Laza Kekic is Regional Director for Central and Eastern Europe, at the Economist Intelligence Unit, London. Mr Kekic heads the EIU's largest regional team of analysts who provide economic, political and business coverage for the 27 countries of Eastern Europe. Also heads the EIU's Country Forecasting Services, which include the EIU's main traditional product, the Country Reports, and the Country Forecasts (medium-term forecasts for 60 countries aimed at direct investors).
Laza Kekic met Milena Hristova - Editor of novinite.com and The News.
Excerpts:
Q: During your presentation you put expected Foreign direct investment (FDI) at USD 900 M per year. What factors justify this "decent", in your words, forecast?
A: The forecast is based on the model of framework that describes very well the historic experience, as well as other factors such as market size, wage range, policy environment. Taking into account the fact that Bulgaria has a relatively small domestic market which is growing and that it is still a low wage economy, which is an attraction for investors, that it has this privatization strategy and improved business environment, it is still falling short of the leading countries in the region in terms of the transition, but the gap is narrowing. On the basis of this comes out that forecast.
Set in the context this forecast can be considered quite realistic because it is based on some cautious assumptions. Of course it can get worse but a repetition of 1996 seems unlikely. The forecast depends on a set of assumptions about the external environment; at the same time there is what we call upside risk. It is not inconceivable that the amounts could be even higher. These amounts are a bit smaller than in 2000, but as a share of Bulgaria's economy they are considerable amounts. So if this forecast happens to be true, I would say Bulgaria would have done reasonably well.
Q: You expressed the opinion that the FDI inflows have been too recent to have yet hade a significant impact. When do you think this impact could be tangibly felt?
A: We have some scattered evidence of surveys that show that in Bulgaria like in other countries foreign -owned firms perform much more efficiently and much better than either state-owned or domestic and private-owned firms. That is only one condition for FDI to have a good impact. The other condition is the so-called the spill-over effect - the good performance of the foreign company spreads to the domestic economy. And that of course is not guaranteed, because that depends on domestic conditions. This is what I mean it is too soon to tell for Bulgaria.
Q: What mistakes were made in Bulgaria so that investments here are much lower than in other Eastern European countries?
A: It is a mixture of objective and subjective circumstances. Objectively Bulgaria did start out with much more unfavorable so-called initial conditions, the transition was shocking. It did not have the experience of Hungary, Poland, and former Yugoslavia. But I am sure also mistakes were made and certainly the privatization model, which was initially implemented here had its problems, as well as corruption. Bulgaria is not unique in that but may be Bulgaria had more than its fair share. The economy finally experienced that terrible shock, which I think then, shocked it into beneficial change. As a by-product something good came out of what was a terrible crisis.
Q: The Economist Intelligence Unit does not preclude early elections in Bulgaria...
A: No, we are predicting on the basis of analyses that Bulgaria can expect some period of political turbulence. How will this turbulence manifest itself? I think there are two things to be said. First it will manifest itself either in early election next year or it could be the formation of a new center-right coalition. Notwithstanding this from a broader perspective, since democracy now has deep enough roots here, this does matter that much. It is important not to over-dramatize. It is dramatic for the politicians that might be replaced but in the scheme of things, for the future of the country, we are not talking about coups or irregular political events. Governments come and go and we are relatively sanguine about the consequences of this turbulence and that's the best word to use. It is unlikely that this government will survive its full term in office.
Q: Is there a way for the government to fight public discontent?
A: It is a very difficult issue and very difficult to say from the outside. This is the beauty of the democratic system that the government will have to make its own choices. Its room for maneuver is circumscribed both because of its international aspirations and obligations and because of objective circumstances. But at the end of the day it has some room for maneuver to make decisions and the ultimate arbiter will be the electorate. Bulgaria aspires to join NATO, which means that you are not going to be cutting the military budget, Bulgaria is also looking for a set roadmap for the EU, which means the government will not be considering policies that depart too much from the sort of role that is required by the EU. All this reduces the scope for big discontinuity in the policy, which is why what we called turbulence probably would not have much of an impact.
Q: Prime Minister Simeon Saxe-Coburg not long ago pointed out 2006 as a realistic date for EU entry. How would you comment that?
A: It is good to set always goals and to be ambitious. With EU there are things happening that affect not only Bulgaria. There will be some delays. Our forecast was that the first round would happen as a big bang long before when people wre even talking about five only candidates. And it looks like a more and more reasonable forecast. It can be expected that there will be some delay but this is not tragic. There is a firm perspective as the EU enlargement is not a question of "if" but "when". But I think 2006 is not a realistic forecast.
Q: How would EU accession impact FDI?
A: Evidence shows that expectation of EU accession is not as important for investors as is sometimes presupposed. This is in way good news for Bulgaria and Romania, as long as several very important pre-conditions are met, among which assured market access to the EU, and conducive business environment.
Q: What can Bulgaria learn from other countries with respect to the privatization process?
A: Bulgaria has been learning from everybody but what I did not hear very much is any sort of own solutions. It is true that there is no point of rediscovering America. Starting a little later you have the benefits of learning from the mistakes of others. At the same time no two countries are totally the same. It could be that the room for maneuver is so circumscribed by these overwhelming goals that there is much room. It is important also to be innovative even if it means to do trial and error.
Q: Do you think Bulgaria has a functioning market economy?
A: There is the criterion based on perception that can be compared to other countries and there is the legalistic definition that EU applies, and even the EU one is an assessment and is not based on any hard, clear- cut criteria. The best way is not to put it in those terms - yes or no, but rather to see how it compares to other similar economies. Bulgaria has shown improvement in its business environment, it is still not catching up over the past five years with the top ones but really narrowing the gap.
Send to Kindle
