20.05.2021

VISION FOR TRANSFORMATION OF THE BULGARIAN ECONOMY IN THE POST-COVID DECADE

Analysis of the Bulgarian Chamber of Commerce

The transformation of the Bulgarian economy in the next decade is both necessary and inevitable. This is because some of the well-known statistics are very worrying and not typical of an EU Member State or even a developed country. According to the World Population Review (2021), Bulgaria has the highest mortality rates in the world in 2021. In this respect, it is ahead of developing countries. Bulgaria is also at risk of ambient air quality, with the most serious exceedances observed in the indicators SO2 and PM10 according to the European Commission (Press release IP / 19/4256. Brussels, 25 July 2019 and others).

Exactly these two indicators are sufficiently indicative of the state of an economy. On the one hand, they provide information on the level of quality of life in a country. This affects the desire for migration, which in turn affects the size of the active workforce and at the same time consumer demand (which is one of the main factors for the growth of Bulgarian GDP). On the other hand, these two indicators affect the opportunities for attracting foreign direct investment: declining skilled labor force, poor potential of the domestic market for consumer demand, poor ambient air, combined with very high mortality, indexing a low level of health - repel the desire of foreign specialists to be seconded to Bulgaria. This largely explains why in recent years foreign direct investment has surrounded us and targeted our neighbors who are not even members of the EU.

Even with only two indicators can indicate the need for transformation of the Bulgarian economy in the next decade. And many more can be listed.

COVID-19 has caused the worst global economic crisis in nearly 100 years. This is not the first global economic crisis, but it is the first global crisis of an exogenous nature. That is why economic policies constructed on the vision of instrumental management of endogenous cyclicality have failed.

Until now, the Bulgarian economy has relied on classical macroeconomic policy. Leading role of fiscal policy in combination with balanced participation of monetary policy (there are different classifications for the types of economic policy).

But the annual growth rate of economic policy so far can hardly be called convergent. PPP-based calculations do not take into account the difference in the quality of goods offered by the same company for high and low purchasing power markets. And when using indicators based on current prices - e.g. GDP / capita, the difference is 4 times compared to the EU-27 average.

This requires its change in direction:

    First, the strategic use of targeted manageable budget deficits. There is nothing wrong with using budget deficits when they are targeted (support important structural reforms in the economy) and manageable (economic growth keeps them at low risk).

   Second, assessing the risks of long-term zero interest rate policy: "liquidity trap", "closed economy effect", "escape to cryptocurrencies", etc. Especially in exogenous shocks, the combination of zero interest rate and currency board is not effective enough. Cryptocurrencies and quasi-monetary aggregates created by private non-financial entities will still create strong pressure on public monetary policy in balancing it between the interest rate and the amount of money in circulation.

      Third, the maintenance of normative fixed prices, normative fixed wages, "artificial" employment exhausts the economy, not supports it. In such cases, the level of the so-called "gray economy" or human labor is replaced by productive capital and the opposite effect occurs. These are some of the reasons for the existence of structural problems in some economic sectors.

     Fourth, digitalization of the economy and the public sector, combined with constant and real professional development of the workforce. Digitalization is happening globally and at a rapid pace. If Bulgaria lags behind in this process, it will not be able to catch up with the other countries. At present, the potential for economic growth based on the low cost of labor has been exhausted because unemployment, even in a pandemic, is close to a minimum. This means that accelerating growth can only be based on digitalisation and GDP restructuring.

    Fifth, a change in the structure of the fiscal burden (which is different from the tax burden). The focus of restructuring must be on so-called 'quasi-taxes'. The overall fiscal burden in Bulgaria is quite high compared to other developed countries. This process must be carried out in parallel with the restructuring of the health system, energy and other unreformed sectors.

    Sixth, investment in science and education combined with reform. The reform in this sector has so far not yielded significant results. Only one Bulgarian university (in some years and one of the medical ones) enters the international rankings. The number of patents created by Bulgarian universities is below the European average. Investments first in science and next in education are key to the future restructuring of the Bulgarian economy into a digital one.

    Seven, green transformation of the economy. As much as Bulgaria is dependent on local energy resources, which provide energy security, the world is transforming. The United States is cutting 130,000 jobs in the mining and energy industries related to fossil fuels. China has announced plans for a rapid transformation of its energy sector over the next decade. The EU is raising its targets in this area. The focus is on the risks of the pace of climate change on long-term investment. Green transformation is inevitable and Bulgaria, instead of postponing this process, should try to take a leading place in it. This will require high investments, which cannot be secured by European funding alone.

   Eight, the disappearance of labor-intensive low-tech industries. The pandemic has shown that labor-intensive industries are highly dependent on national health systems, which are weak in developing countries. Such are even in transition economies. In order not to break supply chains, this type of production will be replaced by high-tech robotic processes. In this situation, the cost-benefit analysis of robotics is a plus and the high initial investment is worth it, and the development of science already allows it technically. This means investing in retraining the workforce, which will also take time. Therefore, this retraining process must start ahead of time before burdening public social spending.

The post-COVID economy will intensify, not limit, globalization. Global supply chains will become digital, greener and more technological. Anyone who relies on low cost of production resources and low level of production technologies will be excluded from them. On the contrary, high investment in science (following the example of vaccines) will be the new norm and will bring economic benefits.