The Transition
That Never HappenedAt Least Not The Way That Was Recommended
Interviews
Professor Ivan Angelov
In 1990, Professor Ivan Angelov was a chief economic advisor of Prime Minister Andrey Lukanov.
Something the people did not realize but that concerned experts at the time was that the second half of the 80s was characterized by a severe crisis in Bulgaria’s economic development, although it’s incorrect to use the word ‘development’ because that did not exist at all at the time. It was part of a wider, growing stagnation that encompassed the whole socialist regime.
Bulgaria which exported about 80% of its production of goods and services within the Comecon, 50-55% of which went to the Soviet Union, could not help but feel this stagnation. In the face of crisis Todor Zhivkov who, despite all his faults, had an uncharacteristic (for the time) appreciation for the need for innovation and the demand for finding solutions actually allowed certain individuals to be promoted and climb the nomenclature ladder in the hope that something can be done to tackle the decline. Although I never met him personally, I read the transcripts of Politburo meetings in which he joked about socialism - something that ordinary citizens were sent to prison for. But in fact underneath all that he was making a statement about the state of the economy and stagnation.
The purpose of the July concept was to introduce new ideas about ownership. The intention was to create an impression that workers in state enterprises have the ability to make decisions. It was thought that this would rekindle their interest (in the enterprises). Despite hostility from the nomenclature towards economic reform there was a small group of partisans in Bulgaria who agreed there was a need for a change.
This occurred even before Poland and Hungary introduced some of their own reforms. The goal was to create a false sense of security amongst the people that some sort of improvement would come - to make them believe that they are “owners or holders” by making small superfluous cosmetic changes. But it was too little, too late. In reality there was no motivation for people to actually work more and, therefore, earn more. World-renowned Hungarian economist, Janos Kornai, wrote a well-known book about the ‘economy of shortage’.
This is very similar to what happened in Bulgaria. Even if you had money and worked hard to earn more at the end of the year there was nothing to spend it on in the kind of socialist society we lived in. If you wanted to build a house you had to wait 15-20 years, if you wanted to buy a car, again you had to wait 10-15 years. For luxury goods that you could buy from Corecom (the only department store selling foreign goods) you had to have foreign currency, you were not allowed to spend Bulgarian money there.
It is true Corecom supplied ordinary goods to meet the needs of the basic consumer too but if you wanted to buy more expensive, better quality goods you couldn’t because they would be sold out within an hour of appearing on the shelves. Often the luxury goods would be bought out in advance by people with connections.
I myself tried to voice my concerns at a conference held on the 30th of April, 1985. I told them, „Radical economic reforms are needed. If these reforms are not undertaken socialism as a political and economic system will face demise.”. This set the whole meeting on fire! The kind of things I heard back - curses, threats ...
What saved me was that when we returned to Sofia the official newspaper published an article by Gorbachev who underlined the exact same issues. They couldn’t punish me for something Gorbachev himself confirmed. If that hadn’t happened I would have been fired from the Economic Institute where I was Senior Fellow and they would have surely excluded me from the Communist party.
There were other voices calling out for reform too - Georgi Petrov, for example. And others in the nomenclature - David Davidov was another example; he was broad-minded, Boris Parvulov too, etc.
Party leadership realized that if reforms were to materialize they would lead to the end of the socialist party’s control over the economy - control that was, after all, the alpha and omega of their doctrine.
Many people in our country spoke about the moratorium of 1990. It was a big issue. They mocked at Lukanov. But what actually happened was this: Until the mid-eighties our balance of payments was in satisfactory condition. We had a relatively large export and although we had a large expense for servicing the foreign debt things were fine. At the end of that decade external debt was around $10 billion. Now the total gross debt of Bulgaria depending on the dollar-euro exchange rate is about $50 billion. And I can’t say that now the economy is much stronger in terms of export or in its competitiveness or in the ability to tackle debt.
In addition to this there was poor management and overreaching into giant, unsustainable projects like the power plants in Radomir and Russe. We wanted to impress with a super modern machine factory in Radomir equipped with Japanese technology. But we relied on an illusory market which never came to be.
We earned a lot from arms exports and from electronics exported to the CMEA. But gradually in those years and after the Geneva agreements, it was a calmer world situation. Certain conflicts were put to rest and the demand for weapons dropped. Environmental conditions were poor, however. And there was a drought.
All of a sudden from a net exporter of agricultural products Bulgaria became a net importer. All this led to deterioration of the balance of payments and less revenue in hard currency since there were greater difficulties in servicing debt.
March 31, 1990 was the due date for a consecutive payment of $500 million. $200-300 million remained in the foreign exchange reserves. This would not be enough, however. Luckily, with the help of the French government and some French banks Lukanov was able to gather a considerable amount of money. Interestingly, he arranged for a visit with Helmut Kohl in Bonn to ask for help in the form of a short-term loan. He didn’t want to have to resort to a moratorium. Kohl was friendly to him and provided his personal business jet to take Lukanov to Frankfurt. In the presence of Lukanov Kohl spoke with several bankers from Frankfurt and asked them „to help his friend Andrei”. This bore some fruit, although not as much as hoped. The last part of the sum remained to be found. Lukanov had no choice but to resort to an appeal to Soviet leadership. A small part of their foreign exchange reserves were held in Bulgarian banks, so he asked to use them with the promise that in the next few months they would be recovered.
I‘ve been present in Lukanov’s office several times when he wanted to speak on this matter with Ryzhkov but he was never there. This is a trick big bosses play when they do not want to talk to someone they say they’re not available. So Lukanov was forced to go to Moscow to meet with Gorbachev. But Gorbachev refused him straight away. And not only that - he withdrew the small portion of foreign exchange reserves that was held in the Bulgarian banks. After a day or two a call came from Kohl. He told Andrei, „Our friends in Washington have told us not to meddle in your work, which means we can’t give you the money.“.
So now there was no money in the reserves and the deadline of March 31 was approaching. There was no alternative but to announce a moratorium. If Lukanov can be criticized for anything it’s that he didn’t do it earlier to avoid liquidation of our reserves. But of course it’s easy to criticize something in retrospect. There was no alternative. I am confident that was the case. I was there, although I didn’t make any of the decisions. The talks were led by the Chairman of the Foreign Trade Bank, the President of the National Bank Kolarov, and Lukanov himself. But I was witness to everything.
The situation then was extraordinarily serious - far more serious than the current protests now. Unrest then had spread all over the country. There was an atmosphere of desperation and frustration from the nation’s experience in the three to four decades of socialism. But in fact it was not even real socialism - that never existed in our country. What we had was a totalitarian form of socialism and nothing more. Decisions were not made by the people; they were made by the establishment. In this sense there has never really been public ownership. In the tense atmosphere of the time - a combination of despair and resentment for the past but also of great hopes for the future people believed that it was the end of communism; that we had defeated the regime. Some even believed Bulgaria would become the Switzerland of the Balkans.
It was demagogy but people believed it.
The country was seething; demonstrations continued. People were caught up in the moment; they were not thinking about work or export. This caused a decline in economic activity and a drop in export revenue. Income declined and the economy virtually halted. Lukanov and his people were, in the meantime, desperately trying to figure out a way forward before the decline spiraled out of control.
We wanted to join forces with the leaders of the UDF to tackle the situation but they would have none of it. Then an idea came to us - it was a lucky coincidence - on the basis of a personal acquaintance to contact Richard Rahn, then chief economist at the U.S. Chamber of Commerce. It just so happened that one of the Bulgarians working at the Ministry of Foreign Trade told me and Bashikarov, then minister of foreign trade, that his wife knew a Finnish woman who worked for several Eastern European countries as a sales agent for the promotion of exports. The Finn, in turn, had been close to Richard Rahn. So we decided to contact him. The UDF did not want to work with us, so we thought if we involve the Americans in a last ditch effort we could then use it as a basis for approaching the UDF and maybe they’d be more open to hear us out.
With this in mind Rahn was invited to come to Bulgaria. He met Lukanov who instructed me to take professional responsibility for communication with the Americans - and with Rahn especially. I met Richard several times. I thought he was a very nice guy and so did all our mutual contacts. We agreed that he would organize a group of experts from American corporations and in circles of the U.S. government to develop a proposal for economic reform in Bulgaria.
Of all the numerous chapters in the report only two were written by our side and I was documented as the author. However, I can’t take credit for their content. It was taken from a Memorandum of a letter of intent which we sent to the IMF and the World Bank when we applied for membership in these two organizations. In these chapters we outlined the state of the economy and the intentions of the Bulgarian government for the coming years. I do not know why in the Bulgarian version of the text these two chapters were not translated and some people thought they were a state secret. Nothing of the sort. These were our letters from the Bulgarian government addressed to the aforementioned institutions - the WB and IMF.
Rahn then organized a team of around 20 people. They visited Bulgaria several times, went to see some of the factories and plants not only in Sofia but in other towns too. I recall a very pleasant evening during one of these visits - they came back after another tour and there was a cocktail party at the residence of Montgomery who at the time was the second person in charge at the embassy. I remember that it was somewhere in the village of Simeonovo. We chatted and they said they were impressed by our highly skilled engineers. One of American managers even told me he would like to hire these engineers.
Others who had been to visit another factory - the one for mechanical tools in Sofia - were also impressed. One of them said to me, “I have been in this industry for 30 years and I know the state of these plants around the world. Your plant is among the most modern I have ever seen”.
The Americans confirmed that if their managers took control of these plants they would become competitive to the rest of the world. And there’s something else I’d like to mention here: at the time we were sort of in the situation of the German officers who surrendered in World War II. Could you imagine a German officer imposing conditions before signing his surrender? It would have been absurd. This is analogous to the situation we faced back then. We had a meeting at the Council of Ministers with 5-6 people from the U.S. team. Under Lukanov’s orders I told them and Richard how we imagined the report and asked them what things should be reflected in it. We asked for 15 points - prerequisites from our side - to be included. This was meant to be for the protection of the most vulnerable segments of the population. When I gave it to him Richard said, “Yes, the English expression for this is ‘a social safety net”. Other demands we included were changes to the banking system, equality between state, cooperative, and private property, for the state to play an important role in natural monopolies, workers to participate in privatization, health system to remain broadly stable with some improvements similar to the education system and so on. There were fifteen all together. On the whole, our requests were accepted and appeared in the report.
Some people have asked me whether this led to the situation we are in now and the disasters that struck the country afterwards. My answer has always been, no. If the plan had been implemented properly Bulgaria would not be in the state it is now.
How it all began? Well, they did most of the work. We held a meeting to discuss the rough draft prepared by the Americans. From their side about seven or eight people in leading company positions were present. They expressed genuine concern over the problems facing Bulgaria. It was incredible for us to witness such big, important people willing to deal with such a small country like ours.
This cooperation was largely constructive. Participants from our side were two groups - economists from the left side of the political spectrum and the supporters of the UDF. The whole group was about twenty-five people split equally between left and right.
When the Americans came here for intermediate coordination of the text they had meetings with us, a group of economists from the BSP, which were held at the Council of Ministers and the Ministry of Commerce in the hall on the ground floor. In this team the majority of the people from the BSP were from the Institute of Economics.
Conversations were always professional if not always profound because quite a few of my colleagues at that time did not speak or understand English well enough.
When the text was ready the Americans suggested four experts - two from the BSP and two from the UDF - to go to the U.S. I was head of the group but both groups had virtually full autonomy and entirely different programs in the U.S. Members of the group included Emil Hursev and a young man who later became ambassador in the U.S – Ognian Pishev was his name. Paparizov was meant to come but a prior commitment held him back.
We spent two days in the U.S. Chamber of Commerce discussing the text in the presence of the American authors. We shared our opinion completely professionally - no politics were involved - in what was a very amicable atmosphere. There is one other detail worth mentioning - when the plan was ready both Rahn and Utt came to Bulgaria to share it with us. We held a meeting at the Council of Ministers in the lobby. Andrey Lukanov, Petar Beron, Petko Simeonov, and myself were present.
In my opinion, Lukanov appeared to have friendly relations with Beron. Lukanov told us, “We have the plan, now let‘s build on it. Let‘s create a working group to develop an operational project for reform in Bulgaria”. There wasn’t supposed to be a left and right side. The aim was to be the group that works together for the good of the country.
But Beron would have none of it. He said, “Andrei, even if it’s a brilliant program we will never work with you. We want to take power and make our own reforms”. I guess, politically, there was logic in his decision. If I were in his place I’d probably have done the same. In those days the political climate favored the UDF. They knew it was only a matter of time before the old regime collapsed.
In this sense everything Lukanov did - the whole experience with the Americans, them preparing the project, trying to unite left and right, trying to work under a common cause for the benefit of the country - it was all in vain.
A lot has been said about the Rahn-Utt plan. There have been numerous accusations directed towards it and unfortunately also towards us - the Bulgarian economists who participated in it. It’s important to note, however, that we were not the authors of it; we only edited the material where it needed to be and participated in discussions around its content. The authors were the Americans. We asked them to include the fifteen points we had prepared and they agreed.
In my opinion, the Rahn-Utt plan provided a much better way to manage the Bulgarian economy and reform compared to what was later imposed on us by the IMF and WB. They simply dictated their orders to us while the Rahn-Utt plan was the product of mutual, professional collaboration. Unfortunately, it was simply not put to any use.