Potential Output of Bulgaria - Case Study Example

Potential Output of Bulgarian Economy The economy of Bulgaria, according to the economywatch.com website, is rated as a nation of lower middle-income. Despite this, it is notable that the economy has made huge steps forward recently by way of ensuring sustained growth and long-term stability. It has made apt policies regarding its economy and this has resulted to high levels of average growth. (economywatch.com, 2009) This study is set out to have a look at the economy of Bulgaria and consider the potential output of this nation. To this, it is going to answer the question, “What is likely to boost the potential output of Bulgaria?” Therefore, a review of the economy will be provided before narrowing down to seek the befitting answer to the study question. Bulgaria is formerly a communist state and it made an entry to the EU as year 2007 set in. It had a strong growth with regards to its economy subsequent to the 1996 downturn. Various governments have shown responsibility in the nation’s fiscal plans and the economic reforms going tandem. Their only failure is the ever increasing level of inflation as well as the deficits of the current account being too huge. Since year 2004, the average growth of this country’s economy has been above 6%. Due to the high economic growth, there has been a rise in the foreign direct investment to Bulgaria and from Bulgaria. However, challenges still rock the country like the public administration’s corruption, weakness in the judiciary and also organized crime. The statistics show that the real GDP growth rate has been 6.3%, 6.2%, and 6% in years 2006, 2007, and 2008 respectively according to the CIA statistics. This GDP is composed of 62.2% services, 30.5% industry and 7.3% spectral contribution from agriculture as per 2008 estimates. The 2007’s inflation rate was 9.8% and 2008’s was 12.3%. The current account had a balance of US$-8.716 billion in 2007 and US$-12.07 billion in 2008. (CIA, world fact book, 2009) As shown in the CIA statistics, the agricultural sector contributes a very small percentage of the nation’s GDP. For instance, the 2008 statistics show that the agricultural sector contributed a mere 7.3% to the GDP. Thus, one cannot refute that this sector has a high potential to increase the nation’s output. According to the Institute of Market Economics, in the last decade the contribution of the agricultural sector to the Bulgaria’s GDP has declined by about five times. This is despite the continual growth of the country’s economy. A vast support has been dedicated to the sector, though. Most of the support given to the sector in the period running from 2001-2007 was in form of subsidies and tax relief and which was about 2.5 billion leva. Despite the high level of support, during the same period from 2001-2007, producers in the agricultural sector had not remitted taxes which amounted to approximately 779 million leva. This was as a result of the policy of preferential tax with the inclusion of income tax, excise tax and corporate tax. There was a high concentration of on particular producers when it came to the giving of subsidies. For example, in year 2007 four fifths of the subsidy funds were paid to around 7% of the agricultural producers and the remaining 93% got below 20% of the total subsidies. Research also showed that only 2% of the farmers declared huge levels of income as well as got the biggest stake of the funding. The other farmers do not usually make a declaration of their agricultural income. Thus, the constant intervention of the government in this sector did not lead to the perceived results. As the institute for Market Economics argues, the progress of any given sector is so much dependent upon the people and whose pursuit is self-interest. Through this the people risk in developing businesses as well as investing. This behavior is determined by incentives, which are to a huge extent extorted in the Bulgaria agricultural sector. Agricultural producers of Bulgaria are not consumer oriented anymore but are interested on the government. Government incentives are not aimed at wealth creation but at the redistribution of most of it to the specific groups of interest. (ime.bg, 2009) As written in the book by the World Bank, agriculture played a vast role in the economy of Bulgaria. Before 1988, this nation was a major processed and fresh fruits’ exporter and also the vegetables exports were huge. However, the reforms’ process together with the transition to a system of agriculture that is market-based has been a hard task for the agricultural and food sectors of Bulgaria. The procedures of privatization were flawed and thus it was difficult to privatize assets especially due to the relative instability prevailing up to the year 1997. Another cause of this disruption was the Russian market crisis which seemed to affect Bulgaria as an economy more than any other economy in East and Central Europe. Since the year 1997, the Bulgarian government has done much to implement the program of reform. However, since not much progress had been witnessed before 1997, some essential components were not complete, though. Therefore, the food products from Bulgaria are not able to compete well in the international trade arena. (World Bank, 2001 p 116) The structural changes of the Bulgarian economy were very slow. The early process of privatization was aimed at returning the agricultural land to the previous owners as well as the restitution of buildings in the urban centers. As not anticipated earlier, privatization of agricultural land was a tough task. The smaller plots got to their former owners. But these small plots later turned out inefficient, which also resulted to late land preparation. The markets of the land also made it harder to put together units of production. The herds of animals also decreased since the agricultural producers got the animals even before obtaining the land to sustain them. In spite of all these predicaments coupled with the sharp fall in the production from the agricultural sector, this sector remained an essential sector. This is especially because it made a big stake contribution to the country’s GDP than any other countries in the South-East and Central Europe. Its contribution stood at 13.7% of GDP in 2001. (Bell, 2004 p152) Mudacumura and Haque, in their book, noted that the Bulgarian agricultural sector’s adjustment was less efficient or has been less efficient in comparison to the change noted in other Central and Eastern European nations in their transition. Also, they wrote that the adjustment of this sector was in line with the political and economic changes being undertaken in Bulgaria. Due to this, the changes were painful and slow especially when the agricultural sector was considered just as an ordinary economic sector. The land reforms and the instability in the economy also led to a big decrease in the agricultural production. Recently, the negative impacts emanating from the land reforms are quite notable. The completion of the land reforms was a sluggish process, there was a formation of protection policies for national consumers, the decreasing of subsidies and lastly, the absence of investments in this sector – are the biggest contribution to the lack of success in the development of farmers and their establishment as well. One cannot go without noticing that the situation of the macro-economy has stabilized since 1997 due to the currency board introduction. Agricultural producers continue experiencing losses, since the restoration of rights to land had reached 66% by 2004 of the entire land and only 19% of Bulgarian land has deeds that were notarized. Pressure upon agricultural producers is also high. This can be said to be as a result of trade and the price liberalization that was delayed for a period of half a decade. There was also the opening up of the Bulgarian market to importers as well as the corruption among the officers in the custom leading to a rise in the cheap agricultural products in the economy. An apt use of the policies of trade in the bid to protect Bulgarian producers can be optimized, therefore. (Mudacumura and Haque, 2004 pp 259,260) One can therefore rightfully conclude that the sector of agriculture in the Bulgarian economy has the biggest potential to increase economic output of this nation. Therefore, the policy makers in the government should concentrate and make the necessary changes to this sector to realize its full potential. This is in pursuit of answering the study question, “What is likely to boost the potential output of Bulgaria?” Work Citations: Bell, Imogen. Central and South-Eastern Europe 2004. PublisherRoutledge, Edition 4, illustrated. (2004). p 152. Cia.gov. Bulgaria. (2009). Retrieved September 15, 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/bu.html Economywatch.com. Bulgaria Economy. (2009). Retrieved September 15, 2009 http://www.economywatch.com/world_economy/bulgaria/ Ime.bg. Subsidies and Tax Relief Harm Bulgarian Agriculture. (2009). Retrieved September 15, 2009 http://ime.bg/en/articles/subsidies-and-tax-relief-harm-bulgarian-agriculture/ Mudacumura, Gedeon M. and Haque M. Shamsul. Handbook of Development Policy Studies. CRC Press. Edition illustrated . (2004). pp259, 260. World Bank. Bulgaria: The Dual Challenge of Transition and Accession. World Bank Publications. Editionillustrated. (2001). p116. Read More