- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
Economic policy after elections.
submited on 28.06.2005 in category Political stability | Fiscal affairs | Macroeconomic developments
submited on 28.06.2005 in category Political stability | Fiscal affairs | Macroeconomic developments
Most parties in the new parliament seem to have no interest in new elections. For BSP, NMS2 and UDF this seems the logical choice, and the MRF is rather indifferent, but by all means satisfied with the high support. This means that at least in the short term this parliament will have to form a government. However, due to the various compromises that need to be accepted, this government will only be supported until one of the key parties participating in it decides to take its chances in new elections. New elections will be considered as a means to rearrange parliament so that a two-party stable coalition is possible.
At present, a center-right coalition without the MRF is not possible, and at the same time DSB and MRF can hardly work together for the time being. Thus, a future coalition will probably depend on the decision of the socialist party.
When no party gets decisive political support, deep pro-market reforms with long-term impact can not be expected. In our June analysis of economic policy, Industry Watch outline several areas that need reform of public policy– including education, healthcare, pension system and financing infrastructure. Such actions however would need a strong government with secure future; moreover, it cannot be supported by left-wing parties.
At the same time, the obvious priority for the next 6 to 12 months seems the EU accession and the necessary domestic reforms to achieve a positive decision for January 1st 2007 membership. A provisional coalition government would not neglect this priority, and some legislative changes will take a constitution amendment.
We can however outline some economic policy measures that will probably enter the end-2005 agenda of any future government. They will probably include some tax changes (e.g. lowering the VAT rate), raise in public sector wages, expansion of access to healthcare for non-payers, higher subsidy to municipal budgets. Such measure will have insignificant macroeconomic impact. Moreover, they will not come as a novelty since all new-comers in government take similar actions in their first year in office.
Risks to stability and growth
From a macroeconomic standpoint the last two governments have much in common – both Kostov’s and Simeon’s cabinets maintained fiscal stability and general predictability of the business environment. There is however a difference, which can be attributed to the different stages of economic reforms that overlapped with the two government terms in office. During the term of the UDF cabinet, foreign investment flows were mostly through privatization of relatively big enterprises, including entire industry. During the last four years, more small and medium investors chose Bulgaria to locate their business. To keep this investment interest, and to increase it, decisive pro-market reforms still need to be initiated to further improve the business climate. Maintaining monetary and fiscal stability will not suffice. Smaller investor however are relatively flexible in their investment choices, while at the same time they do not have huge leverage to solve their problems by directly talking to the governments (which is what big corporations in emerging markets typically do).
Whatever the outcome of the coalition negotiations, the present situation is profoundly different from 1993 or 1995, when the Berov’s and Videnov’s cabinets (both supported by the BSP) took office. Back then, the absence of active reform actions meant macroeconomic crisis. No such risk is prevalent now, when doing nothing will mean maintaining the monetary and fiscal stability. From an institutional point of view, there are no serious structural problems that need to be tackled (accept the PAYG pension model). However, abstaining from favorable economic policies will not bring about higher economic growth and well-being.
At present, a center-right coalition without the MRF is not possible, and at the same time DSB and MRF can hardly work together for the time being. Thus, a future coalition will probably depend on the decision of the socialist party.
When no party gets decisive political support, deep pro-market reforms with long-term impact can not be expected. In our June analysis of economic policy, Industry Watch outline several areas that need reform of public policy– including education, healthcare, pension system and financing infrastructure. Such actions however would need a strong government with secure future; moreover, it cannot be supported by left-wing parties.
At the same time, the obvious priority for the next 6 to 12 months seems the EU accession and the necessary domestic reforms to achieve a positive decision for January 1st 2007 membership. A provisional coalition government would not neglect this priority, and some legislative changes will take a constitution amendment.
We can however outline some economic policy measures that will probably enter the end-2005 agenda of any future government. They will probably include some tax changes (e.g. lowering the VAT rate), raise in public sector wages, expansion of access to healthcare for non-payers, higher subsidy to municipal budgets. Such measure will have insignificant macroeconomic impact. Moreover, they will not come as a novelty since all new-comers in government take similar actions in their first year in office.
Risks to stability and growth
From a macroeconomic standpoint the last two governments have much in common – both Kostov’s and Simeon’s cabinets maintained fiscal stability and general predictability of the business environment. There is however a difference, which can be attributed to the different stages of economic reforms that overlapped with the two government terms in office. During the term of the UDF cabinet, foreign investment flows were mostly through privatization of relatively big enterprises, including entire industry. During the last four years, more small and medium investors chose Bulgaria to locate their business. To keep this investment interest, and to increase it, decisive pro-market reforms still need to be initiated to further improve the business climate. Maintaining monetary and fiscal stability will not suffice. Smaller investor however are relatively flexible in their investment choices, while at the same time they do not have huge leverage to solve their problems by directly talking to the governments (which is what big corporations in emerging markets typically do).
Whatever the outcome of the coalition negotiations, the present situation is profoundly different from 1993 or 1995, when the Berov’s and Videnov’s cabinets (both supported by the BSP) took office. Back then, the absence of active reform actions meant macroeconomic crisis. No such risk is prevalent now, when doing nothing will mean maintaining the monetary and fiscal stability. From an institutional point of view, there are no serious structural problems that need to be tackled (accept the PAYG pension model). However, abstaining from favorable economic policies will not bring about higher economic growth and well-being.
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