Bulgaria offers a prime illustration of the impact of political polarization and democracy on economic reform. For the first seven years of the 1990s, a parade of old-left and right governments made policy in a polarized and relatively democratic environment, and progress in economic and institutional reform was dismal, even for the postcommunist world. Policy stability was low and successive governments engaged in inconsistent reforms that provided great benefits to their supporters at the expense of the public bourse, and social spending suffered. Not surprisingly, estimates suggest that the economy shrank by about one-third between 1990 and 1996 (EBRD 1997: 115).

In late 1996 the governing old-left Bulgarian Socialist Party collapsed and parliamentary elections brought a new majority led by the right-wing Union of Democratic Forces (UDF) to power. Under IMF scrutiny, the UDF government introduced a restrictive fiscal policy based on a currency board, revamped the tax system, instituted bankruptcy procedures, privatized the banking sector, and liberalized heating and energy prices.