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by Radoslav Danchev Yordanov Government interventions in Bulgaria. The need for more individual freedom in my country.

Nowadays in many countries we are being deprived of more and more of our freedom on a daily basis. My homeland is not an exception to that trend. A number of market interventions have been implemented by the government that apparently aim to achieve a better living standard for the population, however if we became acquainted with them in details we would find that they do more harm than good. The type of this project is an essay intended to influence the voters is such way so they could assess better the policies proposed and fight against the depreciation of personal freedom imposed by the government officials. In this form I want to review and denounce many of the mainstream practices that are contributing for our poor results from an economic point of view. After the class ends I intend to expand my project and probably use it in the struggle for more individual freedom in almost all areas of life. Project outline Introduction Brief history of government activity after the fall of the communist party and the establishment of democracy in the country (1990 2013) After the fall of the communism in Bulgaria the country started shifting to a free market economy. This transition was marked by many issues, most prominent among them the high level of corruption and inadequate implementation of law enforcement. In the first years of the regime the country was in very poor condition as it lost its previous markets due to the collapse of the COMECON system1 and had to take proactive reformist approach in order to stabilize and shift trading to other markets. However in the first years of the new system this did not happen and a number of inflation occurrences devastated the economy in 1994, 1995 and 1996. By this time the people choose a new reformist government which paved the way to normality and introduced a number of vital arrangements introduction of currency board, cuts on state spending, massive privatization, curbing of the inflation and trade liberalization. The second decade of free market was much better for the country. Between 2000 and 2008 Bulgaria had achieved 5.35% average GDP growth rate per year. A lot

Project Draft

of direct foreign investments, low personal and corporate income taxes, together with trade surpluses and decreasing public debt helped keeping that trend during these years. In 2002 the European Commission recognized Bulgaria as a functioning market economy and in 2007 the country entered the European Union. In 2009 the economy contracted with 5.5% of GDP, however returned on the positive path the following year. Nowadays we have a stagnant economy with very low GDP growth, large pressure from unreformed social security and healthcare systems (less and less people pay for the pensions and medical care of more and more of the population). Other major hinders to the economy growth are the increasing state interference in the free market, constant high level of unemployment (about 13 %2), large informal economy (over 30% of GDP3) and overspreading corruption and crime activity. Otherwise the structure of our economy is mainly depended on the services (7.1% of the workforce in agriculture, 35.2% in industry and 57.7% in the service sector). Part I Agricultural subsidies Tobacco subsidies (From the Country) Bulgaria has a history of tobacco subsidizing. Prior the EU accession tobacco producers were stimulated financially by the State. After the entry of the country in EU (2007) these manufacturers started receiving both EU and government subsidies. Despite that the EU subsidies for this kind of commodity have been phased out (as of 20104) the country continued paying same and even more money from the state budget to the tobacco producers (100 million levs planned for 2014 compared to 84.5 million levs in 2013 including a supplementary call at the end of the year at the amount of 11.5 million levs5). Most probably the incentive for this curtsey by the government comes from the electorate number. Tobacco farmers in Bulgaria are quite many 200 000 out of 7.3 million population6. But lets examine how these subsidies are affecting the market of tobacco in Bulgaria. First of all these state payments are increasing the supply of the good. As for every kg of tobacco the manufacturers are receiving defined amount money no matter if they manage to sell their production or not. The increase in supply on the other hand leads to decrease in the prices. However at the same time the government is imposing excise taxes on the cigarettes (cigarettes is the main commodity produced out of tobacco) which are much higher than the product value itself. The average price for pack of cigarettes in Bulgaria currently is BGN7 4.50 out of which BGN 3.50 are taxes and only BGN 1.00 production costs8. From this we can find out that even if the supply is drastically increased the price would not fall by much because most its contents are taxes, kept at constant level. For example even if the supply would lead to 50% decrease on the price if the market was unregulated

(ceteris paribus) in this situation the price drop would be only around 11%. Due to the artificial high price the demand for cigarettes is reduced even though this commodity is with inelastic price elasticity of demand (tobacco smoking is very common in Bulgaria, about 30% of the adult population smoking daily9 second highest in EU). The average price elasticity of demand for cigarettes is -0.8010 based on a study made by Ozgen Sayginsoy, Ayda A. Yurekli and Joy de Beyer. The positive side here is that with an inelastic demand we have less deadweight loss on the total surplus/welfare from the tax imposition compared to a commodity with more elastic demand. Meanwhile no one is willing to buy at the prices the sellers are trying to promote their stocks as mainly due to the subsidies there is large oversupply and the buyers are in favorable position. Currently these low prices led to protests from the producers that there arent enough buyers and/or they are offering too low price. Consequently the government commenced considering a change in the laws and probably the introduction of minimal price for this kind of commodity (price floor), thus contributing to the increase of the illicit market, loss of total welfare and consolidation of the oversupply making it permanent. We know that the price floor is above equilibrium market rate as currently the price for a kg of 1st grade tobacco given by the buyers is around BGN 3-4, while the government is talking for a price floor at rates as higher as BGN 7-8. In summary we could conclude that the subsidies are sending false signals to the producers and many sellers grow tobacco. However when the time for selling comes they are complaining as the prices are very low. If the market had been freed from subsidies the incentive to invest in tobacco production would drop and the market would start shifting to its equilibrium point. Les investors will became tobacco producers and trend for diminishing of the oversupply will arise. The strangest fact that we could examine in this market is that the government is giving subsidies for tobacco production with one hand and imposing high taxes on the cigarettes sales with the other. Their explanation is that with the subsidies they are helping the producers for which tobacco growing is the only option for earning a living. And with extensive taxing on the cigarettes prices they are hoping to reduce the demand for tobacco and thus reducing the number of people with health problems arising out of the smoking (lung cancer, etc.). We receive too much regulation and too much deadweight loss. Grain subsidies (From EU and the Country) The situation with the grain subsidies is similar to that of the tobacco payments, however on much larger scale. BGN 1.118 billion from the EU not including the state complimentary call of BGN 60 million11 for 2014 which the government agreed to pay up front due to a pressure from the local

farmers. This means taking debt of more than a billion BGN which will be reimbursed by the EU at later stage. All these funds that are being thrown in the grain production industry throughout the years lead to large increase in the supply of such goods. The main commodities produced are wheat, sunflower and barley and the oversupply which is mainly resulting from the subsidies exerts downward pressure on the prices for these grains. Thanks to the payments the farmers upgraded their technology in terms of machinery (tractors, harvesters, etc.) and started using better fertilizers which boosted their production per acre. However this money could be used elsewhere, by the individuals at their discretion and in many different areas of the economy if they werent taken from them by the governments and send to the agriculture businesses. From moral point of view this is really unfair as from every taxpayer income the member states are deducting in taxes a part of the payment which goes to the farmers, yet not every man benefits from the consequent increase in supply and decrease in grain prices. Some are using more while others are not using at all such goods, but all are paying their share. Furthermore in addition to the subsidies the government is covering the excise tax on gasoline used by the farmers during their production process. Thus reducing their inputs costs and eventually reducing further the grain prices, but putting at a disadvantage the other areas of economy, where the participants are paying in full the petrol fuel prices. Renewable energy subsidies Due to the EU regulations (20-20-20 targets12) that are currently implemented and requiring from every state member to reach 20% share of energy produced from renewable energy sources till 2020 (nowadays this target has been decreased to 16%) in 2007 the government decided to start subsidizing this market. So for every Mw unit of electricity produced from renewable energy sources they promised by law a certain amount of preferential feed-in tariff (differentiated between the different types wind, solar, etc.). We should bear in mind that the renewable energy is about 4 times more expensive than the electricity produced from coal plants for example. And even 17 times more expensive than the electricity provided from our Nuclear Plant. (Bulgaria has 2 x 1000 MW nuclear plant reactors currently). So due to the high subsidies many investors started building renewable energy production plants (mainly wind turbines and solar plants) and these created large strains on the state budget as with every connection of these new sources to the country electricity grid more subsidies had to be paid to the investors even though that Bulgaria have permanent oversupply of electricity and we are losing export electricity markets month by month due to new energy plants in the surrounding countries (mainly our neighbors Turkey and Greece). So there is large oversupply of electricity and the move

that the government made was to stop temporarily the work in state coal plants and mines (thus reducing the number of sellers of cheap energy) and the implementation of tax on all renewable energy projects that were build (as of 2014) to which by some sources reaches 40% of this type of businesses income13. In fact the target share of renewable energy sources had been reached and outdone in 2012 (17.7%). This is a classical example how government interventions could change the whole structure of an economic area and resulting to a decrease in the overall consumer surplus, as the higher electricity bills are effecting almost all households in the country, while the only benefiting party are the green energy investors. Part II Labor market One of the most debated regulations imposed on the labor market is the minimum wage. At least two-three times every year the parliament is voting whether to increase the minimum wage or not and almost every year decision on rise of the minimum wage is taken. As of 1st of January 2014 the basis of implementation is BGN 34014 (USD 240), while the average salary in the country is BGN 800 (USD 564). We should take into consideration, however that most of the high salaries are paid in few region with the highest economy activity (the capital Sofia, Plovdiv, Varna & Burgas cities). So the minimum wage is affecting with much stronger effect the population in rural areas compared to the population in the capital for example. In addition the average salary for the whole country may be USD 564, but if we examine the market for low-educated and unexperienced labor we might find that the minimum wage is keeping many of these people without job. Exposed to such risks is large population of the minorities that have lower than elementary education, many young men recently graduated and without any practical experience, low skilled workforce, etc. From the statistics we can see that the unemployment rate for the whole country is 13%15, while same rate among youngsters (15-24) is 29.40%16, in rural regions is 20.3%17, people with secondary education 27.8%, people with primary education and lower 46.2%. The high unemployment level for these groups leads to lower wages. In addition the oversupply of labor force in some particular areas like food and hotel servicing, public administration, etc. drives their salaries to an average near the minimum rate. For many of the men in these groups the minimum wage is a price floor that they cannot overstep as the equilibrium market price is lower. For example a young man without experience and higher education is searching for a job, but with this minimum wage no one is willing to hire him at that rate. If this regulation was not implemented he could have agreed on a lower payment in order to gain some additional skills and experience that would help him earning a

higher salary in the future, however with the minimum wage he would be deprived of that choice. Regulating internship Another prominent example for government intervention in the labor sphere is the brand new regulation on internship. It seems that the parliament decided to intervene on a massive scale with intend to protect the interns and secure them minimum salaries. The new regulations are allowing only youngster under 29 year old to be employment under internship contract. Secondary education or university degrees became mandatory. Furthermore the applicants for internship must not have previous working experience in the relevant field. Salary amount became mandatory for every intern contract. The trainees cannot choose an internship program in other business than their graduated profession. On top of that the working period is limited in the range of 6 to 12 months, i.e. you cannot be intern less than 6 and more than 12 months18. And last, but not least for every trainee a designated mentor is required that cannot be one and the same for different interns. These new protective legislations immediately throw off part of the potential candidate interns which cannot fit in the framework (e.g. older than 29, lower education degree, graduation degree in other working sphere than the desired trainee program, etc.). Note the following examples - a man which is studying for a teacher cannot be intern at a software company, a software specialist cannot be intern at a bakery and so on (we should bear in mind that in Bulgaria only 20%19 of the population with university degree are working in the area which they have graduated, yet that doesnt stop many of them on being good at their jobs, mainly learning by experience). On the other side of the medal are the employers. It is certain that due to the increased burden they would carry when hiring interns the number of trainees employed will be significantly reduced. This includes the interns that cannot earn the amount of their salaries. In overall the final result will be: - Decreasing number of interns hired; - Loss of valuable experience that in other situation they could have gathered and used to their advantage; - Difficulties in finding a job at a later stage, leading to rise in the unemployment rate; - Lower future wage levels due to the missed opportunities for acquisition of relevant experience and skills. Energy, electricity and water regulations Electricity and water price demand is very inelastic in Bulgaria, as much of the countries households have no access to natural gas and every appliance in our homes need electricity. Most people are using electricity for heating

and cooling as well. In addition due to low overall welfare of the households (average gross salary in Bulgaria USD 564 for Q3.201320) the electricity bill comprise relatively large part of the total income (USD 38 per month on average - 7% of the income21). In overall in the last years the electricity prices are going up mainly due to an increase in the fossil fuels & natural gas prices plus green energy implementation. However as the electricity prices are regulated by the government they are not increasing alongside the market trend. The price is consisted of electricity, transmission, distribution, VAT, co-generations, green energy and unrecoverable costs. As most of these inputs are increasing and some are relatively fixed (e.g. VAT) the strain falls on the distribution. The distributing companies are covering part of the price rise, however this leads to some negative effects that in a long run would be devastating. The budget for repairs and maintenance of the distribution grid has been reduced drastically by the distribution companies and in addition the overall condition of the electrical grid is not very optimistic (large percent of old infrastructure and permanent low amount of investments on the equipment). This leads to some failures and emergency situations in many regions and with time passing by we may be witnessing an occurrence power black-outs and low quality of the electric voltage supplied. Furthermore the price ceiling deprives of their choice the citizens that could pay more for better service. The other effect of this policy is a change in ratio of export to locally used electricity. As the price in the country cannot go up even if the demand is high most of the producers will try to export their production in order to gain better prices and maximize profits. Of course it this difficult in this type of business as losses may occur while transferring electrical energy in long distances, yet for some producers near the main export markets it is a solution. In such situation when the supply is at constant level and the exports are increasing at the expense of the local distribution a shortage for the local consumers may arise. Another effect that is not seen by the government is that with the price ceiling the consumers have less incentive to purchase new energy-saving appliances (e.g. LED bulbs compared to incandescent light bulbs, better stoves, etc.). A weird fact is that the state is both keeping electrical prices low and promoting new energy saving technologies. For example they have implemented a law that is phasing out the production, import and sale of incandescent light bulbs. Licenses, certifications and mandatory standards The certification process in our country had evolved to an obstacle for too many new firms in too many economic spheres. In order to comply the law companies must have the relative license in their area of practice, despite that most of these licenses are not providing nothing to the firms or the consumers. For example a manning firm would need certification giving the

right to work as an intermediary, travel agency would need a tour operator certificate, a trucking company would need a licenses to carry cargo, etc.. Because of the high level of bureaucracy in the country these cumbersome certification procedures are taking a lot of time, funds and efforts from the business. A lot of paperwork must be compiled and verified from the different state agencies prior submission for certification. Minor discrepancies could lead to loss of precious time due to return of the documents and consequent re-submission. This bureaucracy discourages many new firms from entering the market, which means less supply and most probably higher prices. In addition the expenses accrued by the enterprises that have passed through the certification process are increasing the production costs of their output and can reflect on the prices. In this paragraph we can include the endless flow of mandatory standards that are imposed mainly due to the pressure of the EU commission. Some of the most contradictory are the cucumber standard (all cucumbers and bananas must be free of abnormal curvature this standard in particular dropped out in 200922 after protest from many member states), the expected tomato seeds standards (only certain types of tomato seeds can be used in the EU area thus throwing out of the market many small firms with other types of cheaper seeds23), the hens living standards (EU directive that stipulates a certain minimum space per hen needed in the egg production), etc.. Many of these directives are supporting the big producers and weaken the small firms, while others are just incomprehensible. Imagine what additional costs the business has made due to such imposed regulations. If you refer to the last example with the change in hens living standards you would notice that a whole egg production premises have to be re-shaped in order to facilitate the new space rules and less hens would fit in it, which means large extra expenses, reduction in the supply volume and higher price per egg. Part III Education market interventions A whole new project could be written regarding the intervention in our education system and that is why under this article I will provide only a brief summary of the regulations together with one recent example. Most of the schools in Bulgaria are public with some private schools presence, however in both cases the state have large control over the education process. The general curriculum, the data inputted in all textbooks, the mandatory literature that should be studied, the time that the children should be in school, the age restrictions (classes are divided by age and not by skills), the maturity exams, etc. are compiled and managed by the central authority. The power of the individual teacher is substantially smaller than that of their colleagues in many other countries. Furthermore our system is not stimulating the individual needs of the students. Every kid

has particular interests and skills that want to improve and there is a demand for more individual programs. However the state is implementing defined school subjects that must be carried in a certain order by all students. Yet not all students are the same. Some prefer music over biology, other prefer mathematics over chemistry, etc.. In addition we should bear in mind that the state curriculum updated very slowly and not as per the current business needs. For example creativity and entrepreneurship are virtually missing from the study programs in elementary schools. There is a lot of data revealing our education system inefficiency. According to the last PISA tests Bulgaria is near the bottom compared to the other EU countries24. My sole example for this paragraph would be the case of 12 year old Bojidar from the city of Smolyan25. This child is not going to school, but relies on home education provided by its parents. In our country such type of education is unlawful. Despite that he never had been to traditional school the 12 year old won first place in informatics competition organized by a private company and attended by many students from the schools. He wins due to the application of unusual method while solving one of the questions. Because of the win however the boy attracted attention from the state and now the family could be fined, because they didnt send their son to the mandatory daily school. Such reactions only show us how conservative the authorities could be and how their interventionist policies are suffocating the derelicts from the mainstream no matter if they are successive or not. Economically speaking we can see that such system is rather monopolistic in nature. Despite that there are many different schools their main study program is governed by the central authorities. Furthermore alternative means of education such as home studies, online education, etc. are not acknowledged by the state. Traditional daily schools are obligatory for all children. Until recently even the degrees earned in other EU universities were only recognized until a cumbersome procedures were carried out26/27. I think that in order to improve the current system we should reduce the administrative interventions and let every school authorities decide to what curriculum will they adhere to and what is best for their students. In addition the parents must have the right to decide what type of education they want for their children. By doing so the competition among schools and students studying via different programs will rise and the overall quality should improve. References: 1 2 Data for Nov.2013

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