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## **2.2. Second generation reforms: governance and FDI**

While macroeconomic performance has been impressive since the introduction of the stabilizationcum-transformation program in 1997, the progress in implementing the second-stage institutional reforms has been less spectacular, albeit not disappointing. With some delays privatization took off and a number of measures improving business climate have been implemented.<sup>2</sup> Since 1998, Bulgaria has reformed the regulatory and institutional framework of the banking sector and privatized private banks to strategic investors. As a result, the financial sector has fully recovered from huge financial losses and damage to its credibility suffered in the aftermath of the financial meltdown in 1996-97.

This section examines Bulgaria’s position in terms of the progress in structural reforms as captured by corruption indices, World Bank’s indicators of governance, and EBRD indicators of economic reforms. It assesses progress both over time and vis-à-vis its regional peers. Since the test of pudding is eating, we also look at links between achieved progress and FDI inflows.

# _A. Perception of corruption, governance and structural reforms_

How does Bulgaria compare to other countries in the region in terms of progress achieved in structural reforms? In order to answer this question, we use three different indicators: Corruption Perception Index (CPI), World Bank-based aggregate index of governance quality, and EBRD-based index of progress in second generation reforms. Admittedly, each of them is very subjective based on experts’ opinions rather than ‘hard’ numbers. Yet, taken together they provide basis for assessment of changes over time and Bulgaria’s position vis-à-vis its regional peers. Taken together, they point to very significant progress in improving business climate achieved especially over the last three years.

We begin with CPI providing information on perception of international investors of corruption in a country in comparative context. International investors’ perception of the Bulgarian investment climate has substantially improved since 1998. The verdicts given by participants of Transparency International annual surveys have been increasingly favorable for Bulgaria. While in the mid 1990s Bulgaria together with Romania was ranked somewhere between CEEC-8 and CIS economies, the latter notorious for high incidence of corruption, Bulgaria has been moving up. It has not only the ‘cleanest’ institutional environment among Balkan countries but, by 2000, Bulgaria has also become like other CEEC-8 countries in terms of the value of CPI (Table 2). The decline in perception of corruption has been impressive since 2000, as Bulgaria has been moving towards the median CPI value of 4.4 in 2000-04 for CEEC-8 countries. Bulgaria’s current rating stands at 87 percents of the CEEC-8 average and 93 percent the CEEC-8 median value of CPI.

**Table 2:** _Values of Corruption Perception Indices for selected countries in 1998-2000 and 2002-2004_

||1998|1999|2000|2002|2003|2004|Index, 2004<br>2000=100|
|---|---|---|---|---|---|---|---|
|Bulgaria|3.3|3.5|3.5|4.0|3.9|4.1|117|
|Romania|3.3|2.9|2.6|2.8|2.8|2.8|108|
|Average CEEC-8|4.2|4.6|4.5|4.6|4.6|4.6|104|
|Best 1999-2004: Slovenia<sup>**a/**</sup>|n/a|6.0|5.5|6.0|6.0|6.0|109|
|Worse 1998:Latvia|2.7|3.4|3.4|3.7|3.7|4.0|118|
|Worse 2004:Poland|4.6|4.2|4.1|4.0|4.0|3.5|85|
|Average EU-15|7.7|7.6|7.6|7.6|7.8|7.8|103<br>|
|Average SEE-5|n/a|2.7|N/a|2.8|2.8|2.8|103<sup>**~~b/~~**</sup>|
|**_Memorandum_**: Bulgaria in||||||||
|% of the CEEC-8 average<br>|78.6<br>|76.5<br>|78.2|87.9|85.7|88.4|116|

Notes:<sup>**a**</sup> **/** no data available for 1998.<sup>**b**</sup> **/** base year is 1999. Source: derived from data available at the web site of Transparency International at <u>http://www.transparency.org/</u> 2 For instance, the Privatization and Post-privatization Act repealed the 1992 Law on the Transformation and Privatization of State and Municipal-owned Enterprises only in March 13, 2002.