IME: Smart Recovery Requires Building Local Capacity

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It is the go-to resource for socio-economic analyses on Bulgaria’s regions. Whether you are an investor looking at Gabrovo’s engineering potential, a local planner in Ruse interested in attracting educational investment, or an expansion-minded business in search of areas with low taxation, efficient local administration, and a qualified workforce, the Regional Profiles of the Institute for Market Economics (IME) are your first stop.

Will you be able to attract enough qualified workers from neighboring towns if you decide to set up shop in Haskovo? Are there complementing industries in the area you are considering? What is the state of the local infrastructure? The Institute’s comprehensive annual analyses of Bulgaria’s regional potential will supply the data you need to make informed decisions and draw up effective policies. Its supplementary discussions of current and future economic trends, perspectives on topical subjects, and detailed wage and employment maps ensure that users have the complete picture and relevant, up-to-date information.

The Institute’s Regional Profiles 2020, published in January 2021, and the accompanying look at the economic and social effects of the coronavirus pandemic, are now available free of charge in Bulgarian and English at www.RegionalProfiles.bg.

IME’s overall contribution to guiding socio-economic policy in Bulgaria and making government spending more transparent and effective cannot be overstated. In the nearly three decades since its founding, it has helped shape Bulgaria’s transition to a market economy, encourage deregulation, and highlight opportunities in the country’s periphery.

We talked to the Institute’s executive director, Svetla Kostadinova, and senior economist Petar Ganev about how the pandemic affected Bulgarian businesses, about the opportunities and challenges facing regional economies, and about what a smart approach to recovery may look like.

America for Bulgaria Foundation: The Bulgarian economy was in very good shape on the eve of the pandemic. Did this help the country weather the storm better, or did its advantages evaporate quickly?

Petar Ganev: We had record employment before the crisis. At the moment, even after the blow of the pandemic, employment is very high. The accumulation of good years leads to big change. The environment changes when you achieve a decade of 3–4% annual growth, and we had two consecutive such periods—from 2000 to 2009 and from 2011 to 2020, despite the crisis in between. These are two almost-ten-year growth periods, which change the environment.

The model changed as well. There is a demand not just for jobs, but for quality jobs and good salaries. Unemployment programs became obsolete in 2019 because there was no official unemployment. The crisis brought that back.

Even so, we maintained much higher employment during this crisis than we did during the previous downturn. Back then, unemployment doubled, reaching 400,000 jobless, and the job market crisis continued for five years. We shed only 100,000 jobs during the first wave of this crisis. Some of them were regained—not fully, of course, the crisis continues—but the scale isn’t the same. Maybe because this time our economy is better prepared.

America for Bulgaria: The sharp downturn the economy took in 2020 cannot be overstated, though.

Petar Ganev: Yes, it was clear it was going to be a deep dive, but it was relatively short-lived. You don’t go back to the level you were at before, but you cover a big part of the way back relatively quickly. In 2021, we will not go back to the trajectory we were on, maybe in 2022. The short-term slump was unprecedented simply because everything stopped. The lines in front of the social services agencies [in March-April last year, ed.] were most telling. There were also fewer than 1,000 foreign tourists in April, compared to 50,000 in other years. There were simply no foreigners in the streets. This didn’t happen even during the previous crisis.

America for Bulgaria: Your Regional Profiles 2020 is a comparative analysis of socio-economic development of Bulgarian regions on the eve of the crisis. What does the comparative approach accomplish? 

Svetla Kostadinova

Svetla Kostadinova: We wanted to show that there are different things happening in different regions. As a result, municipalities started brainstorming about what their strengths are, so that they could highlight them and attract investment, people, and funding.

We supply the same kind of information about every region, which sets off a comparison spree. If one region has a poor score in one category, it starts comparing itself to its neighbors. Afterward they look at the best and worst performers in the category. All this comparison and competition between regions and municipalities is extremely useful because it generates dialogue and engages other parties.

America for Bulgaria: Why are certain regions doing better than others? What fuels successful development?

Petar Ganev: The dynamics changed in the Bulgarian South, especially around Plovdiv. Over the twenty years since the start of the [post-1989, ed.] transition, the region’s population was stagnant. There was a turnaround in the past ten years—economically because of the industrial zone and culturally because of Kapana. Now, the population is growing noticeably. Seeing that the regional map can change, other regions started changing their thinking and setting up hubs for attracting investment. Such hubs exist in Varna, Burgas, Stara Zagora, and Gabrovo. Sometimes it is a separate agency, at others it is people within the municipality, but generally this was a process led by local governments who saw that certain things could change and be successful, outside the use of European Union funding.

EU funding continues to be very appealing because a considerable amount is headed our way, because people working on these projects can get better salaries, and because certain aspects of the environment can change for the better, such as water and waste management, etc. Attractive though EU grants are, it is clearly beneficial to think in other directions as well, such as attracting investment, defining the region’s economic profile, improving conditions for industrial companies. You cannot plan for the creation of an innovative digital hub from one day to the next. You need to prepare, to have certain people talk among each other, to connect businesses and universities, and to have them understand who is doing what. Those working in that direction—toward determining their smart specialization and their strong sectors—will pull ahead, among them Plovdiv, Burgas, Varna, and secondary centers such as Ruse, Veliko Tarnovo, and Gabrovo to the north.

Svetla Kostadinova: There are smaller municipalities showing very good development for at least the past five years. These municipalities have one big employer, usually a private company that built, invested, and developed its activities there and then reached the next level of thinking, realizing that it has to keep people there and attract new ones because it is expanding and needs more people. In these municipalities, the big investor is in a position to guide development. We are talking about investment in public services such as hospitals, theaters, and long-term support, beyond small grants for a performance or a medical wellness checkup, involving the purchase of assets, the training of people engaged in public services. This shows that small places can be successful as well and reverse the population decline.

We publish a lot of municipal maps, and the ones that attract the most interest show average pay levels in these places. There are a lot of small municipalities that are above the wage average in Bulgaria, where one investor employs everyone willing to work, offering them security, additional services, and good pay.

This is a different model: a private company serves as the local investment hub, attracting other businesses that offer social services. These places see the launch of festivals, the opening of restaurants and cafes because there are young people, of cinemas and health centers. The big investor is that investment hub. All the better if there is a responsive mayor as well.

Petar Ganev: When we started publishing municipal data, we got a clearer picture of these small places where one or several companies were changing the environment. The Srednogorie region is undoubtedly such an example. All municipalities there are small, there is one leading company, and this is visible in the rate of average pay and retirement benefits. Investment in the country is also visible. Asarel-Medet in Panagyurishte is the most obvious example; it has invested in the local hospital, sports hall, hotel, movie theater, and museum. During the pandemic, when we started looking at the number of beds [per capita], Panagyurishte was in the top 5 both in terms of beds and medical specialists.

This is the message we are trying to convey: the economy changes the social environment. We cannot reverse the demographic trend if there is no economic growth.

Examples often come from the same places, but this is where there is initiative and movement. There are also things that cannot be seen at first glance. This is why we got down to the municipality level and started the 265 Economic Stories project—to show that capacity needs to be built at the local level.

America for Bulgaria: The EU’s programs for reconstruction and development for 2021–2027 will be a substantial resource for Bulgaria. How should this resource be used so that it is most effective in aiding recovery and encouraging long-term development?

Petar Ganev: Here again it boils down to the capacity of local institutions. Where the resource is channeled depends on the programs themselves. It is understandable why we had so many projects dedicated to water cycle and waste management, the water supply, and the urban environment. First, it was obvious there was a need for that type of project and, second, it was a technically clear task. You need engineers, basically, to make downtown look more beautiful or remodel the school, to install insulation and new window frames, replace the heating, etc.

In the beginning, it was logical and necessary, to a degree, that technical projects would be the majority. But now we are headed toward a very different type of spending—which isn’t about how to insulate the school, but about how to bring children back to school, how to make them more successful, how to help the school partner with an IT company, connect with a university, or work with business.

The task today is more difficult. It is no longer technical. Planning for and partnering with an IT company on a school digital laboratory project is complex. This is why municipalities are hard at work planning for 2021–2027, and those who know what they are doing will be successful.

America for Bulgaria: Will municipalities be at the forefront of this process?

Petar Ganev: Yes, there is a certain movement in that direction with the regional councils idea. Regional councils will have a bigger role in intermunicipal and regional projects. But generally, the main priorities will be directed by the central authorities. The programs’ names themselves, such as Human Resources and Competitiveness, provide a general frame. This frame is broad enough, though, that the needs of a town can be formulated to fit into it.

For this to work, however, municipalities need to have their own resources. At the moment, local governments do not have the means to initiate projects. They need to either come up with a long-term project that fits into the pre-set frame [of an EU program, ed.], or wait for the end of the year and hope for the budget surplus to cover the cost. When all the work you do is on a project basis, at some point you may get several million levs for a project. At the same time, you need 20,000 levs for another project—to expand a social benefit or provide heating to the local community center. The resulting paradox is that you have five million levs for a new park or water cycle management, but you don’t have the 20,000 levs necessary to heat the community center or local sports hall. This does look ridiculous. This is how project-based budgeting works.

This is why we insist on budgetary decentralization—to have 2% of income tax [which is 10% in Bulgaria, ed.], or one-fifth of what the municipality collects in income tax, to stay at the local level so that municipalities can do long-term planning, invest, and enter into public-private partnerships, all of which is difficult at the moment.

Svetla Kostadinova: What is also becoming clear is the need for municipalities to join efforts—two, three, five, ten municipalities coming together and doing some joint planning for big projects benefiting all of them. Many of Bulgaria’s municipalities are small, and there isn’t a common model for certain types of public services. [Certain services aren’t available at all in places. Ed.] If they join efforts, they can achieve something that benefits all and that is more effective. Municipal administrations and mayors usually initiate projects on their own in order to have full control and only as a last resort, especially if the central government has demanded it, do they work together [such as on infrastructure projects, ed.]. The lack of a common vision to unite similar neighboring municipalities is a hurdle. One requirement in the EU’s next program period is that groups of municipalities work together, that there is no overlap in activities, that different regions join efforts.

Petar Ganev

Petar Ganev: We are also trying to encourage municipal administrations to think beyond territorial limits. Sofia is an example. Its industrial development is connected with the development of neighboring municipalities—Bozhurishte, Elin Pelin, Kostinbrod. This understanding is already a part of Sofia’s plan for integrated development, which features a section on the industrial development of neighboring municipalities and its impact on the capital. In Gabrovo, we are talking about relationships with Sevlievo and Veliko Tarnovo. You cannot restrict your focus to Gabrovo Municipality and expect to achieve great results. Varna’s case is similar; the industrial zone there won’t be located on Varna territory. And it doesn’t matter whether you build a Yazaki factory in Dimitrovgrad or in Haskovo, at least as far as the people living in the two neighboring towns are concerned. It is between them. We see more and more of this type of thinking.

Plovdiv is an example of what this thinking can achieve. Trakia Economic Zone is in the municipalities outside Plovdiv, but it was private companies taking a lead there, and this type of thinking is the norm among them. When a municipality is the leading party, a lot more talking is necessary. And there has been some progress in the thinking and talking over the past few years.

Sofia’s investment agency recently signed a cooperation agreement with Plovdiv and with Varna at the beginning of February. The big cities are joining efforts in looking for investment opportunities. Plovdiv has similar agreements for industrial cooperation with Burgas and Gabrovo—the one with Burgas being in the area of logistics and the Gabrovo one prompted by its mechatronics specialization and university. This type of thinking exists, but only in the more active municipalities. So far, we have only seen joint positioning in the field of tourism.

America for Bulgaria: What are the underlying economic advantages that will aid the country’s recovery 

Petar Ganev: There is the human capital, which has not been lost or changed much by the pandemic. A municipality is considered active if it has good people on the team in charge of economic planning or if it has a separate agency tasked with that. At the same time, established relationships or even joint projects with a local university or businesses are necessary. These informal and sometimes formal links have not been disrupted by the pandemic. It changed the trajectory of our development and plunged us in a crisis, but it seems to me that already-active regions are still the ones with the most potential.

America for Bulgaria: What were the biggest socio-economic challenges municipalities experienced in their COVID-19 response?

Petar Ganev: The fact that they do not have their own resources was significant because it limits their response. Municipalities simply cannot allocate money for additional hospital beds, for example. They purchased masks and disinfectant and increased social benefits, but only after this was mandated by the central government. They do not have the necessary resources to do this.

This is even more of a disadvantage in long-term planning, in the area of development and public investment. If a new factory opens in your industrial zone, your budget doesn’t benefit because the income from it goes to the central budget. This gives you all the wrong incentives and makes you focus your efforts as a planner toward EU funding because it goes directly into the municipal budget. Whether there is investment in your region doesn’t affect your team’s salaries directly.

Centralization suppresses long-term development. Moreover, the needs of the different regions are different. There is no way that a single team will come up with the best solution for Varna, Vidin, and Gotse Delchev. There are 265 teams, political as well as administrative, and it is their job to do the planning. But they need to have the budgets to do it. 

America for Bulgaria: What are the opportunities that the Bulgarian economy should not miss in the next few years? 

Petar Ganev: The trajectory we had is based on things that are still there: the shift in industry toward higher added value and more capital-intensive production rather than manual labor. This shift will persist and may even intensify because there is a clear need for certain production to be located in Europe’s periphery rather than in third countries such as China. This is a result of the pandemic.

Digital services is another area [of opportunity]. Our competitive advantages show that this sector will continue growing, especially in smaller urban centers. In Gabrovo the biggest new investment is in the digital sector, with 80 new jobs created initially and the potential to add up to 400 jobs, which is considerable in the labor market there.

When the challenges brought on by the virus are resolved, economic activity will resume in full, including international travel, foreign visitors, who are really important to the economy. Thereafter, the regions that are best prepared for this transition have an industry that brings more knowledge and capital, and they also have an industrial zone, technical infrastructure, a team that can attract investors, social infrastructure for the training of workers, connections with schools and universities, etc. Regions that have qualified personnel to staff the digital services sector will do well, too. Limited office space was one of the main obstacles to growth in digital services over the years, and the ability to work from home has provided some relief.

America for Bulgaria: Can the home office phenomenon help reverse the demographic decline in some regions?

Petar Ganev: This trend is definitely there, but it goes in both directions. People are leaving Sofia for other big cities. We saw people in the IT sector who moved to Varna or Plovdiv because they like it there more and can do the same thing. There is a move toward villages, and in some areas, such as Gabrovo and Veliko Tarnovo, villages have seen increases in the number of temporary residents. The populations of some villages have even doubled. This process will persist after the pandemic, but not on the scale that we imagine.

The less developed places provide a good alternative, but the social infrastructure there is missing. If you have a problem, you cannot resolve it there—whether it is a problem getting from one place to another, traveling, connecting with the big city, or getting to a veterinary clinic. The influx will be greater in places where that social “tissue” exists. The general trend toward decline will continue, though. Some villages that are in a good region, near an attractive center, will likely fare well. History shows that demographics move in both directions.

 

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