Bulgaria: Where Exports Are as Hollow as Promises

Bulgaria's national statistical service just recorded the latest bombastically impressive figures of export growth to both EU and non-EU countries.

However, the billion euro question about Bulgaria's billion euro export is how much of it is real, and, how much of it actually stems from any decent added value created by the Bulgarian economy.

The latest data of the Bulgarian National Statistical Institute suggest that in January 2011 Bulgaria's export to the rest of the EU grew by 74% year-on-year reaching BGN 1.8 B, while its imports grew by 37.5% reaching BGN 1.7 B resulting in a positive intra-EU trade balance for the country.

Bulgaria's export to non-EU countries in January-February 2011 grew by 65.5% year-on-year reaching BGN 2.4 B, while its import grew by 49.6% reaching BGN 2.6 B, close to a positive balance.

In a January 2011 editorial entitled "It's the (Export) Economy, Stupid (Bulgarians)!" I built upon some current figures about Bulgaria's trade balance to argue that the Bulgarian state and society SHOULD focus massively and explicitly on an export-oriented economy. So these figures – together with Eurostat data that Bulgaria saw the highest export growth in the EU in 2010 should make me happy, one would think.

Yet, they don't. Because in spite of the impressive results on paper Bulgaria's exports are not indicating even a remote step in the right direction of a knowledge-based economy striving to develop and export at least some high added value products. Not that that is of any surprise since in spite of some success stories here and there (more so in the services), Bulgaria continues to have little industry worthy of the name, and the Borisov Cabinet hardly seems to have pondered over which economic sectors to emphasize, not to mention how to go about this "emphasizing."

Some of Bulgaria's export growth can indeed be attributed to some businesses striving to come up with competitive products (let's give them some badly deserved credit).

But the sad fact of the matter is that much of it appears to be based on low-quality, low-added value products, much of it is just fake as financial organized crime uses it to drain VAT credit from the state budget, and the combined effect of the staggering growth figures on improving the well-being of the Bulgarian people is pretty negligible.

First, there are increasing concerns among tax officials and finance experts in Bulgaria that a sizable share of the growing Bulgarian export is just hollow. Even though precise estimates are impossible, there have been suggestions reports that is share might be as high as 30%, perhaps even more.

Businesses just make fictitious contracts rather than engaging in actual trade and as "exporters" become entitled to receiving VAT tax credit refunds from the state literally draining the state budget. As early as the last quarter of 2010, reports have indicated a rising number of such financial crimes with respect to the exports of Bulgarian firms to Romania and Greece, EU neighbors and increasingly important trade partners for Bulgaria – or at least for some Bulgarians. Whether the Bulgarian state will ever have the resources, capacities, and good will to crack down on such crimes is a question for science fiction writers.

Second, a quick scan of even the official releases of the Bulgarian statistic reveals that the products Bulgaria exports (or at least is said to export taking into account the "first" above) consist to a great extent of products of low added value. Much of that export is made up of raw materials such as copper ore and even scrap iron – not unlike the typical export commodities of what was termed in the near past as a "Third World country".

Bulgaria's agricultural export also resembles somewhat the mono-cultural agriculture of many developing states – in 2010 Bulgaria's overall export picked up in part thanks to the good yield of grain. Luxuries such as high added value organic food products which Bulgaria is still best suited for are not even on the minds of the Bulgarian agricultural producers and the government. Of course, unlike many countries in desert territories, Bulgaria has little of an irrigation system so when we get rain, we export grain. When there is no rain, we import rain. Talk of sustainable production and trade policies.

There is hardly any way of knowing how much of Bulgaria's export is hollow, and because of that it is harder (though not impossible) to figure out how much of it is made up of products with a decent added value – in both industry and agriculture.

Since the summer of 2010 Bulgaria's current Finance Minister Simeon Djankov has been beating the export drum claiming that – in a Bulgaria with a staggering collapse of FDI – the rising exports will help the country's budget deficit by bringing in more revenues the medium run (even though that effect won't be immediate since exports are not taxed.) Djankov and other ruling party figures have been proclaiming loudly that the Bulgarian economy is recovering thanks to the export, and that the export-oriented industries will pull it out of the economic crisis.

If the above-mentioned points about the hollowness and low added value of the Bulgarian exports are not enough to cast a serious doubt on such claims, there comes the question of how much and when the supposed "beneficial" effect of all these ongoing glorious export efforts of the Bulgarian capital and state will be felt by the increasingly hopeless general population.

A fresh report of the Open Society Institute and the World Bank has found that two-thirds of Bulgarians barely make ends meet and that one-fifth live below the poverty line. A five-minute walk in an average Bulgarian city neighborhood (not to mention a town or a village) can easily convince even the most adamant skeptic that these conclusions are right.

Just as any other government in the past 12 years, the Borisov Cabinet vocally cites several figures indicated macroeconomic stability but important as this might be, it is totally unclear when its benefits will trickle down translating into some improvement of the quality of life.

The simple answer is – hardly ever at the present ways of setting goals and defining policies – and potentially pursuing them.

Other than carrying out the notorious structural reforms, in the past 20 years Bulgaria has invested nothing in education, science, research and development. Bulgaria's university education has been decimated and might as well be proclaimed dead, and the high school education is also getting there at a quick pace.

Other public services such as healthcare, public safety, and justice are about as bad but education remains the most important factor for a decent economy. Paradoxically, Bulgaria can offer neither abundant natural resources for exploitation, nor does it have an unlimited supply of cheap laborers. What is more, it is probably safe to say the era when foreign investors would jump through hoops to get cheap labor – and low taxes, for that matter – is starting to draw to a close.

The realities of the Global Age, which have already been around for some time but to which those in power in Sofia remain oblivious or simply have no plan how to cope with, are that if you are not competitive in terms of knowledge and quality, you are on the fast track of being marginalized.

One of the leading Bulgarian bankers made an interesting remark during last week's forum "Banks Investments Money" in Sofia – the Bulgarian government has no plan regarding which economic sectors to emphasize and prioritize on – or at least, if it has such a plan, nobody knows about it.

With that, and the total lack in investment in education, let alone luxuries such as R&D, no wonder much of Bulgaria's exports is hollow, raw, and little use for the economy and the Bulgarian people. The Bulgarian economy is only 0.25% of EU's total economy and with the current government policies will hardly be reaching for the stars.

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