Why the Government’s Program Is Vital for the Bulgarian Economy

June 29, 2015

Tony Thompson, Country Manager for Bulgaria 24 chasa

Yesterday my comment at a discussion organized in partnership with Deputy Prime Minister Meglena Kuneva on the Legal Framework for Growth and Jobs, was highly distorted and manipulated by certain media. It is not acceptable to take out of context a summary of opinions and attribute it as a statement of a World Bank official.

It is even more unacceptable this manipulation to be used for political reasons. Let me clarify that the World Bank appreciates Government policies and program. Below is my detailed position.

Since coming to Bulgaria I have had the privilege of working with many members of the government and the opportunity to listen to the business community, both Bulgarian and foreign about their motivations for investing in the country. As a result, I am convinced that many elements of the Government’s current program of policies and actions are addressing the key constraints to business and that, once fully implemented, will lead to a vibrant, growing economy.

Bulgaria is coming back as increasingly attractive destination for foreign investment. In a conference yesterday on the Legal Framework for Jobs and Growth, cohosted by the World Bank with DPM Kuneva, we heard from a representative of the Central Bank of Ireland that Bulgaria now ranks #8 within the EU in terms of attracting new FDI. Among other things, it has a great location, a low cost business environment, a consistently pro-business tax regime, and a workforce with diverse language skills and a strong work ethic.

However, it is clear from listening to business and from observing their behavior that they are selective and strategic in how they choose to invest in the country. Thinking about this it seems their behavior can be summarized into four informal, unspoken ‘rules of thumb’.

First, they prefer to go into sectors where the Government presence, either as a regulator or as a customer, is low. They express concerns that, in their experience, Government behavior has been unpredictable or unreliable which increases costs and uncertain for them. Therefore it is easier simply to avoid those parts of the economy where the Government plays a major role.

Second, they express concerns about the reliability and enforceability of commercial contracts. If not actually affected directly themselves, they hear and read stories from others. Because of that, they prefer, if possible, to invest in ways that reduce their exposure to other parts of the Bulgarian economy focusing on activities that are export oriented and sourcing their inputs from external suppliers. This way they minimize the risk that they will need to face the uncertainties and costs of dealing with the court system.

Third, they recognize the increasingly acute problem of skills shortages and therefore make sure that they come with some strategy for acquiring the essential skills that they need. This may involve approaches such as setting up partnerships with local universities or going to locations with strong traditions of engineering.

Fourth, they prefer to avoid investing in areas where there are long established incumbents with established networks and broad support that may give them non-economic advantages in the market place. They anticipate that new entrants will face additional hurdles in these areas.

Looking quickly at those parts of the economy which have succeeded in attracting new investment it appears that the new investors are indeed following this kind of approach. As a forthcoming report from the World Bank on productivity in Bulgaria will show, this selective approach to investment holds back the country’s growth potential. Ideally dynamic, innovative companies would be investing into all parts of the economy, building their supply chains by establishing networks of local suppliers and thereby boosting productivity substantially and accelerating economic convergence with the rest of the EU.

Here is where the Government’s program is spot on in terms of positioning Bulgaria for growth. First, there are various initiatives addressing public administrative reform, public procurement and regulatory reform which are aimed at strengthening the reliability and predictability of the Government as both regulator and customer. Collectively these initiatives will transform the Government and boost the confidence of business throughout all parts of the economy. Second, the Government has approved a new, comprehensive strategy for judicial reform and is actively pursuing its implementation. Full implementation of the strategy will remove the one issue consistently flagged by the international and business communities as the major impediment to doing business in Bulgaria. Third, the Government is actively pursuing a program to strengthen the education sector. As a World Bank report showed last year, education outcomes in Bulgaria have been falling for some time and now some of the lowest in Europe. The Government’s education reform program should see this negative trend reversed and yield increasingly positive educational outcome over time thereby boosting the availability of essential skills to Bulgarian businesses. Finally, the Government’s strong implementation of competition policy will ensure what good business desire most – a level playing field within which all firms can compete on the basis their economic performance.

Together these Government-led measures have the potential to turn Bulgaria into one of the strongest growing economies in the EU and a premier destination for business investment. As the Productivity report will show, by boosting the productivity growth rate from its current 3% per annum to more than 5%, Bulgaria has the potential to achieve EU levels of prosperity with this generation. We at the World Bank have enjoyed a long and fruitful partnership with Bulgaria. We remain fully committed to supporting the Government fully with our advisory, financial and knowledge services in the furtherance of this vitally important agenda.

* Opinion piece originally published by the Bulgarian daily "24 chasa" on Jun 20, 2015.