The challenge of redirecting reforms and resources towards the human factor

The neoliberal model of economic development promoted by the IFIs and imposed by the Bulgarian Government has brought the country to a turning point: further economic growth and full integration in the EU cannot be sustained without income convergence with the EU and greater labour market participation, qualifications and skills. This calls for efforts to reduce poverty and inequality, promote social inclusion and integration in the labour market, and achieve a high and sustainable level of education.

Recent economic analyses undertaken by international agencies, including the World Bank, have highlighted the need for a major shift in the allocation of resources in Bulgaria. The pressing need for new reforms to increase productivity, per capita income, competitiveness and efficiency, according to the latest neoliberal discourse, is in fact the need to invest in people and in fundamental human rights, such as the rights to food, housing, health, education, and equality and non-discrimination. It means redirecting reforms and resources towards people, which is also the only way to curb the severe demographic crisis and to meet the goals and commitments of the EU Lisbon Agenda.

Contrary to the expectations and rhetoric of the major trade players and the international financial institutions (IFIs), international trade and structural adjustment programmes (SAPs), as they were largely promoted, tend to increase inequality and cause so-called “immiserating growth” (Joekes, 1999). But it is precisely this model of growth, followed by the Bulgarian governments during the transition, that now poses an obstacle to full integration in the EU, which requires more equal and competitive partners.

The very promoters of this model, such as the World Bank, recognize its failure by admitting that reforms did not bring about the desired results. Consequently, they now recommend new ones, including budgetary reforms and resources reallocation. Above and beyond any differences in language and interpretation, one thing seems clear: that reforms and restructuring can no longer ignore the human factor, which is central for achieving sustainable economic development, and this fact has its budgetary implications.

According to the World Bank’s assessment, over the last seven years Bulgaria “has made impressive progress towards long-term stability and sustained growth” (World Bank, 2006a). Average growth reached the levels of New Member States (NMS-8) at about 5% per year between 2000 and 2004. Despite this overall positive performance, however, it is recognized that Bulgaria is still one of the poorest countries in Central and Eastern Europe. In 2003, the country’s per capita income in PPS (purchasing power standards) was 30% and 57%, respectively, of the average level in the European Union-25 (EU-25) and NMS-8 countries. Given Bulgaria’s large income gap with EU-25 and its rapidly aging population, serious measures in the labour market and social sector are needed if the country’s accession to the EU is to result in sustained and meaningful improvements in its standards of living.

Aging population leads to shrinking labour force

One of the most daunting obstacles facing Bulgaria is its negative natural rate of population growth (about -0.7% per year) which, together with net out-migration (about -0.1% per year), has resulted in negative population growth averaging -0.8% annually during the 1990s and early 2000s. As a result, the working-age population is declining rapidly, while the aging population is growing equally rapidly. It is estimated that in 20 years the working-age population will have shrunk by 19% and the population over 64 years of age will have increased by 17%. In the meantime, Bulgaria currently has the second-lowest labour market participation rate (49.4% versus 58% in EU-25 in 2003) and lowest employment rate (43.6% versus 53% in EU-25 in 2003) in Central and Eastern Europe.[1] As a result, meeting the Lisbon Agenda criteria of increasing the employment rate to 70% by 2010, which implies increasing labour market participation and reducing unemployment levels, seems highly questionable, if not impossible. Moreover, productivity growth cannot compensate for low labour market participation. Even if productivity were to increase, without the needed increase in labour market participation, Bulgaria’s per capita income would remain below one-third of the EU-25 level.

Therefore, trapped in the results of reforms that led to demographic crisis and abstract growth, without taking into consideration the human factor, Bulgaria faces the challenge to find a way out, namely by adjusting budgetary flows to the Lisbon Agenda.

Investing in productivity

In this respect, overemphasizing the importance of the prospective EU funds for the 2007-2013 period – the estimated net amount is only EUR 5.5 billion, bearing in mind the agreed contributions of Bulgaria to the EU budget – would divert attention from the real problem. Bulgaria urgently needs to mobilize its domestic resources through more effective spending in the public sector and mainly through productivity growth. The effects achieved by increasing productivity will be three times greater than by merely raising public expenditure.

Shifting resources from lower to higher productivity sectors would require radically different investment policies to the ones the Government has favoured so far. In fact, although significant in quantitative terms, FDI inflows have tended to go to sectors that are oriented towards the domestic market and are generally characterized by lower productivity, such as financial services, real estate and tourism. The expansion of the services sector has been more pronounced than in the NMS-8. Externally oriented activities, where productivity is higher due to increased competition, tend to be in unskilled, labour-intensive, higher energy-consuming sectors, such as textiles and wood processing, which represented about 41% of Bulgaria’s total exports in 2003. Capital and skilled labour-intensive exports, in contrast, reached a share of about 29% of exports. Therefore, in addition to very low labour market participation, a broad share of employment remains in largely unproductive segments of the economy or in activities where productivity is stagnant. It is obvious that maintaining a large number of workers in low-salary, low-skilled sectors at high risk of exploitation, such as the garment industry, does not increase productivity.

Investing in human capital

Investing in human capital means not only shifting resources between sectors but also investing in raising the standard of living, and in the health and education of the country’s citizens. In addition to the extremely low average salary in Bulgaria and a minimum salary of around USD 100, the subsistence minimum for a family with two children had risen to USD 954 by early 2006. According to trade unions, between March 2005 and March 2006 alone, life in Bulgaria became 10.9% more expensive. These trends left three million Bulgarians under the poverty line (set at USD 117 per household member) and 55% of citizens at risk of poverty. Increasing productivity and upgrading the skills of the labour force, as well overcoming the demographic crisis, cannot possibly be achieved through further marginalization of the citizens by their own government. Raising the living standards of members of vulnerable groups and their integration in the labour market should be priorities for mobilizing public resources.

Investing in upgrading labour skills and education is another major direction for reallocation of state budget funds and further public expenditure restructuring. The main tasks are improving the quantity and quality of human capital and access to education by vulnerable groups, as well as strengthening the links between the skills acquired in the education system and those needed in the job market. This can be achieved through more resources for education and vocational training and more effective spending of public resources. Optimizing expenditure on education involves quality-enhancing inputs, such as the modernization of curricula, textbooks and teaching materials. Investments in teachers’ wages and qualifications should also be considered a quality-enhancing input, as they play a key role in the educational process – a role that is not yet sufficiently recognized by the Government. With average wages close to the overall national average, Bulgaria currently falls among the countries with the lowest-paid teachers.

This is a major point of disagreement with the advice of the IFIs , which discourage increased public spending on education as a share of GDP and instead recommend “better outputs with the same cost” and decreasing the role of the State by expanding the role of private education providers. These recommendations from the IFIs, if followed by the Government, will lead to an even deeper crisis in the sector, similar to what has happened in the health sector and the failure of a series of reform programmes undertaken on their advice. Therefore, the solution to be adopted by the Government should not exclude expansion and reallocation of resources. As Table 1 below shows, state expenditure on education was 4.3% of GDP in 2004, which is significantly lower than in other European countries, and specifically the NMS-8, for instance: Estonia 5.7%, Hungary 5.5%, Latvia 5.8%, Lithuania 5.9%, Poland 5.6%, Slovenia 5.9%.[2] Instead of the IFIs’ advice, the Government should follow the example of the NMSs, which obviously took the appropriate measures in order to meet the Lisbon Agenda requirements.

Reallocation of resources towards education and vocational training is fully possible in the framework of the current state budget. For example, the share for Defence and Security of 5% of GDP in 2005 is a heavy burden for the budget and the citizens. The share for Defence in particular was 2.3% of GDP in 2004, an amount assessed as very high by the World Bank economic analyses as well. Comparison with the defence share in the NMSs – which are also NATO member States – is very indicative: Estonia 2%, Hungary 1.4%, Latvia 1.7%, Lithuania 1.6%, Poland 1.8% and Slovenia 1.4%.[3] Clearly, the Government has to redirect resources from state security to human security.

Table 1: Consolidated State Budget by Function (in BGN million)

Source: Government of Bulgaria (May 2005), Budget Projections for the period 2007-2008; and Budget for 2006.

Fighting corruption

Meeting the requirements of the Lisbon Agenda will also require stamping out corruption and improving the efficiency of the administration and the judiciary. These are conditions set by the European Commission for Bulgaria’s full EU membership as of 1 January 2007. Despite the Government’s efforts to convince the public of its efficiency in this area, a report from the Sofia Centre for the Study of Democracy, based on a country-wide survey earlier in 2006, argues that perceptions of corruption are increasing and the general view is that the boundaries between organized crime and public authorities, including the highest levels of government, remain porous.

Promoting women’s participation

Women’s equal participation in the labour market and in education and training is a key element for meeting the goals of the Lisbon Agenda. There is a persistent trend of women representing an oversized share of the unemployed in Bulgaria. The ratio between unemployed women and unemployed men in the third quarter of 2004 was 54.7:45.3. A study of the first gender budgeting initiative in Bulgaria in 2005 showed that the programmes and measures included under the “Gender Equality” guideline represent a fraction of all programmes and measures to promote employment (0.61%), and the corresponding funding is 0.63% of the total amount. All of the funding comes from the state budget, and most of it is allocated to projects and jobs related to women’s traditional gender roles, such as “Family Centres for Children” and “Stimulating Women’s Independent Economic Activity for Child Care Services”.

Women are very active in training and retraining programmes, but the funds allocated for them are highly insufficient. The highest rate of female participation was seen in a national programme called “Computer Training for Young People”: over 80% of the funds allocated for this programme for 2005 were used for the training of young women. There is also a relatively high percentage of women participating in the National Programme for Literacy, Qualifications and Employment (over 60% for the third quarter of 2004). Nevertheless, it is estimated that overall, the percentage of funds used by women is less than 20% of all programme budgets. This amount is far too low, given the fact that women make up a larger share of the unemployed, and that 60% of all long-term unemployed persons are women (Gender Project 2006 report). One promising sign for the future is the inclusion of the gender budgeting approach in the Draft Law on Equal Opportunities for Women and Men.

References

Buhne, N. (2006).UN Resident Coordinator in Bulgaria. “Oxford Analytics on the Risks in the Bulgarian Economy”.
Centre for Economic Development (CED). .
Gender Project (2006). “Active Labour Market Policies of the Ministry of Labour and Social Policy: Gender Analyses of the Budgets of the Programs and Measures for Unemployment Reduction”. Bulgaria Foundation and Bulgarian Gender Budgeting Group (BGBG).
Institute for Social and Trade Union Studies. Confederation of the Independent Trade Unions in Bulgaria.
Joekes, S. (1999). “Gender-analytical perspective on trade and sustainable development” in UNCTAD, Trade, Sustainable Development and Gender, p. 33-59.
World Bank (2005) “Bulgaria. The Road to Successful EU Integration. The Policy Agenda”. Country Economic Memorandum (CEM), Report No. 34233-BG, November 2005. Available from: .
World Bank (2006a). “Bulgaria Country Brief 2006”. Available from: .
World Bank (2006b). “Bulgaria. Public Finance Policy Review. Leveraging EU Funds for Productivity and Growth”. Report No. 33992-BG, February 2006. Available from: .