What is not said in Bulgaria about ”the Romanian economic model”?

After neighbours` economy grew with 8,8% in the third quarter, Bulgarian Economic Chamber came out with a document and explanations about the their success. However the theses of Bulgarian economic experts would surprise their Romanian colleagues

Vladimir Mitev

This article was published on 23 December 2017 on the site ”Baricada”. 

Romanian and Bulgarian have been comparing both countries economically for more than ten years. There is a simple cause for that – their economies and societies are comparable in various dimensions. Romania and Bulgaria will never become what Germany is and comparisons with it could only bring dissatisfaction. But if the neighbouring country is a point of reference, one could get a relatively good idea about his direction of movement.

Romania and Bulgara are “in the same boat”. The realisation of this fact is the first step towards understanding where we are in the world economic process. If Romanians and Bulgarians look at each other they will notice that there are plenty of similiarities and only some differences between their social realities. The economic model in both countries is the same: low direct taxes for the capital, low income, reliance on foreign investments and weak protection of labour. Foreign investors in banks, mines, distribution of electricity are the same or come from the same countries. It is no wonder that managers of international companies often are responsible for a region that unites Romania and Bulgaria and includes also the Republic of Moldova or some other neighbouring country.

A part of the comparison is the intrusive thought that neighbour deals better with the bright capitalistic future’s construction. In Bulgaria Romanians have become a byword for “overachievers”, because right-wing Bulgarians see their dreams realised by the neighbours – fight against corruption removes the dinosaurs of transition from the political game, the economic growth is the highest in the EU, a strong urban middle class is formed and it feels as a leader of country’s modernisation.

It could be surprising to some Bulgarians but in Romania Bulgaria could also be an example for success. To the north of the Danube is being written regularly how in Bulgaria there are more kms of highways than in Romania, how Sofia’s subway is being built fast, while Bucharest’s subway hasn’t opened a new station for quite some time, how Bulgarian tourism industry creates jealousy.

It even turns out that some Romanians have a faint sympathy towards Bulgaria. There is an opinion that national interests in economy are better protected in Bulgaria from the onslaught of foreign capital. The site “Social Monitor”, which presents info graphics about various social indicators in Romania, Bulgaria and Germany unveils that the poor in Bulgaria live a little bit better that the poor in Romania. One could probably reject such conclusions, but what matters is the tendency – on every side of the border we look for “salvation” or inspiration, as we face the mirror image of the neighbour.

In this context the Bulgarian Economic Chamber decided to contribute to the debates about the necessary economic and social reforms in Bulgaria, as it summed up some statistical indicators of Eurostat about Romania and Bulgaria. Romania looked like an example to be followed in the chamber’s document, which was distributed at its site and was shared further by economic media such as Investor.bg. Romania had a record economic growth of 8,8% in the third quarter of 2017. Its unemployment in 2016 was 5,9%. The investment in its economy has been 22,7% of GDP in 2016, while GSP/capita (in PPP) was 59% of the European average. In other words chamber’s list of data showed that Romanians already move on the highway of European well-being.

The same indicators about Bulgarian economy were at more modest levels. The economic growth in the third quarter was 3,9%. The unemployment in 2016 amounted to 7,6%. The investments reached 18,6% of GDP, while GDP/capita (in PPP) was 49% of European average (given that both countries enter in the EU in 2007 at levels of 41% of GDP). The whole picture resonated with the feeling of many Bulgarians that the country outside Sofia and few large cities doesn’t develop and the people pay the price for the wrong model.

The document also made a little bit unexplainable comparison in this context. The annual net income per capita in Bulgaria in 2015 was only 6% lower that the Romanian one, while in 2007 the difference has been 17,7%. It could be surprising to read that against the background of previous data, because it means that Bulgaria keeps a good pace with the income growth. But in the fact these data suggest that in spite of the worse macroeconomic indicators, salaries in Bulgaria rise faster that in Romania so Bulgarians should be both content and not want more, but also worried because economy might not sustain the rising incomes.

Whose income rises? Who benefts from the economic growth and who doesn`t? Why statistics show dreams coming true, while many people in our two states live unable to save money and pray their health to stay good?

One could get lost in the mirror world of comparison, if certain indicators are compared without understanding of the context, which they reflect. That is why comments about the document of Bulgarian Economic Chamber, made by its vicepresident Dimitar Brankov in his interview for the Bloomberg Bulgaria TV on 29 November 2017 need to be studied with attention. He pointed out that the strong sides of Romanian model are the labour legislation reforms, undertaken after the start of world economic crisis, the flexible exchange rate of the leu, financial institutions` competence and foreign investments` attraction. If any of these elements is put in its Romanian context, it starts to look different.

The labour legislation changes of 2011 have been introduced under IMF`s pressure, after Romania was forced to take loans of 20 billion euro from some Western financial institutions. These reforms undermine the labour unions, as they introduce the notion of the so-called „workers` representatives“ – a structure with severely limited capabilities for protection of workers in their relations with the employer. That is how reforms strike a blow to the social dialogue, and Romanians still can`t recover from this hit. It increases enormously the weight of capital in economic relations at the expense of salaried workers.

According to the Romanian social and economic expert Ştefan Guga the excellent economic growth of Romania today would have taken place without labour reforms too, because it has other causes: the success of the export-oriented sector of the economy, which relies on foreign investment and external markets. In fact, the GDP growth doesn`t mean that the whole population automatically gets richer or that public services become better.

Today in Romania exist two different economies – one of them having foreign owners, and relying on foreign investors and external markets, and the other one – Romanian-owned, whose share in the overall economy has been falling after country’s entering into the EU. According to a survey by the experts of Romanian national bank Florin Dragu and Adrian Costeiu about the period 1994-2014 the companies with Romanian capital usually have business interactions with other Romanian-owned firms, while foreign-owned companies usually deal with other foreign-owned entities. Both authors conclude that only 7% of the companies with Romanian capital have realised 50% of the turnover in the relations between the Romanian-owned and the foreign-owned business, based in Romania.

These two parallel economies have different dynamics. The sector of foreign owners in Romanian economy comes with established technologies and markets and uses Romanians’ cheap labour and the low direct taxes upon the capital. This is an export-oriented sector and its orientation towards the external markets permits it to grow a lot in the ten years after entering in the EU to the extent that in 2015 it has a larger share from the overall turnover in the economy than the Romanian-owned private sector.

According to 2015 data in Romania existed 22 146 firms exporters, which have sold abroad goods for 54,6 billion euro. The first 500 of them are responsible for 74% of this export. The share of Romanian companies among these top 500 firms is only 10-12%.

This is the economy sector which creates the big economic growth. The sector of the national capital usually relies more on the internal demand which has been stimulated in the last years through the introduction of a reduced VAT for foods (9%). Rising internal demand however increased the imports and created larger trade deficit. The attempts of giving tax preferences to various categories of citizens together with the rise of salaries in the state sector led to a situation, in which according to the European commission in 2018 Romania will have a budget deficit of 3,9% of GDP – above the threshold of 3% of GDP. That is why in an interview for the blog of the Romanian economic expert Radu Soviani the eurocommissioner for euro and social dialogue Valdis Dombrovskis said that Bulgaria had advanced “considerable” with regard to its entering in the eurozone, while Romania remained behind. In the middle of December 2017 Romanian government unveiled its intentions to take a loan of 8 billion euro, which would be used in the following two years to fill in the holes in the budget.

Even if Bulgaria has made a progress, it remains limited to certain sectors and geographical regions. Joining the eurozone could become a stimulus for making of reforms that could modernise Bulgarian economy and society, as the economist Dimitar Sabev wrote in 2017. However no modernisation plan is seen on the horizon. Instead the Bulgarian government appears to hope to join the eurozone the way it joined the EU ten years ago – as a result of bargain, through obedience to Bruxelles and without making important social changes.

Romanian financial institutions are not accepted unanimously as very competent in Romania. As the Romanian economist Cornel Ban – professor in the University of Boston, points out – the Romanian financial institutions are the main highway through which the world economic crisis entered in Romania in the end of the first decade of XXI century. That is why their competence need to be seen with a doubt, even though the Romanian National Bank has a halo of expertise.

Romania might not be in a currency board as Bulgaria is, but its last large currency depreciation vis-a-vis the euro was in 2008. In the last years the leu`s exchange rate was relatively constant vis-a-vis the European currency. In other words the country hasn`t receieved competitive advantage through currency depreciation for almost ten years. This autumn the exchange rate depreciated a little bit and reached 4,6 leu for an euro, but even this depreciation doesn`t appear to be very significant. Practically, the Romanian National Bank has been sustaining a stable exchange rate vis-a-vis the euro as if the leu is pegged to the European currency.

It is true that Romania attracts more foreign direct investments that Bulgaria (70,11 billion euro against 23,5 billion euro until 31 December 2016), but a part of the explanation for that is not only in the larger dimensions of the country, but also in its abundance of natural resources. They attract as a magnet greater foreign interests. Neighbours are not only open to foreigners, but also worry that foreign economic interests are too well protected by the Romanian state, while the common people don’t see the abundance of natural resources reflected in the price of fuel and in other aspects of their life.

Ştefan Guga points out that in the last years not only the salaries got higher in Romania, but also in parallel certain fiscal measures have been taken so that the labour expenditures don`t grow. An example in this regard is the case with social security payments’ transfer from the employers to the employees. As of 1 January 2018 employees will pay the great part of social security payments in Romania. That is why even though the minimal salary was raised to 1900 lei (around 400 euro) and the income tax was lowered some categories of employees will be paid lower net salaries, while others will obtain a symbolical rise of income. As northern neighbours’ economy marks great economic growth, many people say that the Romanian employee becomes more and more a slave of capital.

Is anybody looking for alternatives to the current economic model of social dumping in Romania and what could be they? The switch to a developmental policy is often formulated as an alternative. It means that the economy must be transformed structurally so that it starts to produce goods and services with a high added value, and thus to bring greater income to the state budget and a more equal distribution of income between capital and labour. According to Guga this vision includes also ”functioning public services accesible to more people… but it remains to be seen to what extent is this scenario viable from politic point of view in today`s context”. Such a development would mean other balances between the economic and politic subjects in the country and beyond it. According to Guga this is utopian for the time being.

Surprising or not the Romanian economic model doesn’t differ a lot from the Bulgarian one. What takes place in Romania has been used for years with political goals in Bulgarian social life. Knowing the Romanian context and the authentic Romanian opinions could help us understand better our own politico-economic realities. It could turn out that the desire to a “more Romanian” model, could lead to a “more Bulgarian” one.

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