Bulgaria: Current Economic Profile - Essay Example

Bulgaria An Overview of the Economic Development and Current Economic Profile Scenarios for Future Development School Case Study Overview of Economic Development and Current Profile Bulgaria is located in south-eastern Europe, northwest of Turkey, south of Romania, north of Greece, and east of Serbia and Montenegro. The total area of Bulgaria is 110 910 square km, with an outlet on the Black Sea and the Danube running along its Northern border. Because of its geopolitical location in Southeast Europe, Bulgaria plays a key role as a binding, and dividing bridge between the West and the East, meaning the European Union countries on one hand, and Turkey, and the Asian countries on the other. Political System According to the Constitution (1991), Bulgaria is a republic with a parliamentary form of government. The President of the republic is the head of state and the supreme commander-in-chief. The Prime Minister on the other hand heads and bears responsibility for the overall policy of the government. After a period of political instability in the mid 1990s, there has been a gradual stabilization since 2001 with the election of Simeon Saxe-Coburg-Gotha, son of Tsar Boris III, and heir of the royal family, as prime-minister (Library of Congress, 2005). The focus of the governmental power of several consecutive governments has been the EU accession process requiring substantial reforms in the legislative, judiciary, administrative and other spheres of economy. General Economic Overview In 2004 Bulgaria's population was estimated at 7,518,000 with a negative growth rate of -0.92 percent per year. About 70 percent of the population is urban; the capital Sofia has population of 1.1 million. Since 1990s migration to Western European countries has increased significantly, with estimated 200,000 residents leaving the country between 1992 and 2002. This movement is expected to accelerate as Bulgaria becomes an EU member state. Concerning ethnic groups, approximately 83 percent are Bulgarians, 9 percent Turks, and 5 percent Roma. In the 1980s during the communist period there was a campaign to assimilate the Turkish population. Today the only ethnic issue is discrimination of Roma who have even lower living standards and are generally regarded as second-class citizens (Library of Congress, 2005). By 1990s during the communist period Bulgaria had strong industrial and agricultural productivity and export within the Soviet and ex-communist countries. Political concussions and the fall of the communist regime resulted in economic shocks, Bulgaria lost many of its markets, because of increased competition and decreased political backup. Productivity levels dropped, many industrial factories were destroyed and plundered, agricultural structures were abolished. This, combined with instability in the political situation, led to a severe economic crisis in 1997-1998. Economical recovery involved the establishment of a currency board and structural changes in all sectors of economy (Library of Congress, 2005). Since that period the country has a slowly developing economy, with lowering inflation rates, improving investor confidence, tax-reducing policies etc. Today the country is facing one of the greatest challenges in its recent economic development - forthcoming EU accession in 1997. EU accession process is as much a political issue, as it is an economical issue. Ever since 1993, when the European Union announced its expansion policy towards Central and Eastern Europe, consecutive governments have adjusted their national programs with view to Bulgaria's prospective accession in the EU. Now, that the principal date of the accession was determined months ago, the government has to overcome many problematic areas, addressed by the EU Commission as areas of specific concern that have to be dealt with beforehand, or else the accession can be postponed. And while the Currency Board pegging the Bulgarian currency (leva) to the euro has contributed to economic stability, increased domestic consumption, and GDP growth, other important issues, such as legislative reforms, large sector of "grey economy" and others are put on the table. Below are presented key statistics, indicating recent economic developments. 2. Economic Indicators Gross Domestic Product GDP growth has been sustained at 4-5 percent throughout the early 2000s (Table 1). According to the ICEG European Centre Quarterly Forecast (2005) Bulgaria will reach the highest GDP growth in the region in 2005 with 6.0% with domestic demand (namely consumption, and investments) being the main driver of the economy. Banking consumer credits further contribute to increased consumption levels. The increased domestic consumption on the other hand, has driven growth of imported consumer and investment goods which respectively has increased Bulgaria's trade deficit by 15.7% of the GDP for the first half of 2005 (EU Commission, 2005). Industries and Environment Since 1990s there is a rapid growth in the private sector. According to the National Statistical Institute of Bulgaria (2005), the private sector in 2005 has generated 77.9% of the value added in the economy, and records a 10% increase, while the public sector shows decrease by 6%. The service sector today accounts for 54% of the GDP production, while decline in agriculture intensifies (See Graph 1). Heavy industry growth (mostly non-ferrous metals) is driven by foreign investments. NSI also identifies strong growth in all industrial fields, especially construction industry, and metallurgic industries. Poor management of natural resources and underestimation of industrial and agricultural activity on environment are all heritage from the communist period. Falling production rates in the mid 1990s slightly improved environmental situation, still heavy industry wastes, car exhausts and organic wastes are a major source of pollution (Library of Congress, 2005). Inflation rate Inflation rates have been kept within the limits of 5-6 percent since 2002 (National Statistical Institute, 2005). In 2002 Bulgaria's inflation rate was 5.8 percent, 3% - in 2003, and 6 percent - in 2004. Compliance with EU requirements means, that the expected inflation rates will be kept within reasonable limits, not exceeding 6 percent for the following year. Wages and Employment Unemployment is a key issue in Bulgaria, and other SEE countries, where official unemployment rates exceed 20% on the average (ICEG Quarterly Forecast). In Bulgaria unemployment rates reached their peak in 2001 - 19% (Table 1), since that period there has been a steady decrease. According to official statistics Bulgaria registers one of the lowest unemployment rates of 12% among SEE countries in 2004 (See Graph 2). The expectation is that the rate of unemployment will not decrease significantly. Still, slight improvement is expected due to expected economic growth enhanced by increased foreign investments. And while Bulgaria stands out among the SEE-7 in terms of official unemployment rates, the country has the lowest average monthly wage level with less than 200 euro per month, while the highest levels are in Croatia with more than 800 euro per month (ICEG, 2004). Wage figures may be misleading, because businesses intentionally reduce taxes and pension payments by declaring the minimum wage level, while paying higher wages. Still, EU regulations do not allow for drastic changes in wage growth, so in the following years Bulgaria will be facing slow changes in average wage levels. This, however, has important implications on the registered poverty rates in the country. According to UNDP (2005) estimates, the number of Bulgarians living in poverty is estimated between 17 and 21 percent of the population. The poverty rate is higher in rural and northern areas, approximating 80 percent of the rural population. With imminent EU accession the current situation will probably worsen with expected short-term inflation rise. Fiscal Policy Fiscal policies are oriented towards increasing financial stability. In 2004 due to better than expected revenues the general government balance had a surplus of 1.4% and was used for the reduction of general debt below 40% (EU Commission, 2005). Exports In 2003 Bulgaria's exports totalled US $9.9 billion and its imports totalled US $14.4 billion, incurring a trade deficit of US $4.5 billion. Since the 1990s due to the broken bondage with ex-Soviet countries and increased orientation towards Western European countries, exports have shifted from Soviet countries to EU countries. In 2004 export to the EU accounts for 54.2% of total exports, while imports from the EU accounts for 48.2% of total imports (Gateway to the European Union, 2004). Grey Economy In 2004 the grey economy accounted for approximately 30 percent of the Gross Domestic Product (Library of Congress, 2005), thus fuelling corruption and sustaining organized crime (Shentov, Dr., cited by CSD, 2004). Revenues from the informal economy are often invested in legal enterprises, blurring the line between formal and informal economy. The large "grey sector" of the economy, combined with the high level of corruption and the interweaving between formal and informal economy often leave participants in the grey economy untouched by law enforcement and retard the legislative and judicial reforms in the country. There is a strong need for a common Southeast European anti-corruption strategy, taking into account EU priorities. Foreign Investments While the economy is slowly developing, low productivity is typical for the transaction period (UNDP, 2005). A key factor underlying this trend is the low overall level of foreign investments that account for less than 20% of GDP. NATO membership plays important role for drawing foreign investment, there is a significant increase for Bulgaria since the country's membership invitation November 2002 (Panayotov, P, Deputy Prime Minister, cited by CSD, 2004). Bulgaria's forthcoming EU accession is regarded as a natural next step in the country's integration into Western Europe institutions. Therefore I put special attention to the EU accession process and economic and political reforms. 3. EU Accession The introduction of EU integration policies in the Western Balkans is the main instrument in the transitional process to political and financial stability. In 1993 EU member states declared open policy for EU expansion towards countries in Central and Eastern Europe, provided those countries met certain economic and political requirements. The negotiations process for Bulgaria started in 2000, along with Romania, and other countries that joined the union in 2004 (EU Commission, 2005). The negotiations for Bulgaria ended in the end of 2004, a couple of months later, April 2005 the accession treaty was signed by the 25 member states, Bulgaria and Romania. At present the Commission is assessing Bulgaria's readiness to join the Europe Union in 2007. This evaluation procedure is necessary because Bulgaria will have to meet certain obligations as a full member state. In that respect the Commission produces annual monitoring reports assessing the status of the political and economic reforms in the country. The report of the EU commission (Sept 2005) determines three accession levels for Bulgaria's progress in introducing political and economic reforms. The first level encompasses areas where Bulgaria has successfully completed these changes. The second level refers to areas where increased attention is required. The third level discusses the most troubling areas that have to be changed before the EU accession. These areas are important because they concern both Bulgaria's future ability to benefit from EU membership, and balance-keeping within the EU itself. The actual decision on the accession date will be taken April or May 2006. 4. Scenario 1: Successful EU Accession in 2007 Bulgaria's EU accession on 1 Jan 2007 will have short-run effect of accelerated changes in political and economic indicators in response to EU requirements. By mid of 2006, when decision will be taken by the EU commission, Bulgaria has the challenging task to implement a range of political and economic changes. Although the EU commission (2005) has pronounced that Bulgaria has achieved satisfactory levels of compliance with EU requirements and has a functional market economy, there are number of political and economic criteria requiring immediate efforts. Political changes encompass the establishment of a complete legislative framework, strengthened public administration, extensive judiciary reforms, increased efforts in fighting corruption, human rights protection of minorities, etc. Economic changes are also required, so as to guarantee that Bulgarian companies will be competitive on the European market. Business environment need to be further improved by changing the administrative and judicial system. Privatisation programmes need to be further implemented. External balance needs to be closely monitored with continued prudent fiscal policy, curbed bank credit growth, and moderate wage increases. Other improvement areas include labour market flexibility, and reform in the educational system to improve adaptability of the Bulgarian economy (EU Commission, 2005). Provided these changes are timely enforced, followed by a sustainable policy in compliance with EU requirements, Bulgaria has a good chance of being accepted as a member state on January 1 2007. If Bulgaria becomes an EU member state in 2007 national borders will disappear thus enhancing free movement of people, goods and services to- and from- other EU member states. Both people and companies will face increased international competition. In the acceding countries GDP growth is expected to remain relatively high, at more than 5% for Bulgaria. Continued expansion will be probably stimulated by improved labour productivity, and increased investments. Harmonization with EU taxes and excises suggests that inflation rates will be kept to limits of 4-5%. Still, rising commodity prices are expected to weigh on inflation, boosting temporarily inflation in Bulgaria as well. This will have negative effect on registered poverty and real buying power of the population. Because of EU restrictions, wages will rise slowly, leaving the country's labour force as one of the cheapest in the union. Lower wage levels and improving productivity will thus attract foreign investments. Direct foreign investments are expected to grow also due to continued open privatization procedures and increasing local demand. Attractive higher wages in Western European countries will stimulate further migration from Bulgaria especially for highly-educated professionals and skilled worker groups. Effect on Businesses and Industries Many small and middle-sized local enterprises will find it very difficult to compete on the European market. Smaller companies in the dairy and stock-breeding industries for example will fail to meet the GMP standards set within the union and will go bankrupt. Exports are likely to shift to countries not yet in the European Union. As ICEG data shows companies from the Czech Republic, Poland, Hungary and Slovakia have already increased their trade operations outside the EU due to intense competition and their non-competitive position within the union. The Economist Intelligence Unit (EIU) specialists further comment that upon accession further business growth will be East-oriented, and not West-oriented, since companies are too small to compete within the Euro zone. Heavy industries will continue to expand, stimulated by improved business environment and cheaper labour force, still EU membership is expected to raise Bulgaria's environmental standards (Library of Congress, 2005), especially with regard to industrial emissions, control on sewage treatment, use of heavy metals and detergents, and motor vehicle exhausts. The services industry will expand, with special accent on increased flow of tourists from Western European countries - since Bulgaria has attractive and developing seaside and mountain resorts. EU's structural funds for agriculture are expected to add value to this economic sector and foster growth, despite present downtrends. 5. Scenario 2: Delayed EU Accession by 2008 On 25 October 2005 the EU commission announced that it would not hesitate to delay the accession of Bulgaria, and Romania by one year, if reforms in key areas, such as corruption, and crime fail (EU Observer, 2005). Although Bulgaria signed the accession treaty in the beginning of 2005, for the fist time this treaty contains a special clause to delay entry until 2008 if entry preparations are not sufficient. Furthermore, the commissioner Mr. Rehn pointed at a range of key areas that require urgent changes, such as handling corruption practices and lowering crime rates, legislative changes, and reform in administrative structures were pointed out to be specific obstacles to Bulgaria's accession into the EU. General elections in June 2005 have already delayed part of the administrative reforms. If Bulgarian institutions do not take urgent measures in the areas strictly observed by the EU commission, there is a real chance for delay in Bulgaria's accession until 2008. Furthermore, actual decision will be taken during the first half of 2006, which leaves little time for the government to implement all the necessary changes. Delay in EU accession due to slow political reforms will have inevitable impact on the economic development of the country. First of all, delay will create political instability, thus retarding legislative reforms that have to improve business environment for international investors. Delayed accession is expected to delay short-term inflation, avoiding immediate negative effect on purchasing power and poverty rates. Political concussions will also defer large-scale privatisation deals and will shake investors' confidence in the country's improving business environment. Apart from immediate short-term negative impact, close supervision by the EU commission and the currency board will not allow for major economic destabilization in the country. Economic indicators, indicative of the country's market economy will continue to improve, securing Bulgaria's eligibility for EU accession in 2008, although at a slower-than-expected rate. Apart from internal economic and political concussions, EU accession delay will also have negative implications on behalf of Europe itself. Already with 10 new members and spreading borders, Europe is having difficult times with increasing migration for Central and Eastern European countries. This impacts visible poverty, unemployment rates, and adds up to the negative attitudes of Europeans towards further EU expansion. Furthermore Borel J. (2005) comments that Poland and other recently accessed countries were not better prepared than Bulgaria and Romania during their accession date beginning of 2005. The accession treaty signed by Bulgaria does not allow for further delay, beyond 2008. It could be suggested that one more year can make the country better prepared for EU accession; still delay will lead to internal political conflicts and probably will further retard administrative and legislative reforms. 6. Scenario 3: The European Union Opts Against Further Expansion According to political commentators as Borel (2005) Europe today is having internal problems with EU structures, emphasizing the referendum results regarding the EU constitution in France and Holland. This means that the European Union as it once was is vastly changed. Rejection of the EU constitution by French and Dutch citizens is an important indicator of Europeans' inclinations toward further enlargement. Another crack in the EU system is also visible in the failure to agree on the EU budget in the middle of 2005. Other problems are also pending - limited labour market, slow economic growth, loss of political support of EU adherents etc. According to John, M. (2005) the Commission is no longer regarded as the institution protecting European stability. This leads to the conclusion that not in the too distant future the European Union will have to change both in structures and policies, in order to remain viable. If these changes are accelerated by open debates and continuing instability and people's oppositions, Bulgaria's accession may not simply be delayed, but made impossible within the present EU structures. If the European Union changes to an extent that it no longer can accept further enlargement, the Bulgarian government will have to reassess its political and economic orientation. Major priority should be continued economic stability and further growth. 7. Conclusion The economic analysis shows Bulgaria's positive development in many aspects of its economic and political life. Still, there is serious drop behind in many economic and administrative areas that the European Commission requires to change in order to keep the EU stability. Bulgaria has now only a couple of month left for many of the changes pointed in the commission's report. It turns out the commission will have to compromise in April or May by approving Bulgaria's accession date, or postpone it for one year. Taking into account recent developments within the union itself, and the commissions shaken position within the EU structures, compromises are highly unlikely to happen. Therefore, in my opinion Bulgaria's admission will be delayed at least for one year, giving chance for the Bulgarian government to intensify economic reforms over a two-year period, until the beginning of 2008. Therefore I believe that scenario 2 has the highest degree of probability. It's very difficult to estimate the future of the European Union itself. There have to be structural changes soon, so that EU to continue to be a true economic and political union for 25 nations and more. From today's perspective, though, EU future, and Bulgaria's place in it is still unknown. Tables and Graphs Table 1: Bulgaria. Main Domestic Trends 2000-2005 2000 2001 2002 2003 2004 2005 GDP ann. % ch 5.4 4.1 4.9 4.5 5.6 6.2 1st half Private Consumption ann. % ch 4.9 4.6 3.4 7.1 4.8 6.6 1st half Unemployment % 16.9 19.8 17.8 13.7 12.0 10.6 1st half Wages ann. % ch 12.8 8.3 6.6 6.2 7.0 9.4 1st half Current Account Balance % of GDP -5.6 -7.3 -5.6 -9.2 -7.4 -9.6 1st half Direct Investment % of GDP 8.0 5.9 5.8 10.3 8.4 6.4 1st half Interest Rate % p.a. 4.6 5.1 4.9 3.6 3.3 2.7 Jan-Sep Exchange Rate (BGN/EUR) Value 1.95 1.95 1.95 1.95 1.95 1.95 Jan-Sep General Government Balance % of GDP -0.5 1.4 -0.2 0.6 1.3 2.7 Jan-Sep General Government Debt % of GDP 73.6 66.2 54.0 46.1 38.9 37.9 1st half Source: Eurostat, ECOWIN (2005) Graph 1: Bulgaria. GDP Structure, 2004 Source: National Statistical Institute, 2004 Graph 2: SEE countries. Unemployment Rates 2004 Source: ICEG, 2004 References 1. Beunderman, M., (2005), Brussels Threatens Bulgaria and Romania with Entry Delay, EU Observer. Published at: www.euobserver.com. 2. Borel, J., (2005), the Countdown of Sofia, Spain. Estrella Digital. 3. Bulgarian Constitution (1991), Published at: www.oefre.unibe.ch/law/icl/bu00000_.html 4. CSD, (2004), NATO, EU and the New Risks: A Southeast Europe Perspective. International Security Conference. Sofia, Bulgaria. Centre for the Study of Democracy. 5. European Commission, (Oct 2005), Bulgaria: 2005 Comprehensive Monitoring Report. Brussels. Published at: www.europa.eu.int 6. Eurostat, (Oct 2005), Bulgaria - Main Domestic Trends. ECOWIN 7. Gateway to the European Union. Article. Published at: http://europa.eu.int 8. ICEG (2005), Prognostic Report on the Economic Development of SEE Countries. Published at www.euractiv.com 9. ICEG (2005), Quarterly Forecast on the Southeast European Countries (Q3 2005) Outlook for 2005 and 2006. SEE Monitor. No 16. 10. John, M. (2005), The European Union Loses Direction and Vision. Reuters. 11. Library of Congress, (2005), Country Profile: Bulgaria, June 2005. Federal Research Division. Published at: lcweb2.loc.gov/frd/cs/profiles/Bulgaria.pdf. 12. National Statitistical Institute of Bulgaria, Economy. Published at: http://www.nsi.bg/Op_e/Op_e.htm. 13. Republic of Bulgaria, (2005), Political Priorities of the Government of European Integration, Economic Growth and Social Responsibility. Published at: www.government.bg 14. UNDP, (2005), UNDP Supports Bulgaria on the Road to Membership in the European Union. Published at: www.undp.org Read More