Austerity Vs. Efficiency : How Recovery Drives Distorted .
Preliminary estimates of the IMF show that the recovery of the economy wasdiscontinued in 2011; and, most probably, in 2012, and even in 2013, the negative trend will be preserved. This forecast was confirmed in spring 2012 by the European Commission. International experts specify that, if there is some economicgrowth, it will be insignificant, and tending to 0% on an annual basis.The economy of Bulgaria received some “shocks” at the initial stage of thecrisis and its proliferation, and the economy is expected to have a longer downturn in time with a growth close to zero, or at zero level, without any indicationsfor positive near-future growth.Restructuring of the labor markets is wrongfully applied.Austerity policies produce imaginary stability, which has a procyclical effect,inevitably.The crisis in Bulgaria will be a long-term one, and it will also be stronger, asthe country is de-industrialized and does not own any more national highly competitive industrial and trade capital; in addition, the foreign capital in the industrysector is rather incidental, while in the trade sector it is speculative by nature to agreat extent, or the trade profits are exported abroad.September 2012
Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in BulgariaCONTENTSINTRODUCTION . 3I. JOBLESS RECOVERY . 5II. STRUCTURAL DISBALANCES ON THE LABOR MARKET. 15III. DEFORMATIONS AND DYSFUNCTIONS OF THE LABOR MARKET . 20CONCLUSIONS . 26APPENDIX – EMPLOYMENT IN SOME ECONOMIC SECTORS . 28SOURCES . 31ABOUT THE AUTHORS . 321
Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in Bulgaria2LIST OF GRAPHSGraph 1. GDP Growth of Bulgaria and Other Regions (1980 – 2010) . 6Graph 2. Bulgarian GDP-growth on Quarter-by-Quarter Basis (2008-2011) . 8Graph 3. Bulgarian GDP-growth on Quarter-by-Quarter Basis (1997-2011) . 10Graph 4. Dynamics of the Foreign Direct Investments (FDIs) in Bulgaria (in million levs) . 11Graph 5. GDP Growth and Unemployment Rate in Bulgaria by Quarters (2003-2011) . 12Graph 6. Youth Unemployment Rates in EU (2009-2011) (Age Group 15-24) . 13Graph 7. GDP Growth – Unemployment Rate Interdependence by Quarters (2003-2011). 14Graph 8. GDP Growth – Unemployment Rate Interdependence by Quarters (2003-2011). 17Graph 9. Primary Labor Market of Bulgaria (2006-2010) . 19Graph 10. Official Remittances (transacted through a Financial Intermediary) of Bulgarianswho reside permanently abroad (in million euro) . 23Graph 11. Cumulative Indices of Labor Productivity, GDP, and the Real Working Wagesin Bulgaria (1993-2000) . 24Graph 12. Indices of Labor Productivity (2010) and the Minimum Working Wage (2011)for Some Countries . 25Graph 13. Total Number of Employed Individuals in Bulgaria (by months; 2008-2011). 28Graph 14. Employed in the Processing Sector (by months; 2008-2011) . 28Graph 15. Employed in the Trade Sector (by months; 2008-2011) . 29Graph 16. Employed in the Construction Sector (by months; 2008-2011) . 29Graph 17. Employed in the Transport Sector (by months; 2008-2011) . 30Graph 18. Employed in the Agricultural Sector (by months; 2008-2011) . 30Graph 19. Employed in the Hotel Sector (by months; 2008-2011) . 31
Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in BulgariaIntroductionThis present paper is a logical continuation of the publication of the two authors,titled: “Bulgaria: Transition Revised – SocialFragmentation and Poverty Increased”, issuedby the Friedrich Ebert Foundation in 2011 inthe Collected Papers: “Equity vs. Efficiency:Possibilities to Lessen the Trade-Off in Social,Employment and Education Policy in SouthEast Europe”. This first study was centeredonto the shifts in employment, changes inincomes and modifications of the social alterations during the period of the economicboom – just before and after the accession ofBulgaria to the EU.This, second in a roll paper is titled:“Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms inBulgaria”. It is focused on the social effectsas a result of the global crisis, which enteredthe Bulgarian economy in 2009. More specifically, this paper reveals the changes in employment, income, and quality of employedworkers, which are due to the sharp decreasein economic activity as well as in the measuresto combat the crisis, which were initiated inthe period 2009-2012.The thematic scope of the analysis may beexplained in the following way:Destructive influences on the austeritypolicies on the labor market, entrepreneurship, and life strategies of Bulgarians.As is widely known, austerity policies aredesigned to follow austere restrictions of expenses in order to maintain a low budgetdeficit (less than 3% of the GDP) and a safelevel of the external debt (less than 60% ofthe GDP). Put simply, austerity measures leadto uncompromising “tightening of the belt”.Once launched, austerity measures divert theactions designed to combat the crisis goals tothe field of fiscal policy, making all regulatorymechanisms subordinate to one primary goal– financial stability.The sharp turn towards extremely restrictive fiscal and social policies in Bulgariawas made preemptively (comparing whathappened in the country in contrast to otherEU members) – at the inception of the second half of 2009. This turn was facilitatedby several circumstances: a political mandate of a new right government with predominant neoliberal ideology; the presenceof a Currency Board, which automaticallydisciplines economic agents; conformismof the social partners and, particularly, thediminished influence of the trade unions; apassive mood of the civil structures (including professional organizations, local communities, organizations for self-defense ofthe tax-payers etc.).Following the scenario developed byGermany and France, under the pressure ofthe European Commission, austerity policieswere introduced in almost all countries whichwere members of the EU in 2011-2012. Thenew radical drift was marketed to the general public as the safest road to recovery ofemployment and economies of the countries.However, in practice, this strategic choiceturned out to be counter-productive.Concentration of the whole attention ofthe political leaders, and the greater part ofthe resources onto the financial sector, madeit clear that there are too many weaknessesand long-term negative effects, accrued as aresult of speculative bank operations in theEurozone.In 2010, the debt catastrophe case ofGreece exploded, and in just a few monthsthis country came to the brink of bankruptcy;then Ireland followed, and Portugal, as well asSpain, along with Italy.3
4Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in BulgariaCounter-measures of an austerity typewere imposed by the so-called Troika (EC, ECB,and the IMF), as a precondition to deliver emergency money aid, but they turned out to be oflow effectiveness up to this date, and even inadequate to treat the debt crisis positively.After some temporary excitement in2009-2010, the European economies entereda second recession, which is expected to lastinto 2013 as well.The only countries not affected by thisnegative trend up to the present moment areGermany, Poland and Estonia. Meanwhile,the second downturn has brought a new,more serious impact on employment both indeveloped and in developing economies ofthe EU. Some of the recent forecasts of theILO predict that a return to the precrisis levelsof employment necessitates the creation of80 million new jobs, which could happen in2015-2016 (given the fact that the present,dominated by the fiscal-oriented anticrisistools are replaced by others, which are designed to stimulate the economic growth).At first glance, the Bulgarian financial system is situated well, according to the indicators for domestic stability and external debts,bearing in mind the unpleasant circumstancesof the foreign markets. The budget deficithada downturn in 2009 (4.3% of GDP). In thenext two years there were attempts to stabilize it at noteworthy low levels, and in 2011 itwas 2.1% of the GDP.The external debt of 16% of GDP isalso among the lowest indicators in Europe– almost four times lower than the limitfixed by the Fiscal Pact, approved by theother country-members of the Eurozoneon March 1 st, 2012.These results gave firm grounds for theFinancial Minister of Bulgaria to underlineseveral times that Bulgaria is firmly amongthe top five countries in the EU in terms ofthe criteria for fiscal stability. Hence, the conclusion that the Bulgarian practice of regulating incomes and taxes could serve as aprototype of a successful anticrisis policy ona European scale!In his turn, the Prime Minister, BoykoBorissov, used similar arguments to recommend to the European partners, whohappen to have high/risky indebtedness,that they impose the Bulgarian model forextreme restriction of the wages and pensions, in order to restore the financial equilibrium. Translated into figures, such an “innovation” could stand to mean that Greecemust cut the wages and pensions in thecountry by 120%-150%; and other countries, including Italy, Spain and Portugalshould do the same.No matter whether it is a matter of inadequately used irony, or it is a matter of notbeing familiar with the elementary relationsand interdependencies in comparative economics, these provincial recipes raise topicalquestions, which necessitate holding seriousdebates among Bulgarian economists and sociologists, who are professionals in the field ofcrisis economics: Question Number One: When and towhat degree will the austerity model,tested in Bulgaria produce the first positive results in real sector of the economy, based on the indicators of: (1)growth of employment and incomes;(2) shortening the distances in the pyramid of social injustice (respectively limiting mass poverty)? Question Number Two: Is Bulgaria capablealone of reaching a new boom in employment (/similar to that in the period 20022007), and is it possible for the countryto restore the trends for catching-up
Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in Bulgariawith the average European incomes andstandard of living, bearing in mind thecountry’s open type of economy, whichis directly affected by the export and theneo-colonial type of the banking system?(a note: over 90% of the banks operatingin the country are foreign – Greek, Italian,Hungarian, and others).To provide a competent answer to thequestions raised, it is necessary to follow: On the one hand, the trends in the economic growth in crisis periods and theirreflection on the stability of the labor markets, dynamics in the wage levels (in directrelation to labor productivity) and socialstratification; On the other hand, specifics of the manifestation of the crisis cycle in the Europeanarea, and more specifically, in the periphery and the center of the Eurozone (thatis, in countries, whose economic and financial condition may directly affect theBulgarian situation);Our approach in this case is aligned tothe strict requirements for reliability of information and for objective conclusion making, imposed by comparative economics andcomparative sociology. Our efforts are aimedat preserving ourselves from the influenceof political indoctrination, which is adherent to the public debate in Bulgaria in theperiod of 2008-2012, whenever it comes tothe question of the global crisis and its lo-cal aftermaths. We have in mind reactionsmotivated by political empowerment, whendomestic failures are explained by foreigndrawbacks, and partial national successesare taken, turned into absolute truth, andare even recommended as models to followin an international plan.I. Jobless RecoveryAcquiring an objective and sustainable vision,which is free of local pressure - about the dynamics of Bulgaria’s GDP growth for a longertime horizon is directly related to using datafrom international institutions. In this case,we quote the indicators of the InternationalMonetary Fund /IMF/.The Graph-1 illustrates the GDP growthof Bulgaria, of Emerging and DevelopingEconomies, of Advanced Economies, and theWorld. As may be easily seen, Bulgaria’s growthdropped sharply in 2009, and then a process ofslow recovery was detected in 2010.These indications do not turn into an upward dynamic trend, however.Preliminary estimates of the IMF show thatthe recovery of the economy was discontinuedin 2011; and most probably in 2012, and evenin 2013, the negative trend will be preserved.This forecast was confirmed in Spring 2012 bythe European Commission. International experts specify that, if there is some economicgrowth, it would be insignificant, and wouldtend towards 0% on an annual basis.5
6Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in BulgariaGraph 1. GDP Growth of Bulgaria and Other Regions (1980 – 2010)Source: Adapted Illustration from the IMF Data Mapper of the GDP Growth [1]If the time span is expanded and a historical comparison of the GDP growth is conducted for the last 15 years, it will be evident thatthe recession of 2009, followed by a secondtrough point in 2011-2012, is as extreme interms of the negative consequences on businesses, labor markets, and incomes of households as it was in the crisis in 1996-1997.It is known that in the hyperinflation crisis of 1997 there were mass job cuts and layoffs of workers from enterprises, countlessnumber of bankrupted companies, constantdelays in payments and chained bank bankruptcies. Excluding bank bankruptcies (up tothis moment), the other economic indicators of the economic downturn scenario thathas already happened are available today aswell. Hence, it is most probable that historywill repeat itself in the short-term plan (thesecond half of 2012 and 2013).1In most of the New Member States (NMS)countries of the EU this last recession wascoupled with steady and sustained increasesof prices – of diesel, electricity, home-runbills, and numerous others prices, which gavemuch room to speak about of stagflation.More specifically, these facts stand tomean that the period of stagflation in theBulgarian economy must be associated witha serious decrease in the levels of production,coupled with new mass layoffs and a high1Our prognosis is different from rather optimistic expectationsfor not entering a second recession and having a sooner upwardtrend, which expectations were delivered at the beginning of theyear by a pool of experts from the so-called School of MarketFundamentalists; our prognosis is different from the SummaryReport of the Economic Institute of the Bulgarian Academy ofSciences announced in May 2012.
Austerity vs. Efficiency: How Recovery DrivesDistorted the Labor Market Mechanisms in Bulgariarise in the prices of energy resources, andprices of goods and services; and this periodshall be from 2009 to 2013. In addition, theforecasts of the European Commission (EC),the IMF, and the Organization for EconomicCooperation and Development (OECD),which traditionally accumulate a huge volume of analytical information, delineate theposition that the countries of the Eurozonewill enter a new recession in 2012.Consequently, the NMS of the EU, includingBulgaria, will enter a period of recession in thespring 2012, or summer 2012, at the latest.If this pessimistic forecast is confirmed, anew deeper trough point will be reached inthe business cycle of Bulgaria between 2014and 2015. And this is the main reason in ourpaper to speak more about the second phaseof the crisis and to interlink the analyses ofemployment, income, material and socialwealth of the country.Here is why the viewpoint we share is thatthe Bulgarian economy has already entered thesecond phase of the economic crisis, which isdue to: on the one hand, the multiple externalfactors, such as the frictions in exports, the dramatic fall of the foreign direct investments (FDIs),paralysis of the credit activity in the country;and, on the other hand, the Bulgarian government stubbornly following the most hardliningpolicy ever applied on the European continentin terms of utilizing austerity measures.It is exactly this extreme neoliberal orientation which is the root of the poor economic performance and the high levels of job reduction. Government and financial hardliners are committed to following this pace fora third year in a row and, as it seems, theyintend to follow it to the end of their political mandate in 2013 (more probably – evenafter that point).Despite the series of austerity measureswhich have been adopted, such as cuttingcosts, such as payments of contracts, wherethe state is a party with private economicoperators, working on a discount rate of7% of the contractual value, and manyother measures, the business activity in thecountry is expected to shrink further, andthe GDP growth to be extremely slow, ifthere is any growth at all.Here, we are referring to the objective reports and prognoses, and not the optimisticscenario, which is simulated at the beginningof every fiscal year, when the bill for the budget of the country is discussed.Let us recall, for example, that when therewere debates for the macroeconomic framework for 2011, the Minister of Finances ofBulgaria delivered his prognosis that the economic boom will be about 3.5% on an annualbasis [2]. However, it is already known that atthe end of the first quarter of 2012: The official GDP growth of the country for2011 is 1.7%; The situation is the same in 2012. Theofficial forecast for the GDP growth,targeted by the budget, is 2.4%. At theend of May the Minister of Financesunilaterally corrected this value to 1.4%.It will be interesting to see what the actualresults are at the end of this year.And, bearing in mind that ministerial statistics are quite elastic (not to say frivolous),it is far better to use the data released by theNational Statistical Institute (NSI), in order toillustrate the real trend of economic growthin the last few qu
petitive industrial and trade capital; in addition, the foreign capital in the industry . ployment, income, and quality of employed workers, which are due to the sharp decrease in economic activity as well as in the measures . being familiar with the elementary relations and interdependencies in comparative eco-nomics, these provincial .
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