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

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

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

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

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

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

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

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.

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)

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.

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

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.

Available options:1. Slash investment2. Slash consumption3. LOLR

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.

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”

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)

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 West2. To import consumption goods3. Ineffective investment of the foreign

credits

‘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

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

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