CHAPTER 12
CHARACTER AND STRUCTURE OF THE ECONOMY
Under comprehensive control of the Bulgarian Communist Party (BKP--see Glossary), the economy was severely strained in mid-1973 as the result of the dual task imposed upon it by the BKP leadership to increase productivity rapidly and substantially and to provide a growing volume of consumer goods and services under a newly announced program for raising the population's low standard of living. A first step in improving the living standard took the form of an upward adjustment in the lowest wage brackets and a broadening of social security provisions. Further improvements, however, were made conditional upon attainment of the productivity and production goals.
The development of the economy and of the consumer program faced severe limitations because of the inadequacy of domestic resources, including basic raw materials, fuels and power, skilled workers, and trained professional personnel. Economic development was heavily dependent on financial and technical aid from the Soviet Union, and dependence upon that country was to be increased in the 1971-75 period. Efforts to overcome persistent and growth-retarding difficulties in the economy led to frequent organizational and procedural changes in the economic mechanism, the structure of which in mid-1973 was still in flux as a result of decisions taken by the BKP in 1965 and in 1968.
The main trend in reshaping the organization and management of the economy was one of concentration and centralization--a trend that led to the creation of huge trusts in industry and distribution and of vast agroindustrial complexes in agriculture. In the process, divisions and lines of authority were blurred, and violations of government directives were frequent because of their complexity and the constraints they placed on the day-to-day operation of economic enterprises.
In the search for a more efficient organization and management pattern, heavy reliance was placed on the introduction of complex automation into all economic processes with the aid of a nationwide computer network--a system of automation that would extend from the highest levels of national economic planning down to the individual factory shop and cow barn. No ideas have been advanced, however, on how complex automation would solve the basic problem of the economy--the widely acknowledged and pervasive lack of incentives to work. The methods used to grapple with this problem were limited to a tinkering with the wage and bonus system, administrative sanctions, political indoctrination, and exhortations.
ORGANIZATION
State ownership of the means of production predominates in the economy. Collective ownership has prevailed in agriculture, but it may be gradually eliminated in the course of the agricultural reorganization initiated in 1970 (see ch. 13). Private ownership of productive resources is limited to subsidiary farm or garden enterprises of collective farmers, industrial and state farmworkers, and artisans; a small number of individual farms on marginal lands; and noncollectivized artisan shops. In 1971 private ownership encompassed about 10 percent of the agricultural land but only 2.5 percent of the fixed assets used in production. Private ownership of personal property and homes is allowed.
The proportions of national income (net material product) generated in each of the ownership sectors in 1971 were: state, 70 percent; collective, 21 percent; and private, 9 percent. The importance of private enterprise in the production of food, however, is much greater than its contribution to the national income may suggest. The private sector has provided more than one-fifth of the crop output and one-third of the livestock production (see ch. 13).
Whereas the leadership has promoted livestock production on private farm plots, since 1968 it has placed increasingly severe restrictions on the activities of private artisans, who had originally been encouraged to expand their operations through liberal regulations issued in 1965. Aside from providing essential services, private artisans played an important role in supplying a variety of consumer goods for the population. The restrictions on artisans' activities have been based on the BKP tenet that private ownership of means of production and the use of personal property to acquire unearned income are incompatible with the socialist order and the country's new constitution.
Economic activities are centrally planned and directed along lines prescribed by the BKP. The functions of planning and control are exercised by the Council of Ministers with the aid of specialized economic ministries, such as the Ministry of Finance, the Ministry of Chemical Industry and Power Generation, and the Ministry of Foreign Trade, and of various governmental committees and commissions (see ch. 8). The state banking system and, more particularly, bank credit have also served as tools for the control of enterprises and trusts.
The economic management structure has been subject to frequent changes. In the spring of 1972 there were fourteen economic ministries, including five ministries exclusively concerned with branches of industry and construction. The Ministry of Agriculture and the Food Industry, as its name implies, has functioned in two major economic sectors and has also had substantial responsibilities in the field of distribution. Among the committees and commissions the most important have been the State Planning Committee, the Committee on Prices, and the Commission for Economic and Scientific-Technical Cooperation. In December 1972 the Commission on the Living Standard was created to coordinate and control the fulfillment of the national living standard program decided upon by the plenum of the Central Committee of the Bulgarian Communist Party. Attached to the Council of Ministers and chaired by a deputy minister, the commission is composed of ministers and deputy ministers, representatives of public organizations, scientists, and other members.
Since the beginning of 1971 economic management has been more highly centralized than before. A plan for partial decentralization of economic decision making adopted in 1965 was abandoned by 1968. The economy is organized into trusts (officially known as state economic associations) that unite enterprises within branches of economic sectors along functional lines, such as metallurgy, textiles, food processing, railroads, freight forwarding, tourism, wholesale distribution, publishing, and filmmaking. In agriculture, trusts are known as agroindustrial complexes; each complex unites several previously independent farms (see ch. 13). Trusts are subordinated to economic ministries and are ultimately responsible to the Council of Ministers. The extent of the ministries' authority over trusts is not clear. In some important respects trusts receive instructions directly from the Council of Ministers.
Agroindustrial trusts number 170. In the nonagricultural sector about sixty-two trusts were originally created, with an average of thirty branches but as many as 106 in one instance. The process of concentration and centralization continued on a small scale at least until the spring of 1973, in part through the consolidation of separate trusts. Before the reorganization, trust branches had been legally and financially independent enterprises, and trusts served only as administrative links between enterprises and ministries. Whereas individual enterprises were previously regarded as the basic economic units in the country, it is the trusts that have been officially considered as such under the new system of management.
Trusts have assumed various functions previously performed by the enterprises themselves. They formulate economic and technological development policies for the trust as a whole and for each branch; establish relations with suppliers, distributors, and financial institutions; and centralize research and development. Trusts have also been charged with responsibility for providing operational guidance to their branches and for organizing the export of products that they manufacture. Branches remain responsible for the effective organization of operations, efficient uses of resources, and the conscientious fulfillment of tasks assigned to them by the annual plan.
Regulations governing the authority of trusts over their branches were intended to permit the establishment of flexible internal management organizations adapted to the particular needs of each trust. The trusts' policies were expected to be based on the rule that whatever the trust could do better than the branches should be centralized in it and, conversely, whatever the branches could do better than the trust should be left in their field of competence. Each trust was supposed to arrive at an optimal combination of management centralization and decentralization.
The transition to the new management system involved difficulties because of delays in issuing pertinent regulations, misinterpretation of the regulations by trust managers, and the reluctance of enterprise managers to acquiesce in the loss of their independence. Most of the organizational and personnel problems were reported to have been resolved by the end of 1971, and in March 1973 party chief Todor Zhivkov reported that further consolidation of the new management structure had been achieved. In the long run, greater efficiency of economic management is to be attained through pervasive automation of all management functions with the aid of a synchronized national network of electronic computers.
Under the new system of trusts, profits of individual branches are pooled and redistributed by the parent organization. Highly productive branches may thus find themselves in the position of having to share their profits with unproductive branches. This feature, some observers believe, may reduce incentives to raise the level of efficiency, increase output, and improve the quality of products.
STRUCTURE AND GROWTH
National income (net national product, which excludes most services not directly related to production) was officially reported to have been 10.41 billion leva (for value of the lev--see Glossary) in 1971, compared to 10.53 billion leva in 1970. Nevertheless, the official index of national income growth showed an increase of 7 percent from 1970 to 1971. This example illustrates the difficulty of using official statistics to describe the structure and growth of the economy or structural changes over a period of time.
According to the 1971 statistical yearbook for Bulgaria, the respective shares of industry and agriculture in national income in 1970 were 49 and 22 percent. The yearbook issued in 1972, however, cited 1970 figures of 55 and 17 percent instead. According to the earlier source, the proportion of national income contributed by industry increased by 6.5 percent in the 1960-70 period, whereas the subsequent source shows a growth of 17 percent for the same period. Similarly, the contribution of agriculture to national income was reported to have declined by 36.4 and by 33.3 percent. An upward trend in the contribution of trade to national income was shown in the earlier source, but a declining trend appeared in the latter.
The differences in statistical presentation resulted primarily from a major revision of wholesale prices, introduced by the government in January 1971. Price revisions made in earlier years, changes in the composition of individual statistical categories and other methodological modifications also contributed to the inconsistency of statistical time series in value terms. Because of differences in concept and coverage, Bulgarian national account data are not comparable with those of the United Nations or the United States systems of national accounts.
In the 1960-71 period national income at prices of 1957 was reported to have increased 2.25 times, which is equivalent to an average annual 7.7 percent rate of growth. The growth of national income was more rapid in the years 1966 through 1971 than it had been in the 1960-65 period. The official national income index implies an average annual increase of 8.5 percent in the latter period, compared to 6.7 percent in the earlier years. Reliable data on the growth of Bulgarian national income in Western terms are not available. Relatively high rates of economic growth are generally associated with early stages of industrial development.
In 1971 industry still lagged behind agriculture in terms of employment, although the proportion of the labor force employed in industry had been steadily rising, while employment in agriculture had been declining. In the 1960-71 period employment in industry rose from 21.9 to 31.2 percent of the labor force, and employment in agriculture declined from 54.7 to 33.4 percent of the total. During the same period employment in the services sector increased from 9.2 to 13.4 percent of the labor force, and gains in employment were made in all other economic sectors except forestry, including construction, transportation and communications, and trade.
LABOR
Growth and productivity of the economy have been adversely affected by shortages of skilled labor and of adequately trained and experienced technical and executive personnel. In the words of the minister of labor and social welfare, the level of worker's current training is inconsistent with the country's industrial base; it lags behind the requirements of the scientific and technical revolution. The lack of required skills has contributed to frequent machinery breakdowns and to the output of low-quality products. As a means of upgrading the skills of workers and executives, a broad program for training and retraining was launched in October 1972 with the cooperation of the Ministry of National Education. About half the number of persons undergoing training were below the age of thirty.
Other persistent shortcomings in the field of labor that have plagued the economy and have been the target of frequent criticism and administrative action by the leadership are inefficient organization of labor and poor labor discipline. Inefficient labor organization has been mainly an outgrowth of inferior management skills. Poor labor discipline has been a consequence of inadequate work incentives. In 1972 the minister of labor and social welfare estimated that more than 20 percent of the working time was lost through idling and other violations of labor discipline.
Adequate information on the structure of wages was not available in mid-1973. The main faults of the wage system that prevailed in early 1973 after repeated revisions, however, were outlined by the BKP leader, Zhivkov, and these faults were also discussed by labor ministry officials from the point of view of their effect on labor productivity. The basic wage constitutes the main incentive for work; bonuses, premiums, and honors play a minor role. Because of the large investment needs for industrial development and the corollary need to restrict consumption, wages have been kept low, and the rise in wages has been slower than the growth of productivity.
Basic wage pay has been based on the place of employment and not on the work performed. Wage scales for identical work have differed substantially between branches of the economy and industry. In industry, wage scales have been lower in branches manufacturing consumer goods than in branches producing capital goods; they have been lowest in textile mills. Wages have been determined by job classifications within economic and industrial branches, the workers' level of education, and length of service. Normal increases in pay for workers remaining in the same positions have therefore been infrequent.
Slow promotion and the disparity in wage scales contributed to excessive labor turnover because, under the prevailing conditions of scarcity, trained workers were able to improve their incomes through a change of jobs. It also led to irregularities in job reclassification by employers seeking to retain their workers through increases in pay. Wages have been raised from time to time by the government through general upward revisions of pay scales. This method, however, has no incentive value because it is not directly linked to an improvement in the workers' performance.
With a view to enhancing the stimulative effect of wages on productivity, Zhivkov proposed a basic reform of the wage system that would be carried out gradually in the 1973-80 period. In presenting his proposal to the BKP Central Committee plenum, Zhivkov dwelt on some of the major principles to be embodied in the new wage system. The minimum wage must be higher, and the rise in wages must be more rapid than before. Increases in basic wages must be closely linked to individual performance and to overall labor productivity in general, pay would be based on performance rather than on formal qualification or length of service. To this end the sectoral approach to wage determination is to be abandoned in favor of a functional approach that would establish a uniform economy-wide wage scale for jobs in relation to their complexity and hardship and to the specific conditions of work. Rigid pay scales are to be replaced by flexible schedules providing a range of pay for each job depending upon the ability and performance of the worker.
The reform would also gradually eliminate the egalitarian aspect of the current wage system by providing appropriate differentials for workers with higher qualifications. Under the current system, for example, the salary of economists has been below that of engineers, and the salary of engineers has been equivalent to the wages of skilled workers. This problem has been repeatedly considered in the past, but its solution was delayed for lack of funds.
Zhivkov also cited shortcomings of the prevailing piecework system and suggested some long-range remedies for the ills. About 60 percent of all workers have been employed on the piecework system. Production norms under the system have been low because of technological advances and the infrequency of adjustment of norms. Under these conditions workers have been able to exceed the basic norms to such an extent that payment for work above the norm has become a large, and in some cases the predominant, portion of the workers' earnings. Striving to increase their wages, workers under the piecework system have often resorted to shortcuts that have lowered the quality of output.
Zhivkov's proposal for improvement included the introduction of more realistic and more flexible quantitative and qualitative production norms and a gradual transition to hourly rates of pay with bonus payments for superior work whenever the quantity and quality of output is not directly dependent on individual workers. Under these conditions bonus payments would be linked to the performance of the entire working personnel, and the importance of the bonus in wage payments would be enhanced.
The wage reform has been discussed in the context of a broad program, announced by the BKP Central Committee plenum in December 1972, for a general rise in incomes and an improvement in the population's level of living. In the process the difference between urban and lagging rural incomes is to be eliminated. Implementation of the program has been made contingent upon the attainment of greater productivity and output through workers' efforts to surpass production and efficiency targets set by the government. These more difficult targets must be embodied in what have been officially labeled workers' counterplans. The BKP and the government have launched a new form of so-called socialist competition among workers and economic units, the aim of which is to exceed in performance the requirements of the counterplans.
Implementation of the standard of living program began with the introduction of wage increases, effective March 1, 1973, for workers employed under difficult or hazardous conditions, schoolteachers and university faculties, physicians and medical personnel, and employees of artistic and cultural institutions. Effective June 1 the minimum wage for all types of work was raised from 65 to 80 leva per month, and a level of 88 leva per month was decreed for all workers earning between 80 and 87 leva. The resultant distortion of the wage structure is to be eliminated over a period of several years.
Another important measure affecting labor was announced in March 1973--a gradual transition from a six-day, forty-six-hour workweek to a five-day week of forty-two and a half hours. Under the BKP directive the transition must be accomplished without loss in production; the loss in worktime must be compensated by a corresponding rise in productivity. The shorter workweek had been in effect on an experimental basis for about 17 percent of the industrial workers since 1968. In 1973 and 1974 it was to be introduced in enterprises of the material production sector, excluding agriculture, provided that the required rise in productivity has been assured. In 1975 the reduced workweek will be introduced in transport, for management of state economic enterprises, and for persons employed in the field of services other than health services and educational institutions. Preparations for experiments with a shortened workweek in these two areas and in agriculture are to be undertaken in 1974 and 1975. The decree on working hours gave formal approval to an established practice that requires workers to make up by work on Saturdays or Sundays for worktime lost whenever official holidays fall on weekdays.
INVESTMENT
The proportion of national income devoted annually to capital formation (net investment) rose steadily from 22.6 percent in 1961 to 35.4 percent in 1966 and 1967 and declined thereafter progressively to 26.8 percent in 1971. In absolute terms annual capital formation increased from 1.06 billion leva in 1961 to 3.06 billion leva in 1970, then declined to 2.74 billion leva in 1971. More than half the net addition to capital (from 46 to 67 percent annually) consisted of fixed assets; the balance represented equipment and inventories.
Gross investment at current prices increased from 1.4 billion leva in 1961 to 3.6 billion leva in 1971; investment was officially estimated at 3.9 billion leva in 1972 and was scheduled to reach 4.3 billion leva in 1973. The bulk of investment has been channeled into the material production sector (including trade). The annual investment share of this sector increased from about 74 percent in 1960 to 79 percent in 1969 and declined to 76 percent in 1971. The proportion of investment devoted to housing and services declined correspondingly in the 1960-69 period from 26 to 21 percent and rose in the subsequent two years to 24 percent. The shift in the investment trend foreshadowed the formal directive issued by the Tenth Party Congress in April 1971 for the development of a program to raise the population's standard of living.
Industry has been the main beneficiary of investment funds; its share rose to almost 50 percent in 1969 but declined slightly thereafter. Agriculture received only about 15 percent of investment in the years 1969 through 1971, compared to 28 percent in 1960 and 19 percent in 1965. Residential investment declined from 14 percent in 1960 to an average of not quite 10 percent in the 1969-71 period.
Building construction and installation work absorbed the largest, though declining, share of investment--60 percent in 1960 and 46.4 percent in 1971. The share of investment spent on machinery and equipment rose by 50 percent in the 1960-69 period from 26 to 39 percent, but declined to 34 percent in 1970 and 37 percent in 1971. Imported machinery, mostly from the Soviet Union, constituted a major though declining proportion of investment in machinery--from two-thirds to one-half of the total in the 1965-71 period. Other investment expenses, including geological surveys, absorbed from 12 to 17 percent of annual investment.
New investment has been increasingly concentrated in state enterprises. In the 1960-71 period the proportion of investment absorbed by state enterprises increased from 68 to 83 percent, while the share of investment devoted to collective farms declined from 18 to 8.5 percent. Annual investment in artisans' collectives rose from 1.2 percent of total investment in 1960 to 2.7 percent in 1968 and declined to 1.1 percent in 1971. This trend paralleled the government's policy of initial encouragement and subsequent restriction of private artisan activities; it suggests that the government's restrictive policy may not have been limited to private artisans alone (see Organization, this ch.).
Private investment in residential construction declined from 12.7 percent of annual investment in 1960 to 6.5 percent in 1970 but rose to 7.2 percent in 1971. In absolute terms private investment increased from about 174 million leva to 262 million leva. By 1973, however, new restrictions were being introduced on housing construction by private individuals. As much as 90 percent of the residential construction in 1960 and 70 percent in 1971 was privately financed. In the 1968-70 period about half the private investment in housing was supported by bank loans or by loans from special funds of employing organizations.
The rise in the volume of capital per worker in the 1960-70 period as a result of the investment activity did not produce a corresponding increase in labor productivity; that is, the efficiency of investment declined. Whereas the amount of fixed capital per worker in the sphere of material production increased at an average annual rate of 10.4 percent, and the volume of machinery and inventories rose by 12.5 percent per year, output per worker increased at an annual rate of only 7.7 percent. In an effort to increase the efficiency of investment, the Tenth Party Congress, convened in the spring of 1971, directed that 35 percent of new investment in the sphere of material production during the 1971-75 period should be used for the reconstruction and modernization of existing facilities. In 1972, however, the proportion of investment used for this purpose was only 18 percent.
In the context of the eventually abandoned program for economic decentralization, provision was made for reducing the role of the central government budget in financing investments and for increasing participation by investors with their own funds and bank credits. In the sphere of material production, excluding trade, budgetary allocations in 1965 accounted for 55 percent of investment, and bank credits made up 7 percent; in 1969 investment funds from these sources constituted 21 and 32 percent, respectively. The contribution from the budget, however, rose again after 1969 to 28 percent in 1971, whereas bank credits declined to less than 20 percent of the investment funds. The share of investors' own resources, including funds of local governments, increased from 36 percent in 1965 to 52 percent in 1971. Budgetary investment funds are being increasingly concentrated on projects in the fields of services and raw materials production.
A satisfactory explanation of the shifts in the pattern of investment financing is not feasible in the absence of adequate information on the changing methods of financing economic enterprises and organizations. The announced government policy is to shift financing progressively from the budget to the economic trusts. The shifts did not alter the fundamental fact that all investment funds, excluding the small private investment, remained public property subject to governmental controls and that the difference was merely one of bookkeeping. The change in the channeling of public investment funds was introduced in the hope of increasing the effectiveness of their use.
The realization of major investment projects, particularly in industry, has been made possible by very substantial technical and material assistance from the Soviet Union. Nevertheless, serious shortcomings have been officially reported in the implementation of investment programs, both in industrial and in residential construction. The main problem has been posed by the initiation of building programs that exceed the capacity of the construction industry and the consequent scattering of limited resources. The situation has been aggravated by frequently poor project planning, inferior design, delays in the delivery of machinery and materials, poor organization of work, and slack discipline.
As a result of the difficulties in construction, the completion and commissioning of new industrial plants has often been delayed, and housing construction has fallen chronically short of the volume planned--by as much as 25 percent in 1972. The consequent failure of the anticipated output from new plants to materialize created shortages in various areas, thereby affecting production and market supplies adversely and necessitating revisions of the economic plans. In an effort to minimize these difficulties, the government adopted various administrative measures in 1971 and 1972, including the formulation of a list of nationally important construction projects, direct supervision of which was assumed by the Council of Ministers. The number of projects included in the list for 1972 was variously reported as thirty-five and thirty-nine out of a total of more than 3,000 projects. The listed projects consisted mainly of plants for the production of industrial materials.
BUDGET
The budget constitutes the basic financial plan of the country's leadership. It is the monetary expression of the annual socioeconomic plan and provides for the financial flows implicit in that plan. The budget is comprehensive; it takes into account all aspects of the economic, social, and cultural activities of the country. In line with the government's policy of gradually placing economic trusts and their branches on a self-financing basis, a progressively larger share of the funds budgeted for the economy is being retained by the trusts rather than channeled to the budget. The sums thus retained by economic organization rose from about 3 billion leva in 1971 to a planned level of more than 5 billion leva in 1973. Ultimate control over the use of these funds, nevertheless, remains with the government, and their disposition is subject to the provisions of the budget.
The national budget is formulated by the Ministry of Finance along lines dictated by the BKP leadership and must be approved by the National Assembly. As a rule only very minor modifications are made in the process of legislative review. Budgets for local governments are prepared as a part of the national budget; in 1972 and 1973 their total amount was equivalent to about 17 percent of the overall national budget. The Ministry of Finance is also responsible for ensuring the scrupulous implementation of the budget. It is assisted in this task by a nationwide network of state and local inspectors and by agents of the banks. Actual budgetary results are directly affected by deviations from the annual economic plan and therefore seldom, if ever, correspond to the original estimates, which have the force of law.
Systematic publication of budgetary data was discontinued in the mid-1960s. Since then only scattered figures have become available through press reports on the presentation of the budget to the National Assembly and occasional articles by the minister of finance or other ministry officials.
The annual budgets have grown steadily larger. The approved budget for 1973 called for revenues of 7,057 million leva and expenditures of 7,035 million leva. In 1970 actual revenues totaled 5,723 million leva, the expenditures amounted to 5,650 million leva. Usually about 90 percent of budgetary revenue has been derived from operations of the economy, and the remainder has been raised through a variety of levies on the population. The largest single item of revenue--more than 30 percent of the total--has been collected in the form of a turnover tax on sales that has been passed on to the ultimate consumer. The second most important revenue source has consisted of levies on enterprises in the form of a profits tax, a tax on fixed capital (interest charge) and miscellaneous other deductions from income. Social security taxes based on payrolls have been the third major source. Levied at a rate of 12.5 percent through 1972, the social security tax was raised by 20 percent in 1973 in order to meet rising costs. In 1972 about four-fifths of the turnover tax and two-thirds of the revenue from taxes on profits and capital was to be derived from industry.
In December 1972 the BKP Central Committee plenum embarked upon a gradual modification of the income tax system that would eventually lead to a total abolition of income taxes for wage earners and collective farmers by 1980. Initially, the existing system is to be improved by introducing unified taxation for all blue- and white-collar workers and collective farmers and by establishing a tax exemption equal to the official minimum rate of pay. Gradual elimination of all income taxes for these population groups in the 1976-80 period is to be synchronized with the contemplated reform of wage scales. At the same time a system of progressive taxation is to be introduced on incomes derived from activities in the private sector that are not in conformity with the amount of labor invested.
The most complete recent information on budgetary expenditures is available from the approved budget for 1972. Out of a total outlay of 6,514 million leva, 3,224 million leva was earmarked for the national economy, and 2,065 million leva was set aside for social and cultural needs. The remaining undisclosed balance of 1,225 million leva, or 19 percent of the total outlays, must have included expenditures for defense, internal security, and government administration. The social and cultural expenditures included; social security payments, 1,054 million leva; education, 532 million leva; public health, 303 million leva; culture and arts, 83 million leva; and science, 93 million leva, in addition to 235 million leva to be provided by research organizations and economic trusts.
Information on the budget for 1973 was more sketchy. No information had been disclosed on the magnitude of the expenditure on the national economy; the usually undisclosed residual was therefore also not ascertainable. The increase in overall revenues and expenditures over those in 1972 was about 8 percent. Outlays for social and cultural affairs, however, were planned to increase by 11.8 percent, including increases of 18.8 and 15.7 percent, respectively, for public health and education. These figures reflected the government's announced program for increasing the well-being of the population.
The BKP and government leadership look upon the budget as a major tool for executing BKP economic policies. As expressed by the minister of finance in 1973, the budget contains a whole arsenal of financial and economic levers--levers that must be used ever more skillfully to raise the efficiency of economic performance, to improve the structure of production and consumption, and to bring about a well-balanced economy. The budget is also considered a tool for exercising effective control over the entire sphere of production and services, not only to ensure smooth current operations but also to inhibit any undesirable departures from official policy.
The disciplinary powers of the budget have yet to be more fully developed to cope successfully with the officially reported shortcomings in the economy. One step in this direction calls for the further intensification of what has been officially called financial and bank control through the lev, that is, the discretionary use of financial sanctions, including the denial of budgetary allocations or bank credits, to enforce strict compliance with specific plan directives. Another advocated measure is to intensify the public campaign against waste and the irresponsible attitude toward public funds and for tighter financial discipline. An implacable campaign is also to be waged against wrongs done to the citizens in the use of public funds, illegal formation and misappropriation of funds by economic organizations, irregularities in the supply of materials, failure to produce consumer goods despite the availability of needed resources, accumulation of excessive inventories, and pilferage.
Many apparent violations of economic and budgetary discipline arise because of the frequently inadequate knowledge or understanding by personnel at all levels of the economy of the constantly changing laws and regulations concerning the operation and interrelation of the diverse economic units, particularly in the area of finance. The changes in laws and regulations are the result of an unceasing search for a system that would provide effective incentives toward conscientious and efficient work to all gainfully employed persons.
BANKING AND CURRENCY
Banking
Since early 1971 the country's banking system has consisted of the Bulgarian National Bank and two semi-independent banks attached to it: the Bulgarian Foreign Trade Bank and the State Savings Bank. This banking system emerged after three reorganizations in the 1967-70 period and conforms to the general pattern of institutional and management concentration in the economy. In addition to serving as the central bank of issue, the Bulgarian National Bank, an independent agency under the Council of Ministers, is directly responsible for financing all sectors and phases of the economy other than foreign trade and consumer credit, in which fields it supervises the activities of the Bulgarian Foreign Trade Bank and the State Savings Bank. The bank is also responsible for exercising close control over the economic units that it finances, with a view to ensuring the fulfillment of all national economic plans and the scrupulous adherence to existing laws and regulations.
A minimum of current information was available in mid-1973 on the structure of the banks, the relationships between them, and their financial operations. Official statistics are limited to annual data on bank credits for investment and on the volume of outstanding short- and long-term loan balances for the banking system as a whole. Data on outstanding loans are broken down by type of borrower and, in the case of short-term loans, also by purpose. With minor exceptions, no information was available on the volume of loans extended, on loan maturities, or on interest rates after 1970. Statistics had also been published on the volume of personal savings in the accounts of the saving bank at the end of each year.
The total amount of loans outstanding at the end of the year increased from 3.6 billion leva in 1965 to 9.2 billion leva in 1971. The proportion of long-term loan balances rose from 24 percent of the total amount in 1965 to 40 percent in 1970 but declined to less than 36 percent in 1971. The increase in lending activity to 1970 was a direct consequence of the partial shift from predominantly budgetary financing of economic activities to a substantial measure of self-financing by enterprises and trusts. The subsequent decline was related to the tightening of investment credit in an effort to reduce waste in the construction program (see Investment, this ch.). Long-term loans have been granted predominantly, if not exclusively, for fixed investment purposes.
Of the 3.27 billion leva in long-term loans outstanding at the end of 1971, 2.61 billion leva was due from state and collective enterprises, and 660 million leva was owed by private individuals who had borrowed to finance home construction. Only 12.5 percent of the loan balances was due from collective farms--an amount equivalent to barely 62 percent of the sums owed by private individuals. Collective enterprises in industry and services had outstanding loans of only 13 million leva. In relation to the value of each sector's fixed assets in 1971, the proportion of outstanding long-term loans was: state enterprises, 11.3 percent; collective farms, 16.1 percent; and collective artisans, 2.9 percent.
Nine-tenths of the short-term loan balances at the end of 1971 were owed by state enterprises, and one-tenth was due from collective enterprises. Wholesale and retail trade accounted for 36 percent of the outstanding loans; industry and construction were each liable for 28 percent. Short-term loan balances of agriculture amounted to less than 8 percent of the total sum, and balances of the services sector constituted less than 0.2 percent. The largest part of short-term loans was granted for working capital purposes, including the procurement of farm products. A balance of almost 1 billion leva, however, was outstanding on loans for the completion of building construction, including a small amount for housing.
A very small, though increasing, volume of consumer loans for the purchase of durable goods and clothing has been granted by the State Savings Bank. The volume of such loans--36.5 million leva in 1966, 48.2 million leva in 1967, and 45.4 million leva in 1968--was equivalent to slightly more than 1 percent of retail sales in the commercial trade network. The outstanding balances of consumer loans at the end of the year rose from 49.1 million leva in 1968 to 102.1 million leva in 1971. Consumer loans may not exceed the sum of 500 leva and may be used only for the purchase of designated goods. In 1969 the authorized list included twenty-three categories. A sample survey in 1969 indicated that about two-thirds of the loan volume was used to acquire television sets, furniture, and motorcycles; another 20 percent was spent on radios, sewing machines, and scooters.
Apart from consumer loans, the State Savings Bank grants small loans to licensed private craftsmen for working capital and to collective and state farmworkers and other qualified applicants for the purchase of productive livestock, seeds, fertilizers, small tools, and other farm perquisites. The bank also makes loans for adapting premises to the needs of tourism; for current building repairs; and for meeting personal emergencies, including loans to newlyweds for the acquisition of furnishings. Depending upon the purpose of the loans, loan ceilings range from 150 to 800 leva, and maturities extend from ten months to eight years.
The volume of consumer loans was reported to have reached 116 million leva in 1972. Under the economic plan for 1973, the State Savings Bank was scheduled to make loans to individuals for the purchase of consumer goods and other needs in the amount of 203 million leva and for home construction in the amount of 180 million leva. The bank was also expected to lend 141 million leva to people's councils.
Loan funds of the State Savings Bank have been derived from personal savings deposits and, presumably, from interest payments. The bank also conducts state lotteries for the benefit of the state budget. There is no evidence as to whether the bank retains a portion of the lottery proceeds for its own operations. Savings deposits increased almost fivefold in the 1960-71 period to a level of about 3.6 billion leva--a sum equivalent to 64 percent of total retail sales or 150 percent of food sales through commercial and institutional channels in 1970. According to preliminary data, savings deposits rose by 630 million leva in 1972, and they were scheduled to increase further by 870 million leva under the economic plan for 1973. The bulk of savings deposits has been channeled into the budget.
The repayment record on loans by the State Savings Bank was excellent, at least through 1969. The proportion of delinquent loans was reduced from 3.1 percent in 1966 to 0.01 percent in 1969. This result was achieved by a regulation that provided for penalties to be imposed on paymasters throughout the economy who failed to withhold or to report to the bank monthly loan payments. According to a bank official, there had been no need to impose any penalties because the regulation itself proved to be an adequate deterrent.
The loan repayment record of enterprises, trusts, and other economic organizations has not been nearly so good and led to a tightening of credit provisions in 1971. The proportion of overdue short-term loans in the production sector increased from 10.7 percent in 1966 to 11.8 percent in 1971. Similar information on long-term loans has not been published.
The penalty interest rate on delinquent loans is 10 percent (it was 8 percent through 1970), compared to a normal range of 1 to 5 percent on loans for working capital. Whenever a bank loan or supplier credit is delinquent for more than three months and the delinquent amount exceeds 20 percent of the borrower's working capital, the borrower becomes subject to a special credit and repayment regime, the specific conditions of which are not known. The ultimate sanction is the refusal of credit and, at times, even the replacement of the trust or enterprise director. The special credit regime is also applied whenever a trust or its branch (enterprise) stockpiles unneeded inventories; procures materials for production without guaranteed outlets for the output; undertakes a construction program without adequate financial provisions; increases its obligations; or suffers a worsening of its financial condition for any other reason.
Interest costs in excess of those planned lower the economic organization's income and, under the prevailing incentives system, also reduce the funds available for the payment of wages, salaries, and bonuses. Loan delinquency and the associated penalty interest rate, therefore, often bring about the reduction or elimination of bonus payments and, in extreme cases, the withholding of a portion of regular pay. Application of the more severe sanctions entails a serious deterioration of the economic organization's finances that adversely affects its production program. Through close contact with borrowers and detailed supervision of their operations the bank endeavors to forestall delinquencies and the attendant losses to the economy. In December 1972 the Council of Ministers adopted a decision to enhance the role of the banking system in administering the economy by intensifying its participation in the formulation of economic plans and by expanding its authority in monitoring plan fulfillment.
Currency
The currency unit of the country is the lev, divided into 100 stotinki (see Glossary). It is a nonconvertible currency with a variety of exchange rates, usable only in domestic transactions. Since January 1, 1962, the lev has been officially defined to contain 759.548 milligrams of fine gold--equivalent to 1.17 leva per US$1 at that time. This exchange rate was valid only for commercial transactions. In the wake of the United States dollar devaluation on December 18, 1971, the official commercial exchange rate was set at 1.08 leva per US$1 (greenback--see Glossary). A further revision of the exchange rate was put into effect on February 13, 1973, which established a parity of 0.97 leva per US$1. The subsequent decline in the value of the dollar in foreign markets did not call forth another official exchange revaluation to mid-1973.
The official tourist exchange rate for so-called capitalist currencies underwent similar revisions and was set at 1.65 leva per US$1 on February 14, 1973. The noncommercial rate for ruble area countries, based on a parity of 0.78 leva per 1 ruble, was equivalent to 0.64 leva per US$1 until that date; thereafter, at the new ruble-United States dollar parity, it was equivalent to about 0.59 leva per US$1.
In addition to the official exchange rates, there are three varieties of clearing account rates. The multilateral transferable ruble is used to clear accounts with other European members of the Council for Mutual Economic Assistance (COMECON--see Glossary). Socialist bilateral units arise from bilateral trade agreements with other communist countries. Neither of these two exchange varieties has private markets abroad. Bilateral clearing units arise from bilateral trade and payments agreements with about thirty noncommunist trading partners. These clearing units are traded sporadically abroad at varying rates of discount.
The lev has been traded on the black market in exchange for so-called capitalist banknotes or gold coins. The black market rate of the lev fluctuated between 4.60 leva per US$1 in January 1963 and 2.58 leva per US$1 in June 1972.
Except for small remittances or travel allocations to other communist countries, the lev is nontransferable for residents; resident status applies to all physical and juridical persons who have resided in the country for more than six months, regardless of their citizenship. Ownership of or trade in gold, foreign currencies, or so-called capitalist securities is prohibited, as is the import and export of Bulgarian banknotes. There are no investments by noncommunist country nationals in Bulgaria.
Exchange transactions are administered by the Bulgarian National Bank jointly with the Ministry of Finance, the Ministry of Foreign Trade, and the Bulgarian Foreign Trade Bank. Bulgaria is neither a member of the International Bank for Reconstruction and Development nor of the International Monetary Fund. Statistics on currency in circulation, the public debt, foreign exchange reserves, gold stocks, and the balance of payments have not been published.
FOREIGN TRADE
Foreign trade is a state monopoly. Trade policy is formulated by the BKP and government leadership; it is translated into a complex set of laws and regulations designed to encourage the expansion and qualitative improvement of production for export, to promote import substitution, and to bring about greater efficiency in production and foreign trade operations. Control over foreign trade is shared by the Ministry of Foreign Trade, the Ministry of Finance, and the Bulgarian National Bank through the Bulgarian Foreign Trade Bank.
Along with other elements of the economic structure, the foreign trade apparatus and the laws and regulations governing foreign trade have been frequently modified. As a result, there are two basic types of foreign trade organization: those attached to and serving individual economic trusts with a large export volume and organizations serving several trusts whose export activity did not justify a separate export department. Two foreign trade organizations that imported most industrial materials were attached to economic trusts responsible for the domestic distribution of supplies. Foreign trade organizations affiliated with trusts retain their legal identity and are not considered to be branches of the trusts they serve. Relations between foreign trade organizations and the trusts whose products they handle are governed by contracts, the framework of which is provided by official regulations. As a rule, foreign trade organizations carry on their activities for the account of the trust. There are a few organizations, however, that trade for their own account, and there are also a few economic trusts that have the right to engage in foreign trade activity directly.
Export plans are approved by the Council of Ministers for each economic trust in physical and value terms and by major trading areas, that is, member countries of COMECON, other communist countries, Western industrialized nations, and developing countries. Trusts pass their trade plans to foreign trade organizations. The plan of a single trust may be apportioned among several foreign trade organizations, and many foreign trade organizations receive plan assignments from several trusts so that their own foreign trade plan is a composite.
Under the regulations of 1971, as amplified in 1972, and unlike earlier conditions, the financial results of export operations are directly reflected in the producer's profit position. This circumstance is counted upon by the leadership to motivate trusts toward attaining optimum efficiency in export production and toward adjusting output to foreign market requirements. Financial incentives to surpass official foreign trade targets are provided by allocating the producers and foreign trade organizations a portion of the receipts from excess exports and a portion of savings made on imports through import substitution. Excess exports may not be made by diverting output scheduled for the domestic market, and savings on imports may not be made at the cost of quantitative or qualitative deterioration of the domestic supply.
Producers for export are obligated both to produce the items called for by the export plan in accordance with specifications and to meet contractual delivery dates; with few exceptions, they have no direct contact with foreign buyers. It is the responsibility of the foreign trade organizations to seek out the most profitable markets and to handle all physical and financial details of the trade transactions. It is also their duty to keep producers currently informed about changing conditions in world markets and to make them aware of needed adjustments in production.
Standard subsidies per 100 leva, differing by trading area, are granted on all exports. These subsidies, in effect, modify the official exchange rate so that trade is actually conducted on a multiple exchange rate basis. Subsidies from the state budget are also provided for exports, the returns from which do not cover costs. Special bonuses are offered to economic trusts and their branches that fulfill or surpass their export assignments to noncommunist markets. Proceeds from exports are credited to the economic trusts and not to the foreign trade organizations.
Relations between economic trusts and foreign trade organizations are determined in broad outline by government regulations. Specific details, however, including precise financial arrangements that are the core of the relationship, must be worked out by the parties to the contract. This situation provides opportunities for friction that may be harmful to the export program. Trusts and export associations were therefore enjoined to undertake negotiations in a cooperative spirit and to avoid taking advantage of their monopoly position as producers or exporters. Disputes that threaten to involve financial losses are to be settled by the Ministry of Foreign Trade and the Ministry of Finance.
Total trade turnover increased more than 3.5 times in the 1960-71 period to a level of 5 billion leva, including 2.55 billion leva in exports and 2.45 billion leva in imports. The growth of trade was erratic, particularly in the case of imports. Over the entire 1960-68 period, however, the average annual growth of exports and imports was almost identical--13.9 and 13.8 percent, respectively. In the subsequent three years exports rose almost twice as rapidly as imports, though at a lower rate than in earlier years. The change in the relative rates of growth during the 1969-71 period--10.5 percent for exports and 5.6 percent for imports--helped reverse the consistently negative trade balance of the earlier period and produced trade surpluses in three consecutive years.
The great bulk of the trade has been carried on with communist countries, primarily the Soviet Union. The share of these countries in total trade, however, declined from 85 percent in 1961 to 78 percent in 1970; it had fallen to 73 percent in 1966. Communist countries outside COMECON, primarily Cuba and the Democratic Republic of Vietnam (North Vietnam), accounted for only 3 to 4 percent of the trade annually. The Soviet Union alone provided more than half the imports and absorbed an equal amount of exports. The German Democratic Republic (East Germany) and Czechoslovakia were the main COMECON trading partners after the Soviet Union, but the volume of trade with these countries was very much lower. The share of East Germany in the total trade had been 10.5 percent in 1960 but ranged between 8 and 8.6 percent in the 1965-70 period. The proportion of trade with Czechoslovakia declined from 9.7 percent in 1960 to only 4.8 percent in 1970.
The orientation of trade toward the Soviet Union has been based largely on political factors but has also been dictated by the shortage of export goods salable in Western markets and the inadequacy of foreign exchange reserves (see ch. 10). Trade with COMECON members is conducted on the basis of bilateral clearing accounts that do not involve the use of foreign exchange. Furthermore, the Soviet Union has supplied Bulgaria with a large volume of industrial plants and equipment in exchange for the products of these plants. In the 1971-75 period trade with the Soviet Union is scheduled to increase by 60 percent over the volume in the preceding five-year period, and the share of the Soviet Union in the total trade volume is planned to reach 68 percent.
Trade with noncommunist countries rose from about 15 percent of the total volume in 1961 to 27 percent in 1966 but declined thereafter to 22 percent in 1970. From three-fourths to four-fifths of this trade was accounted for by Western industrialized nations, primarily the Federal Republic of Germany (West Germany), Italy, France and Great Britain. The balance of the noncommunist trade was with developing countries, mainly India, the United Arab Republic (UAR), and Iraq. Trade with the United States has been negligible.
There has been a gradual shift in exports from agricultural to industrial commodities and from raw materials to manufactured and semiprocessed products. Yet in 1970 exports of agricultural origin still constituted 55 percent of the export volume, including 8 percent of raw farm products. The share of industrial exports rose from 25 percent in 1960 to 45 percent in 1970, of which 13 and 27 percent, respectively, consisted of machinery and equipment. In 1972 the proportion of machinery and equipment in exports was reported to have risen to 34 percent.
Machinery and equipment have been exported almost exclusively to communist and developing countries. In 1968, the last year for which information was available, machinery and equipment constituted only 1.8 percent of exports to Western industrialized nations.
Imports in the 1960-70 period consisted predominantly of machinery and equipment, fuels, raw and processed industrial materials, and raw farm commodities. Imports of foods and industrial consumer goods were limited to about 10 percent per year. Machinery and equipment constituted from 40 to 44 percent of imports; fuels and industrial materials accounted for about one-third; and agricultural raw materials made up the balance.
In the 1960-70 period the country's overall trade balance was negative each year with the exception of 1969 and 1970. The trade deficit for the entire period amounted to 580 million leva, including 530 million leva in the trade with noncommunist countries and 50 million leva in the trade with communist partners. A breakdown of the trade balance by all four trading areas was available only for the 1965-70 period. For that period the overall trade deficit amounted to 278 million leva. Whereas trade with communist and developing countries had positive balances of 148 million leva and 154 million leva, trade with developed Western countries accumulated a deficit of 580 million leva. Almost all of this deficit was incurred in the years 1965 through 1967, when government controls over foreign trade were temporarily relaxed in an aborted economic reform. Under the system of bilateral agreements governing Bulgaria's trade, the surplus in the trade with communist and developing countries cannot be used to offset the deficit with Western trading partners.
Data bearing on the balance of payments have never been published. The Soviet Union has granted substantial loans to Bulgaria since 1946, some of which were used to finance imports from that country. Bulgaria, in turn, has made some loans to developing countries to help finance its exports. A portion of the deficit with Western trading partners may be offset by income from the rising Western European tourist trade, particularly with West Germany. A reputable Western source reported Bulgaria's indebtedness to Western nations to have been US$88 million in 1971, but the basis of this estimate and the degree of its reliability are not known.