Commentary

Interview: Answers to Questions from Emil Petrov and George Sharabov

1. What is your opinion on the resignation of Borisov’s government? Was it a weakness or the right measure?

In reality, Prime Minister Borisov had very little choice. Rather than endlessly elaborate on all the points associated with the resignation, I will simply state that, when faced with reality, Borisov acted rationally.

2. What is you opinion of the protests in Bulgaria and the main cause for them high electricity and central heating prices?

Endemic political and bureaucratic corruption is the real source of Bulgaria’s problems. Outrage over the recent increases in electricity and fuel prices is nothing more than a convenient explanation. In short, the Bulgarian Mafia’s links to politicians, bureaucrats, and state structures explain why Bulgaria’s political system is always in a state of unstable equilibrium, at best.

I have expressed my strong views about Bulgaria’s corruption problem for many years. Indeed, I observed it firsthand. When I was operating as President Stoyanov’s independent adviser, many foreign companies alerted me to the problems they were facing. To underscore just how big the corruption problem was, I reached into my briefcase, during one meeting Mrs. Hanke and I had with President Stoyanov, and pulled out proof that a Bulgarian minister was demanding bribes from an American company.

3. One of the main reasons for the protests is the poor economic condition of ordinary people and the amount of wages that are several times behind European levels. How and when Bulgarians will have the same salaries like Germans, for example?

In short, it will take a long time. Assuming the current projected growth differential between Bulgaria and Germany persists, it will take slightly more than 80 years for the average Bulgarian’s income to catch up. That’s four generations. And, those calculations are based on rather optimistic assumptions.

4. Can you imagine such protests in USA- what is the amount of monthly energy bills there and who pays the electricity and gas for poor and unemployed people?

No, not at a national level. In the U.S., residential energy costs take up 4% of the average family’s annual income. There are a variety of programs that assist Americans in poverty with their heating and electricity bills. These range from private philanthropy to state and federal government programs, to, yes, foreign government assistance. Indeed, strange as it might seem, Venezuela’s state-owned oil company has a fuel assistance program for poor people in the U.S.

But, these assistance programs are very small. For example, the federal government’s program amounts to about USD $300 per year for each U.S. family in poverty. Adjusting for Bulgaria’s lower per capita income level, this would amount to USD $44 (66 leva) per poor family, per year, in Bulgaria.

Allow me to close on this by stressing that government fuel subsidies are a road to economic ruin and major political instability. Just consider the following countries and the magnitude of their government fuel subdivides:

  • Egypt — 8.9% of GDP
  • Morocco — 6.4% of GDP
  • Lebanon — 5.0% of GDP
  • Tunisia — 3.8% of GDP
  • Jordan — 3.8% of GDP

Notice a theme here? It’s the Arab Spring.

5. Are there in USA energy monopolies and how their prices are regulated?

A full answer to this question would be complex and cover many pages of Trud. The short answer is that, unlike in Bulgaria, the generation of power in the U.S. is, in general, competitive. And, prices are, in general, not regulated. In the 1970s, I was part of a group of economists that provided the early analysis that led to the deregulation of, and enhanced competition in, U.S. power generation. This increased competition has worked very well to reduce costs to U.S. consumers

Moving from power generation to distribution, U.S. distribution companies are granted monopoly rights by local governments, and those governments regulate the prices that are charged for distribution services. Ultimately, the big issue with non-market-regulated prices is always the quality of the regulator.

6. Do you think that the Bulgarian currency board is under threat?

No. Even though there is some loose talk, and even conspiracy theories, about an alleged desire by some to get rid of the currency board, I don’t think there is a serious threat. After all, Bulgarians know that, if the currency board was done away with, politicians and various Mafia elements would grab more fiscal power; the deficit would grow; the country’s debt would grow; Bulgaria’s credit rating would be downgraded; interest rates would soar; the inflation rate would increase; the economy would slow, as confidence collapsed; and so on. In short, economic chaos — like that in Greece — would ensue.

Without the currency board anchor, Bulgaria would be tossed around like a small boat in a violent sea. Why would Bulgarians want to go back to the pre-currency-board economy of the Videnov years? A vote against the currency board would be a vote to commit economic suicide.

7. Some people are transferring their deposits from leva to euro. What do you think about that?

I have checked with the BNB, and that assertion is simply not correct. The BNB monitors deposits on a daily basis, and Bulgarians have not been switching out of leva into the euro. In terms of public opinion, year after year, Bulgarians express their full faith in the currency board system, as they should.

8. What is your advice to people in Bulgaria in these anxious times?

Armed with a currency board system, Bulgarians overcame the hyperinflation crisis of 1996-97, and finally began to realize stability and economic growth. Bulgaria’s success, of course, has a lot to do with the monetary stability generated by the currency board, but it also stems from the fiscal discipline that Bulgaria’s currency board imposed on the political system.

That said, a sound currency and fiscal restraint are only the first steps in Bulgaria’s economic emergence. Now, it’s time to get serious about Bulgaria’s biggest problem: corruption. The lesson is simple: the institutions of government (the rule of law) count for a lot more than individual politicians. So, create solid institutions — like the currency board — and build on them.

9. Do you think that the protests and future political instability will reflect the future economic development of Bulgaria?

If street protests and political instability continue, it will ultimately be bad for the Bulgarian economy. Sound policies are not made on the streets. Indeed, there are no ideas on the streets. Street protests, political instability, and corruption will hamper future economic development; the rule of law will promote it.

10. What is your opinion of the work done by minister Simeon Djankov? What are your advices to his successor?

It’s difficult to comment on a particular Minister’s performance in the Borisov government because Borisov operated as a czar and made all the “Big” decisions. That said, my advice for future Finance Ministers is simple: follow the currency board law, and get serious about fighting corruption.

11. What will you advice the next government to do in economic policy and which are the urgent measures that it will have to implement?

The next government should look to the example of Singapore’s leader, Lee Kuan Yew. In 1965, Singapore gained its independence, when it was expelled from a two-year federation with Malaysia. At that time, Singapore was backward and poor, a barren speck on the map in a dangerous part of the world. Its population was made up of a diverse group of immigrants with a history of communal tensions. However, Singapore had a leader with clear ideas on how to modernize the country.

Lee Kuan Yew ruled out passing the begging bowl and accepting foreign assistance of any kind. Instead, he embraced stable money and first-world competition. Stable money was initially achieved with a currency board. Competition was attained by light taxation, minimal regulation of business, and free trade. In addition, Lee Kuan Yew insisted on personal security, public order and the protection of private property. To accomplish his objectives, his central principle for organizing a small government was to run a tight ship with no waste or corruption. To implement that principle, Lee Kuan Yew appointed only first-class civil servants and paid them first-class wages.

Today, Singapore is one of the freest, most flexible and prosperous economies in the world. Bulgaria can be too.

12. What is your opinion of the new finance minister Hristov?

President Plevneliev sent a strong confidence-building signal by tapping Kalin Hristov for interim Finance Minister — an excellent choice. Since the currency board is the foundation of Bulgaria’s economic success thus far, what better choice is there than Hristov? He’s an expert who understands both the technical details and the spirit of the currency board.

13. What is your advice to the caretaker government and particularly to the economy minister?

The caretaker government won’t have time to introduce any “Big” initiatives before the elections, and it should not try to do so. It should simply maintain its integrity and resist corruption. In addition, it should pay great attention to all the details of the government, so that no “Big” mistakes occur on the caretaker’s watch.

Prof. Dr. Steve H. Hanke is a Professor of Applied Economics at the Johns Hopkins University and co-director of The Johns Hopkins University’s Institute for Applied Economics, Global Health, and the Study of Business Enterprise in Baltimore, Maryland, USA and a Senior Fellow at the Cato Institute in Washington D.C. He served as an adviser to President Petar Stoyanov from 1997-2001. You can follow him on Twitter: @Steve_Hanke.