News

Yavor Aleksiev

In June 2014 the IME organized six regional roundtables focused on important issues of regional development. The first three events were held in Blagoevgrad, Plovdiv and Stara Zagora in the second week of June. The main impressions of the IME regarding South Bulgaria are available here. The meetings were attended  by a number of local businesses and NGOs as well as local and regional authorities. The round tables were organized with the active support of the Bulgarian Chamber of Commerce and Industry (BCCI). The series of roundtables is part of the preparation of the forthcoming third edition of the "Regional Profile: Indicators of Development", published with the financial support of the "America for Bulgaria".

The economic recovery in Northern Bulgaria continues to be barely noticeable. In some places (such as the Silistra District) even increasingly negative trends are observed. With regard to the labor market sustainable improvement is noticeable only in Northeastern Bulgaria, especially in the districts of Varna and Dobrich. Despite positive trends in these two districts and generally positive expectations that were shared by businesses in a survey, conducted by IME in May, employers' organizations are skeptical about further recovery in the labor market this year. They point out four main reasons:

• continuing uncertainty about the "South Stream" project;
• geopolitical crisis in Ukraine, which is a leading export market for many companies in the North East and the North Central Region;
• potential adverse effects of bad weather on agricultural production;
• expectations for declining flow of tourists from Russia and Ukraine, resulting in a weaker tourist season

The continuing political instability and the populist rhetoric of some parties in Parliament have a strong negative impact on foreign investments. As a result, some investment projects in the industrial sector in Gabrovo have been frozen or terminated. Another serious problem for Gabrovo is the lack of appropriate municipal land, which can be used to attract potential investors. According to representatives of both local business and local government, in many cases the ownership of such lands is not settled, or they are already taken-up by old factories, which although privatized, have not been active for years. Communication between the municipality, potential investors and the current owners of such lands and factories is very difficult, which prevents their sale/rent and use.

Local administrations are very concerned about the potential suspension of some European programs. A recent example is the municipality of Troyan (Lovech), which just a few days ago had to borrow 5 million BGN to settle payments with the companies implementing the project for the city’s integrated water cycle. Suspension of funds under OP "Environment" can have negative consequences on the financial state of this and other municipalities in the region.

The effect of the opening of Danube Bridge-2 is assessed as positive, but the poor condition of the road network in much of the region and the lack of highway roads in the Northwest and the North Central region of the country hamper further potential benefits of the facility.

The lack of adequately educated young staff is a serious problem, especially in areas such as Vratsa and Veliko Tarnovo. There are no examples of successful collaboration between local businesses, local governments and educational institutions. Educational equipment is outdated. Another serious problem is the lack of strategic investors and large companies in the North West region of the country, with the notable exception of NPP "Kozloduy".

There is a positive attitude towards the idea of ​​increasing the financial authority and independence of municipalities (e.g. retaining some part of the personal income tax) in order to provide additional incentives for local governments to attract investment.

Yavor Aleksiev

In May 2014 The IME conducted a nationwide survey of 1680 companies for the purposes of the forthcoming third edition of the study "Regional Profiles: Indicators of Development".

The survey included questions assessing the expectations of enterprises about future investment and income dynamics, as well as their expectations of hiring or releasing employees. The results we obtained are in line with the consensus of a recovering labor market and point to more jobs and higher investment activity over the next 12 months.

Main findings

During the same period of last year businesses expected increases in the number of employees in only 10 of the country’s 28 districts. Our latest survey shows that this year annual employment is expected to remain stable or increase in practically every district of the country.

A significant increase of employees is expected in nine districts, including three in the Northeast region (Varna, Targovishte and Shumen), one in the Southwest (Kyustendil), three in the South-central region (Pazardzhik, Plovdiv and Haskovo) and two in the Southeast region (Sliven and Burgas).
The group of districts in which businesses believe that the number of employees will remain stable or will register insignificant increases includes Veliko Tarnovo, Stara Zagora, Razgrad, Pleven, Pernik, Gabrovo and Blagoevgrad.

These expectations are in line with three main trends that the IME pointed out in the summer of last year:

• The labor market recovery in 2012 and 2013 was lead by the South-central and South Eastern regions of the country; in view of the expectations of businesses this trend is likely to continue in 2014 and 2015.
• The labor market in Southern Bulgaria is recovering much faster than the northern part of the country; there are no districts in the Northwest and North-central regions of the country with clearly defined positive employment expectations.
• The increasing economic activity in the district of Varna will most likely facilitate job creation in Shumen and Targovishte in the second half of 2014 and the first half of 2015;

Main factors affecting business

Enterprises point to both credit accessibility and EU funding as leading business environment factors. Both of these enjoy a more positive assessment by larger companies (those with over 50 employees), but the perception among micro firms and small firms is also mostly positive. At the same time, despite the high average rating of EU funds, 32.5% of respondents could not evaluate their effect.

In line with results from previous studies as well as other IME labor market analyses, the local labor market comes forward as the leading negative business environment factor. Businesses in Sofia (district), Dobrich, Pernik, Vratsa and Sliven find it the most difficult to find suitable employees.

Business environment factors such as infrastructure and the quality and speed of administrative services are considered somewhat neutral. In turn, the size of the domestic market (domestic consumption) is a problem especially for micro-firms and small enterprises.

Additional information about the IME survey among businesses will be posted on the website of the project "Regional Profile: Indicators of Development" in the coming weeks.

Yavor Aleksiev

Over the past week, the Institute for Market Economics (IME) organized its first series of round tables throughout the country (June 9^th-12^th), focusing on current issues of regional development. The first three round tables were held in Blagoevgrad, Plovdiv and Stara Zagora and included representatives of local businesses and NGOs, as well as representatives of district and municipaladministrations.

Main impressions from Southern Bulgaria

The Southern Central and the Southeast regions continue to be the main drivers of the economic recovery of the country in 2014. Several districts (like Pazardzhik, Plovdiv and Sliven) enjoy increased investment interest and rising employment in 2013, as well as in the beginning of 2014. The economic recovery of Burgas is also well underway – a strong summer season may result in annual employment levels surpassing those before the crisis. The labor market in Southeast Bulgaria remains subdued, which has a negative effect on the economic recovery of Blagoevgrad, Pernik and Kyustendil. Sofia (capital) is the only district that registered positive tendencies in 2013 and the first quarter of 2014.

Positive tendencies:

• Increasing investment potential and stronger interest towards the IT sector in Plovdiv;
• Postponement of planned staff cuts in leading companies in and around Stara Zagora, despite continuing economic uncertainty;
• Positive effect of putting the Trakia Highway into operation on economic activity in the districts of Yambol and Sliven;
• ncreasing investment activity in one of the country’s poorest districts – Silven, coupled with tendencies for an increasing number of jobs in the second half of 2014;
• Positive business expectations regarding employment, investment and revenue levels in most Southern districts, including some of the poorest ones;
• The local administration in the district of Plovdiv realizes the extent of missed opportunities for more active participation in the Operational Programs of the EU – measures have been taken to esure higher EU funds’ absorption and there are, in our opinion, realistic expectations for improving effectiveness in the near future;
• There is a prevailing positive attitude towards the idea of increasing the financial authority and autonomy of municipalities (for instance, through the retention of a part of the income tax, paid by employees in their jurisdiction), which aims to create additional incentives for local administrations to attract investment.

Negative tendencies:

• The lack of adequately qualified workforce (for both local and international businesses) is a problem that to a vast extend defeats two of the main competitive advantages of the Bulgarian economy – low taxes and low labor costs;
• Although in some places (Blagoevgrad) there are recent examples of successful cooperation between local businesses, educational establishments and the local administration, the postponed adoption of more up-to-date legislation in the educational field hinders the synchronization between labor market needs and the educational system;
• Businesses are negatively affected by the continuing political crisis;
• Local administrations are seriously concerned about the prospect of a potential freeze of funds under some European programs;
• The uncertainty in the energy sector is a problem of particular importance to businesses in some districts (especially Stara Zagora);
• The lack of strategic investors in some districts of the country (like Blagoevgrad) and newly opened enterprises is a serious issue. The prevailing impression is that the vast majority of foreign capital is attracted by a drive for quick returns, which does not give opportunities for long-term economic development and income increase.

During the next week the IME will organize a series of round tables in Varna, Gabrovo and Vratsa:

Monday, June 16, 2014 Varna

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Varna and the Northeastern region, followed by a discussion
• Location: Varna Radio Concert Studio
• Start: 9:45

Wednesday, June 18, 2014 Gabrovo

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Gabrovo and the North Central region, followed by a discussion
• Location : Technical University - Gabrovo , Library Hall
• Start: 9:45

Thursday, June 19, 2014 Vratsa

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Vratsa and the North Central region, followed by a discussion
• Location: Chamber of Commerce and Industry Vratsa
• Start: 9:45

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The events will be held in Bulgarian.

Join us! For more information and registration:
Vessela Dobrinova | vessela@ime.bg | (+359 2) 952 62 66

The series of round tables is a part of the preparation of the forthcoming study “Regional Profiles: Indicators of Development 2014”, carried out with the financial support of the “America for Bulgaria” Foundation.

Between 9^th and 19^th June 2014 a team of IME economists will visit and organize a series of roundtables in Blagoevgrad, Plovdiv, Stara Zagora, Varna, Gabrovo and Vratsa. The tour is part of the preparation of the third edition of the study "Regional Profiles: Indicators of Development", carried out with the financial support of the "America for Bulgaria" Foundation.

The roundtables are organized with the support of the central and local structures of the Bulgarian Chamber of Commerce and Industry.

Monday, June 9th, 2014 Blagoevgrad

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Blagoevgrad and the Southwest region , followed by a discussion
• Location : American University in Bulgaria , Red Hall
• Start: 9:45

Wednesday, June 11, 2014 Plovdiv

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Plovdiv and the South Central region, followed by a discussion
• Presentation of the investment profile of Plovdiv and the region (Industry Watch)
• Location: Novotel Plovdiv hall " Moscow"
• Start: 9:45

Thursday, June 12, 2014 Stara Zagora

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Stara Zagora and the Southeast region, followed by a discussion
• Location: Chamber of Commerce and Industry Stara Zagora, Georgi Rakovski 66
• Start: 9:45

Monday, June 16, 2014 Varna

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Varna and the Northeastern region, followed by a discussion
• Location: Varna Radio Concert Studio
• Start: 9:45

Wednesday, June 18, 2014 Gabrovo

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Gabrovo and the North Central region, followed by a discussion
• Location : Technical University - Gabrovo , Library Hall
• Start: 9:45

Thursday, June 19, 2014 Vratsa

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Vratsa and the North Central region, followed by a discussion
• Location: Chamber of Commerce and Industry Vratsa
• Start: 9:45

The events will be held in Bulgarian.

Join us! For more information and registration:
Vessela Dobrinova | vessela@ime.bg | (+359 2) 952 62 66

Despite the recently published positive labor market data, the number of employees under labor contract decreased on an annual basis in each of the first three months of 2014. The decline is concentrated mostly in the poorest areas of the country and is accompanied by a rise in the level of wages - a trend that deserves further attention.

Yavor Aleksiev

According to NSI’s last quarterly labor force survey the number of people employed in the first quarter of 2014 are 39 thousand more than the same period of last year. At the same time, the number of employees under labor contract in the country continues to decline in each of the first three months of the year (yoy), dropping to 2,216 million at the end of March 2014, compared to 2,231 million in March 2013.

The discrepancy of the two indicators is due to the different scope of the data presented in the labor force survey and the short term statistics on the number of people employed under labor contract and their average wages. NSI’s quarterly labor force survey includes all employed, i.e. it is based on survey among a sample of the entire population. Meanwhile, the short term statistics on the number of people employed under labor contract and their average wages are based on a sample of enterprises in both the private and the public sector. These include employees with existing labor contracts, but do not cover the so-called self-employed, or people working under civil contracts and others.

Therefore, the number of employees under labor contract is always smaller than the number of employed in the economy as a whole. Despite that, there has also been some improvement in the dynamics of first quarter data on employees under labor contract. The number of employees under labor contract in the first quarter fell by only 0.6% on an annual basis, which is the most positive result in years.

Figure 1: Annual dynamics of the number of employees under labor contract, %

Source: NSI

In the first quarter of 2014 there is a significant negative correlation (-0.58) between the annual growth in the average wages of employees under labor contract at the district level and the initial levels of those wages in the first quarter of 2013. This means that wages in districts where remuneration is usually higher have been increasing more slowly than wages in areas where they are traditionally lower. This is a somewhat expected result of the minimum wage increase at the beginning of 2014, In the poorer districts where wages are lower, increasing the minimum payments puts upward pressure on average wage levels, thus increasing the average wage. The available data on the number of employees under labor contract and their wages enable us to make some further observations.

Sofia (capital) is the only district in which the wages[1] of employees under labor contract decrease on an annual basis in the first quarter of the year (Figure 2). Other districts with traditionally high wages, but a relatively low increase are Burgas and Stara Zagora. This means that in three of the districts with the highest wage levels in the country, the annual increase in average pay is below the national average of 2.3%. At the same time, some of the largest wage increases are registered in some of the poorest districts. These are Vidin (12.1 %), Razgrad (11.1 %) and Silistra (10.1 %). In each of these three districts, however, the number of employees under labor contract continued to decline. The parallel growth of average pay and the declining number employees could mean that the latest minimum wage increase has forced employers to continue releasing some of their low-paid workers. Statistically, this has the effect of driving average wages in the enterprises concerned higher, which in turn raises average wage levels in respective districts.

Figure 2: Average wage in the first quarter of 2013 and increase registered in the first quarter of 2014 by districts

Source: NSI, IME calculations

In 10 of the 14 districts in which the increase in the average wage of employees under labor contract is higher than the national average (if we exclude the effect of the capital), and wage levels are lower than the national average, there have been three consecutive months of decline in the number of employees on an annual basis. Among them are three of the Northwest region districts - Vidin, Lovech and Montana, where in March the number of people employed under labor contract is 5% lower than the same period last year. Similar developments in terms of the number of employees can also be seen in other relatively less developed districts in the country like Silistra and Razgrad .

Targovishte, Yambol, Smolyan and Veliko Tarnovo are the four districts in which the increase in wages at a rate faster than the national average is not accompanied by a decline in the number of employees.

Meanwhile the labor market has performed relatively well in districts with traditionally higher wages, where the annual increase of remuneration is lower or in line with the national average (excluding the effect of the capital). Most such places observed timid growth or minimal decrease of the number of employees. Such is the case in Sofia district), Plovdiv and Varna.

It is likely that the data reflect a shrinking shadow economy in large districts, a process which puts a downward pressure the level of average wages. A possible explanation of this process can be found in the recently introduced tax incentives for low-income people (the possibility for those receiving minimum wages to request a refund of their income tax for 2014 in the spring of 2015). At the same time, we see no increases in the number of employees in the vast majority of poor districts (on the contrary), despite rising wages. We can speculate that employees there are being released, or that they move into the informal economy. Forthcoming labor survey data on employment at the district level, will allow further examination of this issue.

This is the first time since the beginning of the crisis, when such a significant negative correlation exists between these two factors – rising wage levels and their proportional effect on remuneration in districts where labor is not as well paid. This may be a sign of hitting the ceiling of business’ capabilities to pay a higher minimum wage in some districts. Although data on the labor force survey gives some hope that the negative effect of an increasing minimum wage has been relatively relatively well contained, any subsequent increase should be subject to careful analysis of labor market developments smaller districts.

Yavor Aleksiev

In recent years EU operational program fund utilization has become a leading prerequisite for the successful realization of many rural development, infrastructure and environmental projects on the local level. Although the actual payments as of January 31st, 2014 amount to less than 40% of all the value of all contracts of Bulgarian municipalities as beneficiaries of EU funding, the speed and scope of utilization is quite diverse.

To analyze their dynamics, we’ve used data provided by the Unified Management System for the EU Structural Instruments in Bulgaria[1]. By January 31, 2014 the total utilization of EU funds by Bulgarian municipalities amounts to 2.76 billion BGN and the total value of all contracts amounts to 7.55 billion BGN.

Utilization at district level

EU fund utilization is highest among municipalities in the district of Burgas – 285.7 million BGN, and lowest among municipalities in the district of Kuystendil – 23.2 million BGN. A clearer representation of the different speed of EU fund utilization is shown in the figure below, which shows the per capita utilization in different districts[2]. In per capita terms utilization is highest in Gabrovo, Burgas and Sofia, and lowest in Ruse, Kuystendil and Stara Zagora.

Source: IME

Municipal level

The comparison of EU fund utilization and IME data on e-government development in 226 municipalities (provided by the municipalities themselves) shows no correlation between the scope and quality of e-services, provided by local authorities, and their utilization of EU funds. There are plenty of examples of both municipalities with low level of e-government development which have managed to attract significant EU funding (like Hissarya and Pirdop), and municipalities with well developed-services with relatively low EU fund utilization rate (like Petrich and Pazardzhik). A slightly stronger, but statistically insignificant correlation can be found between municipalities’ one-stop-shop capabilities and their EU fund utilization results. In other words, there is no evidence that these two factors have any effect on the capabilities of municipalities to attract projects, which may be attributed to the specific characteristics of EU fund distribution mechanisms. Having a modern local administration is by no means a prerequisite for the attraction of EU funding, but may theoretically have relevance to the successful completion of planned activities.

The highest rate of per capita EU operational program fund utilization is observed in Pirdop – 4 373 BGN per capita, and an overall population of just 8 thousand people. As of January 31^st, 2014 the total sum of EU fund utilization by the municipality amounts to 35.5 million BGN, with further contracts for about 10 million BGN. In comparison to that the municipality of Kazanlak, which has a total population of over 70 thousand people, has managed to utilize just 20.2 million BGN. In other words – in a municipality where the population is 10 times larger, utilization is two times lower.

Among well performing municipalities are also several small in size resorts like Hissarya (3 204 BGN per capita), Primorsko (2 852 BGN) and Sozopol (2 463 BGN). Kostinbrod also caught our attention with a per capita utilization of 3 419 BGN. The lowest utilization is registered in Gramada (0 BGN per capita), Kovachevtsi (0 BGN), Alfatar (2 BGN), Simeonovgrad (4 BGN) and Nevestino (5 BGN). The municipalities of Gramada and Kovachevtsi haven’t managed to attract a single project. Gramada has only put forward 2 project proposals, both of which were turned down.

• EU fund utilization surpasses 1 000 BGN per capita in 26 municipalities. Among these are Gabrovo and Dobrich (city) – the only district centres in this group. The municipality of Byala (Varna district) deserves a mention with a population of a little over 3 thousand people and value of concluded payments of over 7 million BGN.
• EU fund utilization is below 1 000 BGN per capita, but above the national average of 379.8 BGN per capita, in 64 municipalities. Twelve of those are district centres like Burgas, Vratsa and Lovech.
• The largest group consists of 121 municipalities, where EU fund utilization is below the national average of 379.8 BGN per capita, but above 100 BGN per capita.
• EU fund utilization is below 100 BGN per capita in 52 municipalities, among which are Plovdiv and Kuystendil - the only district centers with such a low result. It is worth mentioning that both municipalities have negotiated contracts for more than 100 million BGN in EU funding. However, their actual utilization is still to come.

The fact that 7 years after Bulgaria’s EU accession there are still municipalities that haven’t been able to secure any EU funding, is indicative of the nature of the problems. Apart from the purely administrative weakness of some smaller municipalities, this is due to other important factors and circumstances such as the quality of the strategic development documents, as well as the coordination between local and central authorities.

The continuing problems in some municipalities threaten to turn the absorption of EU funds in an increasingly serious problem in some areas of the country where the need for such projects is greatest. The reason is that other municipalities gain project experience and develop best practices, while those 52 municipalities where EU fund utilization as of January 31, 2014 was less than 100 BGN per capita, are becoming less able to compete for EU funds. These communities are scattered throughout the country. With the exception of the capital, only three districts (Gabrovo, Targovishte and Shumen) have no such municipalities.

Source: IME

Petar Ganev

Despite being quite intriguing the data concerning poverty and inequality on the local level are often overlooked. It is widely known that every fifth Bulgarian lives below the poverty line, but regional differences are mostly ignored – for example in Vidin and Sliven this is the case for practically every third person. What’s more – every district has its own poverty line, which is formed by the median income in the district itself, in other words – this is the measure of the relative poverty levels in each separate district. The poverty line in Vidin is almost two times lower than the one in Sofia. Despite that the relative share of people below it is two times larger. Does this imply that the development of a given district leads to decreasing income inequality and vice-versa – does the lack of development lead to higher income inequality?

The poverty line in Bulgaria is a relative measure of poverty. Thus it is also a measure of inequality, since it is determined by the median income levels. Simply put – a poor person is someone whose income is lower than the income of others. Despite all the conditionality that the regional data on income and inequality levels suggest, the overview of the situation in Bulgarian districts gives a more or less affirmative answer to the questions above. Richer districts, where GDP per capita levels are higher, are usually the ones where fewer people live below the district’s relative poverty line. This also holds true for local inequality, measured by the ratio between the income of the richest and poorest 20% of households in those districts. This ratio varies from 3.5 in Blagoevgrad to over 10.0 in Vidin, Pazardzhik and Sliven.

In both cases there are examples of poor districts, where income inequality is relatively low. However, there are hardly any examples of rich districts, where income inequality is high. For instance, Kardzhali and Lovech are poor districts, where income inequality is low. Stara Zagora is an example of a relatively rich district, where inequality is high. The overall view, however, doesn’t suggest a negative correlation between better economic development and rising inequality. These observations for the most part also hold true when we look at the Gini coefficient at the local level.

If we replace GDP per capita indicator with employment ratios, the correlation is even clearer. The assumption that higher employment leads to lower inequality is confirmed by the data. What’s even more interesting is that there is a strong correlation between the employment ratios and the poverty line itself – more jobs lead to higher median income levels, while also reducing the share of people living below that line. This is another argument that leads us to conclude that the focus of policies, targeted at reducing poverty should be on creating more jobs and not on income policies. The latter usually includes not only income redistribution, but also labor market interventions, which despite aiming to help the employed, actually drive the price of labor up and hinder job creation, especially in poorer districts.