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The English version of “Regional Profiles: Indicators of Development 2017” was presented on March 13th 2018 at a dedicated round table discussion attended by representatives of foreign embassies, chambers of commerce and industry and international organisations, among other distinguished guests.

download the full study | browse the district profiles | download the presentation [1] [2]

The presentation was focused on the following topics:

• Economic expansion: which parts of the country grow robustly and which lag behind;
• Labour markets: is labour shortage the only game in town;
• Education: what is education quality in the regions and is there a feedback loop to labour market performance;
• Local taxes: are tax hikes trendy among local authorities.

The IME also presented the country’s leading economic centres – a pilot research effort, made public just a few weeks ago. The study came out of the team’s desire to draw an economic map of the country based entirely on natural economic processes. The analysis highlights the strongest nuclei of the national economy and their pertaining peripheries.

Yavor Aleksiev

Recent Eurostat data show that the gap between the poorest and richest regions in EU countries is still considerable. In the 2007-2016 period, this gap increased in 12 countries, including Bulgaria, and declined in 9. In almost all cases "convergence" was achieved because the poorest regions have caught up, but because of a decline in the relative wealth of the richest one. The indicator used by European statistics for this comparison is GDP per capita, expressed in terms of purchasing power standard (PPS).

Figure 1 shows the differences in the development of the richest and poorest regions in each member state (as % of the EU average), which has more than one such region within Europe.

Figure 1: Per capita GDP (PPS) as % of EU average, 2016

Source: Eurostat, IME calculations (* Data for the richest region in the UK show the average for all five London regions.)

It is clear that Bulgaria is far from being among the countries with the greatest unevenness in the development of the regions. At the same time, Bulgaria, Croatia and Greece, which has seriously deteriorated in recent years, are the only countries in which the richest region has lower welfare than the EU average.

Change over the last decade

The analysis of the wealth gap in the richest and poorest regions in European countries over the last decade shows that the countries in which disparities decrease between 2007 and 2016 are nine, and we can conditionally divide them into three groups :

• Countries in which differences are shrinking because of declining relative development in the richest region and increasing development in the poorest (Austria , Germany and Portugal);
• Countries in which differences are declining, but there is a decline in the relative development in both the richest and the poorest regions (Belgium, Finland, Spain, the UK and Greece);
• The only country that has managed to achieve some, albeit minimal, upward development of its poorest and richest region, that has lead to more cohesion, is Hungary.

In the vast majority of Member States, the gap between the poorest and the richest regions is widening. We can define four groups here:

• Countries in which both the richest and the poorest regions have increased their relative development, but the differences are getting bigger due to faster growth of the rich regions - Denmark , Poland , Romania and Bulgaria;
• Countries in which both in the richest and the poorest regions are losing ground compared to average EU levels, but the negative processes are more pronounced in poor regions, so the gap is widening - the Netherlands , Sweden and Croatia;
• Countries in which the differences are growing due to an increase in the relative level of development in the richest region and a decline in the poorest - Ireland, France and Italy;
• Countries in which the poorest region stagnates and the richest improves its relative level of development - the Czech Republic and Slovakia.

Focus on Bulgaria

Between 2007 and 2016 GDP per capita, expressed in PPS, in the poorest Bulgarian region (Northwest Bulgaria) has increased only slightly - from 27% to 29% of the EU average. For the same period, the increase in Southwest Bulgaria is from 67% to 78% and the average for the country has increased from 40% to 49%. Thus, our country remains last in terms both of the relative prosperity of its poorest region and that of its national values. In 2007, the poorest Romanian region (Northeast) had the same level of development as Northwest Bulgaria. In the following period, however, the increase in this region of our northern neighbour is from 27% to 36% of the EU average compared to the 29% for Northwest Bulgaria.

Of course, some of the observed differences are a consequence of the peculiarities of the administrative divisions of EU countries, as the capitals of many of them are separate statistical regions.

Yavor Aleksiev

After years of systematic analysis of the Bulgarian regions, the IME took the next step and focused its efforts on the municipal level. The study "Economic Centers in Bulgaria" raises a number of questions and their answers must be found as soon as possible so that the notion of "regional policy" can aquire a more functional sense.

What are the economic centers?

As "economic centers", our analysis identifies the economically leading municipalities (nucleus) in the country and their adjacent periphery. The importance of these centers for the development of the country's economy is indisputable. Although they occupy only 36% of the territory, they account for nearly 75% of employment and investments in fixed tangible assets and for over 80% of foreign investment and total output.

Importance of the economic centers for the national economy

Source: NSI, IME calculations

It is important to note that this map in no way exhausts the “economically active” regions of the country. With slightly more liberal selection criteria, the centers would have been more, but the focus would have been blurred without sufficient rationale from a research point of view. The municipalities we designate as "economic nucleus" meet at least two of the following three criteria:

• they rank among those in which production is highest (all without Sopot);
• they rank among the most attractive for workers from neighboring municipalities, viewed through the prism of everyday labour migration (only 5 of the included nucleus do not correspond to this criterion, among which the secondary ones - Pernik and Devnya);
• they are distinguished by a high density of the employed in relation to the territory of the municipality (here the exceptions are 7, but they all cover the other two criteria);

Some well-performing municipalities, even smaller ones (such as the resorts Bansko and Nessebar), are excluded from the scope of the survey because they do not meet more than one of the criteria mentioned.

Conclusions from the analysis

The conclusions we can make are many, but only a handful of them can serve as a starting point for policy making:

• It is evident that the current administrative-territorial division of the country is far from optimal. The number of municipalities not meeting the initially required population threshold is growing. Limited human and financial resources make it so that local authorities are mere observers of the processes taking place on their territory. Bulgaria needs fewer territorial-administrative units which will better reflect the actial social and economic processes in the country.
• The lack of sufficient own funds is an enormous problem, has led to a race towards higher local taxes . However, even clearly identified problems at local level can often not be solved due to the lack of own resources. The revenues of local authorities are more than two times lower than the average for the EU in relation to GDP.
• The best way to overcome the gap between taxation and political representation at the local level is to transfer income tax returns back to municipalities via the principle "money follows the ID card". Transferring only 2 percentage points of the personal income tax currently collected will result in additional municipal revenues of around 650 million. This reform will create opportunities both to cover old liabilities and new capital costs while at the same time provoking local authorities to work towards attracting investment, higher employment and wages.
• There is no analysis based on daily labour migration data that does not make infrastructure development a top priority. Without good infrastructure (specifically road infrastructure) we cannot expect the working population to be mobile and ready to work 50 or 100 km. away from home. Despite the relative progress over the last decade, there is still much to be done, both in terms of the overall infrastructure development of North Bulgaria and in terms of its connectivity with the southern part of the country, in particular the tunnel under Shipka and the "Black Sea" highway.

Whether there is political will and, more importantly, public interest in such matters remains the key question. The reform of the administrative-territorial division must overcome political interests, and financial decentralization should happen at the expense of, and not in addition to, the existing tax burden to the central government.

We will only achieve real progress when local processes become a determining factor for the financial well-being of Bulgarian regions and their citizens. Only then will local democracy make sense, and it goes hand in hand with something long lost in our country - local identity.

In 2017, the IME set out to map the borders of Bulgaria’s economic centres. Our goal was to go beyond the country’s administrative and territorial division and establish new internal boundaries, based solely on natural economic processes. The grouping within the centres was done around the economic cores, which gather significant daily labour migration from surrounding municipalities, have significant concentration of employed people and generate relatively large production.

A key element of the study of economic centres is the establishment of peripheral municipalities with strong economic ties and highly reliant on the cores. In this analysis, the peripheries were formed by municipalities where more than 10% of the employed people travel daily and work in the core. This definition of economic cores and their peripheries differentiated several broad categories of economic centres:

• Large economic centres with economically strong cores and large periphery, such as Sofia and Plovdiv;
• Smaller centres, with peripheries generally limited only to the surrounding municipalities, such as Ruse, Pleven and Shumen;
• Specific economic centres, neighbouring each other and having a numerous features in common, despite having very limited on non-existent peripheries, such as Gabrovo-Sevlievo, Stara Zagora, Kazanlak and Radnevo

It is important to note that the map of the economic centres does in no way cover the entire economic and investment map of the country. The exclusion of certain regions does not mean that there is no economic activity, investments and perspectives for development in them. It is true, however, that the municipalities not included in the map fall behind in their level and rate of economic development in comparison with the centres. They also lack peripheries, and thus they lack tangible effect on employment in the surrounding municipalities. Because of this, the focus of the analysis is on the 20 largest centres.

The economic mapping of the country led to several very curious observations. The first one is the territorial coverage of the centres. A little over one third of the territory of Bulgaria is covered in economic centres, but they generate 86% of the total production of the country (based on 2015 data). In other words, about two thirds of the territory of the country is, figuratively speaking, an economic wasteland, outside of a small number of “oases” which generate the other 14% of the production of the country.

Particularly interesting is the fact that the process of concentration of economic activity in the centres has continued in the past years. In 2011, 85% of the production of the country was generated in them, while five years later this share has increased by 1 percentage point. The continued concentration of capital and labour in them as a result of the good infrastructure, the size of their markets, synergies with existing companies, the social environment and other factors will likely continue to support this trend of economic centralization.

The economic centres attract most of the investment – 81% of foreign direct investment (FDI) in the country at the end of 2015 where in them. When it comes to the other important investment indicator - annual expenditure on tangible fixed assets (ETFA), three quarters of all ETFA’s were made in the centers in 2015.

Seventy-five per cent, or three quarters of the people employed in the economy worked in the centres in 2015. In the same time, in 2016 62% of the population lived in the economic centres, which in turn means that more than one third of the population lives outside of the most economically active and prospective parts of the country. It is also interesting that the economic centres concentrate not only more production, but a larger share of the total population of the country – in 2000 there lived 59% of the population, while in 2016 this share has grown by 3 percentage points.

The total number of economic centres in the country is 20, but their size, territory and economic profiles are very diverse. It comes as no surprise that the largest economic centre has formed around Sofia municipality. It is the largest in terms of territory, population, production, investment, and number of employed. The Sofia economic centre also has a secondary core – Pernik municipality. This happens because Pernik attracts significant labour migration from the surrounding municipalities, but in the same time it is a major labour donor for the capital – so large that Pernik is the municipality with the lowest net labour migration in the country. This centre generates 43% of the total production of the country according to 2015 data, and 42% in 2011. The centre encompasses 18 municipalities and employs a third of the workers in the country. The centre attracts the most foreign investment – 55% of the total FDI as of the end of 2015.

Here, the unemployment is the lowest in the country (3.5% in 2016), and the average salary is the second highest in the country (1174 leva average monthly gross salary), lower only than that in the small economic centre Kozlodui where the high salaries in the nuclear power plant have significant impact on the averages.

The economic centre around the capital also has a concentration of highly educated people, as it has the highest share of the population with tertiary education – nearly one third, compared to 20% in the country as a whole. The quality of education, measured through the results on the Bulgarian language and literature matriculation exams, is the highest in “Sofia” – Good 4.48 in 2016, compared to 4.17 in the entire country, which points to a capability of the centre to retain a high share of highly education population.

Apart from the centre around the capital, the other geographically large centres are formed around the core municipalities of Plovdiv, Burgas and Varna. The second largest centre – “Plovdiv” is nearly five times smaller in terms of production compared to “Sofia”. The total production of the three centres “Plovdiv”, “Burgas” and “Varna”, as well as the number of employed in them is a little more than a half of that of the economic centre around Sofia, and foreign investment is about a third.

The centre around Plovdiv – the second largest in the country – encompasses 12 municipalities and generates about one tenth of the total production of the country. We have to not that, thanks to significant investment and the attraction of human capital from remote municipalities, “Plovdiv” has one of the highest production growth rates among the economic centres in the past five years. In 2015, the production in “Plovdiv” was 39 per cent higher compared to 2011, second only to the 40 per cent growth of the much smaller centre around Ruse.

It is rather interesting that south of Stara Planina, all the centres are connected. In the same time, the centres in North Bulgaria are islands of economic activity and investments, surrounded by large areas with little economic activity. The only exception is the "agglomerate" of several centers in North-East Bulgaria, comprised of several interconnected centers – “Varna”, “Shumen” and “Targovishte”, containing a total of 17 municipalities, 10 of which are peripheral to Varna. It is likely that the absence of a highway north of Stara Planina also contributes to this situation.

The interconnectedness of the centers in the south part of the country means that it is likely that after some time the boundaries between some of them may start to fade. The center around the capital, for instance, borders “Pazardzik” to the east, which in turn borders “Plovdiv”. Near “Plovdiv” is “Haskovo” – a rather interesting center with a rather fast-growing core, but currently without a periphery. “Haskovo” is already officially positioned as a part of “Economic area Trakia” (EAT), which formed around Plovdiv in the past years, linking together six industrial areas. “Haskovo” could also become a part of the agglomerate comprised of “Sofia”, “Pazardzik” and “Plovdiv”. An important factor for this, of course, was the completion of two highways in South Bulgaria in the past years – “Trakia” (connecting Sofia and Burgas) and “Maritsa” (connecting “Trakia” highway at the Orizovo road junction with the Bulgarian-Turkish border at Kapitan Andreevo border checkpoint).

The agglomerate of centers in South-West and South-Central Bulgaria is also growing eastward. In the spring of 2017 it was announced that EAT will be expanding towards Burgas. A memorandum between the area and Burgas municipality has been signed, pursuant to which the territory of Burgas will be included in the area. Given that, it will come as no surprise if in the future a supercentre is formed in South Bulgaria, on the axis Sofia – Pazardzik – Plovdiv – Haskovo – Burgas.

On the other hand, in the area around Stara Zagora the IME methodology has identified four economic centers – “Sopot”, “Kazanlak”, “Stara Zagora” and “Radnevo”. Galabovo could also be added, as data from the recent years indicate the appearance of a new center, which has not yet surpassed the necessary thresholds. These five centres, given their territorial proximity, infrastructural and economic interconnectedness are a part of one larger economic centre, with a pronounced industrial economic profile. The natural formation of an economic centre is the reason for the push by local authorities for the creation of the “Zagore” industrial area. Without a doubt this move is a response to the good development of Plovdiv and the positioning of EAT as a leading investment destination. Obviously, “Zagore” will be the first attempt to replicate the successful model of EAT. The socio-economic profile of Stara Zagora forces the decision to form a separate investment destination rather than join the EAT. The two, of course, can have numerous links and amplify each other’s effects, but as separate zones with distinct profiles. The centres around Stara Zagora are relatively even in terms of the economic development of the five cores. This region has untapped potential for development in the field of information technology and outsourcing following Plovdiv, which is important for the retention of highly qualified young people in the area.

The lack of good and fast infrastructural links between North and South Bulgaria is an important factor influencing the boundaries of economic centers. There is, for instance, a clumping of several centers in Central Bulgaria on the two sides of Stara Planina – to the south, there are the centers around Stara Zagora, and to the north there a two other economic centers – “Gabrovo - Sevlievo” and “Veliko Tarnovo”. The lack of appropriate infrastructural connections through the mountain hinders the economic linking of the two active territories on its two sides and limits their growth potential.

The economic centre “Gabrovo - Sevlievo” north of Stara Planina is also a very interesting formation. It is comprised by two cores – the municipalities of Gabrovo and Sevlievo, united in a single centre due to the geographical proximity and relatively high labour migration between them. The centre has no periphery, and it has pronounced industrial profile. It has a relatively small economy, as its share is about 1% of the production of the country. The centre around Veliko Tarnovo is one of the smaller ones, as it has a core – Veliko Tarnovo municipality and only one peripheral municipality – Lyaskovets.

These two centres aside, north of Stara Planina four other, rather limited, centres are formed, around the cores Ruse, Pleven, Kozlodui and Dobrich. The centre around Dobrich has only Dobrich-rural municipality as a periphery, and its formation is the result of the small area of Dobrich municipality and the fact that Dobrich-rural municipality surrounds it from all sides. Thus it is an integral part of the economy of the city of Dobrich and the existing boundaries are administrative rather than economic. A similar case is the geographically small Yambol municipality and the surrounding Tundzha municipality as well as the Sopot and Karlovo municipalities, the latter becoming natural periphery of Sopot.

Among the economic centres to the north, “Ruse” has the largest economy, with a total of three per cent of the production of the country. It holds the second place in North Bulgaria, following Varna and fifth in the country. The centre formed around Ruse is comprised of five municipalities and employs 3% of all employees in the economy in 2015.

The review of economic centres and their peripheries should be views as a first step towards the formation of successful investment destinations. The positioning of an economic centre as an investment destination should not follow the rigid administrative territorial boundaries of the municipalities in question, but rather unite the natural economic area around the economic cores. The map and profiles of the economic centres created by the IME allow for the identification of the correct investment destination – from the expansion of economic centre “Plovdiv”, including Haskovo, through the appropriate unification of the centres around Stara Zagora to the big challenge in the north, namely the formation of strong investment destinations from the few centres, currently developing separately.

January 18, 2018, 10:00 to 12:00

French Institute | P. R. Slaveykov Sq. № 3

On January 18, 2018, the Institute for Market Economics (IME) will present its pilot study "Economic Centers in Bulgaria". The study is the first of its kind and will be presented at a round table with representatives of the executive and legislative authorities, business, academic circles, civil society and the media.

In 2017 IME set itself the goal of determening the boundaries of the economic centers in the country. Our ambition was to "overcome" the administrative-territorial division of the districts and regions and to draw new internal borders in the country based entirely on natural economic processes. As a result of these efforts, we have identified both the strongest nuclei of the national economy, as well as their adjacent periphery of municipalities.

• What does the economic map of Bulgaria look like?
• Which are the leading economic centers in the country and which centers are developing the fastest?
• How does "membership" in an economic center affect smaller, peripheral municipalities?
• Is there a convergence process within the economic centers?
• How can territories outside the economic centers accelerate their development?

Program

Please confirm your presence by 15 January to Vessela Dobrinova, 02/952 62 66, vessela@ime.bg.

We are expecting you!

The IME team

During the presentation of "Regional Profiles 2017", the IME proposed the redirection of 1/5 of income taxation revenues to municipalities. This is a proposal that the IME has also put forward in previous periods, a detailed version of which is available in the article „Fiscal Policy and Regional Development: Recommendations for Changes in Income Taxation” (2014). At the beginning of this year, we also pointed the attention at the trend of rising local taxes - "Municipalities Will Continue Raising Taxes Unless We Change the Model " (2017).

IME's proposal is that income taxes should continue to be collected in the same way - by the NRA, which will afterwards automatically transfer 1/5 of the proceeds to municipalities following the principle "money follows the ID card" – i.e. revenues end up where the person is registered. Our calculations indicate that this resource would amount to BGN 634 million in 2018, which means almost doubling the tax revenues of municipalities. This reform would greatly improve the state of municipal budgets, creating opportunities for both repayment of debts and new capital expenditures. There will also create incentives for local authorities to work for more investment, higher employment and wages.

The map below shoes how these BGN 634 million would be allocated to individual municipalities. IME’s calculations are based on the number of employees and wage levels in each municipality, with only two municipalities missing. Such an account is most likely made at the NRA but is not currently publicly available. The overall conclusion is that all municipalities would benefit from the reform, while those who concentrate more economic activity (higher employment and higher wages) will get a resource that would make them much more independent than the central government.

The English edition of the study will be available in February 2017.

November 28^th2017 11:00 - 12:00 | BTA Pressclub

On Tuesday, November 28th at 11 o’clock the Institute for Market Economics (IME) will present the key findings of this year’s edition of the “Regional Profiles: Indicators of Development” study. The regional profiles are a unique study of the socio-economic conditions and development of the regions in Bulgaria, compiled by the IME for the sixth consecutive year, allowing for the underlining of long-term processes on the regional level.

The English version of the study will be available in December 2017.

This year, the presentation will focus on the following topics:

• Economic development of the regions: which regions grow the fastest and which fail to take part in the economic upturn?
• Labor market: where has the employment rate reached record levels and does this affect demographic processes?
• Education: what are the main predictors for dropping out of school and the quality of education and what is the relationship between the product of education and the labor market?
• Local finance: is there a trend towards an increase in local taxation and does the mechanism for straightening of municipalities work?

The findings will be presented by:

• Dessislava Nikolova, chief economist, IME
• Yavor Aleksiev, economist, IME
• Zornitsa Slavova, economist, IME
• Petar Ganev, senior economist, IME

The complete analyses, data and other materials included in the study will be uploaded on the project’s website.

For more information: Vessela Dobrinova (02/952 62 66, vessela@ime.bg)