-  10  -

contingent macroeconomic liabilities but also incentives to managers to strip assets and design schemes to ‘privatize’ income from state-owned assets. Therefore, delays in implementing hard budget constraints and in privatization further eroded potential value of assets and dramatically raised the cost of transition from central planning in Bulgaria.

**Table 2:** _The collapse of output and dependence on “socialist trade”_

||Last year in which output fell|Cumulative output<br>decline since 1990|The share of CMEA exports (or inter-<br>republic)in total exports in 1989<br>4/|
|---|---|---|---|
|Bulgaria<br>|1997|41|53|
|Czech Republic<br>1/<br>|1998|16|37|
|Estonia<br>3/|1999|52|98|
|Hungary<br>|1993|19|41|
|Latvia<br>3/<br>|1995|57|97|
|Lithuania<br>3/|1999|55|94|
|Poland|1991|14|41|
|Romania<br>|1999|39|25|
|Slovak Republic<br>1/<br>|1993|27|37|
|Slovenia<br>2/<br>|1992<br>|22<br>|37<br>|

1 **Notes** : / the share of CMEA –oriented exports is for former Czechoslovakia in 1989. 2/ the combined share of exports to CMEA and Yugoslav republics in 1992. 3/ the share of exports to former Soviet republics in 1990. 4/ The respective shares were re-calculated using Hungarian exchange rate for transferable ruble because the Hungarian rate better reflected the purchasing power of the transferable ruble than rates used by other CMEA partners (See Kaminski, Wang, Winters 1996). **Source** : Fischer and Sahay (2000), Kaminski, Wang and Winters (1996), and WB 2005.

The most powerful indication that the failure of economic policies in 1990-96 to remove administrative barriers to allocation of resources and to introduce hard budget constraint on firms, mainly state owned,<sup>9</sup> explains Bulgaria’s unique pattern of export performance in that period relates to factor content of its exports. In contrast to factor intensities of Hungarian or Polish exports, capital intensive and skilled labor intensive products drove Bulgarian exports. While one would expect that—like first in Hungarian and subsequently in Polish exports—these products would become levers of the export growth, as this would be in line with their comparative advantage, this could not have occurred without prior industrial restructuring. In the case of Bulgaria, the bulk of exports in 1991-96 continued coming from state-owned firms. Their share in total output of industry in 1995 was still 88 percent. Operating at a loss, some of the state-owned firms were able to offer prices low enough to be competitive on the international markets. Subsidies facilitated competing through prices rather than quality. This explains why, in contrast to Bulgaria’s endowments and available production assets poorly matching market imperatives, skilled labor and capital intensive experienced initially the fastest growth in EU-oriented exports. While in Hungary and Poland large chunks of industry, deprived of subsidies and “easy” markets at home, faced extinction or restructuring, there were no similar pressures in Bulgaria.

The loss in competitiveness vis-à-vis its regional partners, as a result of misguided economic policies in 1991-96, was very significant. Bulgaria’s share in total exports of CEEC-11, i.e., European transition economies that either acceded or are on the accession path to the EU, fell from 5 percent in 1996 to 3 percent in 1999. Significant improvement in Bulgaria’s performance has not been sufficient to allow for the increase in its share in total exports of not only CEEC-11 but also CEEC-3 (Table 3). Bulgaria has succeeded, however, to expand at the same pace as other countries of the Balkan Stability Pact (see notes to Table 3).

> 9 Major measures of first-stage reforms were not only overturned but also no structural, second-stage reforms followed. Price liberalization was partly reversed and—with the capture of economic policy by powerful private vested interests—privatization program of large state-owned enterprises suspended. For a review of Bulgaria’s decade of transition, see Mihov (1999). For an analysis of the 1996 crisis, see Dobrinsky (1997) and Wyzan (1998).