EKIP– Expert Club for Economics and Politics A Different Opinion
The recession in Bulgaria and the subsequent stagnation clearly highlighted the problems of the economy, which remained in the shadow of the strong growth at the beginning of the century. However, in the midst of political debates and promises, populism and social policy were the ones that reached their peak, and constructive solutions seemed to be missing again. In this context, reaching “European standards” is becoming more of a myth than a realistically achievable goal, and the reasons for this unfortunately remain far from public attention.
As in previous elections, comparisons with European economies have come to the fore. Whether these discussions and the arguments used in them are reasonable is an open question. What is striking, however, is the tendency to focus more on the very existence of the difference than on the reasons for its preservation.
Graphic 1:
GDP per capita (Purchasing power parity, PPP)
One of the standard methods for measuring the level of development between different economies is GDP per capita. Chart 1 shows that despite the low levels from which Bulgaria started, the economy has not shown progress compared to EU countries. The relatively equal growth of the economies of the member states and Bulgaria for the last 11 years shows that we are actually far from catching up with European economies. In 2011, the GDP per capita values in Bulgaria reached only 46% of the EU average. Although we are making progress in this regard, the comparison with countries such as Belgium, the Netherlands and Austria look much bleaker – 39%, 35% and 36% respectively.
The question is why are we failing to close this gap? One of the serious obstacles to the convergence process, according to the IMF [1], is the shrinking labor force due to an aging population. The country's labor force decreased by 7.7% between 2000 and 2010 and is expected to shrink by a further 18.9% by 2025. This in turn puts serious pressure on economic growth in the long term.
At the same time, a major problem remains labor productivity, which remains far from the average levels in the member states. Labor productivity, measured by GDP per employee, is an indicator of the added value of human capital. The higher the value of this indicator, the more goods and services can be produced by the employed in an economy. The data for Bulgaria are not promising (Figure 2).
Figure 2. Income, productivity and employment in Bulgaria and the EU (Bulgaria 2000 = 100)
In a context of a shrinking workforce, labour productivity remains the most important factor for convergence with EU GDP per capita levels. Figure 2 demonstrates key trends in several areas. On the one hand, the growth of labour productivity in the country for the period 2000-2006 exceeded that in the EU, reaching 25%. On the other hand, the subsequent growth of the indicator after the onset of the crisis is mainly due to the sharp contraction of employment. For the period 2008-2011, the number of employed people contracted by 11.8%, while real GDP registered a decrease of 3.5% [2].
In other words, from a technical point of view, we observe the denominator effect. Third, in addition to the growth of a given indicator, it is necessary to consider its absolute levels. The reason is obvious - the greater the differences between labor productivity in Bulgaria and the EU, the higher the growth of the indicator in the country must be in order to reach the desired levels.
According to the IMF, it is precisely the improvement of human capital that will reduce the income gap between Bulgaria and the EU. If the country achieves 4.25% annual productivity growth by 2040, it will be possible to equalize GDP per capita in Bulgaria and Portugal (the country with the lowest levels of this indicator in the Eurozone). To narrow the gap with the average levels for the EU, annual growth of 5.75% will be necessary.
However, whichever scenario we consider, a significant improvement in labor productivity is needed, as the average annual growth for the period 2000-2011 was only 3.75% (Chart 3).
Chart 3. GDP per capita ($US )
The existence of subjectivity regarding the accuracy of such forecasts does not prevent us from drawing some basic conclusions. First of all, it is obvious that the current model for “guiding” the Bulgarian economy is extremely ineffective, if we assume that the goal is indeed to reach the so-called European standards. Of course, we cannot rely on a prolonged contraction in employment to surpass the growth of labor productivity in the EU.
In this line of thought, we come to the conclusion that structural reforms are needed – again a term that is extremely misunderstood by the contemporary political class in the country. The point of these reforms is to achieve a real change in the way the various components of the economy function and interact, be it the public and private sectors or the labor market and education. In absolute contrast to this, however, are the nominal changes always promised by politicians, the most popular of which are increases in minimum wages and pensions, unemployment benefits or increases in education spending without a clear constructive idea behind these expenditures.
What are the appropriate structural reforms in question, the reasons why labor productivity in Bulgaria fails to achieve the dreamed-of high growth, and how economic growth is actually not such a complicated task, we will examine in the second part of "Why European standards remain a mirage"?
