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during the current expansionary phase. But there are several indications heralding change underway:

- The composition of top performers in EU markets (with an increase in EU imports of at least 2.85 times between 2000 and 2003), accounting for 16 percent of Bulgaria’s EU-oriented exports in 2003 up from 4 percent in 2000, indicates the shift towards natural resource and capital intensive products.

- Bulgaria’s export offer in EU markets has shifted towards more processed goods mostly products of electro-engineering sectors.

- Although Bulgarian producers are not yet become on any significant scale of the division of labor based on production fragmentation in vertically integrated sectors, they have made significant strides in information communication technology products and automotive parts.

- Last but not least, trade in parts and engineering products not covered by the network trade analysis has displayed strong growth, with their exports accounting in 2003 for 5.4 percent of Bulgaria’s EU-oriented exports up from 3.1 percent in 1998.

• The returns usually associated with liberal reforms, i.e., gains in competitiveness combined with shift towards in products in line with country’s endowments in production factors began to surface only recently. In contrast to the period preceding the second transformational recession, gains in competitiveness derive from corporate and industrial restructuring and not from subsidies.

## **2. Highlights of Bulgaria’s trade performance: dynamics and geographical reorientation**

What are the major characteristics of Bulgaria’s overall performance? How does it compare to other regional partners? What are its idiosyncratic features? These are the main questions addressed in this section.

# **A** **_._** _Trade in goods and services: three phases_

Looking solely at the dynamics of Bulgaria’s foreign trade over 1990-2004, one may distinguish three distinct phases. The first phase of hesitant recovery, covering the period in the aftermath of the collapse of central planning in 1989-90 until 1995, was characterized by a slow growth in the value of both exports and imports. The value of total trade increased 60 percent between 1991 and 1995, with a caveat—balance of payments statistics for this period are hardly reliable. Trade in services, which increased more than threefold, contributed significantly to the increase, as trade in goods increased only 40 percent during this period (Table 1).

The beginning of the second phase of stagnation, if not contraction, coincides with the eruption of financial crisis in 1996 and ends in 1999. Within this second phase, the deep macroeconomic crisis that brought the economy to a grinding halt in 1996-97 affected foreign trade in perverse ways. While in 1996 both the values of exports and imports contracted, the former increased in 1997 (Table 1). This led to a very significant surplus in foreign trade, with the value of exports of goods and services 20 percent higher than their imports. Surpluses disappeared in both 1998 and 1999, as exports were contracting and imports increased in both years.<sup>4</sup> In consequence, in 1996 total foreign trade in goods and services fell more than the GDP—in 1995 the ratio fell from 137 percent to 97 percent in 1996. Subsequently, the foreign trade contracted less than the GDP in 1997 and grew faster in 1998. In 1999, when the GDP

> 4 Although the value of exports of goods and services increased in 1997 over 1996, the value of imports fell much more. In consequence, the total trade declined in 1997 marking the beginning of the stagnation and contraction in Bulgaria’s foreign trade.