Going for VAT Hikes in the Balkans. Or Love Thy Neighbor in Time of Crisis

Editorial |Author: Ivan Dikov | July 12, 2010, Monday // 18:54|  views

If one is to give it some serious thought, the global economic and financial crisis has actually been rather beneficial for Bulgaria so far...

And it could become extremely beneficial if some smart policies have been/are adopted. What is more, by mid 2010, the effects of the economic crisis on Bulgaria's two fellow EU neighbors Romania and Greece is suggesting new important lessons for the country.

The crisis did put an end to several years of record economic activity in Bulgaria – with foreign direct investments reaching the record EUR 9 B in 2007, and the pretty decent EUR 6 B in 2008.

The years 2006-2008 were a period of “great” “job security”, in a way, because Bulgarians – especially the pool of unskilled laborers, did not have to worry about employment. They could, literally, just go to the nearest bustling construction site, toil for 10-11 hours there, and get paid BGN 50 in cash in the evening - a good deal if you are not the kind of person who worries about the blatant lack of labor safety, insurance, social security and health benefits.

This period has been over for 1-2 years now as the crisis wiped out Bulgaria's pre-2009 economic growth. Which is probably something that one should not fret about given that, in addition to the proper foreign investors, it was also fueled to some extent by speculators – and some exciting money laundering schemes, and was focused on a limited number of sectors – construction, finances, tourism, and trade.

The fact of the matter is that the economic and financial crisis did save much of the Bulgarian environment – and therefore the potential of its tourism sector – by making investors freeze or abandon a number of resort construction projects located in or near protected areas.

The crisis helped tame Bulgaria's previously raging current account deficit, and even led to an improvement of the country's trade balance – the country's foreign trade gap is now closing not so much because of the modest growth of the Bulgarian exports but because of the collapse of imports previously driven by the now shattered domestic consumption.

Another probably mostly positive effect of the crisis was halting what was emerging as the need to “import” thousands of foreign laborers from countries such as Vietnam. Basically, by mid 2008 when Bulgaria's Socialist-led government even went to Vietnam in order to “procure” migrant workers, the Bulgarian economy was getting close to reaching “full employment”.

Not that importing immigrants would have been a bad thing in itself – as every self-respecting industrialized Western nation seems to be doing it. It is just that in terms of its administration, legislation, and societal attitudes Bulgaria seems to be woefully ill-equipped to handle a substantial immigrant inflow, and it probably has the lowest capacity of all EU member states to absorb, that is, to accept, relatively large numbers of foreigners that look different and speak languages very different from its own.

So by the fall of 2008 the Bulgarian economy was really overheated – to the extent that an economy run and staffed by Bulgarians can be overheated – that is, since, unfortunately, we don't rank very high in terms of labor productivity.

With all that now gone, the Bulgarian companies and authorities should really (have) seize(d) the crisis as a golden chance to try to find the road for sustainable growth, i.e. to identify the priority sectors and economic models, invest heavily in training and education, figure out how to utilize best Bulgaria's limited potential in the research and development sectors – and also to prepare in terms of legislation, infrastructure, and mentality for the future advent of the foreign workers from Vietnam or elsewhere – that is bound to happen as soon as the economy starts taking off again – as a result of the demographic crisis.

It is probably too early to say how much Bulgarian companies and institutions have managed to take advantage of the positive aspects of the crisis yet – but my guess is – probably not as much as they should (have).

The present economic and financial situations in Bulgaria's two EU neighbors Greece and Romania raise some interesting questions in this respect. Not least because figuring the best way to integrate Bulgaria's economy and border regions with those of its neighboring EU states would make a lot of sense in terms of preparing for the “post-crisis world.”

It certainly is a good idea for Bulgaria to look at its other neighbors as well – Serbia and Macedonia as well as Turkey with the vast and vastly unexplored market of its 20-million megalopolis Istanbul sitting right next door. But the opportunities presented by being able to bridge Romania and Greece – both fellow EU member states with larger economic potential than Bulgaria – are certainly crucial even as both Greece and Romania are struggling financially.

The rationale for that seems clear. To mention a few simple facts, there were one million Romanian tourists in Bulgaria only last year. 30% of the Bulgarian banking sector is Greek-owned, and Greece is the third largest foreign investor in Bulgaria in the last 15 years – surpassing Germany, the UK, France, the US, to name a few.

Yet, in Bulgaria (and probably in Romania and Greece as well) there has been little appreciation and thought of mutually beneficial policies for proper EU-type economic integration – of the kind that has spurred prosperity in Western Europe, and has made a war between the two parts comprising Franco-Germany unimaginable in the past 60 years.

A good test for that are the two general sets of attitudes in Bulgaria towards the economic troubles of its two EU neighbors – Greece, whose finances are now scrutinized by the EU and the entire world, and Romania, which has had to succumb to pressure by the International Monetary Fund in order to get some bailout money into its economy.

The first set of attitudes in Bulgaria has been underlined by the fact that its EU neighbors had to up their value-added tax rates (from 19% to 23% in Greece, and from 19% to 24% in Romania) while for the time being, despite much heating debating, the Bulgarian government is evading going for a VAT hike. The argument here goes that the Greeks don't deserve aid from the EU after cooking their financial data, and that we are doing better than both of our neighbors and should not care for them.

Needless to say, this has been some pretty ridiculous gloating in Sofia since not only aren't we doing better than Greece and Romania but if our neighbors are crumbling, we will not just miss benefits, but there are chances are our economy will suffer badly as well.

The second types of attitudes in Bulgaria have to do with hopes to profit from the plight and misery of the Greeks and Romanians. This goes primarily for the border regions – in the Bulgarian Southwest and along the Danube where thousands of Greek and Romanian shoppers have been flocking to buy groceries and fill up their gas tanks.

This sentiment has gone as far as a huge headline in a major Bulgarian daily newspaper saying, “The Macedonians Are Stealing Our Greeks”, referring to the fact that in their quest to save a few bucks some households from Northern Greece started shopping in Macedonia, which is competing for the Greek buyers with Southwest Bulgaria.

A leading Romanian journalist and economic analyst has suggested that because of the tax hikes in his country, a large number of Romanian companies will relocate to the Bulgarian Danube city of Ruse “which is only 60 km away from Bucharest.”

Clearly, this “hey-there-is-our-time-to-profit-big-from-the-troubles-of-our neighbors” attitude is about as ridiculous as the “gloating” one. Because, sure, a few isolated pockets on Bulgarian territory might strike it rich for a few months from foreign shoppers. But without real sustainable growth reforms in Bulgaria – including the integration of our border regions with the border regions of our EU neighbors – the much dreamed-of economic prosperity will keep being nothing but a distant prospect. Not until we have the roads, the tunnels, the bridges, and the mutual understanding that one country's prosperity is the chance for another to become prosperous as well, and that one country's economic troubles are most likely to drag down the neighboring economy as well – a simple concept still lost to many in the Balkans.

So when the VAT goes up in Romania and Greece, Bulgarians should probably be as concerned as if it were going up in Bulgaria instead of being happy that some grocery store in Petrich or Ruse has made a few extra bucks from struggling foreign families.

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Tags: Greek banks, Romanian tourists, Romanians, Greeks, Greek shoppers, danube, Southwest Bulgaria, Petrich, Ruse, reforms, Istanbul, turkey, macedonia, Serbia, Balkans, EU, economic crisis, financial crisis, global economic crisis, greece, Romania, VAT hike, VAT, FDI, Foreign investors, construction, tourism, finance, IMF, IMF loan, bailout


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