Bulgarian Businesses Trapped in Rising Wages and Low Productivity

Business | July 3, 2024, Wednesday // 11:17
Bulgaria: Bulgarian Businesses Trapped in Rising Wages and Low Productivity @Pixabay

Bulgarian businesses are facing a critical juncture as they grapple with escalating wages amidst persistently low productivity, prompting calls for substantial reforms in the labor market and education system to bolster competitiveness. Economists at the Ministry of Finance's Council for Economic Analysis recently highlighted these challenges during their annual conference. They underscored that Bulgaria's labor costs are rising rapidly without corresponding gains in productivity, lagging behind EU standards. This imbalance poses significant risks to the economy's ability to compete effectively, according to Geoff Gottlieb from the IMF.

Gottlieb emphasized that despite the rising costs, Bulgaria's nominal wages remain comparatively modest within the EU, hindering income convergence. He stressed the urgent need for Bulgaria to tap into its pool of economically inactive youth and to bridge educational disparities compared to Central European and new EU member states through bold educational financing reforms.

Professor Kaloyan Ganev, a council member, echoed concerns over Bulgaria's lagging investment levels compared to peers like Romania and Croatia, particularly in non-residential infrastructure. Ganev pointed out a stark decline in these investments since 2015, reaching their lowest levels in two decades by 2023.

Desislava Nikolova of the World Bank emphasized the imperative of enhancing both public and private investments to stimulate economic growth. The bank's economic memorandum for Bulgaria warned that without ambitious reforms, GDP per capita will not reach European averages for another 15 years. Nikolova stressed the necessity of boosting total factor productivity, human capital, and investment to achieve sustainable economic advancement.

Efficiency in investment deployment emerged as a critical issue highlighted by Gottlieb, who noted substantial potential savings through improved investment efficiency and reduced fiscal subsidies. He also cautioned against fiscal profligacy exacerbating inflationary pressures in Bulgaria's economy.

Meanwhile, the Bank for International Settlements (BIS) has cautioned on a global scale about the risks posed by mounting government debt levels, which could destabilize financial markets. Despite signs of recovery from the COVID-19 pandemic and related economic shocks, BIS President Agustin Carstens warned against complacency, pointing to record-high sovereign debt levels and upcoming global elections as potential triggers for financial instability.

Carstens stressed the need for governments to refrain from further increasing public debt, recognizing that interest rates may not return to pre-pandemic lows. The BIS report highlighted demographic shifts, climate change impacts, and geopolitical tensions as additional factors that could disrupt global markets, necessitating cautious monetary policies globally to avoid exacerbating inflationary pressures.

Claudio Borio, head of monetary and economic affairs at BIS, cautioned that historical patterns indicate financial stress typically follows rate hike cycles by two to three years, underscoring the importance of prudent central bank actions to prevent premature easing that could reignite inflation and undermine economic confidence.

Both Bulgaria and the global economy face pivotal challenges requiring strategic reforms and prudent economic policies to navigate uncertainties and sustain growth trajectories effectively.

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Tags: Bulgaria, Gottlieb, inflation, economic

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