulgarian economy remained virtually untouched during October - November 1997 crisis of the global capital market, the Asian Crisis and the Russian financial collapse of Summer 1998. The explanation for the former is in the underdeveloped nature of the Bulgarian stock market; in the unclear supply and doubtful demand side of this market. The direct consequences of the Russia’s crisis have been minor as well, because low Russia’s share in Bulgarian exports (about 6.6% in the first half 1998), further declining to 5.2% in the first six months of 2000. Bulgarian products have already had difficulty accessing Russian markets, due to both economic and political reasons. The economic reason was mainly the low competitiveness of Bulgarian industries, while the political one was in the high import tariffs. Hence, the collapse of the Russian market did not drastically affect Bulgarian exports to Russia, given the fact that they were not high anyway. Imports from Russia accounted for around 28% in the first half of 1998 of all Bulgarian imports, mainly energy resources and mineral products. Since Russia was interested in achieving a stable supply of hard currency, imports were not affected as well.

4. Direct costs of the Kosovo crisis for Bulgaria were negligible. They include $ 0.7 million aid to the government of Macedonia, and officially registered 317 Yugoslav refugees. The war rather highlighted inherited weaknesses than served as a sole reason for Bulgaria’s poor economic performance in 1999. In 1999, exports of goods and services went down by 16%, while imports decrease by 3% only. During the first three months of the year, effectively before the war, export industrial sales had already fallen by 26%. Domestic sales fell by 12% for the same period, and GDP went down by 0.7% compared to the same period of 1998. The poor performance was already there before NATO air strikes. The immediate shock was perhaps most obvious in April 1999 when exports dropped from $ 335.1 million in March to $ 283.7 in April. Imports went down as well, but at much slower pace: from $ 453.7 to 442.9 million. The aggregated decline in the imports for the first half of 1999 is only 1% while exports were down by 21.7%. This difference suggests that physically interrupted trade routes were no single factor of worsened Bulgaria’s competitiveness, although there were delays in deliveries. In fact exports improve in April - June 1999, and the GDP has picked up by 1.6% compared to the same quarter of the previous year. Eventually, the real GDP growth in 1999 was 2.4%. It seems that for pure domestic reasons Bulgarian has reach the bottom of economic performance before the crisis and on its aftermath it behaved relative independently from external influence, the main reason being, perhaps, the low recovery starting point in 1997.

5. 2000 brought about continuous increases of the petroleum prices and weakness of the EURO against US dollar. Depreciation of the EURO approaches 30% since the introduction, the Bulgarian currency; the Lev (BGN) is pegged to the EURO at 1.96, and in the first half of November BGN is 2.3 for US dollar (up from 1.9 a year ago).

Oil and natural gas import is 23% of the total Bulgaria import in the first 6 months of 2000. If oil and gas are excluded form the current account the deficit is rather modest, USD 23 million in the first quarter of 2000. (In 1999, the same figure would be USD 170 million.) The reason is in the fairly good performance of non-oil exports. Although the current account deficit would probably exceed 5% of GDP (the government forecast is 4.5%), the balance of payment of the country will remain enough strong to absorb pressures from hiking oil and gas prices. It is due to the high foreign investment record in the fist nine months of 2000, amounting USD 600 million. On the other hand, in the period of 1994-1997 Bulgaria was spending on average 10% of its GDP on oil and gas imports; in 1998-2000 this figure is 5%, which basically means that there is a tendency towards lowering the overall energy dependency.

As to the depreciation of the EURO, it does not harm significantly the country’s balance of payment, though 65% of its foreign debt is US dollar denominated. The weaker EURO adds 0.23-0.24% of GDP to 2000 fiscal costs of debt service. The exports is, perhaps, benefiting from the cheaper EURO, although the history of the 1990’s proved that structural factors are more important than the exchange rate in Bulgaria’s export performance.

Bulgaria, similarly to other SEE countries, depends critically on international trade. In the last the level of the imports has always been between 70 and 80 percent. Presumably, in the years to come, the growth prospects of EU and other major partners would be of critical importance to the growth potential of the country, and the region.

Bulgaria’s openness had a relatively long history but to the former CMEA. Thus the openness did not produce sustained output and higher income. Compared to Slovenia, which in 1991 had close to 60% of its trade with EU and EFTA, Bulgaria had to re-orient its trade from the same trade volume to then at the eve of dissolution CMEA, seeking other markets. Bulgaria’s starting point of reforms was significantly worse than that of other emerging economies. Also, Bulgaria lost markets in Iraq, Libya, and Iran. Sanctions against Iraq and Libya blocked USD 2 billion of their debts to Bulgaria. It happened simultaneously with the default on foreign debt payment in March 1990, announced unilaterally by then communist cabinet. It also happened at the eve of the first democratic general elections of the post-communist history of the country, held in June 1990. Then elected new set of government had still to establish itself and simultaneously, in a condensed time-period, with the reorientation of trade to deal with debt rescheduling, launching reforms and constitution making. The immediate victim of this agenda was not the constitution making, political reforms or the international relations but the consistency of economic reforms.

The following two graphs visualize the great redirection of Bulgaria’s foreign trade: the result in 1999 is diametrically opposite to the situation at the start of the reforms.

Since 1998, imports from Russian Federation and CIS had virtually been limited to energy resources. It equalizes its rank as a market to CEFTA countries, while exports to EU have become ten times higher. The original decline in 1991-1993 in the "Eastern" trade is to be explained with two factors: the disappearance of the CMEA greenhouse and the fact that Bulgaria lost its "unique" access to COCOM-embargoed products, thus ceasing to be an exclusive supplier to the East. Until 1997 (i.e. before the Russian crisis), exports to CIS share in Bulgaria exports remained comparatively high. This is due to the so-called Yamburg agreement – an ex-CMEA (1987) agreement on natural gas supply at lower than international prices, which was paid back by pre-agreed reversed supply and barter.

After 1989, only four years registered growth in real GDP. In 1994, 1995 the growth was modest but fueled by indebtedness of the state owned enterprises, quasi-fiscal subsidies and international conjecture. It reemerges in 1998 and 1999 on sounder fundamentals (stable currency, low inflation, bankrupted loss making enterprise, etc.). 2000 is likely to register growth of about 5% of GDP, thus completing a three-year test period for growth sustainability. At the same time, since 1989, real GDP has lost more than one-third of its initial volume and the recovery is slow, reaching in 2000 72% of the pre-reform level.

Source: NSI, IME calculations

The graph below demonstrates the failure to maintain price stability. In 1990’s periods of inflation coincided with periods of sharp GDP contraction.

These circumstances suggest that the trade re-orientation, although taking place through out the period, was not backed sustained economic stability and changed structure (which could build penetration to new markets due better productivity and competitiveness). Discontinuing central bank credit to the government and refinancing of the banks in March 1997, and eventual introduction of the currency board arrangement in July the same year have brought about monetary and financial stability only in 1998. Currently, a provisional return to policy discretion constitutes a political risk. As discussed above in the paragraph on the external shocks, the experience of the mid-1990 suggests that the absence of straightjacket on government interference could hamper prospects for growth.

At the same time, inflation periods were accompanied with or caused by sharp depreciations of Bulgarian currency. This factor was not boosting exports to any significant extend but served as a motivation for Bulgarian companies to seeks hard currency markets to substitute the volatile purchasing power at home. The same motivation was behind the lack of foreign investment, besides sectors, which could build upon then existing possibilities for export. 1992-1997 lead exporting sectors were the petrochemicals, ferrous and non-ferrous metallurgy, chemicals plus tobaccos and wines. These sectors have had a considerably larger global market share that the average Bulgaria’s position in the global trade. Tobacco was and still is a government monopoly. Though wineries remained yet government owned in mid-1990, marketing wines abroad was a private venture. Short-term "advantages" of the heavy industry sectors were either in the cheap natural gas supply under the Yamburg agreement or in different forms of quasi-fiscal subsidies (debt forgiveness, subsidized electricity or postponed environmental liabilities). What is important for our topic, however, this to mention that even still artificial structure of the Bulgarian economy in the most of the 1990 was boosting Bulgaria’s exports westwards.

Thus, besides some sporadic attempts to impose protectionist’s tariffs, even in difficult general conditions Bulgarian economy remained predominantly open.

Excluding the decline in 1990 and up-end boost in 1997, the percentage share of foreign trade in the GDP became relatively stable. The export/import comparisons by year give evidence of imports most of the time exceeding exports. The weight of the exports as a GDP factor was constantly declining in reform years, thus proving the uncompetitive real positioning of Bulgaria on international markets. In 1998 Bulgarian exports to EU had risen to 49.5%, and imports to 46.1%. For all years the pattern has been the export of low value added and energy and labor intensive products. The external demand did not serve as a factor of then registered growth.

The table above compares the demand driving Bulgarian GDP since the start of the reforms in March 1991. Preliminary data for 2000 demonstrate a restoration of the role of exports as a factor of GDP. The significant fact is that it is the first development of the sort for ten years. The big question mark, however, is whether it marks a beginning of a trend or simply due to conjecture factors.

To answer this question, we need to pay a closer look to different domestic factors that are likely to support greater trade potential. For different factors we allocate different meaning of contemporaneity. As factors select:

• Average growth of GDP for certain periods, although there was a growth in 1998 of 3.5%, we categorize this year to the previous period in order to "discount" a provisional impact of the economic inertia, and not to take into account the factor of the low starting point (the contraction of 1996 real GDP was 10.9%, in 1997 – 6.9%);
  
• Average export growth for the same periods;
  
• Average growth of savings to GDP, this time the contemporary period includes 1998, and it is compared to the years between 1995-1997 in order to avoid the sharpest decline in saving at the beginning of reforms;
  
• Gross domestic investment (taken for the period of 1994-1997 in order to skip the disinvestments in first reform years) and foreign direct investment.

What exists is possible. Growth trend seems to be reversed. Investment is steadily higher in the last three years than in the previous period. Foreign investment is higher than in years before 1998 but still unused factor. Bulgarian trade was converted from East to West under circumstances less favorable in 1998 – 2000 period, than they could be at early years of transition. Institutional background was also providing for greater government discretion, which allow eventually to mismanage the exchange rate and restored price controls and protectionism in 1995. In addition, by the end of 2000 90% of Bulgarian banks are private and 70% of them – foreign. No domestic political party is advocating major changes in the monetary or trade policies. External policy framework of EU accession is an additional institutional constraint to domestic temptation for radical policy reversals.

The external demand is a major factor of growth. Given the assumed low value added of the Bulgarian exports, the geographical proximity presumably is playing a significant role. In this paragraph we concentrate on two major markets – the EU and SEE.

EU is the biggest trading partner for all SEE economies, ranging from just under 90% of exports in the case of Albania to around 46 percent in the case of Croatia. On the other hand, all of these economies together account for a very small fraction, 1.6% of EU imports and 4.4% of exports to third countries. These countries are simply not major markets for EU exporters and are even less important as competitors to EU industry and agriculture. Excluding Bulgaria and Romania they account for less than 1% of extra EU imports – and of course much less of the EU market, if EU production and intra-EU trade are included. The dependence is obviously not mutual, but it is important to see which countries of the EU have replaced the former CMEA Bulgarian markets.

The alternative SEE market has its own peculiarities. In terms of the trade potential the important to attempt to reflect to what extend Bulgaria differs from other countries in terms of partners they compete for. Tables below show the distribution of main trade partners in 1998. One year obviously not sufficient to draw general conclusions, but it is a normal year, without political distortions, appropriate for an illustration. At the same time, 1998 is not at all different in terms of partners’ distribution from any year since 1995 for most of the countries.

For Bulgaria, the geographical proximity matters only for the trade with Greece, which ranks third partner since 1994, being a member of the EU. For other countries, only Albania has a major trade with a neighboring country.

For Bulgaria SEE trade cannot be underestimated. In 1998, it was relatively negligible but in 2000 it tripled, though it is likely that it has been more or less extraordinary development (mostly due to petroleum exports to FR Yugoslavia).

On overall, intra-regional trade is limited, less 12% of the total Balkan trade. But this average hides many peculiarities. Bosnia and Herzegovina is significantly dependent on its trade with Croatia. Macedonia used to have a significantly larger regional trade within SEE than many neighboring countries. Some neighboring countries rarely trade among themselves, like Bulgaria and Romania. SEE countries trade over 60% with EU and the industrialized West, but not with one another.

Reasons are at least the following:

• Regional integration of a low-income economy with low-income countries usually makes an economy poorer;
• The demand is weak and relatively unsophisticated, and competitive companies chose more complex markets;
• The countries in the region have relatively similar product and quality structures;
• Instability of the regional markets in monetary and political terms;
• Inefficient contract enforcement and dispute resolution;
• Tariff and non-tariff barriers.

Dependency on EU is to be seen in the totally insignificant share of the SEE share in the union’s import – 1.59% in 1998. In addition all the countries have same partners in EU trade, Germany and Italy, presumably trading similar goods. In the future the trade potential of Bulgaria, as well as of the other SEE, would to a significant extend depend on the economic growth in these countries.

Re-channeling trade flows to neighboring Balkan would not serve as an alternative because eventually the extra-regional demand have roughly same address. The longer-term potential would depend mostly on the growth in Germany and Italy. The diversity of the third rank partners is greater but trading in that direction is time lower then for first/second ranks. The same must be true for the entire prospects of the GDP growth in Bulgaria and SEE countries.

The dependency comes from the low income of these economies. Bulgaria’s GDP per capita is 1/5 of the EU lower rank economies. The average SEE GDP per capita at market exchange rate in 1998 was USD 1,793. Lowest GDP per capita had Albania (USD 1,110). Highest GDP per capita had Croatia - USD 4,635. The total SEE GDP was USD 94.92 billion. It is 0.32% of the value of the 1998 world output. If we exclude Romania (which is roughly 40% of the total SEE), remaining SEE GDP for 1998 is USD 58.12 billion, i.e. 0.2% of the world output. (Average per country it means 0.033%). Excluding Romania, the total SEE GDP was roughly 1/12 of the combined 1998 public procurement budget of the EU member states.

Agriculture goods are the only category in EU import from Bulgaria in which it has somewhat greater share. Exports of textiles and footwear are important to all SEE countries: but the share in EU imports ranges from 0.13% in the case of Albania to 3.39% for Romania (textiles) and from 0.31% Macedonia to 8.08% Romania for footwear. In textiles and iron and steel Bulgaria is second after Romania, but in the former goods its EU-market share is more than three times smaller than Romania’s.

Trade partnerships are shaped also by policies. Reorientation of Bulgarian foreign trade was supported by a respective change in the policies.

Although Bulgaria originally has had a remarkable success in trade liberalization at the start of the reforms, it failed to maintain the original pace and direction of trade reforms while it was the advantage of countries like Czech Republic, Poland and Slovenia. The reasons for this uneven progress could be found in macroeconomic instability, uneven progress in introducing broader market reforms, and reemergence of price controls (in 1993-1996), which resulted in exchange rates volatility and demands for protection. Protectionism measures artificially boosted GDP in mid 1990. But even these temporary positive effects were immediately neutralized by the government support for loss making enterprise.

This liberalization process may be divided into several periods, according to the extent of trade liberalization and EU integration progress.

As a whole, the gains from the liberalization of foreign trade up to now have not had an impact on Bulgaria’s economic performance, because of weak flexibility and adjustment to the domestic and international market on the part of economic agents. The hope is that, perhaps in the longer term, benefits from trade liberalization will be achieved through enhancing the competitiveness of production and diversification of the export structure with profitable products.

*(Ratings 1 - 10 equal to "most open" - most restrictive trade regime.)
The table does not reflect most recent developments. Over the last three years Bulgaria’s trade regime became less restrictive: the average tariff rate is reduced from 16.8 % in 1997 to 13.7 % from the beginning of 2000, non-tariff barriers were reduced substantially as well. Reduction of trade restrictions is already contributing to trade diversification and improves the efficiency of resource allocation. Under the conditions of monopoly structures, any effects from decreasing tariffs on resource distribution are lower than in countries with well-developed property rights. According to IMF, if Bulgaria manages to implement envisioned liberalization measures in 2000 the country will make significant progress towards opening of it trade regime and will move from rating 6 to rating 2. At the same time, Bulgaria’s trade regime is far more restrictive than the other two currency board countries from the group of EU candidates, Estonia and Lithuania.

In order to deeper reflect upon institutional foundations of Bulgaria’s trade potential we decided to check to what extend different partners contribute to the efficiency of trade and investment. Efficiency is understood as amount of investment per number of companies.

In 1998, the EU based companies constituted 6% of all registered companies with foreign capital, and their share in FDI’s was 36%, or 60% in 1999 if we take into account reinvested earnings and loans. The difference in comparison with companies established by SEE (including Greek) capital is more than telling. They constituted 36% of all registered foreign companies, and their share in FDI’s was 6% in 1998.

In order to understand what could be the reason we tried to compare different measures of trade between Bulgaria and SEE with the number of companies. We looked at values and the volumes of trades (as a relative estimation of quantity in metric tons) and compared them with the number of companies taking part in trade between Bulgaria and all SEE countries (including Greece and Turkey) for a relatively long period – 1993 – 2000 (first six months).

In the case of imports Bulgaria has too many importers from Turkey compared to the values and volumes of trade. It is difficult to draw a general conclusion but it is obvious that there is a concentration of companies competing similar amounts of trade between Bulgaria and SEE, which itself constitutes a relatively small share of the total Bulgaria’s trade.

Particularly high concentration of importers relative to the value and volume of trade, besides Turkey, is in case of Bosnia and Herzegovina; while it is relatively on the balance in the imports from Croatia and is somewhat more efficient in the similar relation with other parts of SEE.

In exports participants outnumber both values and volumes of trade with virtually all countries except Turkey. This is to be explained by the nature of the Bulgarian exports to this market, which consists mostly of electricity and energy resources. Especially inefficient seems the export to Macedonia and Albania. Part of the explanation is to be found in difficult administrative conditions and non-tariff barriers. Given the longer term we have the opportunity to compare and the rather unstable commodity structure of the exchange between Bulgaria and the Balkan countries, it is strange that companies still seek opportunities for arbitrage and profit. It is likely that part of the explanation is in the poor markets information readily available for the region.

On overall, in seems that exports to Balkan countries is more inefficient than imports: the concentration of exporters is higher than that of importers for all the countries.

As mentioned, these comparisons do not allow for firm explanation but they have a heuristic power. Bulgaria’s attempt to trade more with neighboring markets seems quite persistent, regardless the diverse circumstances of 1990. It is possible to suppose that elimination of the institutional barriers would release greater efficiency and would contribute to the growth of the Bulgaria’s SEE trade.

A different way to look at the trade potential is to compare the demographics of Bulgaria with its global share in FDI’s. Such a measurement has been proposed as a part of general benchmarking on Bulgaria’s economy by the US based consultant company J.A. Austin Associates (JAA). JAA compares Bulgaria’s FDI for a selected year with its share in the global population. In 1998, the first year of a relative break through after the crisis of 1996-1997, Bulgaria attracted USD 401 million FDI’s, which put her on 61^st place out of 162 countries on which information was available for the World Development Indicators of the World Bank. Between EU accession countries behind Bulgaria in that year we only three countries: Latvia, Slovenia and Cyprus.

Source: World Development Indicators, JAA calculations

JAA assumption is that FDI/population ratio might be considered "fair" if it is at least close to 1. Obviously this is a conventional assumption, but it helps comparisons. While Bulgaria’s FDI share is six times smaller the share of the world population, Hungary and Czech republic, although with similar sized of population look considerably different.

The development is the following. In 1998, FDI’s as percent of GDP constituted 3.3%. A year later it almost doubled to 6.1%. In the years after 1998 the inflow of FDI is on average 30% higher per annum. Accumulated stock of foreign direct investment in 2000 would be at least 21% of the GDP. It would be twice less than the share of FDI’s to the GDP of Hungary but roughly the same percentage as in Poland.

FDI’s per country of origin give more information on provisional trade developments. Presumably, the trade would be sustained or even improved if trade partners interweave respective economic entities and cooperate. As mentioned in a different context, in 1999 EU capital had 60% of the FDI’s in Bulgaria, in 2000 this share will be already 63-64%. (In terms of per capita the figure would almost double the amount of 1998.) Similar but higher shares of EU investment have Central European Countries. On the SEE scene similar is the performance of Croatia and Romania. An interesting development is that of the Italian investment. Italia use to be a prime trade partner for the last ten years, but in terms of direct investment she has been at bottom of the list with only USD 35 million. In 2000, the fourth biggest Italian bank, with a major presence at the emerging European markets, Unicredito Italiano, bought the biggest Bulgarian bank. Thus Italy’s Bulgarian position as a second trade partner converted itself into a third investor. The structural impact of such development cannot be underestimated: it has finalized the privatization of the Bulgarian banking sector, diversifying the foreign presence in accordance with the major trade and investment partners. As of the end of 2000, Germany, Belgium and Italy would amount to over 40% of the investment in Bulgaria.

Earlier foreign investors, like Belgium based Solvey and Union Miniere, have bought respectively major chemical plant producing soda and a copper smelter. They build up their advantages on the originally subsidized in mid-1990 markets, restructured the enterprise and provided a bridge to a sustained exports without relying on quasi-fiscal transfers. Similar developments take place in the textile and knitwear industry.

It seems that the structure has been established, and it will not allow for sharp decline in trade values and quality. Exports for 1999 and especially 2000 have demonstrated stronger exports than ever before in the last decay. Low value added is still significant with 17% net growth in the first six months of 2000. But this is to be attributed to clearing up stocks from the last year and partially accelerated restructuring after privatizations in 1998 and 1999.

The following table shows the 1998-1999-export performance of the top six non-energy and non-chemical products.

The comparison of the first half of 2000 to the first six months of last year is fairly positive but the exports during the first quarter of 1999 had reached its lowest point since 1997 and the data for 2000 yet must not be overestimated. In 2000 (fist two quarters) exports and imports are up by 24% and 19.2 respectively. Low value added export (petroleum products, non-ferrous metals and cement) still dominates. However, there is an increase of 7.3% in the export of consumer goods; they contribute to 1/5 of the growth of the export while their share in the total exports is only 17%. Oil and natural gas export is up 55% (exports to Turkey and Yugoslavia), of the petroleum products – 191%. If we take into account the lower imports of crude petrol, it is likely that efficiency of the domestic petrochemical industry is higher (perhaps because of the privatization of Neftochim, the biggest refinery in SEE, and the liberalization of the prices). On average, according to NSI, the exports for the first eight months of 2000 picked up by 13.5%, while imports – by 5.5%. There is no reason to think that by the end of the year this trend will be reversed. However, if we now look at the development in historic perspective, the modest today developments towards better value added cannot compensate for the missing foreign investment at earlier stages of reforms. Then reorientation happened at the expense of complex factors of production, with no or limited opportunity to substitute them via domestic investment.

After the Kosovo crisis there are international political developments, which will eventually result into some sort of equalization of the international trade frameworks for Bulgaria and the rest of the region. The current Bulgaria’s predisposition to the region is shown in the following two tables. But situation may change due to political developments.

Countries of the so called Western Balkans are on the route to signed EU Stabilization and Accession Agreement which in tackling trade issues are similar to EAA’s of Bulgaria and Romania. In November 2000, the EU adopted a 97% non-tariff treatment of its trade with these countries, maintaining quota-approach for agriculture produce, fish and wines. There are talks of debt restructuring and reductions, which could put other countries of the region in a position towards financial markets comparable to that of Bulgaria.

Bulgaria’s advantage is that of a relatively early comer.

It has debt restructuring agreement and it exists on the international capital flow map, performing modestly. Similar is the comparison to other SEE countries in terms of membership in international organizations and initiatives with more direct or remote relation to trade frameworks.

The EU has established a variety of bilateral relations with SEE countries. In each case, the nature of the agreements is different. For Bulgaria and Romania, existing EAA’s aim at establishing a free trade area and foresee a gradual liberalization of trade restrictions by both parties. In the case of the non-associated countries, the EU provides BiH, Croatia, Macedonia and Albania, wide ranging unilateral trade preferences which in substance go back to the former cooperation agreement between the EC and Yugoslavia. The existing agreements are characterized by a more favorable treatment of industry and agriculture. A recent development here is the unilateral non-tariff treatment of Western Balkans and FR Yugoslavia provisional imports to EU (UTA). The agreement with Bulgaria and Romania provides for free trade in manufactures (with exceptions and limitations in some specific sectors e.g., steel) with a variety of transition periods (asymmetric between these countries and the EU), and some more limited specific preferential arrangements for agricultural products. The ATP`s and the contractual agreement with Macedonia contains preferences covering both industrial and agricultural products. (It also is at the eve of signing SAA with the EU that was set to serve as a model for other West Balkan relationship with the union.) As a general rule, industrial products are admitted duty free with no quantitative restrictions, within the limits of tariff ceilings for certain industrial products (steel).

WTO membership varies. Bulgaria and Romania are already members. Croatia, Albania and Macedonia are at the late stages of negotiations for WTO accession, while B&H is in the beginning. Yugoslavia was an original GATT member but the WTO has not acted on its application for accession.

Directly related to trade are the columns of the table above, which list trade organizations (and international standard setting bodies, OECD and ICC) and the EU accession. The third column (excluding BSEC) lists more or less political frameworks.

Increasing the competitive possibilities on enterprise level acts against protectionism measures on general level. Presumably, a country would liberalize and join WTO if and when relative competitive position of a critical mass of enterprise allow for resisting pressures of the open market. If such a stage were achieved, political bargaining to protect domestic players would loose economic "justification". The case with SEE is far from such an ideal reasoning.

Tariff regimes of Romania, Albania, Bulgaria and Macedonia in 1999 with average are relatively restrictive. For comparison the average nominal import tariff of the Central European countries is about 10%. Croatia seems closer to these countries. At the same time the only two WTO members, Bulgaria and Romania could be considered as premature members.

The explanation for Bulgaria is pure political: memberships in WTO and other organizations and initiatives have equipped the government with arguments against domestic interest groups, which could oppose a policy towards greater trade liberalization and trade openness. It this explanation is correct, Bulgaria’s membership in the trade-related organizations and the EU-accession is an important element of the domestic trade liberalization policy enforcement.

A special case is FR Yugoslavia. It is on the track of reassuming its due place in the international frameworks. The sooner it happens the sooner generally accepted principles would be applicable to SEE markets.

A beneficial option for Bulgaria and the SEE countries would be to adopt the same, uniform (uniform meaning that the same tariff is introduced across the region, on all or nearly products and services) and moderately positive tariff between themselves, realistically, roughly equivalent to the external EC tariff, e.g. between 5% and 10%. A free zone, ideally, is an imposing of a uniform tariff of 0%. Such a development is in fact under way through the EAA for Bulgaria and Romania and similar contractual models for the Western Balkan. Combined uniformity (the same tariff for all products and services) and similarity (enforcement by each country) duties on imports from other countries might serve as an instrument enlarging the market and motivating clustering. The merits of the existing international trade framework, with their fair chance of being properly followed and implemented, are the following:

• Uniformity would allow tracking cumulated rules of origin;
  
• Investors would consider the region as a single market, without formerly establishing such a market but forwarding integration with more sophisticated markets currently servicing as major trade partners;
  
• Regional players would easier utilize relative economic opportunities, identifying niches, specialization venues and instances of clustering.

Bulgaria seems well positioned to benefit form such developments, at least it is standing better than most of the countries. The same is visible and in SEE comparison in FDI.

In 1999, FDI increased in Croatia and Bulgaria but declined in some other countries, e.g. in Macedonia and Romania. Per capita inflow for Bulgaria is approximately 2.5 times less advantageous than for Croatia but as a percent of GDP the volumes are roughly comparable. But it is also important that the combined FDI inflow for Southeast Europe in 1999 is 62% of the FDI to Czech Republic FDI for the same year.

Cumulative inflow per capita since 1989 is comparatively very low, more than seven time less than in Hungary or six time less than in Czech Republic.

The openness of the Bulgarian economy is gradually. If we go back now to Gwartney-Skipton-Lawson Trade Openness Index, we may see that Bulgaria stay relatively on all the four factors (tariff rates, black market exchange rate premium, restrictions on capital movements, and the size of the trade sector). Tariff rates are moderate and two political processes (EU accession and Balkan cooperation) are exercising pressure to further liberalize trade. Black market exchange rate is eliminated, and exchange rate fluctuations do not significantly hampers the trade flows. Restrictions of capital movements are modest and institutions to link Bulgarian domestic are well-established viz-a-vie international banking system and trade partners. The only restriction remaining is registration of capital transfers above USD 5,000. The size of the trade sector is high in nominal terms but at a closer look is rather inefficient.

Recently, the export performance worsened in 1998 and 1999. The decrease was due to ongoing structural reform, while impacts of international factors remained limited.

On overall terms of trade has been deteriorating. Volume change in 2000 export is expected to be 14.8% and the unit value would improve by 4.3% (the import change respectively: 5.4 and 14.1%). This means that an overall improvement compared to 1988 might be expected only in a medium run.

The deterioration results from non-elastic foreign demand for Bulgarian exports due to unfinished adjustment and low competitiveness. In other words, fundamental developments like FDI, liberalization and tariffs have been uneven or hampered, and this is the reason, besides other factors of the trade openness, the potential for growth and prosperity to remain dormant or undiscovered.

Trade result for the entire 1993-1999 periods is negative (- 410,866 USD).

EU has promptly become Bulgaria’s most important trade partner with relative share of Bulgarian trade73.92% for the period between 1993 and 1999. At the same time the price for the trade reorientation was the low value added and losses in previously complex factors of production due again to the lack of FDI to compensate for these development. Trade balance for the mentioned period with the EU is modestly positive USD 146,748 for the same period.

The second trade partner for Bulgaria is SEE (including Turkey and Greece) with average share of 31.22% of Bulgarian trade over this seven years period. From SEE main trade partners of Bulgaria are Greece, Turkey, Macedonia and Romania with shares 11.74%, 9.67%, 6.73% and 3.09% respectively.

The development of the trade potential development depends on economic and political factors: enlargement of the market, restoration and use of complex factors that would allow for better competitiveness and provisional clustering while all these depend on the political will to maintain late 1990’s reforms and developments on track.

Summarizing we can draw the following conclusions. Bulgarian economy happened to be resilient to external shock, but more so after the introduction of the currency board arrangement in 1997. It is not simply a merit of the arrangement per se but, practically speaking, it has helped to follow set of policies, which eventually offset negative developments on the international markets. It is no accident – in early and mid-1990’s more crucial domestic policy deficiencies and constellations mediated external shocks. In the cases of embargoes etc. they aggravated the negative impacts. In cases of international market turbulences, they prevented the chocks. In the post 1997 period, the economic restructuring is taking off from the limbo of the previous period. At the same time, besides structural inefficiencies and the ambivalent impacts of external factors Bulgarian economy managed to reorient its markets from the ex-Eastern Block countries to the EU and the European free trade zone.

Annex 1: Direction of SEE trade flows, by partner, 1998 in Million USD