News

Yavor Aleksiev

The data on household income level dynamics[1] in the last 10 years indicate a growing gap between the capital and the poorest districts in the country. Tha annual average growth rate of income levels in the period 2004-2013 is 12.79% in Sofia (cap.), compared to a national average of 8.50%. Income rises the most slowly in Lovech – by just 2.90% annually.

The statistical effect of the significant average annual rate of increase of income in the capital, together with the large and growing number of its population, is that in the period 2004-2013 there are only six districts in the entire country in which the average annual rate of income level increase is faster than the national average. Apart from Sofia (cap.) these are Plovdiv, Stara Zagora, Pernik, Pleven and Yambol. In the other 22 districts of the country the annual average rate of household income increase is lower than the national average, despite the fact that income levels themselves are higher than the ones in some of the before mentioned six districts.

Graph 1: Average annual growth rate of the total income per household member in the period 2003 – 2014, %

Source: NSI, IME’s calculations

When will the other districts catch-up?

If the annual average rate of increase of income levels in the period 2004-2013 stays the same in the future, catching up with the capital would be impossible,

With this in mind, in order to illustrate the gap between the capital and the rest of the districts, we presume that income levels in separate districts continue to rise with their annual average rate for the period 2004-2013, while at the same time income levels in Sofia (cap.) stay on their 2013 levels.

Graph 2: When the rest of the country’s district will catch up to the capital

Source: NSI, IME’s calculations

If income levels in Sofia stopped rising in 2013 the first districts that would catch-up to the capital are Pernik (2016), Pleven and Stara Zagora (2017). A few years later come Plovdiv (2018), Varna, Gabrovo and Yambol (2019). The last districts to do so would be Vidin (2033), Sliven (2039) and Lovech (2044).

This dynamic is, of course, highly conditional, but it provides a good overview of the degree to which income levels in different districts lag behind the ones in the capital.

It is important to note that the annual average rate of income growth depends mainly from the condition of local labor markets, which is due to the fact that income from working salaries generates more than 50% of the total income of Bulgarian households. The demographic structure of the population in different districts is also important – the larger the share of senior citizens in a district, the larger the share of income from pensions. For example, pensions account for just 14.1% of household income in Sofia (cap.) and 32.0% in Vidin. The large share of income from pensions generally suggests not only a lower income level base, but also a slower growth, due to the administrative character of their initial setting and follow-up increases.

At this stage there are no signs that these tendencies will change any time soon. What’s more – the continuing rise of income levels in the midst of the economic crisis and the recovery that followed, coupled with the traditionally high economic activity of the local population make the gap grow even faster than in previous periods.

An IME study into the main factors, determining economic development, measured as GDP per capita, shows that the leading from statistical point of view prerequisites for faster growth are the quality of human capital, local infrastructure and entrepreneurship. The gap between income levels in Sofia (cap.) and the other districts may be narrowed only by increasing efforts to attract foreign investment, improved education, infrastructure development and the facilitation of a business-friendly regulatory environment.

Zornitsa Slavova

For the purposes of the third consecutive edition of “Regional Profiles: Indicators of Development” the IME acquired data about the condition of the road network at the district level. These data are collected by the Road Infrastructure Agency (RIA), which evaluates the condition of the republican road network (highways, first, second, and third class roads) using a three-staged scale – good, average and poor.

In 2013 39,6% of the roads are in good condition, a decrease of 0.7% compared to last year. At the same time the data vary significantly between different districts. The condition of the road network is best in Sliven – 79.3% are in good condition, and only 14.4% are in poor condition. There are 5 more districts where over 50% of the roads are in good condition – Stara Zagora (53.4%), Pazardzhik (52.6%), Targovishte (52%), Blagoevgrad (51.9%) and Yambol (50.3%). At the other end is Vratsa, where only 17.9% of the roads are evaluated as being in good condition, and as many as 44.2% are classified aspoor.. in the quality of the road network in Vratsa keeps decreasing. In 2012 26.7% of roads were classified as good - a drop by 8.8%, which is the second largest after Haskovo, where the part of roadsin good condition decreases by 10.4%, thus dropping to 33.6% in 2013. Among the districts with a relatively low share of roads in good condition are also Montana (29.1%), Ruse(29%), Sofia district (28.6%), Burgas (27.1%), Veliko Tarnovo (25.7%) and Kardzhali (25.5%).

The biggest increase of the share of roads in good condition is observed in Shumen – from 19% in 2012 to 36.3% in 2013 or 17,3 p.p. increase. A continued rehabilitation of 40.5 km of the I-7 road Shumen – Veliki Preslav – Varbitsa is expected In 2014. This will improve the share of roads in good quality even further. The construction of the ‘Hemus’ highway is also progress, despite problems.

Overall, half of the districts have their share of good quality roads increasing, and the other half – decreasing. The map above shows that the share of roads in good condition in Southern Bulgaria is higher. Te total share roads in good condition to the north of Stara Planina is 36.4% while south of the mountain it reaches 45,1%. This is mostly due to the fully built “Trakia” highway and the fact that most big infrastructural projects concentrated in Southern Bulgaria.

The poll, which was conducted in May 2014 for the “Regional Profiles: Indicators of Development” study, shows that one of three companies claim that the quality of infrastructure in their district has a negative influence on their business. The worst resulsts are in Vratsa, where 58.3% of entrepreneurs state that they suffer from low quality infrastructure. This also holds true for about half of companies in other districts – Gabrovo (51.7%), Silistra (48.3%) and Montana (46,6%)– also districts in the northern part of the country.

Building up a good infrastructure has been a priority of the last few governments. The lack of quality roads and convenient transport connections between districts can seriously interfere with their further economic growth.

Yavor Aleksiev

In June 2014 the IME organized six regional roundtables focused on important issues of regional development. The first three events were held in Blagoevgrad, Plovdiv and Stara Zagora in the second week of June. The main impressions of the IME regarding South Bulgaria are available here. The meetings were attended  by a number of local businesses and NGOs as well as local and regional authorities. The round tables were organized with the active support of the Bulgarian Chamber of Commerce and Industry (BCCI). The series of roundtables is part of the preparation of the forthcoming third edition of the "Regional Profile: Indicators of Development", published with the financial support of the "America for Bulgaria".

The economic recovery in Northern Bulgaria continues to be barely noticeable. In some places (such as the Silistra District) even increasingly negative trends are observed. With regard to the labor market sustainable improvement is noticeable only in Northeastern Bulgaria, especially in the districts of Varna and Dobrich. Despite positive trends in these two districts and generally positive expectations that were shared by businesses in a survey, conducted by IME in May, employers' organizations are skeptical about further recovery in the labor market this year. They point out four main reasons:

• continuing uncertainty about the "South Stream" project;
• geopolitical crisis in Ukraine, which is a leading export market for many companies in the North East and the North Central Region;
• potential adverse effects of bad weather on agricultural production;
• expectations for declining flow of tourists from Russia and Ukraine, resulting in a weaker tourist season

The continuing political instability and the populist rhetoric of some parties in Parliament have a strong negative impact on foreign investments. As a result, some investment projects in the industrial sector in Gabrovo have been frozen or terminated. Another serious problem for Gabrovo is the lack of appropriate municipal land, which can be used to attract potential investors. According to representatives of both local business and local government, in many cases the ownership of such lands is not settled, or they are already taken-up by old factories, which although privatized, have not been active for years. Communication between the municipality, potential investors and the current owners of such lands and factories is very difficult, which prevents their sale/rent and use.

Local administrations are very concerned about the potential suspension of some European programs. A recent example is the municipality of Troyan (Lovech), which just a few days ago had to borrow 5 million BGN to settle payments with the companies implementing the project for the city’s integrated water cycle. Suspension of funds under OP "Environment" can have negative consequences on the financial state of this and other municipalities in the region.

The effect of the opening of Danube Bridge-2 is assessed as positive, but the poor condition of the road network in much of the region and the lack of highway roads in the Northwest and the North Central region of the country hamper further potential benefits of the facility.

The lack of adequately educated young staff is a serious problem, especially in areas such as Vratsa and Veliko Tarnovo. There are no examples of successful collaboration between local businesses, local governments and educational institutions. Educational equipment is outdated. Another serious problem is the lack of strategic investors and large companies in the North West region of the country, with the notable exception of NPP "Kozloduy".

There is a positive attitude towards the idea of ​​increasing the financial authority and independence of municipalities (e.g. retaining some part of the personal income tax) in order to provide additional incentives for local governments to attract investment.

Yavor Aleksiev

In May 2014 The IME conducted a nationwide survey of 1680 companies for the purposes of the forthcoming third edition of the study "Regional Profiles: Indicators of Development".

The survey included questions assessing the expectations of enterprises about future investment and income dynamics, as well as their expectations of hiring or releasing employees. The results we obtained are in line with the consensus of a recovering labor market and point to more jobs and higher investment activity over the next 12 months.

Main findings

During the same period of last year businesses expected increases in the number of employees in only 10 of the country’s 28 districts. Our latest survey shows that this year annual employment is expected to remain stable or increase in practically every district of the country.

A significant increase of employees is expected in nine districts, including three in the Northeast region (Varna, Targovishte and Shumen), one in the Southwest (Kyustendil), three in the South-central region (Pazardzhik, Plovdiv and Haskovo) and two in the Southeast region (Sliven and Burgas).
The group of districts in which businesses believe that the number of employees will remain stable or will register insignificant increases includes Veliko Tarnovo, Stara Zagora, Razgrad, Pleven, Pernik, Gabrovo and Blagoevgrad.

These expectations are in line with three main trends that the IME pointed out in the summer of last year:

• The labor market recovery in 2012 and 2013 was lead by the South-central and South Eastern regions of the country; in view of the expectations of businesses this trend is likely to continue in 2014 and 2015.
• The labor market in Southern Bulgaria is recovering much faster than the northern part of the country; there are no districts in the Northwest and North-central regions of the country with clearly defined positive employment expectations.
• The increasing economic activity in the district of Varna will most likely facilitate job creation in Shumen and Targovishte in the second half of 2014 and the first half of 2015;

Main factors affecting business

Enterprises point to both credit accessibility and EU funding as leading business environment factors. Both of these enjoy a more positive assessment by larger companies (those with over 50 employees), but the perception among micro firms and small firms is also mostly positive. At the same time, despite the high average rating of EU funds, 32.5% of respondents could not evaluate their effect.

In line with results from previous studies as well as other IME labor market analyses, the local labor market comes forward as the leading negative business environment factor. Businesses in Sofia (district), Dobrich, Pernik, Vratsa and Sliven find it the most difficult to find suitable employees.

Business environment factors such as infrastructure and the quality and speed of administrative services are considered somewhat neutral. In turn, the size of the domestic market (domestic consumption) is a problem especially for micro-firms and small enterprises.

Additional information about the IME survey among businesses will be posted on the website of the project "Regional Profile: Indicators of Development" in the coming weeks.

Yavor Aleksiev

Over the past week, the Institute for Market Economics (IME) organized its first series of round tables throughout the country (June 9^th-12^th), focusing on current issues of regional development. The first three round tables were held in Blagoevgrad, Plovdiv and Stara Zagora and included representatives of local businesses and NGOs, as well as representatives of district and municipaladministrations.

Main impressions from Southern Bulgaria

The Southern Central and the Southeast regions continue to be the main drivers of the economic recovery of the country in 2014. Several districts (like Pazardzhik, Plovdiv and Sliven) enjoy increased investment interest and rising employment in 2013, as well as in the beginning of 2014. The economic recovery of Burgas is also well underway – a strong summer season may result in annual employment levels surpassing those before the crisis. The labor market in Southeast Bulgaria remains subdued, which has a negative effect on the economic recovery of Blagoevgrad, Pernik and Kyustendil. Sofia (capital) is the only district that registered positive tendencies in 2013 and the first quarter of 2014.

Positive tendencies:

• Increasing investment potential and stronger interest towards the IT sector in Plovdiv;
• Postponement of planned staff cuts in leading companies in and around Stara Zagora, despite continuing economic uncertainty;
• Positive effect of putting the Trakia Highway into operation on economic activity in the districts of Yambol and Sliven;
• ncreasing investment activity in one of the country’s poorest districts – Silven, coupled with tendencies for an increasing number of jobs in the second half of 2014;
• Positive business expectations regarding employment, investment and revenue levels in most Southern districts, including some of the poorest ones;
• The local administration in the district of Plovdiv realizes the extent of missed opportunities for more active participation in the Operational Programs of the EU – measures have been taken to esure higher EU funds’ absorption and there are, in our opinion, realistic expectations for improving effectiveness in the near future;
• There is a prevailing positive attitude towards the idea of increasing the financial authority and autonomy of municipalities (for instance, through the retention of a part of the income tax, paid by employees in their jurisdiction), which aims to create additional incentives for local administrations to attract investment.

Negative tendencies:

• The lack of adequately qualified workforce (for both local and international businesses) is a problem that to a vast extend defeats two of the main competitive advantages of the Bulgarian economy – low taxes and low labor costs;
• Although in some places (Blagoevgrad) there are recent examples of successful cooperation between local businesses, educational establishments and the local administration, the postponed adoption of more up-to-date legislation in the educational field hinders the synchronization between labor market needs and the educational system;
• Businesses are negatively affected by the continuing political crisis;
• Local administrations are seriously concerned about the prospect of a potential freeze of funds under some European programs;
• The uncertainty in the energy sector is a problem of particular importance to businesses in some districts (especially Stara Zagora);
• The lack of strategic investors in some districts of the country (like Blagoevgrad) and newly opened enterprises is a serious issue. The prevailing impression is that the vast majority of foreign capital is attracted by a drive for quick returns, which does not give opportunities for long-term economic development and income increase.

During the next week the IME will organize a series of round tables in Varna, Gabrovo and Vratsa:

Monday, June 16, 2014 Varna

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Varna and the Northeastern region, followed by a discussion
• Location: Varna Radio Concert Studio
• Start: 9:45

Wednesday, June 18, 2014 Gabrovo

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Gabrovo and the North Central region, followed by a discussion
• Location : Technical University - Gabrovo , Library Hall
• Start: 9:45

Thursday, June 19, 2014 Vratsa

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Vratsa and the North Central region, followed by a discussion
• Location: Chamber of Commerce and Industry Vratsa
• Start: 9:45

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The events will be held in Bulgarian.

Join us! For more information and registration:
Vessela Dobrinova | vessela@ime.bg | (+359 2) 952 62 66

The series of round tables is a part of the preparation of the forthcoming study “Regional Profiles: Indicators of Development 2014”, carried out with the financial support of the “America for Bulgaria” Foundation.

Between 9^th and 19^th June 2014 a team of IME economists will visit and organize a series of roundtables in Blagoevgrad, Plovdiv, Stara Zagora, Varna, Gabrovo and Vratsa. The tour is part of the preparation of the third edition of the study "Regional Profiles: Indicators of Development", carried out with the financial support of the "America for Bulgaria" Foundation.

The roundtables are organized with the support of the central and local structures of the Bulgarian Chamber of Commerce and Industry.

Monday, June 9th, 2014 Blagoevgrad

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Blagoevgrad and the Southwest region , followed by a discussion
• Location : American University in Bulgaria , Red Hall
• Start: 9:45

Wednesday, June 11, 2014 Plovdiv

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Plovdiv and the South Central region, followed by a discussion
• Presentation of the investment profile of Plovdiv and the region (Industry Watch)
• Location: Novotel Plovdiv hall " Moscow"
• Start: 9:45

Thursday, June 12, 2014 Stara Zagora

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Stara Zagora and the Southeast region, followed by a discussion
• Location: Chamber of Commerce and Industry Stara Zagora, Georgi Rakovski 66
• Start: 9:45

Monday, June 16, 2014 Varna

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Varna and the Northeastern region, followed by a discussion
• Location: Varna Radio Concert Studio
• Start: 9:45

Wednesday, June 18, 2014 Gabrovo

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Gabrovo and the North Central region, followed by a discussion
• Location : Technical University - Gabrovo , Library Hall
• Start: 9:45

Thursday, June 19, 2014 Vratsa

• Presentation of the study "Regional Profiles: Indicators of Development" with a focus on the development of Vratsa and the North Central region, followed by a discussion
• Location: Chamber of Commerce and Industry Vratsa
• Start: 9:45

The events will be held in Bulgarian.

Join us! For more information and registration:
Vessela Dobrinova | vessela@ime.bg | (+359 2) 952 62 66

Despite the recently published positive labor market data, the number of employees under labor contract decreased on an annual basis in each of the first three months of 2014. The decline is concentrated mostly in the poorest areas of the country and is accompanied by a rise in the level of wages - a trend that deserves further attention.

Yavor Aleksiev

According to NSI’s last quarterly labor force survey the number of people employed in the first quarter of 2014 are 39 thousand more than the same period of last year. At the same time, the number of employees under labor contract in the country continues to decline in each of the first three months of the year (yoy), dropping to 2,216 million at the end of March 2014, compared to 2,231 million in March 2013.

The discrepancy of the two indicators is due to the different scope of the data presented in the labor force survey and the short term statistics on the number of people employed under labor contract and their average wages. NSI’s quarterly labor force survey includes all employed, i.e. it is based on survey among a sample of the entire population. Meanwhile, the short term statistics on the number of people employed under labor contract and their average wages are based on a sample of enterprises in both the private and the public sector. These include employees with existing labor contracts, but do not cover the so-called self-employed, or people working under civil contracts and others.

Therefore, the number of employees under labor contract is always smaller than the number of employed in the economy as a whole. Despite that, there has also been some improvement in the dynamics of first quarter data on employees under labor contract. The number of employees under labor contract in the first quarter fell by only 0.6% on an annual basis, which is the most positive result in years.

Figure 1: Annual dynamics of the number of employees under labor contract, %

Source: NSI

In the first quarter of 2014 there is a significant negative correlation (-0.58) between the annual growth in the average wages of employees under labor contract at the district level and the initial levels of those wages in the first quarter of 2013. This means that wages in districts where remuneration is usually higher have been increasing more slowly than wages in areas where they are traditionally lower. This is a somewhat expected result of the minimum wage increase at the beginning of 2014, In the poorer districts where wages are lower, increasing the minimum payments puts upward pressure on average wage levels, thus increasing the average wage. The available data on the number of employees under labor contract and their wages enable us to make some further observations.

Sofia (capital) is the only district in which the wages[1] of employees under labor contract decrease on an annual basis in the first quarter of the year (Figure 2). Other districts with traditionally high wages, but a relatively low increase are Burgas and Stara Zagora. This means that in three of the districts with the highest wage levels in the country, the annual increase in average pay is below the national average of 2.3%. At the same time, some of the largest wage increases are registered in some of the poorest districts. These are Vidin (12.1 %), Razgrad (11.1 %) and Silistra (10.1 %). In each of these three districts, however, the number of employees under labor contract continued to decline. The parallel growth of average pay and the declining number employees could mean that the latest minimum wage increase has forced employers to continue releasing some of their low-paid workers. Statistically, this has the effect of driving average wages in the enterprises concerned higher, which in turn raises average wage levels in respective districts.

Figure 2: Average wage in the first quarter of 2013 and increase registered in the first quarter of 2014 by districts

Source: NSI, IME calculations

In 10 of the 14 districts in which the increase in the average wage of employees under labor contract is higher than the national average (if we exclude the effect of the capital), and wage levels are lower than the national average, there have been three consecutive months of decline in the number of employees on an annual basis. Among them are three of the Northwest region districts - Vidin, Lovech and Montana, where in March the number of people employed under labor contract is 5% lower than the same period last year. Similar developments in terms of the number of employees can also be seen in other relatively less developed districts in the country like Silistra and Razgrad .

Targovishte, Yambol, Smolyan and Veliko Tarnovo are the four districts in which the increase in wages at a rate faster than the national average is not accompanied by a decline in the number of employees.

Meanwhile the labor market has performed relatively well in districts with traditionally higher wages, where the annual increase of remuneration is lower or in line with the national average (excluding the effect of the capital). Most such places observed timid growth or minimal decrease of the number of employees. Such is the case in Sofia district), Plovdiv and Varna.

It is likely that the data reflect a shrinking shadow economy in large districts, a process which puts a downward pressure the level of average wages. A possible explanation of this process can be found in the recently introduced tax incentives for low-income people (the possibility for those receiving minimum wages to request a refund of their income tax for 2014 in the spring of 2015). At the same time, we see no increases in the number of employees in the vast majority of poor districts (on the contrary), despite rising wages. We can speculate that employees there are being released, or that they move into the informal economy. Forthcoming labor survey data on employment at the district level, will allow further examination of this issue.

This is the first time since the beginning of the crisis, when such a significant negative correlation exists between these two factors – rising wage levels and their proportional effect on remuneration in districts where labor is not as well paid. This may be a sign of hitting the ceiling of business’ capabilities to pay a higher minimum wage in some districts. Although data on the labor force survey gives some hope that the negative effect of an increasing minimum wage has been relatively relatively well contained, any subsequent increase should be subject to careful analysis of labor market developments smaller districts.