Unfinished Revolutions

The path taken by Romania and Bulgaria over the past 25 years differs from that of both Central Europe, which embraced free-market capitalism more enthusiastically, and the Western Balkans, much of which was set back by internecine war. Today, both are EU member states, but both struggle to shake off the legacy of communism and a troubled transition.

Following a severe crisis in 1997, by the 2000s, Bulgaria became something of a success story, trading on its low taxes, macroeconomic stability and educated population, but in recent years has been set back by political instability and concerns about the influence of shady business groups. Romania, the largest economy in SEE, has had its share of political wobbles but is arguably the most promising market in the region.

Their mixed records can be traced back to the earliest days of their post-communist transitions – or rather their botched attempts at breaking free from rule by communist apparatchiks.

While other parts of Central and Eastern Europe had singing or velvet revolutions, Romania had a violent one, with over 1,000 deaths and the execution of President Nicolae Ceausescu and his wife Elena after a brief show trial.

The years after 1989 saw many of the insiders of the old order retain their grip on the country. Instead of shock therapy to swiftly create a market economy, Romania tried the “human-face capitalism”, which in reality meant cronyism and political stagnation. Under the leadership of President Ion Iliescu, Romania became, in the words of economic commentator Cristian Pantazi, “a black hole for investors”.

A brief interregnum of liberals in the late 1990s made some economic progress and moved the country towards EU and NATO membership. But by 2000 Mr Iliescu returned to power – a period in which “corruption reached an unprecedented level,” says Vladimir Tismaneanu, a professor of politics at the University of Maryland, and an expert on East European history.

The 2004 elections (the same year Romania joined Nato) saw what the Romanian opposition dubbed its own “orange revolution”, bringing pugnacious Bucharest mayor Traian Basescu to the presidency in alliance with liberal and rightist parties in parliament.

Despite continued economic growth and joining the EU in 2007, Romania was buffeted by political turmoil, as the opposition twice tried to impeach Mr Basescu, while he unleashed anti-corruption investigations on the opposition led by Mr Iliescu.

Dodgy politics combined with a pro-cyclical fast-and-loose fiscal policy left Romania badly exposed when the economic crisis hit. The economy shrank by 7% in 2009, and the IMF, EU and World Bank stepped in with a €20bn bailout – the first of three packages intended to prop up the economy and encourage reform. This proved painful, with 25% cuts to public sector wages, but remarkably successful, in the view of ratings agencies and the Fund at least. Austerity was less well-received by the populace, however, and street protests in 2012 led to a parliamentary coup against the pro-Basescu government.

Victor Ponta, the new prime minister from the Social Democrats of former president Iliescu, hit back against his rival, pushing through reforms seen as weakening independent institutions, partly to reduce Mr Basescu’s influence.  The break with the old pattern of bitter rivalry came in the remarkable presidential election victory of ethnic-German Klaus Iohannis, who defeated Mr Ponta in November.

“Altogether, the rule of law seems relatively stable, the political landscape is less turbulent than in neighbouring Hungary, and Ponta’s kleptocratic authoritarianism suffered a major defeat in the November 2014 presidential elections,” says Prof Tismaneanu. “Moderate optimism is therefore justified.”

Romania’s economic performance has picked up strongly – the country posted the EU’s second-highest y-o-y GDP growth in Q3 2014, at 3.3%, according to Eurostat. The Economist Intelligence Unit forecasts average annual growth of 3.9% for 2015-2019 on the back of reform – not too far off the rates achieved before the crisis.

That return to growth is allowing Romanians to look at their long-term trajectory.  A June 2014 report by Erste Group compared the transition paths followed by Romania and Poland – the two most populous countries in the CEE. It concluded that Romania had fallen behind Poland due to more cautious reforms in the 1990s, and that the lag had increased during the recent crisis, to which Poland proved more resilient. The good news is that Romania can expect to follow broadly the same development path as Poland; the bad news is that Romania’s deficiencies in policy-making, infrastructure, education and now reputation will make it difficult indeed for it to catch up with the region’s leaders.

Bulgaria is often lumped with Romania at the tail end of the CEE transition countries. While the two have very different histories, their experiences of flawed and incomplete post-1989 transitions have overlapped.

Bulgaria’s first post-communist election, in 1990, returned the rebranded Communists – the Bulgarian Socialist Party (BSP) – to power. Over a quarter century since the fall of communism, Bulgaria has had nine general elections. This political fickleness has slowed economic development in what was already one of Europe’s poorest countries.

“The progress of economic development of Bulgaria since 1989 happened at a slower pace compared to the other former socialist countries because we started from a lower base,” says Kamen Kolchev, CEO of Sofia-based Elana Financial Holding, and one of the most successful businessmen in post-communist Bulgaria. “We had to make all the painful reforms from the beginning but we never had politicians and visionaries for the development of the country who could make decisions beyond their mandate.  Such a transition needs long-term decisions.”

Bulgaria was buffeted by crisis in 1996-97, when real output fell 10% in 1997, but which did establish reforms that turned the country around. With support from the IMF, the national bank implemented a currency board in 1997, establishing a fixed exchange rate with the Deutschmark (and thus from 2002, the euro). This brought down inflation and interest rates, and saw foreign exchange reserves rise. The fiscally prudent government ran a surplus through much of the 2000s, and even after the recent crisis tipped the budget into the red, debt remains below 30% of GDP.

From the late 1990s, a series of governments, one headed by Bulgaria’s former king, Simeon Saxe-Coburg-Gotha, undertook reforms, although not without provoking frequent and massive street protests. Bulgaria’s strong growth made it an attractive destination for investors, further enticed by the 2008 introduction of a flat tax of 10% on personal and corporate income, Europe’s lowest.

The crisis came late to Bulgaria, hitting home in mid-2009, but it revealed the weaknesses of the country’s boom, in particular bursting the real estate bubble and driving up non-performing loans after a period of high credit growth.

Since the crisis, the country has seen three elections and five governments. Ongoing demonstrations against the government’s alleged links to shady business interests and the freezing of EU funding over maladministration. The situation came to a head after two bank runs in June 2014.

Fresh elections in October 2014 brought Boyko Borisov back to power as prime minister at the head of a fragile minority administration including reformists. The government faces a sluggish economy, expected to grow at just 1.5% this year and 2.0% in 2015, hampered by low domestic demand and investor wariness.  Mr Kolchev says that reforms on pensions, healthcare, energy and public administration cannot wait any longer, but is upbeat about the future.

“Bulgaria still has a lot to do to locate itself on the world map as an attractive investment destination,” he told the Central European Financial Observer. “Although there are a lot of fiscal advantages for investors, the burden of political instability in the last years has contributed to the reluctance of foreign investors. I hope that the current government will be able to restore political stability so that local business can see predictability and contribute to economic growth in the coming years.”

If that happens, both Romania and Romania can try to make up their delays in catching up with the rest of the region.

Andrew MacDowall is an independent Belgrade-based correspondent and analyst focusing on Central and South-Eastern Europe. He writes regularly for the Financial Times, and has also been published by the Guardian, Telegraph, Independent, CS Monitor and Business New Europe, amongst others. He is also the Central and Eastern Europe correspondent for CS Monitor’s Monitor Global Outlook service.

 

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