Before World War II, Bulgaria was an agricultural country, consisting mainly of small peasant farms; farming provided a livelihood for about 80% of the population. After the war, the Communist regime initiated an industrialization program. By 1947, a sizable portion of the economy was nationalized, and collectivization of agriculture followed during the 1950s. Until 1990, the country had a centrally planned economy, along Soviet lines, and its sequence of five-year economic plans, beginning in 1949, emphasized industrial production. In 1956, according to official Bulgarian statistics, industry contributed 36.5% of national income, and agriculture and forestry, 32.9%; in 1992, the respective contributions were 42.5% and 12%.
Although Bulgaria has brown coal and lignite, iron ore, copper lead, zinc, and manganese, it lacks other important natural resources and must export in order to pay for needed commodities. Because it relied on the USSR and other CMEA countries for essential imports and as the major market for its exports, and lacks foreign exchange, the Bulgarian economy was greatly influenced by the breakup of the Soviet bloc and the switch to hard-currency foreign trade. In the 1970s, the economic growth rate was quite high (6.8% annually), but the pace of growth slowed in the 1980s, mainly because of energy shortages. The average annual growth rate was only 2% in that decade.
With the disintegration of Soviet-bloc trade and payments arrangements, GDP declined by about 10% in 1990, 13% in 1991, 8% in 1992, and an estimated 4% in 1993. Meanwhile, Bulgaria began an economic reform program supported by the World Bank and IMF. But the economy remained largely state controlled, although there was progress in privitizing many smaller enterprises. The private sector accounted for only about 20% of GDP in 1993 and 45% in 1996. Efforts at economic reform stalled in 1994 as the Socialist government again failed to privitize state owned industries and institute structural reforms aimed at creating a market economy. The economy was further plagued by wide scale corruption among businessmen from the former Communist Party who stripped state enterprises of their assets and transferred the funds out of the country. By 1997, the Bulgarian economy was at the brink of collapse with inflation at 300%, the banking system in chaos, and the government on the verge of bankruptcy. Bulgaria became the poorest country in Europe with average monthly wages of $30 a month.
Angry with the governing Socialists, tens of thousands of Bulgarians demonstrated in the capital calling for early elections. In April of 1997 a new government took power and instituted structural reforms designed to bring order to the economy. The government of Prime Minister Ivan Kostov, quickly moved to implement market reforms. While operating under the direction of an IMF currency board, Bulgaria pegged the lev to the deutschmark (and now also to the euro), and reduced inflation to 1%. In 1997, the private sector accounted for 65% of GDP. This milestone marked the first time in the post-communist era that the private sector outperformed the public sector in production. In addition to structural reforms, the Kostov government also moved to combat corruption by becoming the first non-OECD country to ratify the anti-bribery convention.
As of 2003, industry increasingly was being privatized, and agriculture was almost completely privatized. Bulgaria started accession talks with the EU in 2000, but was not one of 10 new countries formally invited to join the body in December 2002. If Bulgaria completes its accession requirements, it is expected to join the EU in 2007, along with Romania. Bulgaria's laws are being harmonized with EU laws, and customs barriers between them are breaking down. By the end of 1999, more than 50% of Bulgaria's exports went to EU nations.
Following the 2001 elections that brought Simeon Saxe-Coburg to office as prime minister, the stock market soared 100%, but the government in 2002 was unable to live up to its pledge to improve living standards. Foreign direct investment rose modestly in 2002, and although economic growth slowed that year from its 5.8% high in 2000, it was higher than that of many other European countries. Tourism was strong in 2002, and although the weather was poor that year, Bulgaria's agricultural sector performed well. Taxes were lowered, and there is a zero percent capital gains tax on stock market investments. Small businesses are increasingly receiving credit. Corruption, however, remains a stumbling block to Bulgaria's economic success.