News

Martina Goranova*, Desislava Nikolova

Athough there are some inevitable economic divergences between Bulgaria’s districts, it would be interesting to check the assumption about the economic discrepancy between the labour markets of North and South Bulgaria. In order to reply to this question, we will compare three indicators that define the labour market - the unemployment rate, the employment rate, and the economic activity rate.

Regarding the unemployment rate, the difference between the weighted averages for Northern and Southern Bulgaria has narrowed to 2.85 percentage points in 2014 down from 8.58 pp back in 2000. That means the unemployment rate was generally higher in North Bulgaria both during the upturn untill 2008 and during the crisis period and the post-crisis recovery following 2009. It is interesting that the gap has considerably narrowed during the the past 15 years (about 3 times), which in principle could be interpreted as a decrease in the discrepancy between Northern and Southern Bulgaria in recent years, at least in terms of the unemployment rate.

If the capital city was disregarded, the better state of South Bulgaria would have been preserved, namely the average unemployment rate in South Bulgaria would have been 0.93 pp lower than the one in Northern Bulgaria in 2014. So, it turns out that Southern Bulgaria’s better indicators are not only due to the capital city—even without it, this part of Bulgaria would have performed better in terms of its labour market. Nonetheless, the capital city accounted for 2/3 of the difference between the unemployment rates in North and South Bulgaria as of 2014, i.e. its influence should not be underestimated.

The employment rate generally increased in Bulgaria from 2000 to 2008 and it grew again following a drop in 2009-2010.

In respect of the employment rate, the capital city’s influence has also been considerable. The discrepancy in the employment rate between Northern and Southern Bulgaria, excluding Sofia, would be almost double. The divergence between both parts was 5.81 pp in 2014, and if the capital city was disregarded, it would have been 2.95 pp. And still, as it is visible from the figures, the employment rate has been higher in South Bulgaria, notwithstanding the capital city’s influence. In 2014, this rate was 44.23% in North Bulgaria, and 50.05% in South Bulgaria.

It is notable that the difference between Northern and Southern Bulgaria in terms of employment rates has remained stable in time, fluctuating from 5 to 7 pp. Thus, if the data about the unemployment rate supported the assumption that North and South Bulgaria had developed more closely in recent years, then the data regarding actual employment would have firmly rejected it.

The labour market has gradually recovered in recent years, but the employment rate and the unemployment rate have not reached their pre-crisis levels. The differences between both parts of Bulgaria, in respect to employment, have not significantly changed in time, which constitutes another indicator of the insufficient effectiveness of the regional policy and the ongoing discrepancy between Northern and Southern Bulgaria. The interesting point is that Sofia (the capital city) is not the only “culprit” for South Bulgaria’s better rank — South Bulgaria has performed well even without Sofia, in respect of all basic labour market indicators. It should even be noted that role of Sofia (the capital city) concerning South Bulgaria’s advantage has gradually decreased. For instance, if the difference in the unemployment rates between North and South Bulgaria, excluding Sofia, was about 7 pp in 2000, it dropped to barely 1 pp in 2014. The same applies to the employment rate, even though the role of Sofia has slightly weakened—the difference between North and South Bulgaria, excluding Sofia, was 4.4 pp in 2000, and it decreased to about 3 pp in 2014.

* The author is an intern at the IME.

Yavor Aleksiev

The IME conducted 4 individual studies from April 2012 to April 2015 regarding the levels of local taxes and fees. For this purpose, every municipality received inquiries under the APIA during the spring of every year.

Five types of taxes and fees are included into the scope of the study:

• The Immovable property tax for legal entities (‰),
• The vehicle tax (commercial and passenger vehicles, 74 kW to 110 kW),
• The annual license tax for retailers (up to 100 sq. m of retail space – for most favourable location of the site) (BGN/sq. m),
• The annual waste collection charge for properties of legal entities (‰),
• The local tax on the transfer of property (‰).

General Comment

There have been no significant changes in the size of local taxes and fees in recent years. Changes regarding the annual license tax for retailers have been the most uncommon, and the most frequently atered fee is  the annual waste collection charge for properties of legal entities. With regard to the entire period 2013–2015, the waste collection charge was decreased more times (58) than it was increased (48).

We have observed 86 instances of decreases and 122 instances of increases of the local taxes and fees under consideration . Most probably the actual amendments (in both directions) have been more than the ones registered by our team, but provided there is no official database to enhance the analysis, we present to your attention the results of our study of the information gathered under the APIA.

Number of instances of increasing and decreasing local taxes and fees from 2013 to 2015

Source: IME on the basis of inquiries to municipalities under the APIA

It is notable that:

• The levels of local taxes and fees are largely a result of the availability, or the lack, of investments and functioning businesses. The levels of local taxes and fees remain relatively high in the biggest economic centres, and relatively low in the low developed ones.
• Neither high taxes and fees discourage investors from starting businesses, and the people from migrating to districts possessing relatively high tax burden, nor low taxes and fees manage to attract entrepreneurs and immigrants in the less developed districts.

It is clear that the factors defining any decision for starting a business, or migrating to a municipality/district, are rather related to the size of the local market, the quality of infrastructure, the availability of workers, job opportunities, the social environment, etc.

In other words, there is no observable tax competition between municipalities. This is not surprising in view of the fact that the main part of the tax burden, for any company, is actually towards the central government (via labor and corporate taxes, social security contributions and indirect taxation), and not to the municipalities. No matter how much a municipality tries to decrease the size of the taxes and fees collected by it, it is hard for it to achieve such an effect on the overall tax burden that is able to offset other flaws of the local investment environment (for instance, the small size of the local market, the remoteness of the region, or the poor infrastructural development of the district).

The proposal for granting more tax powers to municipalities, which was revoked several weeks ago (the ability to collect 2% income tax in addition to the already collected one) could theoretically spur tax competition, but it would also increase the overall tax burden on the economy.

Increasing the financial independence, accompanied by a territorial and administrative reform, constitutes a strategy whereby the depressed districts could regain their attractiveness for people and businesses. In order to achieve this, however, it is necessary that the financial decentralisation should not only be discussed, but it should be set forth within the clear framework of the current tax burden. The best method is to gradually grant an increasing share of the revenues that are already collected to municipalities untill achieving a degree of differentiation that would allow the more depressed districts to offer much better business conditions than the more developed ones.

Zornitsa Slavova

The 2015 edition of “Regional profiles: Indicators of Development” which was presented in the beginning of November 2015, was the first to include indicators for security and justice on regional level.

We observe an interesting correlation between the indicators that describe crime and the work of courts on one hand, and economic development on the other. In economically developed districts there are more crimes against the person and property and the work of local justice systems is more problematic.

For instance, the most economically developed district – Sofia (cap.) – is also the one with worst indicators in the sphere of security and justice. The same goes for districts like, Blagoevgrad, Burgas and Varna. On the other side, districts such as Kurdzhali, Smolyan, Silistra and Lovech are characterized with low criminality and relatively effective local justice system, but poor economic development. As usual, there are exceptions –Gabrovo, while among the districts with best economic indicators also registers relatively low crime levels, moderate work load and relatively effective work of criminal judges at district courts. Yet the districts Kyustendil, Sliven and Montana illustrate combination between economy and performance of security and justice, both at poor level.

Crimes

In the last 15 years, registered crimes against the property on a national level declined from average 105.8 per 10,000 people in 2000 to 89 per 10,000 people in 2014. A slight increase is noticed in the crimes against person: from 4.5 per 10,000 people in 2000 to 5.9 per 10,000 people in 2014. In 2014, the districts Smolyan, Kardzhali and Silistra are characterized with the lowest crime levels in the entire country, as they demonstrate the lowest number of crimes against local population in both categories. Crime levels in Sofia, Varna and Burgas are nearly 4 times higher than this within districts Smolyan, Kardzhali and Silistra.

It should be mentioned that our analysis is based on registered crimes in only, Presumably in some districts the effectiveness of the police and/or the social trust in its work are lower, which may lead to artificially low levels of registered crimes. In the recently published issue of Index of Economic freedom, Bulgaria is distinguished as one of the countries where people have the lowest trust in the police, so this is probably a serious factor when interpreting the data.

Courts of justice

The data about the workload of judges in district courts also display a proportional relation with the state of regional economic development. In more developed districts such as Sofia (capital), Stara Zagora, Plovdiv, Varna and Burgas the workload of courts is higher. It is interesting to note that both in courts with high workload and in courts with low workload, effectiveness measured as the share of pending penal cases and the share of penal cases finished in a 3 month period is relatively low. From 2010 to 2013 the workload of judges from penal departments of district courts has decreased from 10.8 to 8.3 cases per month per judge. At the same time this does not reflect the duration of cases.

Although that measured against 2010 the workload of judges declines with over 30% in 2013, the share of cases completed in a 3 month period, decreases with barely 2.7 percentage points (from 91.1% to 88.4 %), and the share of pending cases increases with 0.7 pp (from 7.8 % to 8.5%). This is a sign for deepening ineffectiveness of law enforcement system on local level.

Yavor Aleksiev

Two weeks ago we showed what would happen to the country’s average levels of  unemployment, employment, and economic activity, provided Sofia was excluded from the calculations. While the deterioration of certain indicators is to be expected, provided the leading economic centre of Bulgaria is not considered, their dynamics suggest some interesting observations. Here we  focus on two additional indicators: the GDP per capita (in current prices) and the salaries of employees. Regarding both indicators, the capital city’s effect on the national averages is considerable.

GDP per Capita

If we exclude the capital, the GDP per capita would decline from 11,283 BGN per capita to 8,347 BGN per capita in 2013, or by 26% (Figure 1). In the period from 2000 to 2010 the effect of the capital city on the average per capita GDP increased steadily. Disregarding Sofia would have caused a drop of 12.1% from the national average in 2000, while this figure would have already been 27.9% in 2010. This effect slightly weakened in 2011 and 2012 to 25.8% in order to increase again to just over 26% in 2013.

Figure 1: GDP per capita (2000–2013, BGN)

Source: NSI, calculations by IME

If the capital city is not considered, a total of seven districts would surpass the national average level of the GDP per capita. These are Varna, Sofia (region), Burgas, Plovdiv, Gabrovo, Ruse, and Vratsa.

Figure 2: GDP per capita in 2013, BGN

Source: NSI, calculations by IME

Salaries of Employees

Wages in Sofia (cap.) play an ever larger role in determining their average size on the national level. While the difference between the wages of employees, including and excluding the capital city, was barely 5.9% in 2000, in 2013 it was as high as 16.7%. The effect of the capital city’s salaries on the national averages considerably increased from 2006 to 2008 because of the economic boom in Sofia.

Figure 3: Average annual salary (2000–2013, BGN)

Source: NSI, calculations by IME

If we exclude Sofia (cap.), the average annual wages would have been higher than the country’s average in the districts of Sofia (district), Varna, Burgas, Plovdiv, and Gabrovo. Compared to the year 2000, the districts of Pernik and Kyustendil have lagged the most. These two districts would have reported higher salaries compared to the country average in 2000 if the capital city was disregarded. A possible explanation for that could be the decline of some local industries and also the intensification of the daily labour migration to the capital city. The reason thereof is that the statistics calculate wage levels depending on the place of work, and not on the residence.

Figure 4: Average annual salary (2013, BGN)

Source: NSI, calculations by IME

These calculations demonstrate that the capital city has an increasing impact on the country’s average values of GDP per capita and wages since the beginning of the new millennium. This effect has increased more slowly since 2008 (regarding wages) and has slightly dropped compared to its peak levels (regarding GDP per capita). Nevertheless, it seems that this trend will also continue in the coming years. One of main reasons for that, of course, is the ongoing concentration of businesses and the increasing population of the capital city. In 2013 some districts, such as Burgas and Plovdiv, succeeded in not only maintaining the growth rate of wages and the GDP per capita of the capital city, but they considerably offset their lagging in terms of investments. Other districts, however, continued to lag behind.

The observations above presuppose higher attention to the implementation of policies based on national-level indicators. Despite the common acknowledgement of this conclusion, its actual implementation has continued to be more of an exclusion than a rule. This constitutes a kind of political and institutional sloth that the regional development of Bulgaria cannot afford.

For the fourth consecutive year the Institute for Market Economics (IME) presented the only one of its scale and depth study of the social and economic state of districts in Bulgaria. The press-conference took place on November 9th 2015 in BTA. The English version of the study will also be available by the end of the year.

Regional Profiles: Indicators of Development 2015 (BG only)

presentation (BG only) | handout (BG only)

The research is published at a time when newly selected mayors are expected to propose the most effective policies for regional development. We believe that the publication would be helpful in resolving these issues because it outlines both the advantages of every district, as well as the challenges they face.

This year’s edition of “Regional Profiles” also includes analysis of the work of local justice systems, due to the undeniable importance of justice for the social environment and the conditions for doing business on local level.

Some of the questions that the study tries to give an answer to are:

• In which districts incomes and salaries are the highest?
• What does the poverty map of the country look like?
• Which territories attract the most investment after the crisis?
• Is there a connection between the level of economic development and crime levels?
• In which districts are local administrative services most developed?
• Where are the demographic tendencies most adverse?
• How does the justice system work on local level?
• Does the quality of education depend on the economy?
• Do the rates of local taxes and fees have an impact on decisions for investments?

9^th November 2015 | 11:00 - 12:00

Pressclub BTA

For the fourth consecutive year the Institute for Market Economics (IME) will present the only one of its scale and depth study of the social and economic state of districts in Bulgaria. The research is published at a time when newly selected mayors are expected to propose the most effective policies for regional development. We believe that the publication would be helpful in resolving these issues because it outlines both the advantages of every district, as well as the challenges they face.

The preconference will be in Bulgarian.

This year’s edition of “Regional Profiles” also includes analysis of the work of local justice systems, due to the undeniable importance of justice for the social environment and the conditions for doing business on local level.  

Some of the questions that the study tries to give an answer to are:

• In which districts incomes and salaries are the highest?
• What does the poverty map of the country look like?
• Which territories attract the most investment after the crisis?
• Is there a connection between the level of economic development and crime levels?
• In which districts are local administrative services most developed?
• Where are the demographic tendencies most adverse?
• How does the justice system work on local level?
• Does the quality of education depend on the economy?
• Do the rates of local taxes and fees have an impact on decisions for investments?

The results from the study will be presented by:

Desislava Nikolova, Ph.D, chief economist, IME

Petar Ganev, senior economist, IME

Yavor Aleksiev, economist, IME

Aleksander Tsvetkov, Ph.D, Director, Regiostat

All analyses, data and other materials related to the study will be uploaded on the specialized website of the project at: http://www.regionalprofiles.bg

For more information: Vesela Dobrinova (02/952 62 66, vessela@ime.bg)