The 1992-96 Bulgarian trade data puzzle: a case of sanctions breaking?

• Author: Dadak, Casimir

Economic sanctions have been used by various countries to achieve political ends with nonmilitary means. Galtung (1967: 379) characterized sanctions as actions designed to penalize one or more countires "by depriving them of some value" or by forcing them "to comply with certain norms." Pape (1997: 97) offered a set of standards to judge the effectiveness of sanctions. In his view, sanctions should be deemed a success if "(1) the target state conceded to a significant part of the coercer's demands; (2) economic sanctions were threatened or actually applied before the target changed its behavior; and (3) no more-credible explanation exists for the target's change of behavior."

The usefulness of this policy tool has been debated for years. Galtung (1967) and Doxey (1980, 1987) find sanctions to be ineffective. Hufbauer, Schott, and Elliott [HSE] find limited success but acknowledge that "the contribution of sanctions to the policy outcome is often murky" (HSE 1990: 41). Pape (1997, 1998) argues that the HSE study is skewed because many of the cases denoted a success were actually resolved with military force rather than with nonviolent means. In response to Pape's arguments, Elliott (1998) stated that the authors of the HSE study "were interested in finding out ... under what circumstances economic leverage might be useful--not necessarily dominant--in achieving foreign policy goals" (p. 51), and conceded that "economic sanctions used independently of other policy tools typically achieve only relatively modest and limited goals" (p. 58). Similarly, Cortright and Lopez (2000) conclude that sanctions alone cannot radically alter the behavior of the receiving nation. Nevertheless, they support the use of sanctions and deem sanctions a success "if they had a positive, enduring impact on bargaining dynamics or if they helped isolate or weaken the power of an abusive regime" (p. 204). The criteria proposed by Elliott and Cortright and Lopez are very broad and differ considerably from those found in Galtung and Pape.

Overall, research shows that sanctions are effective to the degree that they (1) inflict economic hardships on the target; (2) make the receiving country more vulnerable in case the conflict escalates into a war; (3) act as a means to bring a party to the negotiating table; and (4) serve as a "bargaining chip" if negotiations take place. Research does not support the notion that economic sanctions alone can, more often than not, succeed in altering substantially the receiving nation's behavior, or force it to adopt policies it persistently opposes; sanctions are seldom an effective alternative to a military conflict.

Various hypotheses have been put forth to explain the poor success rate of economic sanctions. Galtung (1967) points to three major factors. First, the sending nation may act to express its outrage, rather than to force the target to comply with a certain norm of political behavior. (1) Second, in the face of outside pressure, people in the receiving nation tend to "rally around the flag." Third, sanctions could be evaded. Green (1983) argues that this is indeed the most important factor that allows nations to survive economic sanctions. This point is also brought forward in numerous other studies, for instance in Renwick (1981), Anglin (1987), Leyton-Brown (1987), and Conlon (2000).

Evasion is possible because third parties, both governments and private businesses, put political and financial interests above international norms. In some cases, evasion is even tolerated by imposing nations. Although Great Britain initiated economic sanctions against Rhodesia (present-day Zimbabwe), the "Labour government's carefully concealed double-dealing was the most deceitful of all countries involved in sanctions violations" (Anglin 1987: 39). Another major problem is the impact of sanctions on neighboring countries. Adverse consequences on them "may be no less severe than the impact on the target country" (Renwick 1981: 82). So far, no effective mechanism has been put in place to compensate neighboring countries, especially poor ones, for losses resulting from international sanctions.

U.N. Sanctions on Yugoslavia

From May of 1992 through November of 1995, the United Nations maintained economic sanctions on Yugoslavia. During and after the course of the war in Yugoslavia examples of serious violations of sanctions were officially noted and were reported in academic publications, for instance Woodward (1995), Owen (1995), and Cortright and Lopez (2000). Nevertheless, Cortright and Lopez consider them, together with the embargo on Iraq, to be "the most effectively implemented in history," and the authors believe that they "had devastating impacts on the target's economy and society" (p. 63). The Copenhagen Round Table goes even further. In its report, the group concludes that the sanctions were "remarkably effective" and that they "clearly modified the behavior of the Serbian party to the conflict ... and may have been the single most important reason for" the Serbs accepting the Dayton agreement (United Nations Security Council 1996a: pars. 1, 67).

However, this article shows that throughout the duration of sanctions, especially in 1994 and 1995, very large quantities of goods destined for Yugoslavia went through Bulgaria. This discovery, based on data provided by the National Statistical Institute (NSI) and the Bulgarian National Bank (BNB), strongly indicates that the sanctions were actually very porous.

Bulgarian Trade Data Puzzle

Data on foreign trade in Bulgaria come from two sources, commercial banks and customs offices. Reports of Bulgarian commercial banks, authenticated by the BNB, show a huge rise in Bulgarian exports and imports of goods during the first half of the 1990s, especially in 1994 and 1995. However, the data supplied by the customs offices do not show this increase. The data discrepancy between the commercial banks and the customs offices will henceforth be referred to as the Bulgarian "trade data puzzle."

Prior to 1993, the BNB calculated the balance of payments (bop) tables using data derived from commercial bank reports. This procedure was inherited from the communist times. In that period, all data concerning foreign trade were located in a single place, the Bulgarian Foreign Trade Bank, now known as Bulbank, because this institution was the only bank in charge of financing foreign trade. The state had a monopoly on international trade and central planners made all decisions regarding foreign economic relations. Customs duties were levied on individuals who could bring things in and out for their personal use only. Hence, for all practical purposes, individuals played no role in foreign trade. Thus, prior to 1990, there was little need to collect customs data. This is why in the past the BNB relied exclusively on bank data while preparing the bop tables.

The situation changed with the collapse of the communist regime and, consequently, beginning with 1993 and continuing in all subsequent years, the bop tables were calculated using data found in reports compiled by customs offices. (2) Fortunately, however, the BNB continued to report the commercial bank data in a footnote to the bop tables until 1998. Seldom has such important and revealing information been contained in a footnote. Table 1 presents the two different types of data (commercial bank reports and reports from customs offices) for the years 1991 through 1996.

Table 1 shows that the customs and commercial bank data on imports and exports differ dramatically. The difference first becomes apparent in 1992 (on the export side), and then becomes a yawning chasm in 1994 and 1995. The difference for 1996 is significant only for the first quarter (Figure 1).

[FIGURE 1 OMITTED]

Foreign Trade and the Macroeconomic Situation

For a small, developing, open economy like that of Bulgaria, international trade is vital. Except for transportation and tourism (travel), Bulgaria has no services marketable abroad. Therefore, changes in the magnitude of trade in goods should be readily reflected by macroeconomic variables. Table 2 presents the overall economic situation in the country from 1991 through 1996.

The data show that in 1994, that is, in the year when, according to bank records, Bulgaria almost doubled its international trade in goods, the Bulgarian economy was barely getting out of a very severe and long-lasting recession. The GDP, investment, retail sales, industrial and agricultural production rose moderately, but these gains were accompanied by a decline in consumption and government spending. It is also worth noting that energy consumption declined as well. However, the 95.3 percent and 91.3 percent growth in 1994 bank-reported exports and imports, respectively, should imply a robust growth in all of the macroeconomic variables.

The 1993 dollar value of Bulgaria's GDP was estimated to be between $9.6 billion (World Bank 1996b) and $10.8 billion (NSI, Statistical Yearbook 1994). An increase in exports of about $4.5 billion in 1994 should in theory increase the Bulgarian GDP, calculated in dollars, by some 42-47 percent. But the 1995 Statistical Yearbook shows a decline in Bulgaria's GDP, calculated at the current exchange rate, to $10.1 billion. (3)

In sum, the enormous increase in the volume of merchandise exports was not reflected in the macroeconomic picture of Bulgaria. Calculated in the local currency, the real rate of growth of the GDP in 1994 was only 1.8 percent (Table 2).

Macroeconomic theory tells us that a huge increase in imports, if looked at in isolation, would foster a change in consumption, or investment, or government spending, or a...