Банкеръ Weekly

Briefs

TRANSITION IS OVER, REFORMS ARE PENDING

Several years ago some wise men announced the end of Bulgarian transition. It may be so. But even if the transition is finished, severe reforms in the society are pending from now on. This conclusion is derived from the findings in the report to the World Bank, prepared from experts of the state administration, sent to all parties of the ruling coalition - Bulgarian Socialist Party (BSP), National Movement Simeon II (NMSII) and Movement for Rights and Freedom (MRF). The analyses aim at determining all areas for which Bulgaria hopes to receive free financing from the European Union. The case in point is the effective assimilation of BGN4.6BN. They will help for radical reforms in education, the labour market, agriculture and ecology.
Money however will come only in case the government offers the EU projects, which will convince the bureaucrats in Brussels that the financed sectors will be thus modernised. The European Commission will not allow free money pouring as it will certainly make the system idle and refractory to reforms creating an impression in its employees that European money is due by rights.
The analysis of former use of European funds in other countries shows that they contribute to the economic growth if invested in real reforms. However, in case of unreasonable use these resources would have a short-term positive effect on the economy, while in the long-term run they could lead to a real appreciation of the national currency and a decrease in competition, to an aids dependency and ignoring of all efforts for management improvement.
There is one more
danger that European money is misused
After entering the state budget funds they will shortly increase the income side of the balance and will motivate a pressure for its entire absorption. Trade unions and different low income social groups will gradually urge the government to increase salaries and pensions, while the cabinet would hardly show strong arguments to refuse them. At the same time money poured for salaries and pensions without any increase in competition and productivity leads to higher demand for goods and services. And as Bulgarian made goods and services are insufficient, the result is an increase in import, country trade balance worsening and current account deficit widening. Moreover currently the deficit is among the highest in Europe - 14.2% of GDP at the end of October 2005. If it cannot be lowered, it will inevitably destabilise the country. This danger could be avoided only in case the ruling classes create
stimulus for the private sector
We are not speaking here for tax preferences for some branches or protective duties and other similar approaches. According to Ministry of Finance experts, Bulgarian firms could renovate manufacture and make competitive production for the international markets only in case the tax burden is significantly decreased - not only the corporate tax or VAT rates. The main burden for employers are social and pension insurance rates, as well as the tight demands in the Labour Code for compensating length of service and overtime work. Thus the cabinet decision to freeze the ratio of social payments to 65% for employers and 35% for employees hurts the private sector. This pseudo-social decision could create an initial positive image to the ruling circles among workers because it temporarily limits their insurance expenses. The final effect however is a lower competitive power of Bulgarian firms and shrinking export abilities. Which again will provoke the above mentioned danger of a rapid increase of the current account deficit. Generally speaking, the government of BSP, NMSII and MRF must at last accept the evident fact that in poor economies like the Bulgarian one no strong social policy can be performed and the party of Sergey Stanishev will be urged to admit that it had deceived its voters.
If the government wants to stimulate economy and to maintain a GDP growth of 5 to 6% yearly for a long period, it will have the very grave problem to make
reforms in the most sensitive sectors
of healthcare, pension insurance, education and administration. For these areas funding currently are spent more than two thirds of the state budget resources. While the Bulgarian treasury swallows 40% of GDP for the miserable pensions, salaries and low quality education. Financial ministry experts have calculated that if Bulgaria wants to achieve GDP per capita equal to 75% of the average in the EU, it should yearly maintain 5.5% GDP growth for 20 years. The main problem here is that such growth is very difficult to be achieved in such a long period of time, point out the MF analysts. And in case the treasury absorbs and redistributes 40% of GDP, the mission is almost impossible. In similar position had been Ireland in 1987, when its budget was redistributing 53.2% of GDP, while in 2005 it absorbs and spends 34.3% of GDP. Meanwhile Ireland is described as one of the most rapidly performing economies in the EU with its GDP per capita exceeding the average for the union.
The Ireland model execution
in Bulgaria however is a very serious challenge because together with all other difficulties employees in the private sector and people, who are paying taxes, are gradually diminishing. According to official statistical data in the Bulgarian private sector are hired 1.37 million citizens. They, through taxes paid, provide for salaries and means of living all other Bulgarians - children, students, bureaucrats, policemen, military, doctors, teachers, magistrates, pensioners and unemployed. The ratio is 1:5. Employees in public sector are 740,000 with 475,000 of them working in the state administration. And when a person looks around and realises what kind of services he receives from the state and their quality, he begins asking himself why he should pay taxes at all. Every second Bulgarian is complaining of administrative services speed and quality. The level of education is awful. Hospitals would rather kill than treat you, policemen receive bribes instead of chasing criminals and if a person dares to seek his rights in court... God save him if he has no enough money. All these structures want more and more resources, while on the other hand, fiercely refuse any attempts for their restructuring. At the same moment the so called political class is loudly speaking for changes needed, but when it comes to their approving, politicians begin to beat a retreat with the only thought for not losing the rating and their aids in administration - comfortable positions.
As for the budget funds decrease - these 40% of GDP and reducing the tax burden of the firms - it cannot be achieved without reforms in budget sectors and reducing the number of their employees. Last month
teachers and their strike were in the centre of public attention
They are quite right that nobody could live with a salary of BGN200. Moreover it is not proper teacher compensations to be lower than the mobile phone prices of the students. In this case however, there are two sides.
Consolidated government expenses for education have been rising gradually as a percentage of GDP in last years. They were 4.4% of GDP in 2004 and are close to the average amount in the members of EU, where this ratio is a little above 5% of GDP. And at the moment when funds for education are rising, the number of children in schools is reducing. In other words, expenses for one student maintenance increase in two directions - through the growing GDP and through the rising teacher salaries when the number pf pupils decreases.
For the period between 2000 and 2010 in Bulgaria the number of children between five and ten years is expected to contract by 26.3%, the number of those between 10 and 14 years - by 39.2%, while the number of young people between 15 and 24 years - by 35.6 per cent. In the EU the average rate of decrease of these groups is 7.9%, 10.9% and 17.4% respectively.
And one more fact - in the Bulgarian primary school one teacher is working with 16-17 pupils in average, in the Czech Republic, Germany and Ireland the number is 18-19, while in Great Britain it is 20. Differences in numbers of pupils in high school are similar. In Bulgaria one teacher works with 12-13 high-school students, in the Czech Republic they are 14-15, in Ireland - 14, in Germany - 14-16, in Great Britain - up to 18. Most drastic are differences in universities. In Bulgaria one lecturer teaches 11 students on the average, in Germany and Ireland - 15 (in each country), in the Czech Republic - 17, in Great Britain - 18. Obviously, in Bulgaria one teacher teaches less pupils and students than his colleagues in more rich economies, which explains the lower compensations. So, even though budget funds for education are gradually rising, money for teacher salaries is insufficient.
In spite of the bigger expenses for one student in Bulgaria
the quality of education
does not fit in any way the knowledge needed for doing well in real life.
It is extremely below the level in other Central and East European countries with similar rates of expenses, say government experts. The average marks in mathematics and natural science in Bulgaria are lower than those in the new EU members, finds the special report to the World Bank. Experts explicitly underline that among European countries, which took part in the programme for international valuation of students' knowledge Bulgaria recorded its most serious drop in 1995-2003 period. Almost 40% of the young Bulgarians, who passed the test, scored results of such level that will create serious difficulties in reading of different types of literature as an effective instrument for increasing their knowledge and experience in other areas. Moreover, there are evidences that the Bulgarian system of education does not perform and teach those experiences, which are sought for on the labour market, thus contributing to the high unemployment of the young people. This additionally burdens the budget as it pays, though a very low, maintenance for every unemployed. The budget pays the money for all this chain of mistakes from taxes, i. e. - taxpayers. In such manner is created the correlation between high budget expenses, low quality of education, unemployment and, as a result - limited opportunities for lowering the tax burden. The chain reaction is extended in the following direction: high taxes lead to low competitiveness of Bulgarian firms both on domestic and international markets; trade balance gap and currency volume outflows are rising. Some time from now on the result of this process will be country's destabilisation. That is the reason why many Bulgarian and foreign experts repeat in different reports that some sectors in Bulgaria, including education, need reforms. These reforms are usually connected with lay-offs and quality increase. And when all these things happen, a chance for salary rising will appear without any increase in budget expenses for the sector.

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