Bulgaria Has Problems—But Also Growth Prospects

March 3, 2015 5:15 PM

The latest European Commission's economic forecast for Bulgaria , published on February 26, projects economic growth in 2016 to fall to half its 2011 rate—from 2 percent to 1 percent. Public debt is expected to double in the same period—from 15.7 percent of GDP to 30.3 percent. In addition, Bulgaria recorded the strongest average annual deflation in the European Union in 2014—with an annual deflation rate of 1.6 percent. The Commission states that "the country's growth potential is estimated to be low," and that there are "increasing concerns over fiscal sustainability."

To add salt to the wound, the Commission's forecast pays considerable attention to the banking sector turmoil last summer and concludes that "a strong, credible and transparent banking supervisor is required." It also cites grave concerns over the reliability of reported financial sector data. In other words, the Bulgarian National Bank's supervisory work is questionable, at best.

Finally, the European Commission enumerates the unreformed sectors, which drag down public finances and economic growth: pensions, health care, university education, energy, railways, and the judiciary. For each of these unreformed sectors, a laundry list of measures is suggested. For example, for pensions the European Commission suggests a revival of the 2011 measures that increased the mandatory retirement age by four months each year until workers reach 65 years of age for both men and women. It also suggested limiting early retirement schemes and imposing controls on retirement resulting from illness or incapacity. For the latter, the report notes that the number of early retirements because of illness has doubled since 2010. These are all long-term structural changes that will increase Bulgaria's growth prospects.

What the report does not say is what medium-term measures can be taken to improve the growth rate. This is important since the population can hardly wait a few years for better times to come: Young Bulgarians are emigrating en masse to richer European countries.

Here are four ideas that may boost medium-term growth:

1. Invest heavily in road infrastructure. This was already done in the previous government of Prime Minister Boyko Borisov, where I served as deputy prime minister. Now the focus should be on northern Bulgaria, where the economy has lagged. Building the main highway linking the region will have a high multiplier effect on related economic activities, as well on agriculture and commerce. The International Monetary Fund estimates that in middle-income countries like Bulgaria, the multiplier effect from basic infrastructure is on the order of 4 to 6. In other words, every euro invested in, say, highways, returns 4 to 6 euros in additional economic activity.

2. Enable the creation of logistics and business hubs near the borders with Romania, Greece, and Turkey, where recent infrastructure projects have created better and faster transport links, via sea, road, and rail. Once the basic infrastructure is in place, the government can enable the creation of logistics and business parks that serve to "poach" business from neighboring countries and create new business opportunities. Bulgaria enjoys the lowest corporate and dividend tax rates of any country in the region, so with adequate promotion it could entice European businesses to do their logistics work in the country. For example, the recently opened bridge linking the Bulgarian city of Vidin with Romania provides an opportunity to attract transport towards Central Europe that previously was going through Serbia and Hungary. Now, commerce can originate in the ports of Greece, pass through Bulgaria, where goods are repackaged or assembled, and then travel through Romania and Hungary into Austria, Germany, and other points north.

3. Establish Bulgaria as a year-round tourist destination. Last year a reported eight and a half million tourists visited Bulgaria. About two million visited during the winter months to ski; the rest enjoyed the summer months on the Black Sea. Yet, Bulgaria has the richest natural springs and spa wealth of any European country but Italy. Plus it has a variety of archaeological sites dating from the Thracians, the ancient Greeks, the Romans, the Goths, the early Bulgarian Empire, and the Ottomans. Organizing the sector around these may bring significant benefits and add to the 13 percent share of GDP that tourism already contributes.

4. Boost the car-parts and hi-tech industrial hub forming around Plovdiv, the second largest city, where around 30,000 highly-skilled workers already operate in about 400 enterprises. This involves reviving vocational education in the high schools and universities in the city, to provide a further flow of qualified employees as supply is rapidly getting scarce.

These are, of course, just some possibilities. There are clearly other good ideas to consider. The point is that it would be helpful if future Commission reports also suggest solutions, not just detail the problems.

Read a follow-up post on Bulgaria’s Growth Calculus.

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Simeon Djankov Senior Research Staff

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