NicholasKralev.com

Bulgarians find themselves cast in an unlikely role. For a people more used to being labeled the laggards than the firebrands, Bulgarians are being heralded as the war-ravaged Balkans’ new economic champion.

The “economic miracle” that has successfully battled hyperinflation and spurred economic growth is the currency board set up two years ago by the country’s center-right government, economists say.

Today, the rhetoric over the benefits and disadvantages of a currency board is long forgotten. Everyone -- from government officials to workers to pensioners -- takes for granted the measure that in July 1997 anchored Bulgaria’s currency, the lev, to the German mark.

But in other Balkan states, arguments for and against the currency board have just begun. Looking to Bulgaria’s example, politicians and economists are pondering a way to take the best from it and lift their economies from the bottom.

Currency boards foster economic stability by replacing active monetary policy. They regulate money supply by fixing the amount of money in circulation directly to the amount of foreign reserves held by the central bank.

In the past two decades, Hong Kong, Argentina and the Baltic republics of Estonia and Lithuania have adopted currency boards.

Among Balkan states seeking economic recovery in the wake of the Kosovo war, Montenegro, Serbia’s junior partner in Yugoslavia, has taken the lead. Embracing the idea of economic independence from Belgrade, the pro-Western Montenegrin government has proposed launching a separate currency from the Yugoslav dinar and adopting a currency board.

President Milo Djukanovic last month appointed an American, Steve Hanke, a professor of applied economics at Johns Hopkins University, as his economic adviser. Mr. Hanke, who also advises Bulgarian President Petar Stoyanov, helped set up Bulgaria’s currency board.

Calling on the United States and other Western governments to aid Montenegro in raising the money needed to establish a currency board, Mr. Hanke says $70 million in cash reserves would be enough for the launch of a hard currency.

But reluctant to inflame further tensions in the Balkans, Washington is wary of letting small Montenegro gain economic independence.

“It’s doubtful” that a separate currency is “absolutely necessary,” said James P. Rubin, the State Department spokesman. “It is our view that we support Montenegro’s role within the Federal Republic of Yugoslavia. We do not support their independence.”

As for other Balkan states -- Albania, Macedonia, even Romania -- Mr. Hanke said currency boards are certainly a good idea.

“But there is a better, more elegant solution,” he said. “The currencies of those countries should be abolished and replaced immediately with the German mark. In 2002, the mark would be replaced by the euro.”

“The integrity of any currency board in the Balkans should be protected by appointing directors from outside the region, and the foreign reserves should be held at the Bank for International Settlements in Basel, Switzerland,” Mr. Hanke said in an interview.

To a certain extent this has been done in Bosnia-Herzegovina, where the governor of the central bank is from New Zealand and was appointed by the International Monetary Fund. Bosnia has had a currency board since August 1997, after the 1995 Dayton peace accords mandated its creation.

Both Bulgaria and Bosnia adopted currency boards at a time when their economies were in total chaos. A third of Bulgaria’s banks had collapsed, its foreign reserves had plummeted to $793 million and inflation peaked at 578 percent in 1997.

In 1998, the country’s foreign reserves amounted to $3.05 billion, inflation stood at 1 percent and gross domestic product growth was 4.5 percent after a negative 10.6 percent in 1996, according to the IMF.

The World Bank’s director for Bulgaria and Romania has singled out Bulgaria as “a good place for investment,” Britain’s Economist magazine reported in its latest issue.

During a visit here last month, Mr. Hanke gave a grade of 8 on a range from 1 to 10 to the Bulgarian government’s performance “because they got into a very nasty situation and managed to rescue the economy.”

But while the success is undeniable, the government has to be very clear about what comes next, a Western diplomat in Sofia said in an interview. There is still evidence that “the economy is over-regulated” and centralized, and the free market requires “a shift of power” out of the central government.

Mr. Hanke concedes that the economic reforms in Bulgaria have been slower than they should be. Privatization has only picked up in the last few months with some major deals, such as those for the Balkan Bulgarian Airlines and the country’s main oil refinery, Neftochim, at the Black Sea port of Bourgas.

Mr. Hanke recommended that the government set up a task force to review and accelerate reforms. Prime Minister Ivan Kostov said the Council of Ministers had accepted the recommendation.

Corruption is an even bigger problem than the slow reforms, defined by President Stoyanov as “the major failure” of the democratic process in Bulgaria.

“If corruption is not curbed in time, it may undermine our statehood and discredit the democratic model,” he said.