Extricating the state: The move to competitive capture in post-communist Bulgaria

Abstract

This article uses the Bulgarian case to analyse movement from a situation of what appeared to be a ‘Partial-Reform Equilibrium’ to an ‘Equilibrium of Competitive Capture’. In such a process, elections are important forces for change, but not because they bring reformist parties to power or lead to completed economic liberalisation. Instead, especially in the first several electoral cycles in a new democracy, they can bring to power new leaders who are not beholden to existing captors, but rather to other clients that would like to capture the state for their own interests. Over time, the country experiences a parade of captors, eventually leading to a system where no single group owns the state, but where it is still not insulated. Instead, several competing groups fight with each other to raid it for their own benefits.

Notes

¹Influential examples of such analyses include Lipton and Sachs (1990), Boycko et al. (1995) and Blasi et al. (1997).

²Versions of this recommendation appeared in, among others, Przeworski (1991), Haggard and Kaufman (1992), Williamson (1994), Balcerowicz (1995) and Aslund (1995), some of whom argued against rapid economic reform because of the anti-democratic politics they thought it would require.

³Some scholars, including Cohen (2000) and Reddaway and Glinski (2001), had criticised the emphasis on rapid destruction of state capacity from the beginning, but their arguments were not incorporated into the conventional wisdom. (While their books were published in 2000 and 2001, respectively, they had presented their critiques in other outlets earlier.) Writing in a much more theoretical vein, and reprising Gerschenkron (1962) and Polanyi (1944), Chaudhry (1993) argued early on that a weak state could neither create nor sustain a market economy, but she likewise did not change the dominant conversation about post-communist transformations.

⁴For a range of interpretations of this relationship, see Kitschelt (1992), Fish (1998), Kopstein and Reilly (2000), Bunce (2001) and Frye (2002).

⁵See, for example, Sperling (2000), Hellman et al. (2000), Ganev (2000, 2001a, 2001b), Aslund (2002), Jones Luong (2004) and Stoner-Weiss (2006).

⁶In addition, it may seem intuitive that electing reformist politicians is the way to achieve further liberalisation. Hellman did not make that claim, and a number of studies have shown why it might not be the case: Orenstein (2001) agues that alternation of power, not dominance by the liberal party, is what fostered liberalisation in post-communist states; Fish (1998) shows how elections can moderate former communists; and Appel (2006) examines the continued liberalisation of tax policy in East Central Europe regardless of which party controls the government. Still, painting a picture of reform versus capture can lead one to assume that the path to success lies in the victory of reformers over rent seekers. It is therefore important to recognise that in the Bulgarian case it was the former communists who advocated rapid, voucher-based privatisation and the liberal reformers who preferred a more closed, case-by-case approach.

⁷See Hellman (1998), Aslund (2002), and the literature on rent seeking for discussions of this possibility (Tullock 1967; Krueger 1974).

⁸See Barnes (2006, pp. 229 – 230) on the Russian case.

⁹As discussed below, elections were held in 1990 for a short-term parliament akin to a Constituent Assembly and in 1991 for a permanent legislative body under the new constitution.

¹⁰The group conducted its operations through such firms as Multiart, INP Trading (Malta), and Multi International Holding (Liechtenstein), as well as through connections to Bulgaria's largest metallurgical factory, Kremikovtsi (Nova Makedonija, ‘Bulgarian International Octopus’, 2 November 1995, available at: http://www.soros.org.mk/mn/mils/en/95/11/02-14.html, accessed 3 July 2002). The story of Multigrup has been told with great empirical detail and theoretical sophistication by Venelin Ganev (2000, 2001a, 2001b).

¹¹Others had come and gone during the period of communist-party rule, including the Bulgarian Investment Bank, the Bulgarian Industrial Bank, and the Bulgarian Agricultural and Trade Bank (Petkov 1993, pp. 7 – 8).

¹²These enterprises also borrowed heavily from foreign private banks, which helps explain the rapid rise in the Bulgarian government's foreign debt in the 1980s (interview with Krassen Stanchev by author, Sofia, 12 June 2002).

¹³This situation need not have been the result of malice or corruption on the part of officials. The approach adopted was the easiest way to liberalise the financial sector in a state-socialist economy, and it occurred elsewhere in the late Soviet era. For the Russian case, see Johnson (2000) and Hellman (1993).

¹⁴See Solnick (1998) and Barnes (2006) on the Soviet case.

¹⁵R. Synovitz, ‘Bulgaria: The Death of the Once-Mighty Nomenklatura Business Groups’, RFE/RL Weekday Magazine, 18 October 1996, available at: http://www.rferl.org/nca/features/1996/10/F.RU.961018171123.html, accessed 3 July 2002.

¹⁶ Nova Makedonija, ‘Bulgarian International Octopus’, 2 November 1995, available at: http://www.soros.org.mk/mn/mils/en/95/11/02-14.html, accessed 3 July 2002. See R. Synovitz, ‘Bulgaria: The Death of the Once-Mighty Nomenklatura Business Groups’, RFE/RL Weekday Magazine, 18 October 1996, available at: http://www.rferl.org/nca/features/1996/10/F.RU.961018171123.html, accessed 3 July 2002.

¹⁷See also Georgi Filipov, ‘Nouveaux Riches in Bulgaria: Is a New G-13 Possible?’, AIM Sofia, 7 September 1998, available at: http://www.aimpress.ch/dyn/trae/archive/data/199809/80911-022-trae-sof.htm, accessed 3 July 2002; see also R. Synovitz, ‘Bulgaria: The Death of the Once-Mighty Nomenklatura Business Groups’, RFE/RL Weekday Magazine, 18 October 1996, available at: http://www.rferl.org/nca/features/1996/10/F.RU.961018171123.html, accessed 3 July 2002.

¹⁸Georgi Filipov, ‘No More Secrecy in Banks for Millionaires’, AIM Sofia, 4 February 1998, available at: http://www.aimpress.ch/dyn/trae/archive/data/199802/80214-013-trae-sof.htm, accessed 3 July 2002.

¹⁹All of these groups benefited in perverse ways from the Western embargo against Yugoslavia from 1992 to 1995. Legitimate businesses, of course, were damaged by the loss of market and transportation routes. At the same time, however, criminal networks flourished, as illicit trade, bribery, and protection rackets developed around border crossings. The embargo certainly did not create the organisations engaged in these activities, but it probably helped them grow.

²⁰The labour union Podkrepa, which generally supported the UDF, also called for concessions to enterprise insiders.

²¹For an excellent discussion of the role of ideology in the struggle over privatisation policies in the Czech Republic and Russia, see Appel (2000, 2004).

²²Removing privatisation from the control of the ministries was also one of the main priorities of the radical reformers in Russia (see Boycko et al. 1995).

²³As a result little privatisation took place at all. Although restitution of agricultural land and some small firms began in 1991, only 58 enterprises, the largest of which were four petrol stations, were sold at public auction that year (Frydman et al. 1993, pp. 32 – 34; Kovachev 1994, p. 2). Indeed, the first privatisation deal for a large enterprise was not carried out by the Bulgarian Privatisation Agency until May 1993, when the Belgian company ‘Amylum’ bought 80% of ‘Tsarevichni produkti’ (Maize Products) in Razgrad (Kovachev 1994, p. 8). By June 1994, only about 130 deals had been concluded by the Bulgarian government, and only about 10 of them could be considered large, including the sale of a 49% stake in the Grand Hotel Varna, a resort on the Black Sea, which went to Multigrup after a series of embarrassments for the Privatisation Agency (Kovachev 1994, pp. 8 – 10).

²⁴For examples in Yambol and Bobovdol, see Petkov (1993, pp. 21 – 22).

²⁵All of these phenomena were nearly identical to what was happening in Russia at essentially the same time (see Johnson 2000).

²⁶See also Institute for Market Economics Bulgaria: Current Economic Situation and Long-Term Growth Prospects (Institute for Market Economics, Sofia), 1997, p. 22, available at: http://www.ime-bg.org/pdf_docs/papers/scenario.pdf, accessed 12 July 2002.

²⁷Bulgarian law gave the state a blocking vote on major enterprise privatisation decisions, if it held at least 30% of the shares, and required private owners to hold 33% + 1 share to veto major decisions, so privatisation deals were categorised by the proportion of shares up for auction. In 295 of the original enterprises, over 70% of the shares were for sale; in 488 enterprises, 50 – 70% of shares were for sale; in 49 enterprises the corresponding figures were 33 – 50%; and in the remaining 174, less than 33% of shares were for sale (Miller & Petranov 2000, p. 228).

²⁸Fewer than 50% of eligible Bulgarians collected their vouchers, which was considerably less than the approximately 80% of Czechs who participated in their programme, but it was nevertheless a significant proportion of the population.

²⁹People who had put their vouchers in the 11 funds that closed down before the programme got off the ground were given time to reallocate (Miller & Petranov 2000, p. 232).

³⁰On the Czech experience, see Brom and Orenstein (1994).

³¹See R. Synovitz, ‘Bulgaria: The Death of the Once-Mighty Nomenklatura Business Groups’, RFE/RL Weekday Magazine, 18 October 1996, available at: http://www.rferl.org/nca/features/1996/10/F.RU.961018171123.html, accessed 3 July 2002.

³² Mobiltel was sold to Vladimir Grasanov, whose financial backer was the Russian Mikhail Chernoi. See Georgi Filipov, ‘Nouveaux Riches in Bulgaria: Is a New G-13 Possible?’, AIM Sofia, 7 September 1998, available at: http://www.aimpress.ch/dyn/trae/archive/data/199809/80911-022-trae-sof.htm, accessed 3 July 2002.

³³See R. Synovitz, ‘Bulgaria: The Death of the Once-Mighty Nomenklatura Business Groups’, RFE/RL Weekday Magazine, 18 October 1996, available at: http://www.rferl.org/nca/features/1996/10/F.RU.961018171123.html, accessed 3 July 2002.

³⁴The process had actually begun in 1996, when the Action Programme forced some banks into receivership, liquidated (or promised to liquidate) about 70 enterprises, and cut off another 70 from additional bank credit (OECD 1997, pp. 95 – 97, Box 6).

³⁵‘Multigrup Wants to Be Bulgaria's Gazprom’, Kapital, 2, 1998, available at: http://www.capital.bg/weekly/, accessed 2 July 2002.

³⁶J. Nikolov, ‘Sugargate: The Accused and the Guilty’, Kapital, 32, 1998, available at: http://www.capital.bg/weekly/, accessed 3 July 2002.

³⁷‘State Savings Bank vs. Credit Bank’, Kapital, 1, 1998, available at: http://www.capital.bg/weekly/, accessed 13 October 2006.

³⁸See Georgi Filipov, ‘No More Secrecy in Banks for Millionaires’, AIM Sofia, 4 February 1998, available at: http://www.aimpress.ch/dyn/trae/archive/data/199802/80214-013-trae-sof.htm, accessed 3 July 2002; and Georgi Filipov, ‘Nouveaux Riches in Bulgaria: Is a New G-13 Possible?’, AIM Sofia, 7 September 1998, available at: http://www.aimpress.ch/dyn/trae/archive/data/199809/80911-022-trae-sof.htm, accessed 3 July 2002.

³⁹‘Multigrup Bank in Skopje May Go into State Hands’, Kapital, 14, 1998, available at: http://www.capital.bg/weekly/, accessed 2 July 2002.

⁴⁰Petko Bocharov, ‘Bulgaria: Gas Company Emerges With a New Image’, RFE/RL Weekday Magazine, 20 November 1997, available at: http://www.rferl.org/nca/features/1997/11/F.RU.971120133428.html, accessed 3 July 2002.

⁴¹IME (Institute for Market Economics), ‘Privatization and Post-Privatization as a Type of Industrial Policies’, 2001, available at: http://www.ime-bg.org/disc.htm, accessed 12 October 2006.

⁴²b-info, ‘Press Review: April 18’, 18 April 2000, available at: http://www.b-info.com/tools/miva/newsview.mv?url=news/2000-04/text/apr18.bta, accessed 26 July 2006.

⁴³Georgi Filipov, ‘Moral Credo: Money Makes the World Go Round’, AIM Sofia, 2001, available at: http://www.aimpress.ch/dyn/dos/archive/data/2001/11029-dose-01-10.htm, accessed 4 August 2006.

⁴⁴According to the World Bank's World Development Indicators, GDP grew 4% in 2001; 5% in 2002; 5% in 2003; 6% in 2004; 6% in 2005. According to the same source, Bulgaria's population shrank by 0 – 2% in each of those years, so GDP per capita also rose. Available at: http://devdata.worldbank.org/data-query/, accessed 12 October 2006.

⁴⁵On the new government's promises to bring corruption under control and the ensuing disappointments, see, for example, Stephen (2002a, 2002b), McAleer and Troev (2002) and Kyriakidou (2003).

⁴⁶Institute for Market Economics (2002) Monthly Overview: Activism Back in Fashion (Sofia, Institute for Market Economics), available at: http://www.ime-bg.org/en/index.html; accessed 3 July 2004.

⁴⁷‘Bulgarians Defy Ex-King in Presidential Ballot Shock’, The Australian, 20 November 2001.

⁴⁸‘Deal Allows Bulgarian PM to Survive’, Irish Times, 8 February 2005.