3 reforms covering as a rule activities and policy areas where progress can be gauged only indirectly. Moreover, they usually tend to be highly intertwined. Progress in one area can be ‘neutered’ by the lack of progress in another area. For instance, large-scale privatization may be completed. Yet, its benefits may not materialize if privatized companies are subsidized by still state owned banks, as it was the case in the Czech Republic in the mid-1990’s, or competition policy is unable to contain their abuse of dominant position. The same comment applies to various indicators measuring the quality of business climate. Huge minimum capital requirements or instabilities in tax policies, for instance, may offset simplicity of procedures for business entry.

In order to assess Bulgaria’s progress in building institutions supporting plugging-into global markets, we adopt an eclectic approach. Proxy variables for assessing the progress in structural reforms in a comparative perspective is the improvement in the quality of governance supplemented by the ‘cost of doing business’ indicators and external assessments of corruption. We shall use the methodology and data developed by the World Bank for the first two, and Transparency International’s country rankings for the latter. They are all intertwined with the progress in building institutions supporting competitive markets and improving business climate. Governance takes into account the capacity of state to provide environment conducive to business activity, i.e., transparency, accountability, enforcement of the rule of law, regulations supporting competition, etc. The ‘cost of doing business’ indicators provide measures to assess businessfriendliness of regulations, whereas corruption indicators the extent of graft as perceived by international investors. The incidence of corruption supplements an assessment of the quality of governance pointing to its symptoms.

Two caveats are important. First, the shared weakness of governance and cost of doing business indicators is that a low score in a single dimension can offset high scores on other dimensions. For instance, friendly conditions for entry of start-ups would matter little if the government preys on existing businesses. In a similar vein, political instability will make superfluous positive scores on other dimensions of governance. Second, governance is not a synonym for corruption. Although better governance implies lower corruption, the two are different. Governance includes supply of public goods and services. Better governance and regulatory environment, low ‘hassle’ cost of conducting business, labor force, etc., all increase the probability of receiving higher FDI inflows and provide strong incentives to the development of the locally-owned private sector. Countries that have made the largest progress in transition to competitive markets have also registered stronger growth and attracted the largest inflows of FDI, whereas countries with weaker business climate have been less successful in attracting FDI.

This section examines progress achieved in the post-crisis stage of transition and sets it in a comparative perspective.

# **2.1. First-generation reforms: prices, foreign trade, foreign exchange and macrostability**

Bulgaria followed initially similar policies as other radical reformers in the region. It introduced in 1991, i.e., roughly at the same time as the former Czechoslovakia and Romania, the stabilization-cumtransformation program that “... essentially resembled the Polish program of 1990” (Bruno 1994, p. 24). All these countries freed most prices, removed the multiple exchange rate regime, introduced convertibility for current account transactions and dramatically liberalized foreign trade by eliminating all quantitative restrictions and the state monopoly over foreign trade.

Some differences, however, emerged early in transition indicating that Bulgaria as well as Romania moved with an initially smaller bang than other Central European early reformers. For instance, not all central controls over prices of tradables were removed and the foreign exchange rate regime was not liberalized in line with IMF Article VIII obligations. In consequence, there were significant restrictions on current account convertibility of Leva. In addition, hard budget constraint on state-owned enterprises was not imposed by state budget policies.

Yet, from the perspective of developments in 1995, Bulgaria seemed poised to perform like other radical reformers that appeared to be on the verge of a strong recovery from transformational recession. In