Bulgaria’s Economic “Model” Promotes Poverty

How do you find writing inspiration? I often get inspired when I debate topics with others. Recently, a new opinionated follower on Twitter lectured me on how people in Bulgaria live better than before because they spend more and travel more. When I asked her which people she had in mind, she sent me some articles from Bulgarian media whose quality is questionable to say the least.

I am certain that there are many people who fall for this play with data, which is borderline propaganda, so here is an article about Bulgaria’s economic model, which is anchored in promoting poverty. Some myths propagated by Boyko Borissov’s government should be shattered once and for all.

On Pride and Propaganda

Borissov has tried to sell a few myths abroad. One of the legends which has been picked up is Bulgaria’s economic success, which, in his view, is illustrated by Bulgaria’s GDP growth. In 2018, GDP grew by 3.2%. The legend of impressive economic prosperity started living its own life and found itself even in the economic forecasts of the European Commission. “Robust growth”, they say. But what lies behind it and is it that impressive when you compare Bulgaria’s macroeconomic outlook to the macroeconomic outlook in other countries?

For once, yes, some West European countries cannot boast with such growth. Yet, what happens when you examine other East European countries, including non-EU members? Here is what the 2018 metrics show:

  • GDP growth in Albania: 4.2%,
  • GDP growth in Hungary: 4.9%
  • GDP growth in Latvia: 4.8%
  • GDP growth in Romania: 4.1%
  • GDP growth in Serbia: 4.4%
  • GDP growth in Poland: 5.1%

The economies of most East European countries grow faster than the Bulgarian economy, but the key difference to note is that we are at the bottom, so this growth cannot even help us catch up with other East European countries.

Solid Bottom

Borissov and the EPP-dominated European Commission conveniently forget that Bulgaria has always had the lowest GDP per capita in the EU. In 2018, it was $9,272.629 while the average GDP per capita in the EU was $36,546.4.

Figure 1: Bulgaria has the lowest GDP/capita in the EU; Source of graph: World Bank.

When you compare Bulgaria’s GDP to the GDP of other countries with similar populations, you realize how inefficient the economy actually is. In 2018, the GDP of Bulgaria was $65.133 billion while the GDP of the Czech Republic was $245.226 billion. The population of Bulgaria is approximately 7.05 million whereas that of the Czech Republic is 10.65 million. Their GDP is 3.76 times higher.

Figure 2: GDP of the Czech Republic and Bulgaria in the period 1990-2018; Source of graph: World Bank.

Poverty

Unsurprisingly, economic inefficiency results in very low salaries and a poor standard of living. Bulgaria has always had the lowest median earnings in the EU. Here is the latest data for 2018! The average net salary in 2018 was 457 EUR. Contrast with Romania (565 EUR), Poland (784 EUR), and Greece (917 EUR).

Of course, the next question is how much can this salary get you? Very little. A family of four needed 1188 EUR/month on average for basic expenses in Bulgaria. If both parents earn the average salary, they cannot support two kids. One should note there is an increase in the median earnings, but the main reason for this is that Borissov’s government always increases the salaries of public servants before elections. Even after the increase, the median earnings are still insufficient to support a family of four.

This is also the part where we need to bust another myth about Bulgaria – the famous 10% flat tax. Take a look below! Bulgaria imposes a 22.01% tax on salaries. In Sweden, they impose 23.05%, in Ireland – 20.87%, in Cyprus – 6.80%. Borissov is not that generous after all.

Figure 3: Average salaries in the EU in 2017 and 2018; Source: Reinis Fischer.

In addition to median earnings, another sure-tell sign that a country struggles is the number of people who live below the poverty line. For Bulgaria, the number is very high (22%) and the number has been more or less consistent for a decade.

Figure 4: Poverty line in Bulgaria and the Czech Republic. Source: World Bank.

The Consequences of Poverty

Two of the immediate consequences of poverty are mass emigration and a low birth rate, which result in a demographic crisis. There are more Bulgarians working abroad than in Bulgaria. The upside is that the unemployment rate in Bulgaria is low, which Borissov thinks is positive. However, this is not his achievement. It is a consequence of economic migration.

On average, Bulgarians who stay have 1.5 children because, as we saw above, they cannot afford to support more kids. Bulgaria is now the fastest shrinking nation in the world. Here are some scary numbers:

  • Population of Bulgaria in 1989: 8,876,972
  • Population of Bulgaria in 2018: 7,024,216
  • We have lost 1,852,756!

No Strategy for Development

Bulgaria is notorious for its corruption (it has been ranked as the most corrupt EU member by all reputable indices), its deplorable rule of law, and its lack of vision for the future. Borissov believes that low salaries are a competitive advantage and this is how he has tried to lure investors. In other words, his vision for the future is promoting poverty and manual labor because, let’s face it, who will want to receive a 457 EUR average salary when they can get a much better living abroad?

Investors, however, do not feel particularly attracted by this incentive. Bulgaria has virtually no FDI! The decline started when Borissov came to power.

Figure 5: FDI decline in Bulgaria; Source: World Bank

Bulgaria does not invest in research either. It has one of the lowest government R&D expenditures as part of GDP in the EU.

Figure 6: R&D as part of GDP in the EU. Source: Eurostat.

Without research and without good salaries (a Bulgarian teacher gets 500 EUR on average following a small raise in the fall of 2019), it is not surprising that good education is really hard to find. What kind of labor force is Bulgaria preparing for the future? The latest PISA scores are a catastrophe – Bulgaria performed significantly below the OECD average in all categories. It is even behind non-EU countries like Moldova and Montenegro.

Where Does Borissov’s GDP Growth Come From?

The skeptic in me does not believe statistics doctored in Bulgaria all the more I have talked to experts on GDP calculations and I have learned how easy it is to manipulate this. It is tempting to explore inflation too. In 2018, inflation in Bulgaria was 2.8%. How much of this growth is real?

However, assuming this growth is real and knowing there is no FDI, Bulgarian business is constantly racketeered, and there is a significant grey sector of the economy (nearly 37.8% of GDP)…the only obvious answer is EU funds. When one factors in GDP, Bulgaria receives more compared to other EU member states. This does not look sustainable in the long-run as an “economic model”.

Figure 7: Bulgaria receives more EU funds compared to other countries if one considers the GDP.

Do Bulgarians Live Better?

Going back to the beginning of this article, one of the questionable articles I was sent showed Bulgaria’s GDP was higher than ever before, so we were richer…or something along those lines. This is an extremely unsophisticated argument. The GDP of most countries has grown since the measure was invented and we have many technological revolutions and innovations with which we can explain this. In fact, here is a graph of global GDP:

Figure 8: World GDP from 1960 until now; Source: World Bank

Moreover, the relationship between “living better” (whatever that means because this is a rather subjective measure; according to the latest Eurostat happiness survey, Bulgarians are the least satisfied with their quality of life in the EU) and GDP growth is not direct. This has been argued by many reputable scholars, the latest one being Nobel laureate Joseph Stiglitz. “So what if GDP goes up, if most citizens are worse off?” is one of many reasonable questions he raises. Bulgaria is the poster child for this. By far, it is not the only one.

Needless to say, an ongoing debate among economists in Bulgaria is whether we have a middle class and who belongs to it. The answer is not simple because methodologies differ, but the most pessimistic figure I saw was 107,000 Bulgarians.

The GINI index, a standard measure of inequality, does not reveal a more positive picture. It has been reported Bulgaria has a GINI of 33.9% in 2018, the same GINI it had in 2009. It has one of the highest GINI in the EU, which is a telling sign of inequality.

To conclude, some Bulgarians may live better under Borissov’s goverment, but the economy is on the verge of a breakdown. With no vision for the future, with rampant corruption and a major crackdown on human rights, our prospects do not look very bright.

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PS. I am obliged to my mother, Antoaneta Vassileva, professor of economics, who made sure I navigated the macroeconomic landscape decently for a lawyer.