Institute
of Economics of the Bulgarian Academy of Sciences
Friedrich
Ebert Foundation
Strategy for Accelerated Economic Development of Bulgaria by 2020
Summary of Conclusions
and Recommendations
Sofia, January 2004
Authors
Prof.
Dr. Ivan Angelov – Team leader
Dr.
Tatiana Hubenova-Delisivkova
Dr.
Ivanka Kraininska
Dr.
Malinka Koparanova
Dr.
Matiu Matev
Dr.
Goran Bankov
Stefan
Uzunov
Translated
from Bulgarian into English by Mariana Hill.
English
text edited by Prof. Ivan Angelov
All rights reserved. No part of
this book may be reproduced in any form by any electronic or mechanical means
without permission in writing by the authors.
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Table of Contents
Part one. Accelerated
Development – Substance, Necessity, Sources and Objectives
1.1. Conclusions of global and regional
importance
1.1.1. Global
economic divergence
1.1.2. Increase of
social polarisation
1.1.3. Economic
miracles” can’t be reproduced
1.1.4. Development as
a transformation of society
1.1.5. Integration
and economic convergence
1.1.6. Controversial
trends in CEECs
1.1.7. Controversial
trends in regional convergence
1.1.8. Drivers of
economic growth
1.2. Conclusions and recommendations of
national (Bulgarian) importance
1.2.1. Compounding of
fundamental processes
1.2.2. Wrong reform
philosophy
1.2.3. Functioning
and competitive market economy
1.2.4. Two
development routes
1.2.5. Functions,
components and resources of the strategy
1.2.6. Fundamental
priorities
1.2.7. The human
being – the major benefactor of the strategy
1.2.8. A system of
development indicators
1.2.9. Objectives and
means of economic development
1.2.10. Economic
growth scenarios
1.2.11. Economic
target indicators
1.2.12. Social target
indicators
1.2.13. Environmental
target indicators
1.2.14. The quality
of statistical information
1.2.15. Labour
participation and employment
1.2.16. Labour
productivity
1.2.17. Total factor
productivity
1.2.18. Menu of
growth factors
Part Two.
Recommendations for Economic Policy Priorities for Achievement of Strategic
Objectives
2.2.
Strategic priorities of economic policy
2.3.
Transmission mechanisms from economic policies to economic growth
2.3.1.
Macroeconomic stability
2.3.2.
Regulation and deregulation
2.3.3.
Competition and types of property
2.3.4. Foreign economic policy
2.3.5. Policy for savings and investment in
physical capital
2.3.6. Human capital development policy
2.3.7. Employment enhancement policy
2.3.8.
Income policy
2.3.9.
Mitigating the consequences of the demographic crisis
2.3.10.
Alleviating social polarisation and alienation
2.3.11.
Economic aspects of innovation policy
2.3.12.
Economic dimensions of break-through science and technology developments
2.3.13.
Consumer patterns and consumption policy
2.3.14.
Policy on Innovation of production patterns
2.3.15.
Financial system development and resource mobilisation
2.3.16.
Institutional policy
2.3.17.
Economic aspects of environmental policy
Annex. Table of contents of the full text published in
Bulgarian
In this extended summary – about
10% of the full text of the study, we present the most important conclusions and
recommendations.
There are hundreds of conclusions and recommendations in the full
text of the study. It is impossible, however, to include all of them in the
summary. For obvious reasons no room is devoted to argumentation here. It is in
the main text.
No tables are given here on the international experience in economic convergence or
Bulgaria’s economic, social and environmental development until 2010 and 2020
and in some cases until 2050. For these 29 tables too one must refer to the
full text. For the readers’ ease, we refer here to the respective tables in the
main text.
The bibliography is also not included in the summary.
It comprises references to more than 400 publications in Bulgarian and other
languages. Refer to the full text for these too.
Part One. Accelerated Development – Substance,
Necessity, Sources and Objectives
The analysis provides a foundation for the following
most important conclusions and recommendations:
1.1.
Conclusions of Global and Regional Importance
1.1.1.
Global Economic Divergence
There is no
unquestionable trend of sustainable global economic convergence. It is not evident even between the three main development
centres – the US, Japan and the EU (see tables 2.2 and 2.3)[1].
The diverging level of developed and underdeveloped countries creates the
potential for the latter to develop more quickly and reduce the divergence with
the more advanced ones. This opportunity can only be realised under a
combination of appropriate economic and other conditions. Creating such
prerequisites is difficult and is rarely achieved. Some western authors’ claims
that the average speed of convergence is two percentage points per annum are
occasionally valid for some developed countries. Convergence is often slower or
absent, particularly between developed and less developed economies.
Empirical
proof does not confirm the hypothesis of global economic convergence implied in
the neo-classical models. There is no
clear-cut trend for more rapid development of the underdeveloped countries
compared to the more developed ones. The trend is a growing divergence in the
levels of productivity and GDP per capita (see table 2.1.) Even when the
relative differences decrease, the absolute ones grow larger. The only
important exception are some countries in East and Southeast Asia (see table
2.5).
1.1.2.
Increase of Social Polarisation
Accelerated
economic growth goes along with an even more rapid increase of social
polarisation. In 1960, per capita
GDP in the 20 richest countries according to purchasing parity standards was 18
times higher than in the 20 poorest countries. By 2000 this spread was 40
times.
Rapid economic
growth in itself is insufficient. It has to be for the benefit of as many
people as possible on a global,
regional, national and domestic regional scale. An increase of GDP can not be
successful and sustainable if it is only for the benefit of a small minority.
History has confirmed this on many occasions. This is relevant today too
because regardless of the fact that history is never repeated in full, its main
aspects often are.
1.1.3. “Economic Miracles” can’t be
reproduced
Neither economic theory nor economic practices have
discovered easy solutions and practical recipes for rapid economic convergence.
Global experience proves that “economic
miracles” are a result of a unique combination of country specific
favourable conditions, aggressive economic, institutional, social and other
policies, appropriate geographical location and a coincidence of circumstances
in a specific historical context.
Progress in economic convergence is unique for any country.
It is impossible to replicate it in other countries and times. “Economic miracles” can be explained post factum but they can not be
reproduced. New “economic miracles” can benefit from the lessons of the
preceding ones but they will always contain unique innovative national
elements. Otherwise they would never happen! Each country that wants an
“economic miracle” has to “make it happen”.
1.1.4.
Development as a Transformation of Society
According to the modern paradigms development does not boil
down to technical change – accumulation of physical and human capital,
financial stability, higher labour productivity, competitiveness etc. As stated by J. Stiglitz, development means
a transformation of society. The contemporary understanding of development
does not assume development in general, but rather intensive, democratic, fair
and sustainable development. Social innovation, however, should not destroy the
inherited, centuries-old traditional cultural and other national values.
It is
important to produce. Productive
activities however must be carried out by healthy, highly skilled, free people
who live in dignity and are capable of managing their own fate in an
environment of personal security. People who know that in extremely
unfavourable situations they can rely on the help of the community, of the
society represented by the state. These people must live in an environment of
openness, transparency, partnership and personal commitment to shared ideals
and take part in decision making on personal and public affairs.
Development as
transformation requires something more than appropriate economic policy and
efficient institutions. The new
theories of development as a transformation of society along with the
institutions stress the importance of distribution. The problems of normal
stratification or social polarisation are very important not only as
development goals, but also as means for a more efficient performance of the
economy. Poor people suffer not only because of a lack of means for their basic
needs. They are powerless, helpless and insecure about themselves and their
families. They are unwanted and rejected by society. Given such a social
environment it is impossible to ensure a normal development of society, let
alone any accelerated development!
1.1.5.
Integration and Economic Convergence
Theory is undecided as to whether
integration always leads to economic convergence. Тhis is
apparent when the strictest assumptions of the neo-classical model are made
more flexible, particularly the assumption that production technologies are
identical and accessible to all countries. The poorly timed removal of capital
and labour market barriers between developed and less developed countries can
turn into a source of growing divergence. In some versions of the endogenous
growth and integration models it can induce divergence between countries in
terms of GDP per capita despite the fact that in principle it has a positive
overall effect.
The
experience of the less developed EU cohesion countries (Ireland, Spain,
Portugal and Greece) proves that joining
the European community did not result in automatic convergence. It is a
possibility that can be used (Spain, Ireland and to a certain extent Portugal)
or may not be used as in Greece (see table 2.6.). Its realisation presupposes
the availability of a set of prerequisites – pro-active economic and other
national policies of the member states is one of them. Even then convergence takes not years but decades.
Bulgarian accession to the EU will
take place under more difficult conditions.
First, Bulgaria is the least
prepared of the applicant countries, which have joined the EU so far. Second, Bulgaria committed to a very
high pre-accession price by closing four nuclear power reactors with a total
capacity of 1760 megawatts. The losses and forgone benefits of this amount to
several billions of US dollars. Third, Bulgaria
will receive less EU transfers per capita than the cohesion countries did after
their accession. Fourth, following
accession Bulgaria will have to face strong competitive pressure on the single
internal market, which did not exist when Ireland, Greece, Spain and Portugal
joined. Fifth, Bulgaria will accede
at a time when the EU will be struggling with the inevitable problems of the
Eastern enlargement in 2004 in addition to the difficulties of its own internal
reforms. Any decision of a group of member countries to move faster leading to
a two-speed development of the EU would affect Bulgaria negatively. Sixth, Bulgarian society is not
psychologically prepared for accession. Politicians are cultivating pre-accession
illusions in the public, which will inevitably transform into post-accession
disillusionment.
1.1.6.
Controversial Trends in CEECs
The trends in
the CEECs have been controversial –
both in the 40 years of centralised planning and in the 15 years of transformation.
There is no trend of steady convergence (see tables 2.7 and 2.8). The trend is
towards lagging behind the most developed countries, stagnation and internal
divergence between the CEECs. Only some Central European Countries (CECs) are
slowly converging with the developed economies of the EU-15. Bulgaria is
lagging behind both the EU and the CE countries.
1.1.7.
Controversial Trends in Regional Convergence
Тhe trends in
regional convergence are also controversial –
in terms of both the average EU level and average EU member country levels.
There is slow regional convergence in the most developed countries but regional
divergence continues in the less developed EU economies.
There is great regional divergence in the CEECs, which has
even been growing over the past 10-15 years. Macroeconomic convergence of the
less developed countries with the average EU level continues along with an
increase in the national regional divergence. The higher the GDP growth in a
country, the higher its internal regional divergence. This has been the case
over recent decades. It will persist in the coming decades.
1.1.8.
Drivers of Economic Growth
The most
important driving forces of growth and economic convergence over the past
decades have been investments in
human and physical capital and recently in ICT (information and communications
technologies), research and innovation, internal and external liberalisation,
sectoral, intrasectoral and product adjustment. Financial system development,
competition and entrepreneurship, financial stability, active macroeconomic
policy and institutional modernisation have also been very important.
Geographic proximity to the large developed countries and the powerful internal
development centres also plays an important role.
The driving forces form a certain level of growth and
economic convergence (divergence) by means of labour productivity, quantity of
labour and total factor productivity. All three factors are important, albeit
on a different level in different countries and periods of time (see table
2.9).
1.2. Conclusions and Recommendations of
National (Bulgarian) Importance
1.2.1.
Compounding of Fundamental Processes
The
compounding of several major processes
and simultaneous resolution of several fundamental objectives in Bulgaria and
in the countries of Southeastern Europe slowed down reforms. They impeded the
resolution of all objectives – overcoming backwardness, carrying out market
reforms and preparing for EU integration.
This all occurred against the harsh background of
globalisation and great losses and opportunity costs to Bulgaria resulting from
the UN embargoes against Iraq and former Yugoslavia. In spite of the absence of
ethnic or military conflicts in Bulgaria their presence in neighbouring
countries shed insecurity over Bulgaria and created additional difficulties to
transition and integration.
1.2.2. Wrong
Reform Philosophy
The International Financial Institutions applied wrong
reform philosophy and standard
schemes inappropriate to Bulgarian conditions. They persued only the means of economic policy, such as low inflation,
low fiscal deficits, stable exchange rate, etc. rather than fundamental objectives such as growth, employment,
income, consumption, social justice, healthy environment, etc. The health, the
education, the social justice and even the life of the people were sacrificed
to the altar of financial stabilisation.
External and domestic reform designers imposed a forceful
speedy privatisation at any price and tolerated crony privatisation. As a
result very important portion of the
newly created private sector is not
a bearer of positive dynamism, entrepreneurship,
innovation, respect of low and order. Such a private sector does not
respect loyal competition and fundamental national interests. This makes
Bulgarian private sector too different from the one existent in the advanced
market economies. Such private sector is not likely to contribute much to
sustainable development.
The designers of reforms ignored the fact that there was no
clear process of market transformation in Bulgaria. The latter had to be paired
with overcoming economic, social, institutional and other backwardness.
In this complex setting the share of problems related to
backwardness was smaller in Bulgaria compared to African and Asian countries
and Albania but greater compared to the reforms in the Czech Republic, the
Slovak Republic, Slovenia and Hungary. This was ignored when designing the
reform models.
This made Bulgarian transformation more difficult and increased tremendously its social costs.
Very large portion of the Bulgarian population lives now in great poverty, much
larger than under central planning. The crime is flourishing. This is not what
the people expected from transition.
1.2.3.
Functioning and Competitive Market Economy
It
is far too early to claim that there is a normally functioning market economy
in Bulgaria! There are no real
estate and capital markets, and the money, commodity and labour markets are in
the initial phases of their development, which is accompanied by severe
deformations and criminal deviations. Due to the low quality of reforms and
crony privatisation Bulgaria has turned into an economic minefield. The mines
explode any time when the interests of the respective economic groups are at
stake. This will go on during the coming years and decades.
Bulgaria
will not be able to develop a normally functioning and competitive market
economy in the short and
medium term. Competitiveness may
become a reality only in the distant future – in 15-20 years. Normal relations
between the economic agents are often replaced by criminal tools for “settling
bills” - intimidation, blackmail, arson and assassinations. This creates a
social, economic and psychological environment that will be counterproductive
to normal economic activity for many years to come.
The choice is clear –
initiate accelerated development on a playing field that has been cleared of
crime and corruption or sustain economic and social stagnation in an
environment of crime and corruption. Bulgarian authorities do not seem to
understand that country is at a crossroad.
1.2.4. Two Development Routes
Bulgaria
can chose between two extreme routes of economic development until 2020 and by 2050:
-
Lagging behind development of about 2%
annual average GDP growth, or slow
development of about 3%. Given PP standards, as well as expected average
annual EU-15 GDP growth of 2.0-2.5% the first scenario would result in 30-35%
of the per capita GDP of EU-15 by the middle of the century, or 40-45%
according to the second scenario. Bulgaria will be doomed to socio-economic
stagnation with grave strategic consequences.
-
Accelerated or rapid accelerated development of
5.0-7.0% average annual GDP growth. It is desirable to have average annual
growth of 6-8% in the first ten years, 5-6% in the next decade, 4-5% in the
subsequent decade and 3-3.5% beyond that. This development will not be smooth.
From the point of view of economic convergence it is crucial to have Bulgarian
average annual growth exceeding EU-15 growth 2.5-3.0 times. In this case
Bulgaria will achieve a per capita GDP of 50-55% of the EU-15 level by 2020 and
75-80% by 2050. Such a favourable prospect is on the bortherline between the
possible and the impossible. It requires full mobilisation of national energy
as well as favourable external conditions. World economic history proves that
such a lucky combination is rare.
1.2.5.
Functions, Components and Resources of the Strategy
The strategy
for development of society has several major functions. They are: to define priorities; to co-ordinate; to
contribute to attaining national consensus; to serve as a catalyst for overall
social change; to be a carrier of transformation ideas, prompted by internal
needs; to cultivate ownership; to provide co-operation between the state and
the market.
The strategy
must cover all components of society: development
of the private and the public sector, of the regional communities, of the
family, of the individual. The strategy should treat them as integral parts of
society. It is impossible to achieve sustainable development unless it
encompasses each of these components!
The strategy is a sound proposal only if backed with resources. Тhey include
physical, human and financial resources, efficient macro- and microeconomic
management, increase of knowledge, sectoral, subsectoral, regional and other
strategies as well as social and organisational capital.
1.2.6. Fundamental
Priorities
The main task
of the proposed strategy on priorities is
to identify the areas of sustainable development and the economic, social and
other policies to be activated by the state and society.
The proposed strategy identifies the following fundamental priority areas of sustainable development:
-
improving healthcare
and providing general access to health services;
-
upgrading the
quality, widening the scope and improving access to education;
-
acquiring more state
of the art knowledge leading to establishing a “knowledge based society”;
-
promoting research
and development;
-
structural and
technological upgrading of the economy;
-
developing a modern
infrastructure;
-
balanced development
of the regions;
-
promoting income
stratification but restricting social polarisation;
-
mitigating the
negative consequences of the demographic crisis;
-
protection and
improvement of the environment;
-
creating modern
public institutions and NGOs and an efficient administration.
These general priorities are subject to specification by
means of strategies and programmes at sectoral, subsectoral, regional and
company level to make them operational.
Part two of this summary offers the priority economic and
social policies for achieving the strategic development priorities.
1.2.7. The
Human Being – the Major Benefactor of the Strategy
Setting objectives is central to any development strategy. The main objective of this strategy is the
human being. Improving the quality of life is the major reason to devise a
strategy and implement economic policies.
Upgrading the quality of life is the main criterion as to whether a strategy or an economic policy is
sound. In the absence of improvement after an appropriate time lag the
reasons should be sought in the design of the strategy and economic policy.
Policy, which does not lead to better quality of life is not an appropriate
one.
In a traditional strategy the only development objective is
GDP growth. GDP, however, does not reflect sufficiently the quality of life of
the people. It is a very important prerequisite for wellbeing but is not a
reliable measure of it. Such a measure
is the sustainable development indicator that covers economic, social and
environmental dimensions. The economic, social and environmental objectives
interact and enhance each other. This results in powerful synergies.
1.2.8. A
System of Development Indicators
Notwithstanding its shortcomings, GDP is a very important
aggregate indicator for economic development. There is no better indicator for
operational purposes. The attempts to construct an aggregate indicator for
sustainable development have not been completed so far.
In order to
compensate for the shortcomings of the GDP, we use a pyramid system of target indicators. GDP tops the pyramid.
There are the four important aggregate objectives – economic development,
social development, healthy environment and stable democracy in the middle
layer. There are a large number of more concrete objectives that specify each
of the four groups of aggregate objectives in the base of the pyramid. The
political objectives are not covered in this strategy while the social and
environmental ones are covered only partially.
1.2.9.
Objectives and Means of Economic Development
The main
objective of the accelerated sustainable
development is to improve the quality of people’s lives measured with GDP and
the system of economic, social and environmental indicators.
The means for attaining strategic objectives are the monetary, fiscal and foreign
economic policies, employment and income policies, structural, investment,
science and technology, educational and health policies, demographic policy,
infrastructure upgrading policy, etc.
In more specific
terms, a low inflation, balanced budget, balanced trade and current accounts,
stable exchange rates, foreign exchange reserve, moderate indebtedness and
others are important means of economic policies, not their objectives.
Maintaining low
budget deficit or surplus by reducing investment in infrastructure and
expenditures for healthcare, education and research has a negative impact on
growth in the medium and long term. This generates negative consequences for
employment, income, consumption, healthcare, education, research and ultimately
- for the quality of life! This may balance the budget in the short run but at
a too high cost – an unhealthy and uneducated generation growing up in
Bulgaria, as it is now the case! The health and education of the population
have much higher value in ranking public objectives than a temporarily balanced
budget!
In all CEE countries where the IMF has had stand-by
agreements over the last decade the
objectives of economic policies were confused with their means. Bulgarian
governments shared the same philosophy of transformation. Confusing the ends
with the means of economic policy leads to self-deception, slows
transformation, makes it more expensive and has grave consequences for the life
of the population
1.2.10.
Economic Growth Scenarios
We assume under the above-mentioned conditionalities that
the per capita GDP is a very important aggregate indicator for economic
development and, to some extent, for the quality of people’s life. The standard
of life depends to a great extent (but not fully) on the dynamics of growth of
per capita GDP.
Six scenarios have been constructed for the average annual per capita GDP
growth by 2020, and for the sake of reflection – until 2050. These are at GDP
growth of 3%, 4%, 4.5%, 5.0%, 5.5% as well as a flexible realistic scenario
(5.5%) until 2020, gradually falling to 3% over the period 2041-2050 (see table
4.1 and chart 4.1.).
We
recommend the scenarios of 5.0-5.5% average annual growth by 2020 to the
authorities. Given the same
starting point of 2000 with an average annual growth of 5.0% (and for the EU-15 of 2.0% until 2010 and 2.5% for 2011-2020),
in 2020 Bulgaria can reach approximately
50% of the expected per capita GDP level of EU-15. In the case of 5.5% average annual growth Bulgaria could reach about 55% of the expected level of this
index for the EU-15. This is an immensely difficult task. It verges on the
impossible but could be achieved with a full mobilisation of national energy
and favourable external conditions.
The recent economic history of Bulgaria (1950-1990) shows
that an average annual growth of
5.0-5.5% over a 20 year period is not inconceivable (see table 2.7)
evaluated in the light of the present criteria impacted by the deep crisis of
transition. These comparisons, however, must be made carefully. There are
differences in circumstances between the two periods that can impede the
achievement of steady growth now. There are also differences in circumstances
that can make it easier. It is difficult to say which of the two will prevail.
1.2.11.
Economic Target Indicators
Setting the objectives based only on GDP growth implies a
great risk of strategic mistakes. In order to compensate for the imperfection
of GDP we recommend a system of eight
economic and related target indicators and set their tentative numerical levels
or trends until 2010 and 2020. (see tables 4.2.-4.9). They are: productivity and competitiveness, employment, income and
consumption, education and training, digital literacy, mitigation of the
demographic crisis, balanced regional development and local self-government,
free migration and labour mobility.
We recommend several additional analytical target indicators
for each of them and make quantitative and qualitative estimates for their
levels and/or trends for the 2010 and 2020 horizon. Altogether 30 economic
target indicators are used.
1.2.12.
Social Target Indicators
To compensate for the imperfection of GDP we recommend a system of eight social and related
target indicators with estimations until 2010 and 2020 (see tables
4.10-4.11). They are: fair distribution, social cohesion, access to health
service, social protection for the needy, protection of consumer rights, social
inclusion, a healthy working environment, high quality of labour and flexible
professional careers, awareness and preparedness for transformations in the
family and for the life style changes.
For each of those that can be quantified we recommend
several analytical target indicators and estimate their level and/or trends
until 2010 and 2020. For the rest we offer a description of the expected
trends. Altogether 25 social and related target indicators are used.
Today only a society
that provides prerequisites for its members to income based on merit is
successful. The industrious and knowledgeable generate more wealth and
should acquire more than the incompetent and passive. Each infringement of this
fundamental principle suppresses the incentives for work, knowledge, skill and
entrepreneurship. Without these qualities society is doomed to stagnation and a
fatal end. The normal social and economic development presumes moderate-income
stratification, but no income polarisation. Social polarisation makes
accelerated economic development impossible whereas moderate social
stratification boosts it.
1.2.13.
Environmental Target Indicators
Bearing in mind that the protection of the environment is
the third major pillar of sustainable development we share some ideas and
recommend target indicators (see table 4.12.). We define environmental
efficiency and its importance and investigate the link between GDP growth on
one side and use of raw materials, energy, water, transport services and
harmful emissions – on the other.
We propose five groups of measures for de-coupling environmental pressures from economic growth. This will
help easing environmental pressure while accelerating growth. Environmental
resources are and in the forthcoming decades will become even scarcer
production factor than the traditional resources – labour, capital and land.
This is even more indispensable considering that environmental degradation has reached a
scale that endangers the future of mankind. The seemingly weaker pressure
on the environment over recent years is mainly due to reduced economic
activity, rather than owing to efficient environmental policy. Environmental
pressures will grow again to dangerous levels in the coming years and decades
with the expected revival of economic activity despite more up to date
production patterns and technologies.
Bulgaria needs a long-term
strategy for the protection of environment as an integral component of
sustainable development.
1.2.14. The
Quality of Statistical Information
There are many
question marks on important economic indicators and on the quality of
statistical information in Bulgaria. Is
GDP growing indeed and if so, by how much? What is the labour intensity of
production measured by the average number of employed persons per annum,
man-days and man-hours? What is the volume and what are the structural
characteristics of the operating fixed capital and its annual depreciation? Bulgarian
statistics have not published such data for 15 years and the available data is
not reliable. This makes it inapplicable for analytical and management
purposes.
It is
impossible to calculate reliable labour productivity. There is no data on man-days and man-hours, and the
published data on the number of employees is not reliable. This makes
impossible drawing conclusions about economic policy. It is impossible to
calculate capital productivity or important indicators such as capital/output
or incremental capital/output ratios based on which one can draw conclusions
about economic policy. It is equally impossible to calculate total factor
productivity in this country.
Factorial growth analysis based on a production function of the Cob-Douglas type or on
the R. Sollow model is also impossible.
Analyses of growth by means of more complex econometric models are even less
reliable. Results of such analyses can not be used for operational business
management at a macro and micro level. Even less so for medium and long-term
strategic management.
1.2.15. Labour Participation and
Employment
Labour
activity and participation are changing slowly. Population decline will go on
in the coming decades. The
population in the active age will also decrease. Even in the case of
stabilisation of labour participation the possibilities for GDP growth will be
restricted under constant working time utilisation and labour productivity. In
the case of a moderate decrease of labour participation, the impact on
potential economic growth will be even more negative. It will be compounded by
the worsening age composition of the labour force.
Bulgaria can,
however, increase significantly the number of the employed until 2020 and
beyond by increasing the
participation and the employment rates (see table 5.1.) This increase will be
most significant in the first decade and in the first half of the second
decade. It will decline towards the end of the second decade by reducing
unemployment to normal levels. By the beginning of the third decade this
potential will be exhausted and so will its favourable impact on economic
growth. The negative impact of decreasing employment beyond that can only be
compensated with better utilisation of working time and higher productivity.
This can also be aided by immigration of work force.
By 2020 and in
the decades thereafter, Bulgaria will have great potential to increase the
total number of worked man-hours. This
growth potential will exist even under unchanged labour productivity.
Considering that the latter will also grow Bulgaria will have significant
economic growth potential in terms of available working time in days and hours
per employed person although total number of employment will decline in
subsequent decades. Using this potential will depend on the economic policy.
The labour force will not be an obstacle for accelerated development in the
coming decades despite the decrease in it’s size.
1.2.16.
Labour Productivity
By 2020 and beyond Bulgaria
will rely on a manifold increase of labour productivity as a major factor
of socio-economic progress. Whereas total working time will grow in percentage
terms, the increase of labour productivity will be manifold. If until 2020 per
capita GDP grows by 5.5% per annum on average and if 60% of this growth is due
to higher labour productivity, it would have to grow by 3.3% on average, and
towards the end of the period – by 1.9 times (see table 5.2.). If productivity
accounts for 70% of GDP growth on average for the entire period, until 2050 it
can grow approximately 6 times compared to 2000.
Taking into account the demographic and migration prospects the major sources for extensive growth by
means of the labour force will be “depleted” by 2025-2030. If the current
demographic trends remain unchanged, the main and even single source for
accelerated development in the coming decades will be the growing labour
productivity. It will maintain its decisive role even in the case of a
significant turn of the migration flows after 2020-2025. The return of some of the
highly skilled emigrants may even speed up this process.
Various
scenarios for substitution between labour and physical capital are possible. In the
countries where labour costs are high there is a tendency to replace labour
with capital by rapid increases of the capital/labour ratio. There are no
economic prerequisites in Bulgaria for fast substitution during the first and
probably during the second decade due to the low cost of labour. With time
labour cost will grow in parallel with labour quality and productivity, but
they will hardly reach levels which will speed up labour’s substitution with
physical capital by 2020. This process will become more apparent during the
third decade and beyond. This will provide the technical and economic
foundations for an even faster increase of labour productivity.
1.2.17. Total
Factor Productivity
Total factor
productivity will play a growing role for
maintaining accelerated growth in the first and even more so in the second
decade and beyond. In the 5.5% annual GDP growth scenario until 2020, 30-40%
thereof will be attributable to total factor productivity. This share will be
15-20% in the first decade, and 40-50% in the second (see tables 5.3 and 5.4).
In the decades thereafter the share of total factor productivity can stabilise
around 55-65%. The expected technological and other innovations and further
deterioration of the demographic crisis can make a higher share of total factor
productivity in GDP growth in certain periods possible or even indispensable.
Some believe that intensive growth will follow immediately
under a high-tech oriented development, such as ICT, biotechnology etc., paired
with non-technological elements.
This is a complicated process. A long period of economic maturing is necessary until the results
of a modern economic development become effective. The so-called Paradox of
Sollow is a good illustration.
This paradox, however, prompts an important conclusion for Bulgarian economic policy. Rapid
changes are essential if 30-40 and more years are needed for tangible results
to emerge after technological and other innovations were implemented. If this
applies to the most developed countries, it is even more essential for a small
and not well-organised economy like that of Bulgaria.
In order to gain time the technological, structural,
institutional and other innovations in
Bulgaria must start sooner and on a
larger scale. The sooner the changes the sooner the results will become
evident (after the essential lag). Unlike developed countries, Bulgaria can not
reduce the time for economic maturing. It can, however, prolong it by delayed
action. It does not seem that Bulgarian policy makers are aware of this.
Under current conditions Bulgaria will hardly have to wait
for 30-40 years before the results of the technological innovations appear in
the economic statistics. If we want these to transpire sooner, albeit
marginally in the second and third decade, and to have them feed through to
accelerated development we must act now – in 2004-2007 - and on a larger scale
in the following years.
1.2.18. Menu
of Growth Factors
When devising the operating strategy for accelerated
economic development for Bulgaria the
selected menu of growth factors is of paramount importance with reference
to the share of labour, capital and total factor productivity. Full employment
can be one extreme. This would secure a significant share for labour and a
modest share for capital under a moderate increase of labour productivity and
of total factor productivity. The other extreme can be a maximum increase of
total factor productivity and of labour productivity by moderately growing
employment and maintaining significant unemployment (see table 5.4).
The most
reasonable option is somewhere
between the two extremes. The restricted investment capacity, the moderate
import potential and the use of high-tech with modest skills, discipline and
other qualities of the labour force will contribute to this result. One must
also take into account the social dimension – providing employment for everyone
who is willing and able to work.
Part Two. Recommendations for Economic Policy
Priorities for Achievement of Strategic Objectives
The analysis provides the foundation for the following most
important conclusions and recommendations:
2.1. The Role
of Government
Government’s
main role is to provide an
appropriate economic, institutional, social and political environment for
business activities. The government must not be a business entity except in
rare cases. It creates a healthy business climate by means of economic,
institutional and other policies. It drafts the laws and sees to their
unconditional enforcement. International experience has proven that no one
performs these functions better than the government.
The government
performs its functions in co-operation with the market and not in opposition to it. Their relations are
complementary rather than substitutable. One must apply the constructive
principle of “both the government and the market” instead of the naïve
destructive schemes of “the government or the market”. This primitive construct
has not functioned anywhere.
The government must provide equal conditions for the
performance of both the private and public sector. They must operate in a
competitive market environment and should be equal before the law. The major prerequisite for prosperity of
companies is competitiveness rather than the type of ownership.
2.2.
Strategic Priorities of Economic Policy
The
traditional concept of “priority areas” in
the strategies for economic development from the times of central planning was
to directly or indirectly outline what, how, where and how much was to be
produced and to whom and at what price it was to be delivered. The sectors,
sub-sectors and products to be developed were specified in advance – in terms
of volume, investment projects, technologies, employment etc. The time of such
strategies has passed along with the rejection of central planning and the
transition towards a market economy.
We do not share
this concept of priorities. Neither do we
agree with the current government intuitive choice of selected priority areas
such as new technologies, tourism, agriculture and infrastructure. These
priorities are too general to be meaningful.
Priority areas
of public policy include сreating
appropriate economic, institutional, social and other conditions for
entrepreneurship, scientific and technological research and development under
clearly defined rules. These rules comprise fair competition, health standards,
social justice, environmental considerations, personal and property civil
security, equality before the law, national security and other major national
values.
Scientists can detect trends, offer target scenarios and
policies for their achievement. Government institutions along with the social
partners and NGOs discuss and adopt them. The government sets outlines of
strategic goals, major policies and rules and the institutions that will
enforce them.
The further
formulation and implementation of development strategy with its priorities
depends on the market and on the changes in the internal and external
environment. Within this general framework market
agents decide what, how much, how, where and when to produce, as well as to
whom and how to sell, how to organise the production process and the
relations between the business, social and other partners.
Specific strategies
and priorities at sub-sector, company and product level should be devised by
the businesses, while government must help in implementation by creating
appropriate economic and institutional environment.
The government should
monitor and interfere only with respect
to compliance with the law. Effectiveness should be the concern of the
business entities, which act on their own account and responsibility. They bear
the full risk both for their action or inaction.
The government can also initiate the
formulation of specific priorities in the areas of science, research and development, healthcare,
education, demographic issues, environment protection, infrastructure
development, regional development and others. It should discuss ideas with the businesses and other social
partners, with academia, regional communities and NGOs. Decisions should be
made with respect to level of specification and implementation (at government,
sub-sectoral, regional, company levels); mid-term and final goals; financial,
personnel, institutional and other support; subsidies etc.
The government must
back its priority initiatives by providing appropriate economic and other
environment for their implementation and in some cases even funding. Each level
makes decisions on priorities independently by taking the overall government
strategic framework into account. The respective parties should be free to
deviate from government priorities at their own initiative and responsibility.
2.3.
Transmission Mechanisms from Economic Policies to Economic Growth
One can assume that financial stability, technological and
other innovations, work force skills and other factors have a positive impact
on economic growth. This is beneficial, but insufficient. These causalities
must be proven empirically as well. No such in-depth research has been
conducted in Bulgaria so far largely due to unreliable and insufficient
information.
The study comprises an
attempt to model economic growth in Bulgaria and prove the existence of
such causality. This problem, however, requires more empirical research to draw
firm conclusions.
The solution lies
in the use of evidence from other
countries where such studies have been conducted. Provided that conditions
in these countries are by and large comparable to those in Bulgaria this would
give grounds to expect that such causality may exist here. If certain cause and
effect relationships are apparent in many countries, there will be reason to
expect that they will apply to Bulgaria too.
One can assume
that such a cause and effect relationship exists even though its strength may not be the same. It is important that the dependent
variable responds to the changes in the independent variable.
By means of such an analysis we establish a set of production factors that have strong enough
impact on productivity and GDP. If the regression analysis proves the existence
of a cause and effect link economic policy should focus on activating these
production factors.
We consider
the following dependent variables: GDP
growth, labour productivity growth, total factor productivity growth, economic
convergence. The following independent
variables are used: investment, available physical and/or human capital,
restructuring of the economy, research and development expenditures, public
spending from the budget, taxation, inflation, financial development, openness
of the national market, deregulation, competition etc.
The analysis gives grounds to assume that economic policy priorities for achieving
accelerated development in Bulgaria over the coming decades can be as follows:
-
maintaining
macro-economic stability;
-
regulation,
deregulation, competition and entrepreneurship;
-
openness of the
economy towards global markets;
-
investment in
physical and human capital;
-
high level of
employment and utilisation of working time;
-
appropriate income
policy;
-
tolerance of social
divergence but not of social polarisation;
-
mitigating the
consequences of the demographic crisis;
-
active innovation
policy;
-
break-through science
and technology development;
-
innovation of
consumer and production patterns;
-
financial system
development and resource mobilisation;
-
appropriate
institutional policies;
-
efficient
environmental policies.
2.3.1. Macroeconomic Stability
Macroeconomic stability implies stability of both the
production and the financial systems. The
stability of the production system is
the core of the stability of the macroeconomic system. Financial stability
is a function of the stability of production. A sustainable financial stability
is impossible without sustainable growth. Of course the reverse is also true,
but the productive macro- and microsystems and their stability lie at the root
of the macroeconomic system and its stability. The cause-effect links between
them are two-way, but the impulse from the production to the financial system
is dominant.
The financial
system ultimately serves the production of wealth and not vice versa. The fundamental goal of production is to meet the needs of
the people. Low inflation, a balanced budget, balanced current account, stable
exchange rate, currency reserve, etc. are only means to achieve this goal. The
ultimate goal of companies is to generate products and services, and not low
inflation, a strictly balanced budget or stable exchange rate.
In the coming
20 years Bulgaria should have a price policy that complies with at least three
requirements: stability and
predictability, an environment appropriate for growth and a gradual convergence
to EU price levels. It is obvious that there will be high inflation according
to the criteria of the neo-classicists and that this will have an impact on
interest rates, income policy and the exchange rate. From this point of view
the current low inflation is a defect of the system rather than indicator of
long-term stability.
Evaluating the
permissible inflation over the next 20 years, we need to take account that this will be a period of
convergence to the EU on all important economic indicators including average
price and income levels. At a projected average annual inflation in the EU of
approximately 2% over the next decades, Bulgaria should allow for average
annual inflation of between 8 and 10% to increase the domestic price level
about 3 times over 20 years, i.e. to converge with the EU price level.
Economic theory and business practice have proved and the
Bulgarian experience over the past decade has confirmed that bringing inflation down to zero is not
justified since it has a high economic and social cost. A steady tolerance
of forced two-digit unemployment in the name of low one digit inflation has a
very high social cost. This is expressed in poor utilisation of the available
physical and human capital, paired with growing social and political tension.
The total economic, social and political cost to the public is manifold higher
than the cost of moderately high inflation accompanied with normal unemployment
of about 4-6%.
The economic policy of Bulgaria over the coming decades must
strive for the lowest possible
unemployment and lowest possible inflation. Ultimately a compromise is
necessary instead of sacrificing employment for the sake of low inflation or
vice versa. This conclusion is valid for Bulgaria and countries in similar
conditions. The conditions in the developed European countries are different
including the levels and the relations between inflation and unemployment. The
so-called “Phillips’ Curve” and the “misery index”, suggested by A. Okun are
used to study this interdependence.
We adhere to a more
flexible perception of a balanced budget. Тhis is a budget that is balanced
over a longer horizon with permissible annual deviations of up to ±2-3%. In
years of economic decline a deficit of a couple of points is permissible
whereas in years of high growth a surplus of a couple of points should be
maintained. In extreme situations one can allow for higher deficits provided
that non-inflationary financing is available and the public indebtedness does
not grow to dangerous levels. We do not share the view of strictly balanced
budget at any price and any time. Balanced budget is desirable as a means for
achieving strategic objectives but strictly balanced budget is not the highest
value to a society.
The notion of a
balanced current account should also be handled in a flexible manner. A
deficit of 4-6% is acceptable in individual years. Deficits can be tolerated
for a longer period when the main causes are the import of investment goods
and/or other stable sources for compensation are available.
Maintaining a
large current account deficit for a long time is dangerous, since it increases external indebtedness and destabilises
the budget. This is especially relevant for Bulgaria because of the current
high external indebtedness and the imminent large internal spending and imports
in preparation for EU accession. One must explore a compromise between these in
the name of accelerated growth.
The healthiest
way of balancing the current account
is boosting competitive exports. This in tern requires measures to upgrade
competitiveness. This is the policy to be persued in Bulgaria over the
following years and decades. We do not share the present policy to balance the
current account mainly through a balanced budget.
The exchange
rate will have an important role to play when making these hard decisions. Bulgaria already suffers from the exchange rate peg to the
Euro (DM) introduced in July 1997. The pegged rate becomes particularly
dangerous with an appreciating Euro, as has been the case lately. If
appreciation goes on as it looks like losses will grow to a scale that can
hardly be borne in the current state of the economy.
At first glance, losses due to the expensive BGN in the area
of exports are balanced by the benefits in imports and external debt service.
But the agents who export differ from both these who import and of the budget.
The losses incurred by export manufacturers are not compensated to them by the
benefits to the importers and to the budget and vice versa. Stagnation and even
bankruptcies of exporting companies due to appreciating BGN will jeopardise
future revenues to the budget and the current account and hence their
stability.
If this persists, the expensive BGN can trigger bankruptcies
of exporting companies, can destabilise the economy and suppress growth. This
is the cost that Bulgaria is already paying for adhering to a pegged exchange
rate. A delay in EU accession beyond 2007, which is not unlikely, would
postpone accession to the Economic and Monetary Union. This may have even more
severe consequences for businesses and consumers, for instance a shock
immediately after accession.
The fiscal and
current account policy will determine debt policy to a great extent. The latter should be a policy of a moderate overall
indebtedness. On the one hand, Bulgaria needs external investment loans and direct
foreign investment for accelerated innovation of production capacities, of
infrastructure, for the protection of environment and other areas of activity.
On the other hand, one must take consideration of indebtedness. This
necessitates looking for compromises, once again for the sake of accelerated
growth.
The
macroeconomic stability policy in the coming 20 years could be expressed in
numerical terms. These are:
average annual GDP growth of 5.0-5.5%, reducing unemployment to 4-6% by the end
of the period, an average annual inflation of 8-10%, an average annual budget
deficit of 1-1.5%, an average annual current account deficit of about 5%, total
indebtedness of 50-65% (see table 7.1.).
2.3.2.
Regulation and Deregulation
An accelerated development of the Bulgarian economy over the
coming decades is impossible without significant
deregulation of the economy. Convergence, however, needs some minimum regulation in the areas where
deregulation is not effective as a disciplining mechanism, competition is still
weak, legitimate interests of market agents, health and the environment are at
stake, as well as where vital national interests must be protected. A modern
economy is the one with a high degree of deregulation and regulation that is
restricted in scope but efficient.
2.3.3.
Competition and Types of Property
The fundamental principles of mainstream economics assume private property and competition as
preconditions for sound economic performance. Neither of them existed in
Bulgaria. They are in the process of being established. The emphasis is,
however, confined to private property only.
Privatisation as the focus of transformation is being
justified with motivation. Privatisation is claimed to be the only mechanism
capable of inducing economic motivation for delivering efficient economic
activity. This may be true for a small business but is not so for the medium
size and large companies where the functions of ownership and management are
separated. Privatisation, therefore, is
necessary but insufficient for creating an efficient motivational mechanism.
The main
driving force nowadays is the quality of management. The managers may or may not be owners. Their income as
highly qualified employees (salaries and bonuses) may exceed their income as
owners (dividend).
The managers act in a market environment where no one is
interested in the specific institutional and corporate makeup of the company
that has manufactured a commodity. Only
price and quality matter to the buyer. They depend mainly on the competitive
environment in which production and sales take place.
International practice offers thousands of examples of well
managed state owned companies and of poorly managed private businesses. The
reverse is equally true. Companies go
into bankruptcy not because of the type of their ownership, but due to poor
management. Naturally there is a correlation between the ownership
(shareholders) and the quality of management, but it is weaker than the
dependence between the competitive environment and quality of management. Even
the best private company tends to abuse its monopoly status.
The relations
between shareholders and managers of medium size and large companies and their
ability to influence each other have always been complex. In the era of
globalisation they are even more complex and the boundaries between them are
indistinct. The importance of managers is
increasing for the performance of companies in general and particularly of
large corporations and multinationals.
The quality of management is impacted also by the pressure of stakeholders – the
people working in the company, those living in the neighbourhood, the
community, the trade unions, the budget as a tax collector and the social
security system as a social security contributions collector. The suppliers of
a company and other partners are also interested in its good performance and
exercise constructive pressure on its management.
There are no simple, one-way and permanently valid relations
in the modern economy. Private property is important, but it is no less
important (and is becoming increasingly important) to have a competitive
environment. Private property and
competition have to complement rather than contradict each other. Relations
between the two are relations of mutual complementarity and not of
substitution. Competition is a powerful driving force of the modern economy,
and so is private property. Splitting them and opposing one to the other
impedes the normal functioning of the economy.
A private
sector based economy can not develop without competition because private monopoly suffocates it. It “buys”
governments and MPs, and sharpens social polarisation. International experience
provides numerous examples of socio-economic stagnation and chronic political
instability under a total dominance of the private sector but weak state and
lack of competition such as in Central and Latin America, Africa and southern
Asia.
2.3.4.
Foreign Economic Policy
Openness is a typical feature of the Bulgarian economy, but
unlike the economies of the other CEECs it
has not shown the necessary adaptability to the requirements of the
international markets over the years of transition. The reasons are the imperfections of domestic and foreign
economic policies that have delayed development and have had a direct impact on
future EU membership. This calls for a policy of accelerated foreign economic
development. This policy should provide faster foreign trade growth rates
compared to GDP growth, as well as higher growth of GDP than in the other CEE
countries.
The future policies in the area of trade
liberalisation should be an improved continuation
of the current policy. They should contribute to the effective use of existing
opportunities for access of Bulgarian products to foreign markets. Policy
should be determined by the global trends in international trade and will have
to address the existing non-tariff restrictions.
The trade incentive policy boils down to providing incentives for exports as well as
for raw material and investment goods imports for the normal operation of
export-oriented and related production. The forms and methods of such a policy
vary. They depend on the level of industrialisation of the economy and on the
international market capacity to absorb competitive Bulgarian exports.
The Bulgarian presence on the
international markets is directly related to the policy on inward
foreign investment. It must focus in the coming
years on lifting the formal restrictions and administrative barriers for
foreign capital, on using a system of guarantees that takes into account the
specifics of the foreign investment process and compensates for the delays
caused by the distortions in the investment climate. The availability of an
effective institutional apparatus is essential.
Foreign economic policy predetermines
the state of the balance of payments. The policy over the coming years should
be directed at maintaining a reasonable current account deficit of
approximately 5%. A similar policy should be
implemented with respect to foreign indebtedness at levels of 70 to 50% of GDP.
The relations between Bulgarian and
foreign companies are the core of these developments. They have to be promoted
by intensive innovation activities. Bulgaria’s expected EU
membership determines the specifics of the
trade in agricultural and industrial goods.
The policy of providing
export incentives will cover the application of various financial measures
(export subsidies, export credit, state guarantees to export credits, tax
relief and custom duty exemptions) as well as non-financial measures
(information services, consulting services, direct export incentives, training
and publications, missions, fairs, visits of trade partners).
2.3.5. Policy
for Savings and Investment in Physical Capital
The Bulgarian economic policy faces two major challenges: a modest savings and investment domestic
potential and insufficient attractiveness of the country for foreign
investment.
Effective
policies are needed to increase domestic savings. This can be done by gradually increasing income, creating an
appropriate business environment for the corporate sector. Positive real
interest rates on deposits and security yields, smaller deposit and loan
interest spreads, greater diversification and effectiveness of savings
instruments, an improved deposit protection and a higher share of long-term
deposits and securities would also contribute to this end.
Consolidation of the banking system is necessary. Improved
transparency of the performance of the banking and non-banking financial
institutions is needed. Faster development of non-banking institutions;
enhancing competition between banking and other financial institutions;
improving banking supervision; better protection for minority shareholders; tax
exemptions on dividends etc. are also indispensable
Bulgaria needs
higher public savings. This can be
achieved by significantly improving tax and non-tax revenue collection,
maintaining a moderate budget deficit in years of stagnation and a budget
surplus in years of high growth, as well as an increase of budget investments
in infrastructure.
Preferred
external sources for savings in
the future will include transfers from pre-accession, and later - from
structural and other EU funds, remittances from Bulgarians working abroad, FDI,
European capital markets and foreign investment borrowing. A prospective form
of attracting strategic investors can be the establishment of high-tech
facilities in Bulgaria jointly with leading multinational companies employing
skilled Bulgarian staff.
The state must
also make use of depreciation
to stimulate investment activity. The share of depreciation in the production
costs in Bulgaria is low and has been reduced to a symbolic level over the
recent years. Fixed assets must undergo a revaluation. Depreciation rates are
too low. An update of fixed asset values combined with an increase of
depreciation rates and a greater flexibility in their application are needed.
Depreciation rates in the high-tech sectors have to be increased significantly.
As a direct participant in the investment process the
government has an important role to play in increasing investment activity particularly in infrastructure. The
government can be a sole investor in isolated cases, but will usually work
together with Bulgarian and foreign private capital. The government can also
invest jointly with Bulgarian and foreign private capital in attractive high
tech facilities that are of particular importance to the national economy.
Investor
incentives should be announced
in advance and remain valid for a longer period – 10 years and longer.
We recommend
tentative targets on saving and investment. Here
are the most important: an overall savings rate of 32-33% and an investment
rate of 36-37%, share of investment in infrastructure – 40%, share of
investment in ICT – 18-19% of the total, import of investment goods – 35% of
total imports by 2020. An increase of the share of investment for up to date
services and in reconstruction and innovation is also recommended (see table
8.1.).
2.3.6. Human
Capital Development Policy
The most
important conclusions based on international experience in education are:
-
The educational level
of parents has a very strong influence on the results of their children’s
education.
-
There is no strong
correlation between education expenditures and teaching quality.
-
Centralised exams
provide incentives for a high quality of teaching.
-
Centralised drafting
of curricula is to be preferred, whereas distribution of available resources,
hiring, appointment, promotion and firing of teachers, internal organisation
etc. should be the responsibility of school management.
-
Giving rights and
initiative to individual teachers is useful, whereas wide scale rights of
teacher’s unions do not contribute to improving the quality of education.
-
Competition between
public and private schools encourages high quality teaching and saving of
resources in both systems.
The economic and social convergence of Bulgaria to the EU is
impossible without convergence of human capital in both quantitative and
qualitative terms. Bulgaria can not
prosper without a modern system of education. The authorities tend to
neglect this obvious truth.
The
participation of the state in maintaining the health, education and skills of the citizens is
of fundamental importance for Bulgaria’s development. The state should involve
the private sector but these very important and delicate matters that go far
beyond commercial interest can’t be entrusted entirely to the private sector.
Measures for health and education do not bring about results quickly and are
largely outside the scope of the private enterprise.
Until recently education and qualification were synonymous
with primary, secondary and higher education. In the circumstances of an
accelerated development and in the environment of integration and
globalisation, the meaning of this concept becomes wider and deeper.
Complex
literacy is needed nowadays. This
means reading and writing in the native language; solid foreign language
skills; computer and Internet literacy, ability for individual and team work;
analytical skills; communication skills; independence in learning and in life.
A fundamental concern of the state should be to secure access to healthcare and education for all
citizens. Depriving the poor and their children of healthcare and education
deprives the society of people who may prove to be great talents. And more
importantly, it deprives many Bulgarians of a fundamental human right – the right to life, health and knowledge.
In the absence of state intervention, economic polarisation leads to social polarisation that nurtures
educational polarisation. It intensifies digital devide, which in turn deepens
social and economic polarisation.
Without state intervention and EU assistance the polarisation processes can become even
more dangerous for Bulgaria due to the severe economic situation and the
current state of education. The absence of measures in this area will make
accelerated development impossible. Educational polarisation, coupled with
deterioration of quality of education may have grave long-term consequences for
the Bulgarian economy and the society at large.
The deepening educational polarisation and leaving the
problem of complex literacy unresolved harbours the danger of leaving Bulgaria
at the economic, social and intellectual periphery of Europe, as is the case
nowadays. No accelerated development is possible in such an environment.
Education
requires large resources – public and
private financing, professional expertise, technical and other infrastructure,
subsidies for the municipalities, support by the parents. The result depends on
the size of the expenditures but also on their composition and management.
The strategy recommends that the expenditures of Bulgaria
for education grow from 3.8% of GDP in 2000 to 6.5-7.5% in 2010 and 8-9% by
2020. The intention is that the cumulative education of the population within
the 15 to 65 age bracket should grow from 8.4 years per capita in 2000 to 10
years in 2010 and 11.5 by 2020 (see table 4.5.).
What matters in this case is not only the numerical level
but also its composition – primary, secondary and higher education. Strictly
speaking these components are not commensurate. The weighted indicator,
reflecting the levels of education is preferable.
Financial
allocations for education are very important but they should not be
exaggerated. Larger public
spending does not automatically lead to better quality of education. Prior to
providing additional resources to the education system, it has to be
rationalised. Only then will resources be used in an effective manner.
The larger
part of education expenditures in Bulgaria is provided by the state. This is also the case in the EU countries. The dominant role
of the state in this area must continue. This function can be performed in various
ways. The most widely used is and will be the financing of public schools,
which spend the funds according to certain rules.
An increasing
number of individuals and families will be offered resources in the form of education credits under favourable terms,
grants, special education vouchers by means of which the holders can choose a
school or other specialised training establishment. Such voucher schemes will
be available for training and retraining of the unemployed. Special deposits
for future education with tax exempt interest will be an option to be
considered for introduction.
The
distribution of educational subsidies among pre-school, primary, secondary,
higher education and post-graduate learning is also important. Bulgaria has no experience in this area, particularly with
life-long learning. More resources compared with those to date must be
allocated to financing pre-school and primary education, which have been
internationally proven as the most effective and have long lasting consequences
over the follow-up phases of education.
Particular attention must be given to improvements in the
quality of education, which is mediocre and deteriorating. The minds of Bulgarian students must become thinking machines and not
depositories for facts, dates and numbers, which they may never need.
The state should develop an appropriate scheme to provide incentives to older workers and
professionals to further their qualifications in the official educational
system or outside it. Ideas for implementing this recommendation are given in
the main text of the study.
Nowadays there
are two parallel processes: First, the
growing need for complex literacy. Second, deteriorating access to complex
knowledge. One of the great problems for Bulgaria is the growing tension between the two conflicting processes. This is
growing with the polarisation of the access of citizens to ICT and particularly
Internet and of small and medium size companies to e-commerce and other areas
of ICT compared with large companies.
There is a gap
between the composition of the educated in terms of professions and skills and
the market demand even in the advanced economies. This gap is much larger
in Bulgaria and will grow with the progress of the information society. That
will make it more difficult for workers and professionals to find appropriate
employment and for the companies to find appropriate workers and professionals.
Schools, being the only establishments that have provided
education so far in Bulgaria, should become part of a wider system for
training, called “life-long learning for
all”. School is no longer the beginning and the end of education but a very
important link of the overall system of life-long learning.
In today’s
environment graduation from upper secondary school or a vocational school
becomes a necessity for long-term
employment. About 80-85% of young people in the EU have such an education. This
too is an important prerequisite for developing of life-long learning of young
people who do not continue in universities. Secondary school will play the same
role for the life-long learning of these young people as that, which
universities will play for their graduates.
The situation
in Bulgaria is not favourable in this respect. It is today not merely far removed from the system of
life-long learning, but has deteriorated compared to the past achievements in
both education and training of workers and professionals. The damage must be
remedied quickly.
A system is needed to encourage employees and employers to
constantly improve the skills of the personnel as well as to align and protect
their interests. This system must
incorporate state support, state guaranteed diploma for the respective
level of qualifications that the worker can use for all employers. A system of
allocations for training in a personal account for each employee, similar to
depreciation allowances for fixed assets, is needed. Targeted deposits for
future training, tax exemptions for education and training expenses, a system
of mutual obligations of the employer and the employee related to education and
training could also be helpful.
Retaining human capital is as important as investing in it. Emigration of young and other professionals
is one of the most dangerous channels draining human capital. Bulgaria
along with other CEECs will be subjected to intellectual and biological
depletion in this respect in the coming years and decades.
The brain drain is not a simple phenomenon. It has both
positive and negative dimensions. The most important part of the brain drain problem
for the sending countries is restricting or at least mitigating it. Some
recommend forceful administrative measures. This approach is not acceptable
nowadays due to obvious political, economic, social and moral reasons.
The healthiest
solution of the problem is the accelerated economic and social development, the improvement of living conditions and professional
opportunities in Bulgaria. The young people and other highly qualified
professionals would not leave such an environment. This is, however, a very
complex process and its results can be expected no earlier than 15-20 years
from now.
Although difficult to implement, other solutions are also possible. Modest results can be expected
in the medium to long term (5-10 years). Ideas for such solutions are presented
in the main text of the study.
For some quantitative outlines of the proposed strategy
please refer to table 4.5 of the main text.
2.3.7.
Employment Enhancement Policy
We expect important changes on the labour market. The issues
of employment in the first decade will differ from those in the second and
later periods. The main challenge in the
first decade will be to reduce unemployment, increase the qualification of
the work force and mitigate the consequences of emigration of skilled personnel.
In the second
decade and beyond, the main
challenge will be facing the consequences of the demographic crisis. They are
evident even now, but are not felt as strongly due to the business contraction
and high unemployment. The Bulgarian authorities must prepare for a very
different employment policy in the second decade and beyond. This preparation
should start now.
There are numerous European Commission papers on increasing
employment and improvement of working time utilisation. There is also a European Employment Strategy the
foundations of which were laid in 1997. It incorporates four clearly defined
large-scale modernisation projects in that area, known as the 4 pillars of the Strategy: ability to
work, entrepreneurship, adaptation, forms of organisation of labour and higher
qualification, equal opportunities for all citizens. This is a change in the
paradigm, not simply another rationalisation.
The preparation of Bulgaria
for accession and particularly the time after accession demands that all activities
in this area be oriented towards meeting the requirements of the European
Employment Strategy.
This strategy proposes policies and
measures to resolve the most severe problems of employment and unemployment.
In the first stage (until 2007) a reinvigorating of economic policy is necessary through which the
conditions for large-scale job creation for permanent employment will be
established. Additional investment of 2.0-2.5 billion BGN per annum can secure
85,000-100,000 new permanent jobs. Along with this, medium-term policy should
target a decrease of the officially recorded unemployment from 17% to 13%, an
increase in employment from 41% to 45%, and in economic activity from 50% to
52-53%.
The currently recorded low unemployment level in
Bulgaria (considered a world record in terms
of speed of decrease) does not reflect reality. The very
fact that it is a world record raises suspicion. Firstly, it was achieved by
the “creation” of 80,000-100,000 new jobs mainly for municipal roadside
cleaning for which more than 200 million BGN is disbursed every year, instead
of producing sustainable products or services. This is a strongly distorted
(and ineffective) form of active employment policy. Had these people been
employed into production, they could have contributed to an almost double-digit
GDP growth, which is, however, non-existent in official statistics. Second, it
does not take into consideration the over 20% of labour force dropouts – the
so-called “discouraged unemployed”.
The second stage (2007-2010) will require a better co-ordination of economic and social
policy in order to increase employment to 48%; reduce unemployment to 10-12%;
and achieve economic activity of 54-56%;
In the third stage (2010-2020) the employment policy and the efforts against unemployment
will have to be aligned with the goals, the acquis
communautaire and the social practices of the European Union. Unemployment
is expected to recede to 4-6%, employment to increase to 61-62% and the
economically active population to reach 63-65% towards the end of the period
The priority areas on which
employment and unemployment policies should focus are listed in the main text.
2.3.8. Income Policy
Income policy continues to
be based on the residual principle. It is illogically restrictive and has an
anti-inflationary focus in spite of the fact that salaries have not been
inflation drivers in Bulgaria for a long time. Salaries, pensions and other
guaranteed personal income, as well as the real disposable income of households
are losing their purchasing power. Consumption is shrinking. Bulgaria is among
the poorest countries in Europe.
Poverty has struck the
prevailing part of the population - 43-47% of households live in extreme
poverty, 35-40% balance the family budget at the cost of drastic deprivations,
10-12% do not suffer any serious deprivation and 1-3% are well off.
Based on the analysis of the
present situation, priority areas for income policy until 2020 have been
outlined in the main text.
We suggest four scenarios for increasing salaries
and pensions.
According to the optimistic
scenario, the real average monthly salary should grow by 11% on average per
annum from 225 BGN in 2000 to over 1,800 BGN by 2020(see table 4.4.). According
to the same scenario, the real average monthly pension will grow by 13% per
annum and will increase from 100 BGN in 2000 to 1150 in 2020 (see table 4.7).
These scenarios are
formulated on the basis of the optimistic scenarios for GDP growth – 5.0- 5.5%
annual average until 2020 (see table 4.1 and chart 4.1.).
Specific proposals are made for the income
policy, as well as measures that the
government has to undertake along with the social partners at the respective
stages
2.3.9. Mitigating the
Consequences of the Demographic Crisis
The demographic crisis in Bulgaria is deteriorating rapidly.
It will be one of the most serious
challenges in the coming decades. This crisis coincides and even exceeds
similar problems in Western Europe in spite of an economic and social
development, which lags that of Western Europe by 40-50 years. The current
demographic problems in Western Europe are, according to claims of its
analysts, the result of a demographic maturity. In Bulgaria they are the
fallout of a state of crisis. Hence, we
are decades behind in terms of social and economic development and decades
ahead in terms of the manifestations of this crisis.
Providing
highly qualified labour with higher and upper secondary education is a
priority. These are people who
will satisfy the growing need for such skills, particularly in the second
decade and beyond. The problem is more complicated considering the low birth
rate and the decreasing number of people entering into an employable age. The
smaller numbers have to be made up for by a better quality of labour and new
technologies.
А large scale
substitution of insufficient labour with more capital of a better quality is
necessary. Preparation for this
substitution must start now. Bulgaria will not be able to sustain its
accelerated development unless this substitution takes place soon. Resolving
this problem will be complicated even further if a significant number of
qualified young professionals emigrate in the next 5-10 years. The healthy
solution is in creating an attractive environment for them to remain in.
Other measures
are needed in the older age groups to mitigate the lack of labour of high and
mid level qualification. One option
could be to increase labour participation and employment rates in the age group
between 25 and 54 years.
Measures are needed to increase labour participation and
employment in the 55-64 age group. This can be done by means of training and
retraining, life-long learning, abolishing the incentives for early retirement,
introducing incentives for a greater working age and disincentives for early
retirement as well as preparations for a gradual increase of the official
retirement age.
One must opt
for a cautious increase in the retirement age. This requires early measures for improving living and
working conditions, healthcare, life-long learning measures and the transition
to an “active old age”. Given the current difficult living and working
conditions, increasing the pension age would be impossible since people at that
age already suffer physiological and mental exhaustion.
These measures
can be used for the 65+ age group in order to encourage them to stay on the
labour market for longer. One can
introduce further incentives and support in terms of gradual retirement from
active labour activity by combining work with rest, a wider application of
part-time employment, work from home, consultancy over the Internet etc. in
addition to the measures already mentioned. This will be possible in the
second, particularly in the third decade and beyond, when a significant growth
of life expectancy and an overall improvement of the general health of the
elderly are expected.
One of the consequences of the demographic crisis is the
deterioration of the ratio between employed and unemployed. In this country it is one of the most
unfavourable in Europe at approximately 0.8:1 (which also includes the
people working in the shadow economy) and is deteriorating. In the EU countries
the ratio between employed and unemployed is three times higher.
An analysis of
the composition of the employed and of the unemployed raises additional
concerns. This is because the
share of the young and the students is shrinking, the share of adults is
growing and the share of the long-term unemployed is very high (see table 4.7).
The number of retirees in Bulgaria compared to the employed was 2.5-3.0 times
higher than the EU average in 2000.
The ratio
between the young and the elderly working people will deteriorate in the second decade and beyond. Given the current rate of
the demographic crisis and the lack of action by the authorities there are no
reasons to expect any stabilisation, and even less so an improvement in the
unemployed group.
The
ageing оf the Bulgarian work force is becoming more and more apparent. In the future it will be accompanied with an
upward movement of the retirement age. On the one hand, the share of the young
people in the work force, the groups under 25 and fewer than 35 years will
fall. On the other hand, the share of the working people between 55 and 64
years and above 64 will grow. Toward the end of the second and particularly in
the 3rd and the 4th decade, with the expected increase of
life expectancy (75—77 years for men and 80-82 for women) the share of the
working people older than 65 will grow.
This sets new
problems for Bulgaria. A mass
introduction of the life-long learning will have to be accelerated,
particularly for the work force of the middle aged and elderly generation. This
is because the enhanced development of
science and technology speeds up the ageing of knowledge. By 2015-2020 the
major part of present knowledge of the work force will be obsolete. This fact
speaks for the scale of the challenge. It will require radical changes in the
education system and in training outside it. The life-long learning system will
become increasingly important.
The
quality of services will have to be improved. This is particularly needed in healthcare, nurseries and
kindergartens, for primary education and for the further levels of education,
for care for the elderly, for transport and many other services.
Significant changes are needed in the organisation of production and labour because the working patterns of people in the 25-40, 50-60 and above the 65-70 age groups differ. Flexible labour systems will increasingly be applied.
Labour productivity will grow due to an increasingly active substitution of labour with modern
capital. The proportions will usually be non-traditional, due to the novel
qualities of future labour and technologies. This exchange will also be
activated in work from home. In the absence of this it will be impossible to
raise the standards for the effective and healthy work capability.
The ageing of
the population is exerting stronger pressure on public finances. It will grow in the coming decades due to larger number of
pensioners, larger average pension, additional costs of healthcare and other
services for the elderly. We estimate that additional
expenditure of 6.5-7.5 percentage points of GDP will be needed by 2020.
This has to be added to the 8% registered in 2000 (see table 4.7). Judging by
the experience of the EU member states the additional expenditures may be even
higher than this estimate.
Stabilising
public finances is also a priority task for Bulgaria against the background of
the growing demographic pressure. This
task will be very difficult considering the incredibly low level of pensions
and the imperative need for their increase. One could add to this the danger of
shocks (bankruptcies and other collapses) in the private pension funds, the
large public debt and the necessity for an active budget policy for EU
accession. The expected burden of pension expenditures, about 13-15% of GDP by
2020, will be very severe indeed.
A labour
market reform is needed to achieve higher employment. This will improve the ratio between employed and unemployed,
will boost growth, budget revenues and improve the policy response to the
problems of an ageing population. It will be useful to reduce general income
taxation for people with lower salaries. It would be appropriate to abstain
from increases in social security contributions and to explore opportunities
for their reduction, mainly by means of improving collection and restricting
shadow employment. The system for life-long learning can also contribute to the
increase of employment levels.
Pension reform
improvements are also essential. The
reforms initiated in Bulgaria are correct in principle. They must, however, be
improved in some important areas. One must seek fairer social balance between
intergenerational interests. Bulgaria must aim at two to threefold higher
replacement ratio over the next years and decades.
Gradual
increases in the pension age must
be prepared, which goes together
with providing the option to continue work to all that chose to do so. This
will be harder to apply while there is high unemployment, but will become
essential after 2015-2020 when this problem will be resolved and the
consequences of the demographic crisis become more severe.
As already stated the increase of the pension age must be
preceded by a significant improvement of living and working conditions as well
as an increase in average life expectancy. Prior to creating such prerequisites
the emphasis should be set on creating incentives for people who are willing to
continue working in their pension age and discouraging early retirement.
Some Western countries recommend reducing future pensions
with the view of budget savings. This, in addition to being politically
difficult, is wrong for Bulgaria due
to the prevalence of low pensions. Bulgaria’s problem in the coming years will
be to improve the ratio of pre-retirement income (average salary) and
post-retirement income (average pension) by significantly increasing the
latter.
Reducing the
number of pensioners rather than reducing pensions can mitigate the budgetary burden in Bulgaria. This could be achieved by giving pensioners an opportunity to
work after retirement age and even encouraging them to do so.
The budgetary and the social security system’s stability in
the coming years and decades will also depend on the stability of the
voluntary retirement and health contributions to private funds. Their
stability is important, considering that it affects the interests of hundreds
of thousands of people contributing to private funds. Shocks in this area can
be prevented by more effective public supervision of the management of these
funds.
No single
measure can resolve the problem. The
stability of the budget and of the social security system in the conditions of
an ageing population can only be resolved by means of a complex set of
interrelated measures. High growth will be central to this.
There are frequent references to mitigating the consequences
of the demographic crisis in Bulgaria. There is a silent agreement that the
demographic crisis is an inevitable exogenous process. This is hardly the case.
Unlike Western Europe and Japan, the demographic crisis in Bulgaria is not a
result of demographic maturity, but of a social and economic crisis. Overcoming
this crisis should alienate the demographic crisis.
It would be appropriate to entrust experts with devising a strategy for mitigating the
demographic crisis in Bulgaria. To recapitulate: mitigation of the very
demographic crisis rather than its consequences is a fundamental strategic
objective for Bulgaria. Rapid and radical action is indispensable because if
current trends are left unchecked the demographic destiny of Bulgaria will be
at stake in the next 50-70 years. Lack of action in demographic policy may have
severe strategic consequences for Bulgaria within this century. This is due to
the rapid decline in Bulgaria’s population. It amounted to
8.95 million in 1985 and 7.85 million in 2002. It is projected to be about 6.2
million in 2025 and less than 4 million in 2050, i.e. at the level of 1900.
2.3.10.
Alleviating Social Polarisation and Alienation
Bulgaria has the highest social polarisation in CEE – a Gini
coefficient of 0.41. It is higher only in the CIS countries.
No accelerated
development is possible given such social polarisation. Successful development in a country of 7.8 million people
is unthinkable when 2.5 million are doomed to severe poverty and are isolated
from the benefits of human civilisation. This is not due to the state’s
insufficient financial resources but mainly to the irrational in economic and
social terms distribution of these resources. A small minority of 1-3%
appropriates in criminal and semi-criminal ways a part of wealth that is much
larger than their contribution to its generation and in doing so deprives the
majority from their share. The government not only tolerates, but also by
withholding active measures, contributes to the increase of income
polarisation.
The state has ignored the poor and unemployed and has
isolated them for more than a decade. They have responded with total alienation and growing hostility to
the state and society. There can be no normal social and economic development
and civil peace in such a society, let alone any accelerated sustainable
development. World experience over the past century as well as the comparative
analysis of the social and economic development of Africa and Southeast Asia
over the past 50 years has proved this.
Alleviating social polarisation by means of changing
distribution relations and inclusion of
the alienated is one of the most important measures, which the Bulgarian
government must address immediately. This, however, can not be done quickly
because of the large scale of poverty and the weakened statehood.
Accelerated social and economic development implies encouraging income divergence, based on
contribution by labour, capital and entrepreneurship of various groups, but restricting social polarisation.
No less
important is the economic effect of
alleviating social polarisation. According to rough estimates criminal activity
deprives the budget of at least 2.0-2.5 billion BGN per annum (7.5-8.5% of
GDP).
With such
additional revenues the state can afford further
cuts in taxes and social security contributions and incentives for business
activity; higher investments in infrastructure, healthcare, education, science,
environmental protection etc. They, for their part, will result in additional
GDP growth, more resources for the development of regional communities, for
modernising the system of government. There would be additional resources for
increasing pensions and improving healthcare for the elderly, for law
enforcement and the judiciary, for maintaining relative budget balance by
improved financing of the sectors that provide critical public services.
Fair
distribution provides more adequate social and working climate. People tend to work more conscientiously and be more
productive in such an environment. They feel that they are contributing to
important national goals. This also helps accelerate economic and social
development.
Continuous action and application of complex economic,
social and other measures is needed. Measures to achieve this goal are
recommended in the main text of the study.
2.3.11.
Economic Aspects of Innovation Policy
Bulgaria’s internal innovation potential is restricted. It
can provide no more than 10-15% of the core technological and other innovations
it needs for economic and social development in the next two decades. The main source for technological and
other innovations will be FDI, import of investment goods, projects and
contacts with foreign experts, import of know-how, scholarships for Bulgarian
scientists and other professionals abroad.
Bulgaria must be prepared. This calls for accelerated
development of education, of applied sciences, of research and development, as
well as first steps in marketing new technologies. Bulgaria will be unable to
absorb, disseminate and use imported innovations without certain minimum of
innovation potential. This will be the
main role of Bulgarian innovation policy in the coming years and decades.
The state innovation policy can assist in establishing proactive innovation
development in many areas: development of an appropriate set of economic
incentives for innovation activity (subsidies, tax relief, etc.), developing
research in public research institutes, establishments of higher education and
subsidising research in private research establishments. The same applies to
help increasing the efficiency and the scale of private investment in
innovation, supporting effective working relations among the participants in
the innovation system, simplifying regulation where necessary and maximising
deregulation of everything else in innovation activities.
The establishment and development of hi-tech innovation
enterprises and of small regional research and development facilities must be
encouraged. The initiation of strategic alliances between Bulgarian high-tech
innovation companies and foreign high-tech companies must be facilitated.
The government
can use various instruments to encourage innovation activity. The most important of these are: state subsidies for
funding public research and development facilities, state subsidies for private
research and development facilities, tax relief for public and private research
and development, participation in venture financing and providing credits for
innovative operations. The same applies to training personnel for innovative
operations, creating an appropriate general and innovative infrastructure,
effective protection of intellectual property, facilitating contacts between
R&D and production companies. Simplifying the legal and economic framework
for innovative activities, facilitating imports of foreign technical and other
innovations, facilitating contacts between Bulgarian and foreign innovation
companies could also be helpful.
Funding of
public innovation facilities must be increased. These are public research institutes, laboratories, research
operations of state universities, state research and development facilities
and, in some cases, state owned enterprises, which develop important
technological and other innovations.
The state has to provide subsidies for important research
projects, implemented by private
innovation companies. This can be done in the form of low interest loans,
tax and other relief as well as state guarantees on loans of private
contractors. The difference between the interest on the targeted loan and the
market interest rate should be covered by the state. Maximum transparency is
essential in these cases, which can potentially be provided by means of public
tenders and through other guarantees against abuse.
Special
attention should be devoted when allocating state funding to research projects
of great medium and long-term importance where
Bulgaria has a significant scientific track record. In these cases results can
be achieved alone or in co-operation with foreign partners in small niches but
on a global scale and of great importance to Bulgarian science and, in the
long-term, to the national economy. It is only fair to apply a special regime
for funding such projects; ensure support for setting up the facilities and
flexibility in paying the remuneration of researchers. Talented researchers
should be paid very high remuneration.
When providing subsidies for public and private innovation
activity, one must seek appropriate
trade-offs between government subsidies and company resources. This is
particularly relevant for private innovation companies, so as not to crowd out
private investment. One must target a ratio of financing sources that
guarantees the complementarity of public and private investment which avoids
their mutual substitution. Business practice in developed countries proves that
the share of government investment should not exceed 25-30% of total investment
in the respective innovation projects.
Public expenditures for innovations will most probably
prevail in the next 5-7 years while the share of private expenditures will
grow. Judging by the experience of developed countries, the two sources will
reach equal shares by 2010 and by 2015-2020 private expenditure would account
for 60-70% of the total.
Public funding
will remain significant for a long time due
to the weakness of private research facilities in Bulgaria and their focus on
highly profitable projects with short payback periods. Activities of
longer-term significance, particularly those where private sector benefits are
much lower than the public benefits should be funded by the state as they are
not attractive to the private sector. Such projects are valuable to society and
must be financed.
Innovation projects in the area of defence, healthcare,
environment protection and fundamental research will be a prerogative of the
state for many years to come for obvious reasons. The same applies to high-risk
innovation investment. These can attract private resources but must be
supported by state participation and/or state guarantees. If not, private
capital will avoid high-risk projects.
Funding of innovation activities and particularly public
funding is needed not only for direct technological and other solutions that
lead to the creation of products of short and medium-term importance. It is
even more important for Bulgaria’s
preparation to absorb and implement imported innovations and become a part of
the international innovation networks. Countries with low innovation
activity are not capable of understanding and using imported technical and
other innovations. It is essential that Bulgaria does not remain a passive
observer of the global innovation processes. To prevent this from happening we
recommend a significant increase in research expenditures from 0.5% of GDP in
2000 to 1.4% in 2010 and 2.5% by 2020 (see table 4.5).
Project
financing of science and research must be increased to cover all appropriate activities within a couple of
years. Theoretical studies of long-term importance should be financed along the
established model.
Differentiated
payment of researchers based on their contribution must be introduced and remuneration according to degrees,
ranks and years of service and attendance during working hours should gradually
be abandoned. This will increase the effectiveness of research and development
and will release excess personnel.
It is appropriate to create legal provisions for tax exemption of income and profit derived
from innovation activities for 10 years or longer. This should be valid for
all investors, starting from the initiation of new innovation activity. The
same should apply for dividend on capital invested in innovation activity.
Tax relief and
direct subsidies for innovation activity should
be used both as complementary and mutually substitutable tools. This should be
done in a co-ordinated manner to avoid misapplication of these levers.
It is recommended to devise a strategy for development of Bulgarian science, by selecting an
appropriate structure for research including fundamental and applied research
as well as R&D activities. Efforts should focus on several important areas
where we already have or can achieve a significant scientific track record.
Co-operation should be sought with foreign research institutions for joint
research and marketing in these areas.
A
co-ordination mechanism should be
established for public funded research and development with a view to
allocating restricted resources to areas and projects of prime significance.
Public subsidies for research should be distributed on this basis through a
tender. It is also advisable to have co-ordination between public and private
research operations on a voluntary basis.
A new institutional structure, new organisation of work, new
evaluation and remuneration system for researchers is a must. Their pay is
humiliatingly low at present. It must be improved dramatically as soon as
possible.
2.3.12.
Economic Dimensions of Break-through Science and Technology Developments
In the coming years and decades the economic development of Bulgaria will be most strongly impacted
on the macroeconomic and sectoral level by the technologies for general use –
information and communication technologies (ICT), biotechnology, new materials,
new energy sources, environmentally friendly technologies etc., and on sectoral
level – sector technologies. Nanotechnology is expected to have such an impact
on a global scale, but it is premature to expect a significant impact on
Bulgaria before 2015-2020.
For this to happen highly
qualified professionals knowledgeable both in ICT and biotechnology and in
ICT and nanotechnology must be trained. There will also be a great demand for
managers and entrepreneurs in those areas.
Bulgaria has to design a long-term strategy for the development of information society in
the spirit of the European strategy and the Action Plan in this area. For some
quantitative outlines of this strategy see table 4.6.
The strategy should be of an imitative (converging) and not of an innovative (leading) nature since
imitative solutions are easier and cheaper (approximately 65%) than the
innovative ones. Innovative solutions are of course welcome, but Bulgaria has
no capacities to make them a main goal. By 2020 the strategy has to aim at
closing part of the gap between Bulgaria and the advanced countries in this
area. Matching the science and technology level of these countries is not a
realistic goal for Bulgaria in the coming decades and even in the distant
future.
The imitative
approach should dominate Bulgarian
science and technology development in the coming decades, combined with an
innovative approach in selected niches, where we have already achieved or can
accumulate the necessary critical minimum of scientific experience. Bulgaria
can, under favourable internal and external conditions, achieve converging
development based on the imitative approach over the coming decades and towards
the middle of the century. This, however, is not guaranteed and has an
equivalent chance of failure.
A more
ambitious objective, catching up
the levels of the advanced countries by the middle of the century, would be unrealistic. This is unlikely
considering that over this long period there are bound to be negative internal
and external surprises, which will create additional difficulties for the
development of Bulgaria. In this respect, even the proposed speed of the
imitative approach contains a significant degree of optimism.
It is hardly possible and necessary to start producing information and communication
equipment in Bulgaria. This would be very difficult and costly for a small
underdeveloped country. International experience demonstrates that the economy
and society can successfully use ICT hardware without producing it. This has
been proved by almost all small and medium size nations, including some in the
highly developed ones.
ICT
development creates new challenges for education and training. On the one hand, the technical means of ICT become an
integral part of training personnel. On the other, these developments demand
for a new kind of personnel, with new knowledge, new thinking and a new
approach to problem solving. This goes beyond training people to use new ICT
equipment and speak its language.
Teaching them how to use the information received through
ICT in their daily life and work is even more important and difficult. There
are major problems related to training appropriate ICT trainers. This all
necessitates a strategic rethinking of the system of education and training.
This is the way in which society can derive maximum benefit from the great
potential of ICT.
Increasing
digital literacy is of great importance not
only for the people directly involved in sectors like ICT manufacturing,
software development and information and communication infrastructure. It is
essential to all. The same is true for overcoming digital devide.
Bulgaria is
facing very serious problems in this area. On
the one hand, the quality of ICT training has been insufficient and has even
deteriorated recently. On the other hand, the best graduates of the education
system in ICT leave and seek career opportunities in the developed countries,
which have special programmes for attracting highly qualified experts in this
area. And thirdly, it is unclear how Bulgaria will fill these gaps due to the
poor training of Bulgarian experts, the large scale emigration of the
highly-skilled and the growing need for such expertise. Regardless of the
official statements praising ICT’s importance, it will remain wishful thinking
if human resources of high quality are not trained for its development.
A long-term
strategy for the development of biotechnology
in the spirit of the European strategy and Action Plan on these matters is also
necessary for Bulgaria. An outline of such a strategy is provided in the main
text.
Bulgaria needs also a concept on the development of some
limited research on nanotechnology.
2.3.13.
Consumer Patterns and Consumption Policy
Despite the two-way link between production and consumption,
production ultimately exists to satisfy
consumption, and not for its own sake. Without effective demand the
manufacturing of goods and services becomes meaningless. This demand transforms
the manufactured items into useful products – goods.
Consumption is
the raison d’etre of production.
The reverse is also true of course. However, the fact that a product must first
be manufactured in order to be consumed is insufficient for claiming that in
terms of importance manufacturing dominates over consumption. A more demanding
consumption exercises strong pressure for improvement of manufacturing.
Significant
quantitative as well as qualitative adjustments in consumption are expected to take place over the next 20 years. They
will be pre-determined by the growing income, the life style changes and the
related changes in personal consumption as well as by the deepening demographic
crisis. The share of food and beverage consumption in the composition of the
household budget will decrease. The share of expenditure on clothing and
footwear will stabilise or decrease. The share of housing, furnishing and
heating, transport and communications, health, education, travel and recreation
expenditures will grow (see table 4.4.).
The quality of
consumption will rise. It will become
less and less tangible. Knowledge-based consumption will develop rapidly. The
share of consumption by the elderly will grow and its composition will change.
Personalisation of products and services will grow. The importance of
sustainable consumption will also grow. Provided that social polarisation decreases
simultaneously. Maintaining or increasing social polarisation will have a
reverse effect and will set Bulgaria apart from the global trends in this area.
Theory and practice confirm that mass production is more
efficient than individualised, small and medium-scale production. However, it
is evident from the above that the trend in the coming decades will be to give up some types of mass production and
return to personalised production by age, social, professional and other
groups, and in specific cases, on special order for well to do individuals.
At the same time competition will press for
greater efficiency. That would require additional effort on the part of
scientists and manufacturers to combine large series with the preferences of a
group or an individual, possibly by using modular systems or other methods.
Flexible automated systems of production may yet again receive greater
attention. The other option would be a significant increase of the efficiency
of the individual, small- and medium-series production that allows for a
combination of personalisation and competitiveness.
The
criteria for efficiency and competitiveness will change аs satisfying special personal and group needs
with high quality and strict health-related requirements become more important
than production cost. The role of quality and health considerations as
competitive criteria will grow at the expense of production cost and price.
Naturally, competition will exercise pressure for reducing the cost per quality
unit and per unit of health effect. The new technologies and methods of
organisational set ups will contribute to this.
All this has already led to changes in the consumer policies of the
developed countries. The EU promulgated a new strategy for consumer policy
2002-2006. It emphasises the importance of competition, high quality, health
safety and personal security of the goods and services offered on the market.
Such a consumer policy will become increasingly important for Bulgaria. It will
have to facilitate the convergence of the quality of Bulgarian products and
health standards to those in Europe.
Against this background and in the context of further development
of the EU single market the gradual
convergence of prices for products and services to the EU level becomes
increasingly important for Bulgaria. They are approximately three times
lower than in the advanced European countries. The speed of increase of the
average price level in Bulgaria has to exceed significantly the respective
process in the EU.
This in turn is related to income policy. Nominal and real
income growth in Bulgaria must exceed the growth of average income in the EU. A
higher growth of labour productivity is indispensable as well (see table 4.2.).
In order to achieve it accelerated economic development is a must.
Two scenarios
are likely for such price convergence – gradual and shock. Gradual convergence is possible if controlled pre-emptive
increase of prices and nominal incomes in Bulgaria compared to the same
processes in the EU is initiated immediately. Guided by this, we recommend an
average annual increase of prices of 8-10% and an even faster increase of
income by 2020 (see tables 4.4.-4.7. and 7.1.).
If the above scenario was not implemented shock convergence
will occur at the time of accession and in the successive years regardless of
the will of Bulgarian authorities. This can have a destructive effect on the
socio-economic stability in Bulgaria. The first scenario is, therefore,
preferable.
The convergence of prices is related to the currency board arrangement with its inherent low inflation and fixed exchange rate,
which make the convergence of Bulgarian prices and income to these in the EU
impossible. Bulgarian politicians tend to disregard these problems in spite of
the signals we have been conveying over the past years. The authorities are
opting for a surprisingly short-sighted approach on such fundamental issues for
the future of the nation. The longer the delay in tackling these issues, the
more difficult and painful it will be to resolve them.
2.3.14.
Policy on Innovation of Production Patterns
Active
intersectoral restructuring has been taking place in Bulgaria over the last 50 years. The share of agriculture
has been declining in favour of industry and services. The share of industry
first stabilised and over the past 10-15 years started declining in favour of
services.
This process will go on in the next 20 years. The share of agriculture and forestry will decline
to 5-7% of GDP and of the work force by 2020. This will lead to a significant
increase of productivity in the economy as a whole and in agriculture but will
make redundant the majority of the employed in agriculture. The process will be
active until 2015-2020 and will then decelerate.
Industry (mining, processing, power generation, gas, water and
construction) will continue to lose its share both in production and in
employment, to reach 22-24% by 2020.
The services
sector will develop fastest
and will absorb the workforce released from agriculture and industry. It may
account for 69-71% of GDP by 2020 and will have a similar share in employment
(see table 11.1)
Further
intersectoral restructuring, particularly after EU accession, will cause
problems that are not yet
known to the public. The much lower labour productivity in Bulgarian
agriculture compared to EU agriculture, the lower competitiveness of
agricultural products, the lower sanitation and hygiene standards will cause a
significant reduction of the employment in this sector. The production quotas
that will be imposed on us within the Common Agricultural Policy framework will
add to this deterioration. An estimated 500,000 people will be released of the
760,000 that are now employed in the agriculture. This may have harsh social
consequences.
Accession will
affect Bulgarian agriculture in
many other ways, some of which will be very
severe. Opinions are emerging in the Westeuropean scientific community in
support of an agricultural specialisation of Southern, North-western and
Eastern Europe. As a result our region is to be entrusted with the production
of mass bulk products, mainly grain. This will have a negative impact on
profitability and employment in Bulgarian agriculture.
It would
hardly be reasonable to treat Bulgaria in the same manner as Poland, Slovakia, Hungary, Lithuania, Latvia, Estonia and
Romania and force it to specialise in growing grain. Our climate is more
appropriate for southern cultures, which provide higher employment and income.
Bulgarian natural and climatic endowment (particularly in the southern part of
the country) does not differ from these in Northern Greece, Central and
Northern Italy, Northern Spain and Portugal.
The dynamics of production adjustment in the coming years
will increasingly move from the intersectoral to the intrasectoral area. The
structural changes within industry, services and agriculture will be the most intensive - sub-sectoral and
product adjustments. The dynamics of intersectoral changes will slow down
and the potential for intrasectoral adjustments will remain great, almost
unlimited, particularly in product patterns.
These dynamic intrasectoral
adjustments seem chaotic only on the surface. In actual fact they are
precisely targeted and specific. The current sectoral and product
specialisation in Bulgaria is the result of a destruction of the structural
profile created during central planning and the CMEA. It was conducted through
the destructive processes of the 1990s, which are continuing today. This is a
focused destructive adjustment.
Nowadays Bulgaria
produces and exports primitive low added value goods, which are capital
intensive, energy intensive and unskilled labour intensive. Their content of
skilled labour and high technology is very low. The share of high-tech products
is insignificant. A very large part of Bulgarian exports (30-40%) consists of
simple labour intensive goods of low added value, subcontracted by western
companies to Bulgarian manufacturers – the so-called outsourcing. They are made
with designs and materials of the customer using low cost labour and cheaper
energy in Bulgaria.
The significant size of electricity exports is not a sign of
a mature industrial structure either. The surplus of energy is temporary –
owing to the stagnation of the Bulgarian economy.
As a future EU member Bulgaria
must develop its sectoral, sub-sectoral and product profile. The question is
whether the structural menu should be compiled based on the current sectors,
sub-sectors and products with the respective comparative economic advantages.
These sectors are low tech, resource intensive, energy intensive (with cheap
energy) and labour intensive (with low salaries). In other words Bulgaria would
confine itself to the framework of low-tech sectors and products. This may currently be an inevitable choice,
due to the cheap energy and labour that generates some income, but will be wrong in the medium and
particularly in the long-term.
Bulgaria has to make a
great strategic move in the structural reorientation of its economy over
the next 20 years. In view of the current and to a certain extent - the medium
term realities Bulgaria will be forced to sustain its profile in low-tech
operations by constantly renewing them with new products of medium, high and
top level technology. The share of labour intensive low-tech goods can be
reduced to some 15-20%, resource intensive low tech products - to 15-20%, medium level technology
products can be increased to 40-45% and high-tech products to about 20-25% by
2020 (see table 11.1.). This will be a very difficult structural
transformation. It is, however, indispensable because no accelerated
development is possible without it.
From the point of view of export efficiency, attention
should be focused on producing more complex machines and installations,
electromechanical and optical machines and installations, more complex
transport machines and equipment, pharmaceuticals, ecologically clean
agricultural products etc. Management of
the companies will make the specific decisions on structural readjustment. They
have to formulate their priorities independently. Any attempt of public
authorities to impose them would be inappropriate.
The existing
energy sector development strategy must be revised. It is not based on an overall long-term strategy for
Bulgarian economic development and, therefore, on an estimate for future
domestic energy consumption. Energy saving policy in the consuming sectors has
not been incorporated in this strategy. No reliable investigations have been
conducted on the long-term electricity needs in the neighbouring countries. The
estimates of their future demand were a product of biased improvisation, used
as an excuse by the parties interested in increasing power generation in
Bulgaria at any cost.
In its current shape, the
energy development strategy may have negative long-term effects, since it
relies on a non-existent import demand on the part of neighbouring countries
and possibly on an overestimated domestic demand. It is impossible to establish
national energy needs not knowing how the economy and the household sector will
develop over the coming decades.
The new energy
strategy until 2020 must be based on
a more economical use of energy in the business and the household sector, the
development of gas distribution and supply, and environmentally appropriate
methods of power generation. It is cheaper to focus on rationalising energy
consumption rather than increasing power generation based on imported primary
energy sources at unpredictable prices.
There are no
sound economic arguments in favour of
generating energy in Bulgaria for export. The official claims that Bulgaria is
proud to be an energy centre on the Balkans are baseless. The huge investments
for such a strategy can be used in a more rational way to develop other export
oriented high tech industries. These would generate more value added and
employment. One must choose among different technical and economic scenarios to
this end.
Major
structural readjustment is needed in the service sector. It is insufficient to state that the share of services will
grow at the expense of agriculture and industry. The type of services to be
developed is more important. The rapid growth of security services, the mushrooming
parasite intermediary activities, the old-fashioned transport services, the
abundance of primitive trade and restaurant services is a ground for concern.
This is an evidence of the backward level of the services sector and unhealthy
developments in the economy and society.
World
experience demonstrates that it is more reasonable to develop modern services of the ICT-related type, modern healthcare, education,
pre-school facilities and childcare. The same goes for research, other
innovation activities, modern recreation facilities, services for the elderly,
intensive tourism, financial intermediation, modern business services,
protection of the environment etc. This is what the advanced European countries
are doing.
There will be important adjustments with severe consequences
in the geographic structure of business
activities. As already stated, accelerated development will be the major
focus for Bulgaria in the coming 20 years and beyond. High-speed growth can be
generated mainly in regions and communities that offer favourable conditions –
modern production capacities, telecommunications, transport, technical, social
and other infrastructure, qualified personnel and market proximity.
The most
intensive development in the coming years and decades will occur in the big
cities – Sofia, Plovdiv,
Varna, Bourgas, and other larger towns and will be least intensive in the small
towns, in the villages, mountainous regions with poor infrastructure and human
resources.
The regional
divergence in Bulgaria will grow until 2020-2030. This is inevitable but
policies can be initiated to mitigate the negative implications. This calls for partially compensating preventive measures by
the authorities at both national and regional level. The Bulgarian public must
be informed about this trend and be prepared to face the consequences!
The
development of business activity in Bulgaria will depend also on the behaviour
of foreign capital. If the latter
abstains from establishing active production and business links with local
enterprises there will be less scope for improvement of the structural profile
of industry and services. As a result a
dualistic economy may develop – with isolated enclaves of relative
modernity at a few foreign enterprises, in an environment of mediocre business
activities at the domestic companies.
This is why it is so important to attract first class
foreign investors by means of privatisation, and not merely second and third
ranked companies and even offshore and other unreliable participants with short-term
interests. The quality of the new owners
of privatised companies is of primary importance rather than the price
received. If the current type of
privatisation and the absence of first class foreign investors persist in the
future Bulgaria will be impeded in modernising the structural profile of its
economy. It is already significantly burdened by the wrong and even criminal
privatisation carried out so far.
The European
model is an important benchmark for structural updating of Bulgarian industry
and services. It was proved a
long time ago that the closer the sectoral and the product patterns of two
economies, the greater the potential for stable specialisation and production
co-operation between them. According to this indicator, Bulgaria, along with
Romania, is in the least favourable position. Our sectoral pattern is very
different from the average EU sectoral patterns. The patterns of the Czech
Republic, Slovakia, Slovenia and Hungary are much closer to those of the EU
countries.
Bulgaria has a
restricted capacity to participate alone in the global production networks. The establishment of specialised and high-tech small and
medium sized companies in the respective niches, together with foreign
partners, will allow for a better quality, higher competitiveness and
opportunities to become part of such networks. It would be good to create
awareness of this now and to initiate preparations. A significant improvement
of the education system is indispensable, along with the establishment of
research and development facilities and the creation of a favourable economic
and institutional environment for their operation. If preparations start now
the results may become evident in 10-15 years.
Along with other favourable economic and social consequences
such an approach may help thousands of qualified professionals to remain in
Bulgaria and work in cutting edge technology areas instead of looking for them
abroad in more difficult environment and less chances of success.
The analysis of the
quality of Bulgarian exports to the EU confirms that the convergence
potential is much more restricted and worrying than it looks from traditional
quantitative indicators – a negative balance of trade and current account. The
larger part of Bulgarian export is raw materials or primary processed low
value-added goods, which do not generate
sufficient revenue to the producers and the economy at large. Such export
can not continue for long as it impedes accelerated development.
Reducing the current account deficit by increasing exports
under these circumstances not only is very difficult, but its benefit is doubtful. The manufacturers compensate the loss from
low export prices through cheap labour, cheap energy, illegal imports, not
disclosing other turnover, tax- and social contributions evasion. Such business
practices, in addition to being irrational, can not continue endlessly.
The intensity
of intercompany restructuring
will grow, as will restructuring by
forming international strategic alliances and the intrasectoral exchange on the
basis of sustained specialisation and production co-operation between Bulgarian
and foreign companies.
2.3.15.
Financial System Development and Resource Mobilisation
The development of the financial system is one of the
priority areas of economic policy for attaining strategic goals. Its role in
the study is considered with the view to creating prerequisites for mobilising
resources for accelerated development. The emphasis is set on developing public
finances and the banking system.
The main conclusions
and recommendations for developing public finances are:
- A number of economic and
political considerations and harmonisation agreements with the EU will have a
strong impact on the scope, structure and sequencing of the development of
public finances until 2010. After 2010 the level of fiscal harmonisation in
general and taxation in particular in the EU will have a dominating impact. The
major directions for their development are predetermined and national
flexibility is constrained;
- Attention should focus on
resolving a series of problems:
а) Reducing gradually
redistribution of GDP through the budget;
b) Balancing the budget within a
longer period of time - 15-20 years. Temporary deficits of 2-3% should be
tolerated if justified;
c) Strengthening financial
decentralisation and reforming the intrabudgetary relations;
d) Restructuring the revenue and
expenditure parts of the budget according to the strategic goals and priorities
of accelerated development;
e) Improving tax and other
revenue collection and a more rational use of resources.
On
the system of public spending:
-
Gradual reduction of
public spending as a share of GDP. The speed will increase in the second
decade;
-
Restructuring public
expenditures with the aim of strengthening their incentives function and
focusing on attaining strategic goals;
-
Aligning budget
spending policies with efficiency principles. This is a prerequisite for
rationalisation and higher efficiency of public spending;
-
Targeted unification
of the multi-tiered budget system and creating spending tools and mechanisms for
operations and control at the national, sectoral and regional levels;
-
Applying budget
principles and methods of modern budget management that have been adopted in
the EU.
On
the tax system:
-
An enhanced process
of tax harmonisation with the EU, incl. alignment of the tax systems, types and
rates of various taxes;
-
Gradual reduction of
the overall tax level and the tax burden;
-
Increasing the
stimulating function of taxation;
-
Significant
improvement of tax collection;
-
Continuing transfer
of the tax burden from direct to indirect taxes;
-
On direct taxation:
Gradual reduction of the rates of corporate taxation and personal income tax
aiming at their unification. Applying tax relief including through the tax
base. Co-ordination of the tax and social security contributions aiming at a
reduction of the tax burden in real terms. Priority should be given to
pro-active depreciation policies and introducing tax credit to promote
investment, rather than reducing the rate of corporate taxation;
-
On indirect taxation. Gradual
reduction of the uniform VAT rate, improving its organisation procedures and
harmonisation with EU requirements. Some negative effects are expected from the
accelerated harmonisation of specific excise duties.
The
main conclusions and recommendations for developing the banking system and the
other financial institutions are:
-
Financial services
have a key and growing role for boosting economic development, particularly
through combining financial with information and communication technologies;
-
In order to use the
potential of the financial sector, interrelated policies and measures are
needed aiming at two directions: first, to develop the banking system and the
other financial institutions and second, to improve the environment for their
operation. In order to ensure a better co-ordination between individual
policies and their tools, a strategy for financial sector development must be
elaborated as an integral part of the national economic development strategy by
2020. This strategy has to be in line with the EU trends in this area.
The
main directions of the banking system and other financial institutions
development policy have to be as follows:
-
Eliminating
structural handicaps, expressed in the lacking diversity of financial and
credit institutions;
-
Credit institutions
development stimulating consolidation, control and improved efficiency;
-
Improving financial
and credit institutions specialisation;
-
Establishing a
nation-wide debtor information pool;
-
Adapting the national
payments system to European standards;
-
Enhanced development
of non-banking financial institutions - insurance companies, pension funds,
venture capital funds etc.
The
main focus of the policy on creating a favourable environment for the
functioning of financial institutions should be:
-
Creating an economic environment by co-ordinating
the policies and measures for economic restructuring and financial system
development and elaborating effective mechanisms for making compromises on key
issues;
-
Creating a legal framework supporting the
development of an effective system of private property and mechanisms
transforming property into production capital. The same applies to adapting regulations and supervision to
world-wide trends, European requirements, specific conditions in Bulgaria and
new technologies in a timely manner;
-
Policies for capital market development aiming at
increasing its role in the market infrastructure and facilitating private
sector and public institutions access to investment resources. The same applies
to reducing the monopoly power of banks in credit provision; achieving a lower
cost of capital, higher investment and ultimately a higher speed of economic
growth and competitiveness.
2.3.16.
Institutional Policy
The inconsistencies in the choice of the approaches to institution
building created additional difficulties
when implementing key priorities of the transformation in the area of:
- Economic liberalisation in favour of the emerging
commodities, services, capital and labour markets;
- Macroeconomic policies for modernising
government regulation, for stabilisation of public finances and increasing the
effectiveness of resource management by the national and local budgets;
- Making privatisation and
corporate governance effective and restructuring enterprises with the aim of
fostering economic modernisation.
An assessment of the situation and
the main factors and areas of development of institutional policy was conducted
within the accelerated development strategy.
The strategic choice of the
approaches, goals and areas of institutional policies derives from the
assumption that economic growth can be positively impacted by institutions
provided they reflect the democratic choice of social change. It takes into
account the link between institutions and markets of production factors.
Two basic issues have been analysed when assessing the initial preconditions for accelerated
development of the Bulgarian economy: The first is the extent to which the development of formal
and informal institutions can guarantee a regulation of the new markets and
institutions that is adequate for public needs. The second deals with the
possible future institutional development when competition will replace
regulation and self-regulating institutions will become an inherent feature of
organised markets.
The mechanisms and tools of the
institutional structure for social and economic progress have been defined in a
medium and long-term perspective.
The choice of
priority goals and areas of the Bulgarian institutional policy depends on several key factors. Sustaining political
democracy and developing a civil society, along with securing economic
liberalisation and protecting competition in the newly emerged markets are the
most important of them.
In the medium
term a transition will
take place from policies dominated by the national state to policies leading to
restrictions on national sovereignty.
The long-term
challenges that the Bulgarian
State will face before achieving functional and institutional integrity with
the EU as a full member are identified. In the optimistic scenario – Bulgarian
EU membership in 2007 - this process will continue from 2007 to 2020. It will
run effectively in parallel with institutional policy tasks related to the
development of the EU single market, as well as the possible preparation for
joining the Economic and Monetary Union.
Developing a national sovereignty of a modern type, by means
of which the “accession” of Bulgaria to the global economy will take effect
with institutional support, is considered as urgent in view of the need for
solutions to common contemporary problems.
The choice of
the priorities of institutional policy
is evaluated according to various conceptual approaches. They are separated in
three main groups: first, neoliberal approach; second, opposing the state and
its role in the market economy; third, recognising globalisation and the new
global order as a dominating factor for the institutional policy of the nation
state. When formulating institutional policy special attention is devoted to the
acknowledged socio-democratic minimum comprising two processes:
а/ Introduction of the opinion and the interests of the
people into the political system;
b/ Guaranteeing government accountability to the public.
The comparison between the three
approaches allows for the conclusion, that a democratically chosen regulatory
institutional optimum will be necessary for the socio-economic development of
Bulgaria. It should be combined with developing modern state governance and
well performing institutions in the process of EU accession.
The strategic priorities and goals of institutional
policy have been outlined. From the point of view of
institutional change, overcoming the modernisation crisis marked with the
absence of sustainable economic and social achievements and experience -
becomes very important. Reconsidering Bulgarian experience should go along with
the adoption of the best international and European practice.
The main
mechanisms of institutional policy
subject to our attention include:
-
achieving a stable
balance and interaction between the legislative, executive and judiciary
authorities for the benefit of an accelerated growth;
-
further consolidation
and improving the efficiency of public finances and government;
-
aligning
macroeconomic and structural policies aiming at accelerated social and economic
development;
-
fighting corruption
and opposing institutionalisation of corruption in the public and private
sector through developing organised markets.
2.3.17. Economic Aspects of Environmental Policy
Adherence to environmental
standards is achieved mainly by means of control and prohibitive measures.
There is, however, a trend to replace them with economic tools and one can
assume that they will dominate in the following years and decades.
The
economic tools regulating the
quantity of pollution leave it to the
market to determine who should adapt and in what ways. They are most
appropriate for situations where the regulator demands security for attaining
environmental goals without specifying who must make the effort for reducing
hazardous emissions. Pollution is ultimately reduced where that costs the
least. The society will thus de-couple economic growth from environmental
pressure in the cheapest possible manner.
The most frequently used tools
for achieving environmental goals are taxes, pollution and consumer charges,
insurance policies, tradable emission rights for polluters, etc. When they are
used, the “polluter pays” principle
applies.
A
better idea of the full costs in
terms of the cost of raw materials, energy, water, transportation and other
services is given by including the
external environmental effects. This, in turn, makes it possible to better
evaluate their comparative efficiency. Subsidised prices of raw materials,
fuel, water and transport services, without taking into account the
environmental aspects, are misleading. One can not make proper decisions on the
basis of these prices.
Environmentally sensitive pricing will change the traditional understanding
of the efficiency of large production facilities. In the case of growing
transportation cost one will have to explore technological and economic
solutions to reduce the capacity of the individual production units and the
enterprises and for ways to locate them closer to consumers or raw material
sources.
This will facilitate the
mitigation of environmental pressure, but will
create other problems - changes in
the geographic location of business activities and in employment, income,
mobility, lifestyle. The traditional concepts for the development of the
Rhodopi region, the Strandzha-Sakar region, the valley of the river Mesta etc,
which depend 100% on road transport, will change. It may be necessary to
revisit some current decisions to close down important (but non-profitable
according to traditional criteria) railway lines in various regions of Bulgaria.
Incorporating
external environmental effects in prices leads to a change in the composition of production, in employment,
income and regional structures. The actual production costs can thereby be
calculated and the businesses can select production patterns, which after
allowing for full expenditures provide a higher environmentally sensitive
growth for a long period of time. They contribute to an improvement in the
quality of life of the people in the long-term.
Such approaches touch on
economic, social, environmental and other interests of many people, of economic
and social groups, and affect the competitiveness of many industries. Applying
them without some compromises is, therefore impossible.
This becomes even more difficult
if conducted only in one country and not in all countries that are business
partners. Such an approach is only possible under concerted action of all
interested countries and of the respective economic, social, regional and other
interests in Bulgaria. If this is not done in a concerted manner by all
interested states, the affected nations must be free to protect themselves by
means of customs policies.
Subsidies
for producing and consuming solid fuel should be abolished. The same applies for tax relief that has a negative environmental
impact. In complex situations these changes have to be made gradually in
co-ordination on a regional scale (between neighbouring countries) and even on
a global scale. Such co-ordination is also needed when liberalising the energy
market and introducing “green” tax reforms, because they have contradicting
effects.
The high sensitivity of energy
consumption to energy prices is an undisputed fact. The price of energy,
however, should not be increased sharply. The sustainable policy of steady
increase, conveyed to consumers in advance in order for them to prepare is the
more acceptable option.
The prices for raw materials,
fuel, energy, water and other commodities in short supply or commodities
harmful to the environment are of great importance for their more sensible use.
As stated above, these prices must reflect the direct production costs as well
as all external costs (i.e. damage to the environment) and to incorporate some
profit that secures normal current operations and investment for development.
This
is all the more important for Bulgaria for at least two reasons: The energy intensity of production in Bulgaria is 4-5 times
higher than in the EU-15 and in the CECs. The prices for electricity and
heating in Bulgaria are far lower than in the EU and CECs.
Our assessments predict an alignment of energy prices in Bulgaria with
the current price level in CECs by 2010 and with the current price level
in Western Europe by 2015-2020. There will be a gradual increase of energy
prices over the entire period until 2020 (see table 4.12). Unlike Western
Europe, the liberalisation of energy market in Bulgaria under the present
circumstances will not lead to a decline of energy prices.
The
higher prices will play an important role
in determining the environmental structure, will discipline energy consumption
and will thus contribute to developing more rational economic patterns in the
coming years and decades. This is very important due to the low energy
efficiency of Bulgarian production.
It is advisable to regulate the
quantity and quality of used water through pricing, taxation and charges.
Bearing in mind that a modern agriculture with stable high yields is impossible
in the Bulgarian climate without irrigation, subsidies for irrigation water are
needed following the schemes applied in the southern member states of
EU-15. Bulgaria must subsidise the water for irrigation for a duration and
scale commensurate with the southern EU member states. Bulgarian authorities
must not give in to the expected pressure of the European Commission to abolish
or cut subsidies for irrigative agriculture.
The price of water for
industrial, irrigation and household purposes must vary. The price of water for
irrigation in agriculture should be the lowest and that for household purposes
- the highest. In order to encourage saving water for industrial and irrigation
purposes an additional charge may be
introduced. The proceeds should be used for investment in captation,
transportation, reducing waste and improving water quality.
The charge per cubic meter of
water should reflect availability – if there is a higher shortage in a region
the charge should be higher and vice versa. Moreover, charges may vary
depending on the quantity of water used by consumers. Large consumers should pay
higher additional charges than the small ones.
Pesticides
and chemical fertilisers are the largest pollutants of soil and water. In view of this, one can include a
charge in their sale prices. One can thereby facilitate the reduction of soil
and water pollution as well as the moderate use of chemical fertilisers and
pesticides, which may have a harmful effect on human health. This will
encourage the production of environmentally friendly agricultural produce.
The European Commission, along
with the International Commission for Danube Research and Monitoring are
drafting a Joint Programme for use and protection of the water in these 800,000
square kilometres sized river basin with a population of 82 million. Bulgaria
is likely to be a pro-active participant in this programme.
A
wider application of charges is recommended for solid waste deposited
in landfills in order to encourage its separate collection and recycling. The
approach toward enterprises that have large amounts of solid waste should
differ from the one toward households. There should be special (higher) charges
for particularly harmful and hazardous waste along with the generally
applicable solid waste charges.
Compulsory
waste recycling should be
introduced, including such for complex machines and equipment – cars,
computers, electric machinery, locomotives and other transport vehicles,
tractors and other agricultural machinery and household appliances. The
producers of waste should, according to the “polluter pays” principle, be the
first to conduct this. Recycling cost can be incorporated in the prices of new
items which become waste after their use.
Environmental
protection requires large investment. Forecasts
on the investment needed in Bulgaria to meat the EU environmental standards are
scarce and those available should be used with caution. There are no reliable
assessments in Bulgaria. According to western forecasts Bulgarian investment
needs vary from 10 to 15 billion Euro. This assumes allocations of 4-6% of GDP
over a period of 20 years. Such a task is impossible to accomplish! Based on
the 0.7% of GDP allocated for environmental expenditure in 2000, we asses
investments amounting to 2.5-3.5% of GDP by 2010 and 4.0-4.5% by 2020. (see
table 4.12).
Environmental
criteria are becoming very important for all future investments. Each investment project, regardless of its purpose, should
first be evaluated from the point of view of environmental advisability and
only then on other criteria. If a project is not environmentally acceptable it
should not be adopted even if it was economically sound. Environmental
considerations should become the most important criterion for future investment
decision making.
Table of Contents
of the full text, published in Bulgarian
Foreword. Prof. Ivan Angelov
Part One. Accelerated Development –
Substance, Necessity, Sources and Objectives
Chapter I. Necessity
and Opportunities for Accelerated Development in Bulgaria. Prof. Ivan Angelov
Chapter II. Converging Economic Development – Theory and
Practice. Prof. Ivan Angelov
2.1. Indicators for
the Level of Economic Development and Convergence
2.2. Economic Growth
and Converging Development - Basic Notions and Theories
2.3. Long-term Global
and European Trends of Convergence (Divergence)
2.4. Trends for
Convergence (Divergence) among CEECs
2.5. Trends for
Convergence (Divergence) among Regions in the EU and CEECs
2.6. Driving Forces
of Growth and Convergence
2.7. Transmission
Mechanism for Growth and Convergence
2.8. Conclusions
Chapter III. Substance,
Principles, Functions and Content of the Strategy for Accelerated Development. Prof. Ivan Angelov
3.1.
Development as a Transformation of Society
3.2.
Principles and Functions of the Strategy for Accelerated Development
3.3.
Components of the Strategy for Accelerated Development
3.4.
Conclusions
Chapter IV.
Objectives of the Strategy for Accelerated Development. Prof. Ivan Angelov
4.1.
Overall Characteristic of the Objectives
4.2.
Specific Objectives of Accelerated Development
4.2.1.
GDP per Capita
4.2.2.
Economic Objectives
4.2.3.
Social Objectives
4.2.4.
Environmental Objectives
4.3
Conclusions
Chapter V. Sources
of Economic Growth. Prof. Ivan Angelov
5.1.
Utilisation of Manpower and Economic Growth
5.2.
Labour Productivity and Economic Growth
5.3.
Total Factor Productivity and Economic Growth
5.4.
Composition of the Sources of Economic Growth
5.5.
Conclusions
Part Two. Economic Policy Priorities for the
Achievement of Strategic Objectives
Chapter VI.
Transmission Mechanisms from Economic Policy to Economic Growth
6.1.
The International Experience. Prof. Ivan Angelov
6.2.
Modelling Economic Growth in Bulgaria. Dr. Paraskeva Dimitrova
Chapter VII.
Appropriate Economic Environment
7.1.
Policy for Macroeconomic Stability. Prof. Ivan Angelov
7.2.
Regulation, Deregulation, Competition and Entrepreneurship. Prof. Ivan Angelov
7.3.
Foreign Economic Policy. Stefan Uzunov
Chapter VIII. Policy
for Saving and Investment in Physical and Human Capital
8.1.
Savings Policy and Investing in Physical Capital. Prof. Ivan Angelov
8.2.
Policy of Investing in Human Capital. Dr. Matiu Matev
Chapter IX.
Socio-Economic Policy
9.1.
Employment and Unemployment Policy. Dr. Goran Bankov
9.2.
Income Policy and Living Standard. Dr. Goran Bankov
9.3.
Alleviation of Negative Implications of the Demographic Crisis. Prof. Ivan
Angelov
9.4.
Mitigation of Social Polarisation and Alienation. Prof. Ivan Angelov
Chapter X. Economic
Aspects of Science and Technology Policy. Prof. Ivan Angelov
10.1.
Economic Aspects of Innovation Policy.
10.2.
Economic Policy for the Promotion of break-through Science and Technology
Developments.
Chapter XI. Economic
Aspects of Structural Adjustment Policy. Prof. Ivan Angelov
11.1.
Modernisation of Consumption and Production Patterns.
11.2.
Adjustments of Consumer Patterns and Consumption Policy.
11.3.
Adjustments of Production Patterns
Chapter XII.
Financial System Development and Mobilisation of Resources. Dr. Ivanka Kraininska
12.1.
Development of Public Finances
12.2.
Development of the Banking System and other Financial Institutions
Chapter XIII.
Institutional Policy. Dr. Tatiana Hubenova-Delisivkova
13.1.
Strategic Choices of the Approaches and Objectives of Institutional Policy
13.2.
Important Mechanisms of Institutional Policy
13.3.
Instruments of Institutional Policy
Chapter XIV.
Application of Economic Tools for Environmental Objectives. Prof. Ivan Angelov
14.1.
Necessity of Economic Tools
14.2.
Reducing Climate Change and Energy Utilisation
14.3.
Reducing Utilisation, Quality Upgrading and Reduction of Losses of Water
14.4.
Reduction and More Rational Utilisation of Fossils and Liquid Waste
14.5.
Investments for Environmental Protection
Executive Summary -
Conclusions and Recommendations
References