ITUC Frontlines Report 2012: Section on Bulgaria
The following is an excerpt from the Frontlines 2012 report of the International Trade Union Confederation (ITUC) published in Tokyo, October 2012.
The ITUC Frontlines 2012 report gives an over view of global economic conditions and a snapshot of six countries including Bulgaria, Dominican Republic, Greece, Indonesia, Nepal, Zambia where growth, jobs and workers' rights are in sharp decline.
ITUC Frontlines 2012: Bulgaria
Bulgaria provides stark evidence that an economic strategy based on low wages and labour market flexibility will fail. For more than a decade Bulgaria has been encouraged to pursue such a strategy by both the IMF and the European Union. Unfortunately the country closely followed this guidance resulting in catastrophic consequences. Within the EU Bulgaria has endured one of the worst labour market performances since the onset of the global economic crisis despite having by far the lowest wages and one of the most flexible labour markets in the region. Living and working conditions in Bulgaria remain at levels that should not be tolerated in the EU.
The Bulgaria record demonstrates that the draconian labour market reforms being forced on workers in Greece, Portugal, Spain, Italy and other peripheral countries in Europe are misplaced.
Bulgaria requires a significant reversal in its economic and social policy. It must move urgently from a "low road" to a "high road" strategy by encouraging investment in more productive and better paying industries. To do so requires investment in physical infrastructure and human capital development as well as a comprehensive industry policy. It also requires a significant boost to wages and social benefits plus an expansion of collective bargaining. Bulgaria is fortunate to have the fiscal space to make such critical investments if the political will can be mustered. The removal of the current "flat tax" regime and a more effective crackdown on corruption would provide even more resources for productive public investment.
1. Recent macro economic trends
The economic challenges confronting Bulgaria are substantial. The global recession hit economic growth in Bulgaria relatively severely, with real GDP declining by roughly 9% from a peak in the fourth quarter of 2008 to the trough in the fourth quarter of 2009. While there were some tentative signs that economic growth was starting to recover during 2010 and the early part of 2011, this was almost entirely due to a pick-up in net exports. However, exports slowed significantly thereafter.
As a result, economic recovery stalled in mid to late 2011. Since then the economy has been teetering on recession (see Table 1 for details). In Bulgaria, as elsewhere, the global economic crisis and the events that followed were reflected in a dramatic shock to domestic demand. Investment expenditure had been a major contributor to growth in the boom prior to 2008. But both private consumption and investment expenditure declined rapidly in 2009 and 2010. While domestic demand had started to recover in many of the EU-New Member States by early 2011, there is no clear sign of a substantial turn-around in these two key drivers of growth in Bulgaria.
In fact households are heavily constrained by low incomes, high unemployment, the negative wealth effect of declining property prices and the fear that the jobs market will deteriorate further. While domestic investment is being held back by the legacy of high corporate debt, excess capacity and insipid demand. Severe constraints on access to credit, concerns about liquidity in banks with strong linkages to EU- 15 countries and very high real interest rates are also major factors inhibiting investment.
In the ITUC Global Poll 2012, fear trumps hope for the people of Bulgaria. 75% of respondents think the economic situation is bad.
58% of Bulgarians say family incomes have fallen behind the cost of living. 79% say they are unable to save any money, with Bulgarian coming second after Greece for widespread poverty.
2. Labour market trends
The deterioration in Bulgarian labour market conditions since the recession is among the worst in the EU-27. Despite having a very flexible labour market, Bulgaria has experienced a very large and disproportionate decline in employment compared to the change in output over the same period. Bulgaria lost over half a million jobs during the recession. This is a dramatic outcome for a country where total employment is only around three million. As a result the employment rate declined by nearly six percentage points between 2008 and 2012. Over the same period the unemployment rate more than doubled, and the European Commission has forecast that unemployment will remain above 12% in 2012. This was despite the fact that many people became discouraged and gave up searching for work. It is reflected in a 1.6 percentage point decline in the participation rate between the first quarter of 2008 and 2012. The ILO estimates that if open unemployment and discour¬aged workers are taken together, the composite unemployment rate at the end of 2011 would be close to 19%. See Table 2 for details.
On top of this, outward migration accelerated. Estimates concerning the proportion of Bulgarian citizens living outside the country vary but the numbers are significant. The World Bank recently estimated that in 2010 16% of the population had migrated. Moreover, a survey in 2011 by the Bulgarian Academy of Sciences suggested that an additional 20% of Bulgarians currently working in the country would like to migrate and that this proportion has been increasing in recent years. The main reason cited for wishing to leave Bulgaria is the prospect of better paid and more secure employment outside the country.
3. Wages and indicators of decent work
In the period between 2000 and 2008 Bulgaria – like many other transitional countries in Central and Eastern Europe – experienced average GDP growth rates of about 6% p.a. This outcome relied heavily on strong capital inflows, an excessive expansion of credit to the private corporate sector and a rapid expansion of the non-traded goods sector. This led to the emergence of an unsustainable current account deficit. The pre-crisis growth model proved compatible with increased labour force participation, a significant jump in employment levels and much lower unemployment. However, the gains in labour force participation and employment were not sustained and have been largely reversed since the recession.
While the quantity of employment improved in the pre-recession period, serious questions remain about the quality of the jobs created. The emphasis in public policy on labour market deregulation and increased flexibility over the last decade has been one factor preventing Bulgaria making more progress towards decent work.
For example, wage levels remained very low relative to other EU countries and employment conditions were inferior. Today Bulgaria has by far the lowest wage levels and labour costs among the EU-27 countries. The monthly national minimum wage was frozen for two and half years at 240 BGN (122 Euro) before being increased in September 2011 to 270 BGN or 138 Euro and now stands at 290 BGN (148 Euro). After adjusting for income tax and social security charges, a worker (and their dependents) receiving the minimum wage would have to survive on around 4 Euro per day.
Despite the recent increase, the Bulgarian minimum wage is still around or significantly less than half the minimum wage applying in Poland, Czech Republic, Slovakia, Hungary, Latvia and Estonia and around one-fifth of that in Slovenia ( see Figure 1). Average wages in Bulgaria are a mere fraction of those prevailing in the advanced countries of Europe. But Bulgarian workers also earn less than workers in the other EU-12 countries. For example the average wage in Poland is nearly two and a half times that in Bulgaria. Even in Romania the average wage is some 43% higher than in Bulgaria. As a result of low average wages, Bulgaria enjoys substantially lower unit labour costs then all EU countries, including a substantial differential with the other EU-NMS.
But low labour costs have not proven a formula for sustained and strong economic progress. Rather this strategy has condemned Bulgaria to reliance on industries with low value added that will prevent catchup with the more advanced countries of the EU. This is evident from Bulgaria's export structure, which remained very heavily specialised towards exports with the lowest skill content. In 2000 about 70% of Bulgarian manufacturing exports were of products with very low skill content. Over the last decade this ratio has declined but remained at about 55% in 2010.
Thus, despite relatively rapid economic growth between 2000 and 2008, Bulgaria has remained at the bottom of the EU league table with a level of GDP per capita that is only 15% of the EU-27 average.
Wage and income inequality has also widened considerably since 2000. Poverty also remained pervasive, and productivity growth was moderate by comparison with many other EU-NMS. The European Commission provides comparable data on the proportion of the population considered to be 'materially deprived', which is one important indicator of living standards across EU countries. In Bulgaria it is estimated that 55% of population were materially deprived ( see Figure 2) while 35% of population were considered to be severely materially deprived. On this measure, living standards among the poor in Bulgaria would seem to be worse than in all other EU countries. In terms of housing deprivation, 15.4% of the total population in Bulgaria had neither a bath, nor a shower in their dwelling in 2010 while 25% had no indoor flushing toilet.
Throughout the rollercoaster economic ride over the last two decades, the magnitude of the informal economy remained excessive, and recent evidence suggests it is once again expanding as workers seek survival strategies in the face of declining formal job opportunities. High level corruption and organised crime continue to be issues of concern that are cited by the European Commission.
4. Policy conclusions
Bulgaria faces major economic and social challenges. The current outlook is for a very prolonged period of slow growth, high unemployment and extremely high youth unemployment, increased social tension plus continued outward migration of young people and skilled workers. Despite achieving macroeconomic stability, Bulgaria has failed to match the progress in other EU New Member States in terms of catchup with the advanced economies in the EU. This is partly because Bulgaria has failed to adequately expand high productivity and high value added industries in the traded goods sector of the economy. Low wages and poor working conditions have compounded these problems.
Given the global economic conditions that currently prevail, a return to the pre-crisis growth model is unrealistic and would be socially undesirable. The EU is forecasting economic growth of just 0.5% in 2012. The rapid deterioration in economic conditions in the last year is underlined by the fact that in October 2011 the IMF was forecasting growth of 3% for Bulgaria in 2012.
Growth of the magnitude now expected this year will be insufficient to prevent a further deterioration in the labour market, which in turn will have adverse consequences for social cohesion and political stability. Consequently, the key short term challenge in Bulgaria is to boost economic growth to levels that are compatible with improving the current dire state of the labour market to provide relief to those most affected by the crisis and poverty. Over the medium term the priority must be to move decisively towards a society that reflects the social values and sustainable living standards expected in an advanced economy within the European Union. Tangible progress towards these goals is required to build a more cohesive society and avoid an escalation of the social tension and strikes that spread in the latter months of 2011.
Achieving economic growth rates that are compatible with acceptable employment levels and decent work in the circumstances that are likely to prevail in 2012 and beyond will therefore require alternative drivers of growth to those relied upon in the pre-crisis period plus institutions and policies that will share the benefits of growth more equitably.
Bulgaria is fortunate to have some fiscal space. The public debt to GDP ratio is around 16%, and the European Union has forecast a general government deficit of 1.7% and a structural budget deficit of just 0.7% of GDP in 2012 for Bulgaria. Moreover, the country has a small surplus on the current account balance. In these circumstances it would be appropriate to focus a moderate fiscal stimulus on the most appropriate public expenditure targets.
To enhance decent work in Bulgaria, collective bargaining must be strengthened. The vast majority of collective agreements have traditionally been negotiated at the enterprise level, but in recent years the importance of branch or sector level agreements has increased slightly. The Labour Code provides for the extension of collective agreements by decree by the Minister for Labour and Social Affairs. This procedure has been used on a few occasions in the recent past and should be used more extensively in the future. The Ministry of Labour and Social Policy has expressed concerns about the impact of low incomes and the need for increased coordination of bargaining. In a recent paper the Ministry noted that:
"Bulgaria needs a considerable change in the income policy concerning the population, mostly with regard to the employment income. The low income represents something like a barrier to economic development because it does not provide incentives for quality reproduction of the work force. A debate is needed in this area, a clear vision and coordinated action on the part of all partners."
Along with a move towards improvements in minimum wages and social protection, increased collective bargaining coverage and greater coordination of bargaining would be desirable. The Minister for Labour and Social Policy could make more extensive use of the powers provided in the Labour Code to extend branch level collective agreements in order to help overcome the problem of low pay in Bulgaria.
The ITUC Global Poll 2012 demonstrated that Bulgarians are highly critical about laws that provide job security, with 75% of respondents saying labour laws do not provide adequate job security.
The overwhelming majority of Bulgarians believe that legal protection for a fair wage is inadequate with 86% saying they don't believe laws protect fair wages.
Full Text of the ITUC Frontlines 2012 Reprot is available in PDF Format HERE