Almost a year ago, Volkswagen announced that it was choosing Turkey over Bulgaria for a new plant. Subsequently, after our southern neighbor began hostilities in Syria, the concern decided to build in Slovakia.
It has recently become clear that Microsoft has chosen to build data centers in Greece, and shortly afterwards Amazon announced that it would follow suit. These are two iconic examples of lost profits, and in both cases the amount of investment would be billions, or 1 billion, respectively. It is not clear how many other companies are heading to Serbia, northern Macedonia, Romania or the rest of the Balkans.
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It is not correct to reach common conclusions from just two cases. But when decisions at such a high corporate level are always made to the detriment of the country against the background of the same political situation, we can still draw some conclusions. Here we will discuss what.
Why is there a problem?
The fact that we have a problem in attracting large-scale foreign direct investment (FDI) can be judged from the choice of the two companies and it can be compared with Bulgaria. In the first case, Volkswagen chose Turkey, a country with a de facto dictatorship, a collapsing currency outside the European Union, which (like Bulgaria) suffers criticism of the rule of law and human rights abuses, subject to EU and US sanctions. Nevertheless, Prime Minister Erdogan needed to get started war, before the concern changes its decision.
In recent years, the IT sector has become the fastest growing industry in Bulgaria. But despite all the superlatives, Microsoft and Amazon chose Greece, which, according to the chairman of the Bulgarian startup association BESCO Dobromir Ivanov, lags far behind us.
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“Gaptsiya ima guidance in loshi IT ĸadpi from the Balgapiya; Gaptsiya ima guidance in vicoĸi danatsi from the Balgapiya; Gaptsiya ima guidance in cĸap toĸ from the Balgapiya; Gaptsiya ima guidance in topal ĸlimat and caotvetno lyatoto podpazhĸata na data tsentap e guidance in cĸapo; Gaptsiya ima in low -poor internet connection from Bulgaria! “, he wrote in his profile.
Although both have their advantages, in any case they have much bigger disadvantages than Bulgaria. And in order for them to be elected, key aspects of the economic situation in our country are lame.
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Volkswagen and Microsoft are just symptoms of a problem that exists in principle, we just rarely hear about it. However, the data cannot hide it – investments in Bulgaria are neither what they were (despite low flat taxes), nor are they even at the level of some of the other countries in the region.
Graphics 1: FDI flow as a percentage of GDP
Source: World Bank
Source: World Bank
Until the Great Recession, FDI grew progressively as a percentage of GDP. After that, they not only collapsed by literally ten times, but never recovered, unlike countries such as Romania, Serbia and even one of the worst affected countries of the recent crisis – Greece.
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But foreign investment is declining not only as a percentage of GDP, but also in absolute terms. In fact, last year, which was the peak of economic growth in Bulgaria’s history, their size was lower than at the heart of the 2010 crisis.
Graphics 2: FDI in absolute terms (in millions of current dollars)
Source: World Bank
Source: The World Bank
And if someone is left with the impression that this year, which is also marked by a recession for Bulgaria, mainly due to the measures of the authorities, FDI has reversed its negative dynamics, he will have to be disappointed.
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The fact that net FDI is a negative value during the periods discussed in the table should not worry us – they are generally such.
Graphics 3: Net FDI flow (in millions of current dollars)
Source: World Bank
Source: The World Bank
It may be a coincidence, but these negative figures come against the background of the same party’s rule throughout the period under review. One might say, “Even so, Bulgaria has become more competitive during this time, and this is evidenced by the Global Competitiveness Report of the World Economic Forum.” Nominally this is true. But in reality, it is precisely where the state intervenes that declines occur.
Graphics 4: Ranking of Bulgaria in the global competitiveness index
Source: The World Economic Forum; Tradingeconomics
It is paradoxical that it is when the country is most uncompetitive, if we consider only this index, that it manages to attract the largest FDI as a percentage of GDP and in absolute terms. But let’s see its latest edition.
The country received 56.8 points out of 100 in the category “Institutions”, which ranks 57th out of 141 countries analyzed. This is practically almost right in the middle of the standings, which is not exactly a “prestigious” ranking. In the subcategories “Security”, “Social Capital”, “Transparency” (ie corruption), “Effectiveness of the legal framework in conflict resolution”, “Stable government policies” and “Long-term government vision” we are very deep in the second half of the stack.
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If that was the whole story, it would be clear and negative enough. But it doesn’t end there. In fact, in the subcategories “Organized Crime”, “Police Reliability” (I wonder if there could be any connection between these?), “Independence of the Court”, “Freedom of Speech” and “Property Rights”, our country is right in the third world, ranking 111th, 97th, 89th, 89th and 105th respectively.
Who will come to invest in a country where his property cannot be guaranteed, the police do not do their job, the media cannot cooperate much, and the court is not exactly “independent”?
Unfortunately, that’s not all. Regarding the predictability of the business environment, unfortunately foreign investors are also almost ignorant or when they have clarity, it shows them that business conditions are deteriorating. Why? Because their costs are constantly growing.
Graphics 5: Burden of social security as a percentage of total remuneration
After social security and investment were extremely high in the middle of the last decade, both measures collapsed during the Great Recession. The bad thing is that FDI has never risen significantly and is far below its levels since then, unlike insurance. In fact, this table does not reflect the full scale of their increase, because for some positions there is an annual increase.
At the same time, social security punishes most severely the industries with the greatest added value in the economy. The reason is that they pay the largest amounts in absolute value – it is one thing to accrue 32% of the gross salary, amounting to BGN 800, it is another to accrue on a salary amounting to BGN 3,500 per month.
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On the other hand, the state annually repels investors who would come to our country because of the cheap labor. Yes, it is still the cheapest in all of Europe, but its price is rising every year, for purely administrative reasons, by raising the minimum wage. And it is not small at all. In recent years, the minimum wage has risen by an impressive 7.5 times, far outpacing the nominal wage rate in almost all sectors of the economy.
Graphics 6: Gross minimum wage (in EUR)
I have talked about the negative effects of the minimum wage elsewhere. Here it is important to put ourselves “in the shoes” of a potential investor and ask ourselves the question: “If my main cost increases every year without leading to increased productivity, will I want to invest in one country?” The answer to this question is perfectly visible in Northwestern Bulgaria.
How to reverse the negative trend in investment?
Not everything is lost. Yes, government policies are easy to implement (albeit opaque and short-sighted, as the World Economic Forum shows us) and extremely difficult, if not impossible, to remove. But we could be optimistic.
Even if none of this happens, the simple recipe for attracting more investment is: full deregulation of the economy, privatization of absolutely all industries, including health (81st in the world with a projected only 64.5 years of healthy living per capita) and pension provision, where the deficit is huge, eliminating all measures that reduce labor market flexibility, including the minimum wage, drastically reducing public spending, further reducing taxes and eliminating them directly, e.g. of income tax on interest on deposits. Let us not forget about the failed digitalisation of administrative services, in which billions are sinking without any progress.
It is much easier to write these recommendations than to make them happen. Without reforms, we will continue to pay the high price of the outflow of investment. It is measured in lower living standards, wages, know-how and innovation in Bulgaria. And we should not focus only on the visible dimensions of reality, such as infrastructure projects, and forget about things that could have happened but did not. Because the latter are the ones who pull us back.