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Labour Market Is Bulgaria's Achilles' Heel

Published on , , Sofia

Of all the 7 recommendations, which the European Commission made for Bulgaria last year as part of the European semester for closer coordination of the economic and budgetary policies, the government in Sofia has managed to implement only one. That is to reduce the budget deficit, which makes the only good news in the new package of results of the Commission under the semester. Bulgaria not only has managed to reduce the budget deficit below the required threshold of 3% of GDP but it managed to overimplement this task. This is why the Commission recommends the excessive deficit procedure (EDP) to be suspended. And with this the good news are over and not only the bad news begin but bad news in the long term.

Bulgaria’s most pressing challenges are in the labour market, education, innovation, the business environment, energy and resource efficiency

What draws attention when reading Bulgaria's report is that the Commission had obviously sensed the traditional Bulgarian tendency to be big in words and small in action. This is why it is written that the country reaffirms its existing strategies and plans, focused on fiscal consolidation, increasing investments and absorption of EU funds in all sectors, improving business environment and public administration, but still implementation of reforms is needed. "However, reforms in some areas, in particular the labour market, education and the energy sector, lack the ambition needed to address the challenges in a comprehensive way", as the wording of the document says.

Besides, it is pointed out that, although the excessive deficit correction in 2011 is expected to restore confidence in government policies, fiscal consolidation is facing big risks. First is that budget revenues are likely to be structurally lower than in the pre-crisis boom years. Second, inefficiencies in public spending and risks to the long-term
sustainability of public finances, especially in the area of pensions and healthcare, pose challenges to fiscal stability and predictability. Healthcare is even mentioned as the field where reforms are practically stalled, which could be explained with the frequent change of ministers (which is not mentioned in the report). Overcoming the inadequacy of the pension system also remains a major challenge for the country in the mid-term.

As recently Pritha Mitra and Cyrille Pouvelle noted in a working paper of the IMF, unemployment and especially youth unemployment pose a very serious risk. In the Commission report it is pointed out that the crisis had a significant effect on low-skilled workers, which, please note, represent 70% of all unemployed. Bulgaria has the largest share of young people who are neither in the education system nor are employed - 21.8% in 2010, as the EU average is 12.8 per cent. Almost 5% of the active population is long-term unemployed. Since 2009 the increase of long-term unemployment is significantly faster in Bulgaria than the rest of the EU. The Commission warns that unless reforms are launched, a large part of today's jobless will turn into structural unemployment in the future, which is a serious threat, given the continuous brain drain from the country and the ageing population.

In general, employment dropped by 8% in the period 2008-2010, which is a much greater decline than EU average. The number of employed has dropped by another 4% last year and the expectations for growth are delayed beyond 2012. It is also noted that the implementation of government labour market programmes actually did not prevent the employment decline. Even worse is that a large part of the increase of unemployment is structural in essence and reflects the increase of skills and geographical mismatches because most of the job losses are low-skilled. In general, the measures the government has undertaken to freeze public sector wages in the period 2010-2012 are assessed as relevant and effective response to the issue, because this led to bringing wage and labour costs closer to productivity. However, the bargaining process needs to include mechanisms which will ensure a stronger link between wages and labour productivity.

The future unemployed

And if the situation on the labour market looks bad now, the educational system is doing nothing to stop the pouring out of useless workers into that market. From the Commission assessments it becomes clear that the too high rate of low achievers suggests that there are considerable structural obstacles in the way of ensuring quality
education. The education provided is poor, there are no incentives for better performing teachers, curricula needs modernisation, the national assessment system is poor and lacks accountability. In addition to this gloomy picture is the situation with the tertiary education which, according to the document, provides limited research and innovation opportunities, even though it aspires to provide higher quality courses that are
more relevant to the labour market.

Besides, Bulgaria is missing the potential for economic growth, stemming from innovation. There is no multi-annual funding framework for Research and Innovation, the two national funding instruments (the Innovation and the Science Fund) work poorly, while only a small part of the funding is competitive and allocated transparently on merit. Moreover, access to finance for innovative start-ups and SMEs is severely limited, as is the level of collaboration between research centres, universities and innovative businesses, the report says.

Working pensioners

There is also criticism for the pension reform, which is mentioned in the third recommendation of the Commission, in spite of the registered progress. What the Commission notes as progress is the gradual increase of statutory retirement age from 2012, aiming to reach 65 years for men and 63 for women in 2017 and 2020 respectively. "The planned reforms are a step in the right direction, but the changes are insufficiently ambitious, as they fall short in reducing early retirement", the report says. The requirement for length of service for the police and army personnel was increased by 2 years but their retirement age remains unaffected. There are also no plans to equalise the retirement age for men and women. A major challenge remains the inclusion of people who do not pay social contributions into the social security scheme, as well as tightening control and criteria for allocating invalidity pensions, which in the past have led to a flood of abuses.

Bulgaria in general is doing poorly in terms of pension adequacy indicators. The
employment rate for older workers, the effective retirement age and the average duration of working life are also below the EU averages. This is why, the Commission recommends, it is important better conditions to be created to ensure adequate better benefits through fighting contribution evasion, limiting the access to early retirement, including invalidity, equalising the retirement age for men and women and stepping up efforts in work places and labour markets to increase the employment rate for older workers.

The public administration - inefficient and sluggish

"The tax system in Bulgaria is characterised by significant tax evasion and relatively low administrative efficiency", is another portion of criticism in the Commission report. Grey economy in the country is estimated to be one third of GDP, which is the EU highest level and is more than double the Union's average. Undeclared work in Bulgaria is also much above the average European standards - it is estimated to be between 20 and 30% of employment. Administrative costs per collected revenue are high as are the time costs of paying taxes for businesses. According to the Commission, if Bulgaria would improve tax collection efficiency and reduce tax evasion this would help the country increase its spending on growth boosting measures.

Business environment and competition are also not spared from criticism. A major criticism is that competition is hampered by the lack of legal certainty, especially in the services field and by the limited functioning of the Point of Single Contact for service providers. Public transport is in poor condition, as well as the broadband Internet infrastructure. The energy efficiency is also poor. Competitiveness is additionally reduced by strong energy consumption - the highest in the EU.

Strong energy dependence

It is not news that again Bulgaria's high dependency on a single energy route and a single energy supplier is raised as an issue, as well as an inadequately functioning
domestic energy market. All this exposes the country to risks of significant supply shocks. It is recommended Bulgaria to cooperate more actively for the creation of transparent and integrated regional market for gas and electricity. Without any delay the country should complete the current investment projects for construction of gas interconnectors (especially with Romania, Serbia and Greece) and to make physical and contractual reverse-flow possible on the interconnector with Turkey. Bulgaria has to play a pro-active role in its opening toward the South Gas Corridor because it provides opportunities for diversification of suppliers and routes, which for its part would increase significantly competitiveness.

In conclusion to this point it is written that, although the desired reforms are officially adopted, implementation remains unsatisfactory because of public procurement, private interests and poor management of state-owned energy companies.

There is a table in the report, in which all Bulgaria's achievements are shown on last year's recommendations as under the European semester so under the Euro Plus Pact and the Europe 2020 strategy. To a large extent the recommendations under the Euro Plus Pact overlap with the above mentioned. Regarding the Europe 2020 strategy, aimed at creating growth and jobs by 2020, the Commission notes the following lack of progress:

- In the National Reforms Programme the government has set an objective 76% employment to be achieved. In 2010 this rate was 65.4% and there is no progress toward achieving the goal;

- Progress lacks also on the commitment to spend 1.5% of GDP for research and development. In 2010 the share of this type of investment was 0.6%;

- However, there is progress in terms of the renewable energy sources objectives. By 2020 the country has committed to achieve a goal 16% of its energy to come from renewables. In 2009 their share was 11.6% and in 2010 - 12.6%;

- Regarding energy efficiency, the Commission points out that it cannot make an assessment of the situation because quite recently the format for reporting progress was agreed;

- Early school leavers should not exceed 11% in 2020 is another objective under the Europe 2020 strategy, on which the Commission registers some progress - the country has reduced the number of early school leavers to 13.9% in the period 2007-2010;

- Certain progress there is also on running to the goal for 36% tertiary education by 2020. In 2010 people with tertiary education had a 27.7% share. However, this still is lower the EU average, the table notes;

- On the criterion for poverty reduction progress is also noted - of 1 million and 632 thousand in 2008 their number in 2010 was 1 million and 565 thousand. The aim is by 2020 no more than 260 000 people to be at risk of poverty.

The general conclusion from the Commission recommendations is fully in line with the new European mantra - fiscal consolidation in itself is not sufficient, growth is needed. The lessons which Bulgaria has to draw from the booming years is that it should bet not on cheap but on sustainable growth, which can be ensured only through long-term investments in education, training, skills, innovation and research. Improving infrastructure and fighting corruption and organised crime will also contribute to the sustainable development of the economy and thus to increasing prosperity. Whether this will happen is a choice the Bulgarian governing parties should make, no matter who they are. And on citizens depends to support those of them who can ensure future for them, not present or past.

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