EKIP– Expert Club for Economics and Politics A Different Opinion
Mass industrialization under central planning
In his memoirs published after the fall of the Bulgarian Communist Party regime, Todor Zhivkov wrote that his government returned the gold reserve back to Bulgaria. This is perhaps one of the most notorious lies of the communist dictator. Contrary to Zhivkov's claims, in the 1960s it was his government, with his explicit permission, that exported almost 90% of the gold reserves of the Bulgarian National Bank. The export of gold was used to cover the skyrocketing foreign debts, the repayment of which the People's Republic of Bulgaria was unable to bear in the first half of the 1960s.
Much has been written on the Internet about the details of the export of the gold reserve by journalists such as Hristo Hristov, and a number of articles (including ours ) can be found on the Internet that describe in detail the process, the correspondence of the People's Republic of Bulgaria with the USSR on the matter, as well as the evidence of Todor Zhivkov's participation, refuting the claims in his memoirs. However, very little has been written about the reasons that led to this de facto bankruptcy of the People's Republic of Bulgaria. How did it come to the point that the state finances of the People's Republic of Bulgaria in the 1960s were in such a bad state that it was necessary to export almost the entire gold reserve of the BNB in order to settle the problem of foreign debt?
The reasons are economic and rooted in the economic model of central planning imposed by the Bulgarian Communist Party in Bulgaria. It is precisely on the negative effects that the model imposed by the Bulgarian Communist Party had on economic development and state finances during the 1950s and 1960s that I will focus in this article. However, in order to understand why the Bulgarian Communist Party's model of economic development had such disastrous consequences, we must first clarify some fundamental economic principles.
The role of external liabilities
In a normal market economy, the fact that one person or one individual enterprise imports more from abroad than it exports is not a problem for the entire economy. First of all, because it is possible, at the same time as this "external" trade deficit, to have an "internal" surplus - with other companies or citizens of the same country - and thus the two can be balanced. But even if a company has a trade deficit on both the domestic and foreign markets, and is therefore at a loss and in debt, this is not a problem for the economy as a whole. Because in a competitive market, no company is so large that its poor financial condition can lead to problems on a systematic level, i.e. to economic problems for absolutely all other companies and consumers in the country concerned.
That is why, in general, in market economies, trade deficits, even when they exist at the aggregate level for the entire country, are not a cause for concern. They simply mean that individuals and firms in a country are importing more goods than they are exporting. This does not mean, however, that they are facing bankruptcy or even financial difficulties. Sometimes, trade deficits can even mean the opposite. For example, higher inflows of foreign direct investment actually increase a country's trade deficit (or decrease its surplus).
The only exception is when the trade deficit is the result of government debt. In this situation, the deficit has a direct negative effect on government finances and hence will have a direct negative effect on the entire economy, because the state is not a private enterprise that can go bankrupt and be replaced by another. The financial problems of the state are always transferred to the rest of the population (the private sector) through the tax system, and so its financial problems have a negative systematic effect on the entire economy.
As you may have guessed, this problem is many times more acute when the state power not only regulates, but also directly manages the entire economy within a centrally planned system. This is what is at stake in a socialist economy like the People's Republic of Bulgaria. When all property is nationalized and the economy is managed through central planning by a single governing body, this means that the country (in this case Bulgaria) is practically transformed into one huge business enterprise. And accordingly, when this enterprise imports more than it exports, it is at a loss. And it accumulates debts. And if these debts become very large, it is facing bankruptcy.
The Bulgarian Communist Party's sick ambitions for mass industrialization
After Stalin's death in 1953, all the Eastern Bloc economies began to open up to the world market and trade more actively with capitalist economies. Bulgaria was no exception. But in parallel, the Politburo tried to implement a rapid and massive industrialization of the Bulgarian economy. Until now, the country's main sector was agriculture - most of the country's exports came from this sector.
This was the case in our first years as a communist state, but the Bulgarian Communist Party has the ambition to change this and turn Bulgaria into a serious industrial power. Sounds like a nice ambition, right? The problem is that this ambition for mass industrialization through central planning is what leads to Bulgaria's first bankruptcy during the communist regime and indirectly leads to the next two. The first serious problem is that the industrialization planned by the Bulgarian Communist Party is so rapid and large-scale that it cannot be carried out with the resources available in the country. Bulgaria has neither the necessary raw materials, nor the necessary technologies and facilities.
Therefore, such an ambition could not be realized without opening up trade to the capitalist world. In this context, the change in the foreign policy of the USSR and the Eastern Bloc after Stalin's death was welcome for the economic plans of the Bulgarian Communist Party. Already in the mid-1950s, Bulgaria began to massively import raw materials and industrial equipment, mainly from Western European countries. Initially, the industrialization plan seemed to be going well, and within the framework of the third five-year plan (the so-called "five-year plan") from 1958 to the end of 1962, industrial production recorded an average annual growth of 23%, which was almost twice as high as that recorded in the previous five-year plan.
The problem is that despite the huge increase in the volume of production, the products of the industry are not at all well placed on the international market and therefore the sector is a loser for the huge centralized enterprise that is the Bulgarian economy. The People's Republic is absolutely incapable of successfully placing the products of the domestic industry, so that it can cover the costs of their production. This production categorically cannot compete in quality with the industrial products of the industrial world, whatever myths are spread to this day about the strength of our industry at that time.
Moreover, the larger volume of industrial goods could not be marketed well even on the absolutely uncompetitive market between the communist countries. The enormous growth in volume was accompanied by a proportional decline in the quality of production, and in the late 1950s and early 1960s, the USSR regularly complained about the low quality, especially of the products of our light industry. If Bulgaria's industrial production could not be marketed well even on the acutely deficient market of the USSR, it had no chance of being competitive with the capitalist one.
The irony is that through its ambitious program of mass industrialization, the Bulgarian Communist Party is actually turning our country's industry from a stable one into a loss-making one. As a result of attempts to expand the role of industry, Bulgaria's imports are starting to grow much faster than exports. This is because we are starting to import much more goods with a high degree of processing (industrial equipment mainly), and we continue to export goods with a low degree of processing - mainly agricultural products, because our industrial exports are not successfully placed on the world market. The costs of production of domestic industry turn out to be many times higher than the revenues it brings.
Without market mechanisms, there can be no quality production.
This cannot be otherwise, because in the absence of clear market mechanisms, the communist economy is completely incapable of accurately assessing which types of production should be prioritized. It should be noted that this cannot be a situation of full communism, because the Bulgarian economy functions in the conditions of an international free market in which it participates. The problem is that there is no available domestic free market, which is usually the first destination in which new domestic industrial production must be successfully placed before it can become a stable export.
In the absence of a competitive national market, it is impossible to separate quality from poor-quality industrial goods. Without free consumer choice, it is impossible to set in motion the process of market competition, which leads to the elimination of poor-quality production and the evolution of quality. Only production that has passed the test of "internal" competition can have a chance in the "external" one, which is always more serious.
In the absence of a free national market, the only objective indicator at the domestic level that the state authorities can monitor is the volume of production. On the foreign market, there is a price mechanism that clearly shows the Bulgarian Communist Party that industry is a losing sector. However, the problem is that without a domestic market, adequate adaptation to this information is impossible. In market conditions in such a situation, foreign exports would simply cease naturally until a sufficiently competitive product appears on the domestic market, from which it can also be placed "outside", after it has been successful "inside".
Not to mention that the Bulgarian Communist Party stubbornly refuses to adapt to the problematic situation, but continues to pour more and more resources into a sector that it knows is already losing money. The sick ambition for the people's republic as an industrial power absolutely blinds the party. This economic situation is further aggravated by the huge number of mistakes that the state makes in managing not only the industrial but also the agricultural sector.
Incompetent business management worsens the situation
First of all, the activities of the Bulgarian foreign trade organizations (WTO) are woefully incompetent. The WTO does not take into account the traditional seasonal nature of Bulgarian exports (due to the predominant share of agricultural goods), and this leads to even greater losses. It does not take into account when the most convenient time is to place a given type of goods on world markets, a huge volume is placed at the end of the year simply to cover the norm set in the plan. Similar problems exist on the import side - the needs of domestic industrial production are not adequately assessed, equipment is often imported that Bulgarian enterprises are not ready to implement in production. Thus, much imported equipment actually lies idle, sometimes for years, and is depreciated without bringing any income at all.
At the same time, due to the huge focus on industry, the agricultural sector in Bulgaria began to suffer. In the second half of the 1950s, the problems in livestock breeding were particularly acute, where a strong tendency towards a decrease in cattle was observed. The economic situation was further worsened by abuses and corruption of officials. There were many cases of falsely inflating production reports, reporting of unperformed work, and the diversion of funds and raw materials.
Due to this combination of factors, Bulgaria's trade deficit grew dramatically between 1953 and 1963. This also led to a huge increase in the external state debt, because when exports were not competitive enough, the only way to finance the huge imports was through loans. In just 6 years between 1957 and 1963, Bulgarian external debt increased more than 13 times from 15.3 million dollars to 198.9 million dollars. The People's Republic of Bulgaria accumulated serious debts to banks in France, Germany and Italy, but also to communist banks, where, due to the usually more favorable conditions, the majority of state debts were concentrated.
Exporting the gold reserve is the only way out of the crisis
In the early 1960s, the sale of Bulgaria's gold reserves emerged as the ultimate, but only possible solution to limit the problem of the growing state debt. Despite attempts to renegotiate the terms of state loans, the Bulgarian Communist Party was absolutely incapable of solving the problem of the skyrocketing growth of state debt. And this is not surprising, given that it is rooted not in anything else, but in the very way the Bulgarian economy functions. For the first time, the issue of exporting the gold reserve was seriously raised in 1960, when the Bank for International Settlements in Basel offered the Bulgarian National Bank to deposit part of its gold as collateral for granting new loans.
Bulgaria cannot completely freely dispose of its gold reserves, because a very large part of them is already stored in Moscow, sent for processing to the State Bank in the late 1950s. In 1961, the Council of Ministers sent a request to the USSR to allow the deposit of 21 tons of this Bulgarian gold for the transaction with the Bank for International Settlements. This was carried out in January 1962, which brought the state a little over 20 million leva in credit. Later, in 1963, in exchange for the sale of nearly 6 tons of gold, the Soviet Moscow Narodni Bank (headquartered in London) granted the NRB a credit of 6.1 million dollars. In early 1964, Kiril Nestorov, the governor of the Bulgarian National Bank, in a letter to Todor Zhivkov asked for the export of another 4 tons of gold for deposit in the Bank for International Settlements.
As a result of all this, Bulgaria's gold reserves sharply decreased. At the beginning of 1962, the leva value of the BNB's reserves was 25.7 million leva, and by the end of 1964 this value was only 2.85 million leva. The export of gold reserves alone was not enough to completely extinguish the problem of the state debt, and the Council of Ministers was forced in 1964 to conclude a trade agreement with the USSR, which would settle Bulgaria's remaining obligations to two key Soviet banks.
Thus, mainly by exporting the gold reserves of the Bulgarian National Bank and concluding an agreement with the USSR, Bulgaria managed to settle the problem of the skyrocketing state debt. As it became clear, the main reasons leading to the practical bankruptcy of Bulgaria are rooted in the imposed central planning in the economy. The unbridled ambition of the Bulgarian Communist Party for rapid and mass industrialization in the absence of a free domestic market leads to a colossal waste of resources and a huge increase in the trade deficit and, as a result, external debt. Alas, the export of the gold reserves and the agreement with the USSR will turn out to be only a temporary solution, and the state debt will again face our country's bankruptcy by the end of the 1970s. We will examine the history of this debt crisis in a separate article.
The main source of the historical information presented in this article was the book "Bulgarian Foreign Debt 1944 - 1989: The Decline of the Communist Economy" by Daniel Vachkov and Martin Ivanov.
