Download Extract 2: Bulgaria

Table of Contents
Broad Themes ........................................................................................................................................... 3
Extract 1: Bulgarian Economy: Economic indicators 2000-2005 ............................................................ 5
Extract 2: Bulgaria: The road to successful EU integration .................................................................... 15
Extract 2: Population Projections for Bulgaria ....................................................................................... 21
Extract 3: EU accession for Bulgaria fuels Greek bank explosion in Balkans ....................................... 24
Extract 4: EU Enlargement and Labour Migration: ................................................................................ 29
Extract 5: Economic benefits of EU membership ................................................................................... 36
Key Terms in the Extracts ....................................................................................................................... 45
Map of Transition Countries ................................................................................................................... 46
Broad Themes
The stimulus material for the January OCR 2888 paper covers a wide variety of important themes
relevant to the study of economics of the European Union. Some of the major themes are as follows:
1. The Enlargement of the European Union: Bulgaria and Romania became the 26th and 27th
members of the European Union (EU) when they joined in January 2007. The widening of the
EU single market raises many opportunities and challenges for all EU nations and this stimulus
material covers this on several levels. Is the expansion to 27 countries one expansion too far?
2. Economic growth and development: Will membership of the EU promote long term economic
growth and development for Bulgaria? How might it lead to structural changes in their
economy? Will standards of living rise? What might happen to the levels of inequality within
Bulgarian society?
3. Convergence within the EU: To what extent will increasing the size of the single market bring
about a process of economic convergence between member states? How well has Europe’s new
member nations performed since they joined the EU?
4. Transition economies: What is a transition economy and what evidence is there Bulgaria is
continuing to move towards a fully-fledged market economy?
5. Measuring macroeconomic performance: How can we assess the overall performance of an
economy? How well has the Bulgarian economy performed in recent years in the lead in to her
accession to the EU.
6. Measuring the standard of living: How much lower are living standards in Bulgaria compared
to the rest of the EU? How do we go about measuring living standards and what might cause
per capita incomes to grow?
7. Population change: Bulgaria is a country facing several important population (or demographic)
challenges. What is causing their population to decline? What might be the consequences of an
ageing population?
8. Labour productivity: What factors affect the productivity of labour in an economy and how
can Bulgaria raise productivity and thereby promote faster long-term economic growth? Why is
productivity important for an economy?
9. Economics of foreign direct investment: What are the factors affecting the flows of foreign
investment in and out of the Bulgarian economy? What are the main benefits and costs of
inward investment?
10. Labour migration: Which push and pull factors contribute to migration out of Bulgaria? What
are the possible consequences for Bulgaria in the short and the medium term?
11. Comparative advantage and trade: In which industries does Bulgaria enjoy a comparative
advantage in her trade with the rest of the EU? What factors determine comparative advantage
and competitiveness?
12. The importance of capital: How can physical capital investment and improvements in human
capital lead to a better long-term macroeconomic performance?
Building a synoptic awareness for the exam
In preparation for the exam, it is a god idea to keep up to date with recent developments in the
European Union as the economic landscape is changing all of the time, and the examiners will always
reward up to date awareness that is relevant to the questions under discussion. Throughout this toolkit
we will suggest links for wider reading and research.
Suggestions for background reading on the Bulgarian economy

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




BBC Country Briefing: http://news.bbc.co.uk/1/hi/world/europe/country_profiles/1059735.stm
Bulgaria – Key facts and figures (BBC) http://news.bbc.co.uk/1/hi/world/europe/6206378.stm
Bulgarian economy (Wikipedia): http://en.wikipedia.org/wiki/Economy_of_Bulgaria
Economist Country Briefing: http://www.economist.com/countries/Bulgaria/
EU Commission: http://europa.eu/abc/european_countries/eu_members/bulgaria/index_en.htm
IMF Country Focus in Bulgaria (June 2007):
www.imf.org/external/pubs/ft/fandd/2007/06/country.htm
Oxford Business Group (report on Bulgaria):
www.oxfordbusinessgroup.com/publication.asp?country=23
Basic Fact File on Bulgaria
EU entry:
Population:
GDP (in billion US$, 2006)
GDP per capita in 2006 US$ (PPP)
Share of industry in GDP (in per cent)
Share of agriculture in GDP (in per cent)
January 2007
7.7 million
31.5
10,126
26.1
8.0%
Extract 1: Bulgarian Economy: Economic indicators 2000-2005

GDP at current prices: (row 1) ‘At current prices’ means that the data has not been adjusted
for inflation. The value of national income is being measured in nominal (or money) terms.

Euros: The data is also measured in Euros – since the spring of 2000 the Bulgarian economy
has operated a currency board system with the Euro. This means that the Lev – is effectively
fixed against the Euro. We can see this from the chart on the next page.

Nominal and real figures: In nominal terms, Bulgarian GDP has grown from €13.7bn in 2000
to €21.45 in 2005. This is a percentage change of 57%. When we take account changes in the
general level of prices, we get a figure for national income at constant prices (row 2).

Real GDP growth (row 2) for Bulgaria in the first six years of the decade has been (i) strong
and (ii) stable. Note the small variation in growth rates. It would appear from the data that
Bulgaria is enjoying a period of sustained growth with a trend rate of around 5% per year –
more than twice the average for the established EU nations.

Size of the economy and living standards: Growth is important for future improvements in
Bulgarian living standards. The rule of 72 states that 72 divided by the annual growth rate for a
country gives an approximation of the years it takes for the real GDP of a country to double. If
Bulgaria can grow at 5 per cent a year, her GDP will double in less than 15 years.

Inflation: (row 3) – inflation has been more volatile than real GDP growth ranging from over
10% in 2000 to less than 3% in 2003. It has been rising again in recent years – what might be
causing this? What are the costs of accelerating inflation for a country such as Bulgaria?

Unemployment: (row 4) – Unemployment is measured here as a percentage of the labour force.
Despite a rise in 2001, there has been a sustained decrease in unemployment in the Bulgarian
economy. What factors might have brought this about? Consider some of the possible
consequences for Bulgaria of a decline in the percentage of the workforce out of work.

Investment: (row 5): We take this figure to be the total for domestic capital investment
spending (by both the private and the public sector). The table does not make it clear whether
investment spending is being expressed in real (inflation-adjusted) terms. The data shows a
sharp rise in capital spending of the order of +137% between 2000 and 2005 and over 25% in
the year 2004-2005. If we divide row 5 by row 1 we get a figure for investment spending as a
share of national income. In 2000 capital spending was 15.7%. By 2005 the ratio had grown to
23.8%. This is a significant change – a rising share of Bulgaria’s national output is being
devoted to capital spending. You might think about illustrating this using a production
possibility frontier diagram.

Foreign direct investment (FDI): (row 6) – The table suggests that Bulgaria has been a net
recipient of inflows of foreign direct investment with net inflows of just under €1 billion in
each of the years from 2000 to 2002 and then a jump to a figure above €1.6 billion in 2003 and
2004. Many new EU states have seen large increases in overseas investment in the years
immediately before they joined the single market. Net inflows means that more investment is
coming into the Bulgarian economy than is flowing out.
Exchange Rate against the Euro
Euros / Bulgarian Lev
Since spring 2000, Bulgaria has operated a currency board with the Euro
4.0 Bulgaria, Spot Rates, EUR/BGN, Close 1.95509723
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07 08
Source: Reuters EcoWin
A currency board is a monetary authority which is required to maintain an exchange rate with a
foreign currency. The Bulgarian Lev is pegged to the euro, at the rate of 1.95583 Lev = 1 euro. Having
a fixed exchange rate against the Euro has important implications. One of them is that, if Bulgaria
suffers from higher cost and price inflation than her neighbours in the Euro Zone, there is a risk that her
economy will lose competitiveness and that will have implications for exports, output, jobs and living
standards. However the exchange rate stability also makes the economy attractive to inward investment
from other EU countries. The Bulgarian National Bank has announced an ambitious but credible
intention to adopt the euro at the beginning of the next decade
Further background on the information contained in Extract 1
Bulgaria - Real Gross Domestic Product
16
16
15
15
14
14
13
13
12
12
11
11
10
10
9
9
8
8
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
billions
1995 EUR (billions)
Real GDP at constant 1995 prices (euros billion), 2007 and onwards is a forecast from Eurostat
09
Source: Reuters EcoWin
After a difficult period in the mid 1990s including the economic crisis of 1997, Bulgaria has enjoyed a
decade of strong economic growth. The real value of her GDP expressed in Euros at constant 1995
prices has grown from €8.6bn in 1997 to a forecast of nearly €16bn in 2009. We can then convert this
data into a chart showing the annual average growth for Bulgaria.
Despite the strong growth, the difficulties of transition from communism in the early 1990s and the
economic slump in 1996-97 means that, in 2006, real GDP in Bulgaria was still only 1% higher than it
had been in 1989!
Bulgaria - Growth of Real Gross Domestic Product
Real GDP at constant 1995 prices (euros billion), 2007 and onwards is a forecast from Eurostat
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
-5.0
-5.0
-7.5
-7.5
Percent
7.5
-10.0
-10.0
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: Reuters EcoWin
In recent years, Bulgarian growth has leveled off at about 5.5% a year
Inflation
Bulgaria experienced a bout of hyperinflation in 1996-97. This led to drastic food shortages and the
risk of a complete economic collapse. You can read more about this period here
http://www.bankintroductions.com/bulgaria.html. Bulgaria turned to the International Monetary Fund
for assistance in reforming her economy and in bringing inflation down to manageable and acceptable
levels. One reform was to introduce a currency board – fixing the exchange rate – initially against the
German deutschemark and now against the Euro.
Inflation rates came down in the late 1990s and into the first few years of the current decade. However
since 2005 there has been an upturn in inflationary pressures brought about by cost-push and demandpull factors. Sharply rising wages; the increasing cost of imported commodities and strong economic
growth and falling unemployment have all played some part in driving the rate of inflation higher.
During 1997, the annual rate of consumer price inflation has soared – this is not covered in the stimulus
material for the exam but we can see it clearly in the charts that follow. A period of high and rising
inflation might damage the competitiveness of the Bulgarian economy.
1. Why might the rise in inflation be a major worry for the Bulgarian government?
2. If Bulgaria wishes to join the single European currency (the Euro Zone) what must it do in
terms of controlling inflation?
Bulgaria - Hyperinflation in 1997
Percent
Annual % change in consumer prices
2250
2250
2000
2000
1750
1750
1500
1500
1250
1250
1000
1000
750
750
500
500
250
250
0
0
-250
-250
92
93
94
95
96
97
98
99
00
Source: Reuters EcoWin
Bulgaria - Consumer Price Inflation
Annual % change in consumer prices
16.0
16.0
Inflationary pressures have been increasing
substantially over the past few months (thanks to
rising food prices). If these price pressures persist
over the medium term this would erode the
competitiveness of Bulgarian exports in
international markets.
14.0
12.0
12.0
Business Monitor Report, November 2007
10.0
Percent
14.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
Unemployment
One of the success stories for Bulgaria in recent years has been the progress made in reducing the level
of unemployment. After the turmoil of 1997 and the recession which followed, unemployment rates
soared to over 18% of the labour force. However since 2001 there has been a year-on-year reduction in
the number of people out of work. By the end of 2007 unemployment rates in Bulgaria for both men
and women were less than 8 per cent. There are many fellow members of the EU with higher
unemployment rates than this!
Bulgaria - Unemployment Rate
Per cent of the labour force
24.0
24.0
22.0
22.0
Percent
Male
20.0
20.0
18.0
18.0
16.0
16.0
Female
14.0
14.0
12.0
12.0
Total
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
97
Female
98
99
00
01
02
03
04
05
06
07
Male
Source: Reuters EcoWin
The fall in unemployment has been accompanied by a sustained rise in the total number of people
employed in the economy with over 400,000 extra people in work since the start of the decade.
Remember, Bulgaria is a small country with a population of just under 8 million. Even with a record
number of people in work, the percentage of the total population earning an income remains fairly low
at around 30 per cent. Expressed as a percentage of the population of working age, less than fifty per
cent of Bulgarian people are in work. This has grown in recent years but it is still well below the
average for the remainder of the European Union. Perhaps this is one factor behind the net migration of
workers leaving Bulgaria in search of work in other countries?
Bulgaria - Total Employment
2.4
2.3
2.3
2.2
2.2
2.1
2.1
2.0
2.0
1.9
1.9
1.8
millions
Persons (millions)
Persons employed (millions)
2.4
1.8
99
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
Bulgaria - Total Employment and Rate
Persons employed (millions) and employment rate (%) - not seasonally adjusted
50
50
Percent
Percentage of the population of working age in work
48
48
46
46
44
44
42
42
40
40
38
38
2.4
2.4
2.3
2.3
2.2
2.2
2.1
2.1
2.0
2.0
1.9
1.9
1.8
1.8
00
01
02
03
04
05
06
millions
Persons (millions)
Total employment in the Bulgarian economy
07
Source: Reuters EcoWin
Bulgaria - Inflation and Unemployment
Per cent
20.0
20.0
18.0
16.0
16.0
14.0
14.0
Consumer Price Inflation
12.0
Percent
18.0
Unemployment
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
The unemployment-inflation trade-off appears to have improved for Bulgaria during the last ten
years with falling unemployment and relatively stable rates of inflation. But there are signs that
inflation is now picking up – perhaps the decline in unemployment is now acting to drive prices
higher?
The Growth of Wages and Consumer Prices
Annual percentage change in average wages and consumer prices, per cent
22.5
22.5
20.0
20.0
Growth of Wages
Percent
17.5
17.5
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
Growth of Consumer Prices
-2.5
-2.5
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
Bulgaria - Capital Investment as a share of GDP
Per cent of GDP
22.5
22.5
Although Bulgaria’s business environment
remains sub-optimal compared to EU standards,
the high levels of investment are respectable and
show that investors have not been deterred by
the country’s ongoing problems of corruption
and organized crime
20.0
20.0
17.5
17.5
% of GDP
Business Monitor Report, November 2007
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: Reuters EcoWin
Bulgaria - Capital Investment as a share of GDP
% of GDP
Per cent of GDP
22.5
22.5
20.0
20.0
17.5
17.5
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: Reuters EcoWin
Capital investment and economic growth
Rising investment in new EU countries will help to stimulate economic growth
Output of Capital
Goods
Long term growth path for
the economy
C
C3
B
C2
A
C1
X2
X3
X1
A shift towards capital
investment (i.e. from point A
to B) might lead to an
outward shift of the PPF –
allowing both investment and
consumption to rise in the
long run
Output of Consumer Goods
Extract 2: Bulgaria: The road to successful EU integration
Comments:
Long term stability: Long term stability refers to a favourable combination of steady growth,
maintaining low inflation and rising employment in the economy. A stable economy is one that is not
too volatile since this creates uncertainty for both consumers and producers and can damage a
country’s competitiveness and growth prospects.
Income gap: The income gap refers to the divide in per capita incomes between the twenty seven
nations of the European Union.
Convergence:
Convergence means a coming together, in this context it means that per capita income and other
measures of economic performance including inflation and jobs might converge towards rates achieved
by other EU countries. Convergence can also be expressed in terms of
1. How closely aligned are the economic cycles of EU countries
2. Whether the production and employment structures of EU countries are becoming more
similar – Bulgaria for example has proportionately more people employed in farming and basic
manufacturing than richer nations. In the long term, the decreasing role of agriculture, and the
rising role of services are bringing Bulgaria slowly closer to the economic structures prevailing
in the rest of the EU.
3. Convergence in terms of labour productivity, interest rates and exchange rates
Figure 2:1 provides a comparison of per capital income as a % of the EU 25 average (i.e. the 25 nations
that were in the EU prior to the entry of Bulgaria and Romania in January 2007). The ten countries
chosen are eight of the new EU members (who joined in May 2004) together with Bulgaria and
Romania. Of the new states, Malta and Cyprus are left out of the table.

Figure 2.1 provides evidence on relative living standards

The data is measured as a % of an EU average rather than in any particular currency

We are not told if the information has been adjusted to a purchasing power standard (PPS) i.e. it
is common to adjust per capita incomes to reflect differences in the cost of living between
countries since there are often large variations in the general level of prices for common goods
and services.

We can assume that the data has been PPS adjusted and comes from Eurostat – the official EU
statistics agency. You can find more about EU living standards using this link

The data provided covers 2 years, 2000 and 2004. This is before the accession of Bulgaria to the
EU and is the year in which the eight other countries came into the UK. Therefore no data is
presented on what has happened to relative living standards since they joined the single market.
Our chart below provides an update for you.

Data points:
o It is clear from the chart that some degree of income convergence is taking place.
o All of the countries shown have achieved an improvement in their relative per capita
incomes particularly the Baltic States (Latvia, Estonia and Lithuania).
o In 2000 only three countries had a per capital national income of 50% or more of the EU
average. By 2004, there were five countries in that position.
o In 2004, the chart suggests that Bulgaria had the lowest per capita income of the new
EU states at around 33% of the EU25 average.
The next chart tracks relative living standards for these countries in the years since 2004.
A comparison of per capita income as a % of the EU27 average
110 Bulgaria
100
90
EU25=100
80
Latvia
Romania
Lithuania
Poland
Estonia
Slovak Republic
Slovenia
Hungary
Czech Republic
110
40.2
63.7
40.6
64.6
56.9
74.5
70.5
93.2
65.5
83.7
100
90
80
70
70
60
60
50
50
40
40
30
30
20
20
95
96
Bulgaria
Latvia
Romania
97
98
99
Lithuania
Poland
Estonia
00
01
02
Slovak Republic
Slovenia
Hungary
03
04
05
06
07
08
Czech Republic
Source: Reuters EcoWin
The data in this chart is expressed slightly differently – namely as a % of all 27 EU nations. Bulgaria
has seen her relative position improve as has Romania but they remain easily the poorest nations with
the European family of nations. Slovenia is closest to reaching the EU27 average. Indeed she has now
overtaken Greece and Portugal in terms of per capita incomes.
Why are per capital incomes so low in Bulgaria?
Why are some countries poorer than others? There are many explanations:
1. Lower average wages reflected in lower consumer spending on goods and services.
2. Relatively low labour productivity which in turn affects the wages of people in work.
3. The effects of international trade patterns where exports are concentrated in relatively low
value-added industries which put a limit on the value of goods and services sold overseas.
4. The impact of high unemployment rates and low employment rates (much lower than for the
EU as a whole)
In the long run it is the level of labour productivity that ultimately determines the standard of living.
And Bulgaria does suffer from a relatively poor level of labour productivity compared to many of her
new EU neighbours. Our next chart provides evidence on this. Output per person employed has grown
strongly since the economic collapse of 1997 but it remains less than 40 per cent of the EU25 mean.
Relative Productivity for Bulgaria
EU25=100
Output per worker employed and output per hour worked, EU25 = 100
38
38
37
37
36
36
35
35
34
34
33
33
32
32
Labour Productivity per Person Employed
31
31
Labour Productivity per Hour Worked
30
30
29
29
28
28
27
27
96
97
98
99
00
Labour Productivity per Hour Worked
01
02
03
04
05
06
07
08
Labour Productivity per Person Employed
Source: Reuters EcoWin
Productivity and living standards
‘Productivity is the main determinant of national living standards – it quantifies how an economy uses
the resources it has available, by relating the quantity of inputs to output. As the adage goes:
productivity isn't everything, but in the long run it’s almost everything.’
(Source: LSE report)
If Bulgaria could raise her productivity still further there would be several advantages in the long term:
1. Lower average costs: Improvements in productivity allow businesses to produce output at a
lower cost per unit which might then be passed onto consumers in lower prices, encouraging
higher demand and more output.
2. Improved competitiveness: Higher productivity would improve the competitiveness of
Bulgarian producers within the EU single market and raise exports (an injection of aggregate
demand into their circular flow).
3. Higher profits: Efficiency gains are a source of larger profits for companies which might be reinvested in new capital. Companies could also afford better wages.
4. Economic growth: If the Bulgarian economy can raise the rate of growth of productivity then
the trend growth of national output can pick up.
Investment and Productivity
Extract B states that “Raising investment and productivity are necessary for long-term economic
growth.”
Investment involves the acquisition of capital goods designed to provide us with consumer goods and
services in the future. Investment spending involves a decision to postpone consumption and to seek to
accumulate capital which can raise the productive potential of an economy. But investment is similar to
consumption as it is an important component of aggregate demand. If the Bulgarian economy can lift
the level of investment, it could boost both aggregate demand and supply. The diagram below
illustrates this:
LRAS1
Inflation
LRAS2
P1
P2
AD2
AD1
Y1
Y2
YFC2
Real National Income
Identify and briefly describe four factors that might affect the level of new capital
investment by Bulgarian businesses
1
2
3
4
How can productivity in Bulgaria be improved?
We have seen that the Bulgarian economy has achieved a higher level of labour productivity relative to
the average for the rest of Europe. But it still has a long way to go for there is a large productivity gap
to close. How can the economy reach higher levels of workforce efficiency?
Read through this article on Bulgaria from a recent World Bank report and then jot down your thoughts
to the question below:
Bulgaria needs higher productivity
Bulgaria has to dramatically boost productivity growth if it wants to bring incomes and living standards up to
European Union averages, the World Bank has found in a new report. "If productivity in Bulgaria continues to
grow at 2.0 percent per year, Bulgaria will never fully converge with the EU-25 gross domestic product per
capita," wrote World Bank economist Satu Kahkonen. "But if Bulgaria manages to raise productivity growth to
5.0 percent per year by 2040, you will receive the parity with the average GDP per capita in the rest of Europe,"
the economist said.
Bulgaria, which has around 7.6 million inhabitants, is currently facing increasing demands for higher wages in
many sectors of the economy, with groups such as public transport drivers and teachers recently staging strikes.
But experts are concerned that if wages rise faster than productivity, it could push inflation -- which recently
topped 12 percent in August -- even higher. Average per capita income in Bulgaria, which joined the EU at the
start of this year, is currently only around one-third of that in the rest of the bloc. The World Bank report pointed
to the need for Bulgaria to improve its education system, strengthen labour mobility, encourage research and
development, and support innovation to develop competitive product markets.
Source: EU Business website: http://www.eubusiness.com/Bulgaria/1190642521.89/
If you were the Finance Minister of Bulgaria - outline 5 possible strategies for lifting the level
of output per worker
1
2
3
4
5
Extract 2: Population Projections for Bulgaria
Comments:










This is perhaps the most important section in the entire stimulus material.
The demographic projections for Bulgaria are not promising – the country is experiencing depopulation. Long term this will be a major handicap for the Bulgarian economy.
Both the total population and the population of working age are set to fall throughout the long
time period covered by the chart in figure 2.2.
Between 2000 and 2045, the whole population is forecast to decline from 8.1 million to 6
million – a fall of over 25%. One reason is forecast decline in the birth rate. The number of
babies born each year is projected to decline from its current range of 65-70,000 per year
towards 50,000 per year
The population of working age is forecast to fall by even more in percentage terms – from 5.5
million to 3.4 million, a decline of more than 40%.
How can the steeper decline in the population of working age be explained? Probably mainly
through the effects of labour migration out of Bulgaria and perhaps a trend towards early
retirement.
Outward migration is starting to have a significant effect on the economy – nearly 12% of the
total population is estimated to have left Bulgaria since the early 1990s. Population is declining
at a rate of approx 0.7% per year.
There is a long-term exodus of skilled workers including trained medics and IT workers
Most of the figures in the chart are projections and thus subject to considerable uncertainty
Why is the total population set to fall?
Our next chart updates the population data in Figure 2.2
Bulgaria - Population
9.00
8.75
8.75
8.50
8.50
8.25
8.25
8.00
8.00
7.75
7.75
7.50
7.50
millions
Persons (millions)
Total midyear population
9.00
7.25
7.25
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Reuters EcoWin
Warding off the population decline
Bulgaria has announced ambitious, long-term reforms to ward off demographic catastrophe and bring the
country's mortality and birth rates into line with European levels. Facing widespread poverty, a sharply declining
population base, and an infant mortality rate nearly three times the European Union average, the government set
out specific targets in a 15-year plan to improve Bulgarian living standards. The plan also seeks to reverse a
declining population. From 1990 to 2004, the number of Bulgarians declined by 1.2 million to a total of 7.76
million, according to official statistics. The US Census Bureau estimates that Bulgaria's population will drop off
another 34 percent by 2050. The plan seeks to lower the country's extremely high abortion rate -- 75 terminated
pregnancies for every 100 live births -- to 55 per 100 by 2015.
In the past 17 years Belogradchik's population has fallen from 11,000 to 6,500, according to deputy mayor Angel
Dzhuninski. Many streets are nearly deserted and fields lay fallow. The town's biggest employer, a manufacturer
of phones for the Russian market, now employs only 100 people compared to 2,600 in communist times.
Source: EU Business website:
There are many potential negative consequences among them the following:
1. A reduction in the size of the available labour supply
2. A possible reduction in the quality of the labour supply if skilled migrants leave
3. A fall in aggregate demand for goods and services
4. A worsening problem of labour shortages which could drive up wages, costs and prices
5. A decline in the size of the tax-paying population which will hit government revenue and
spending plans
6. Bulgaria will become less attractive to foreign investment
7. Bulgaria’s cities will become less dynamic and her existing infrastructure will be under-utilized
How can the de-population be reversed?
De-population is a major problem for many of the former eastern European communist countries. What
steps might the Bulgarian government take to reverse the decline in population? Which policies do you
feel would be most effective?
Draw up a list of four strategies to slowdown and possibly reverse de-population – briefly
explain how each might work
1
2
3
4
Suggestions for reading on the exodus of workers from Bulgaria and other countries
This selection of short articles will give you a good feeling for some of the factors driving the depopulation of many of Europe’s new member states:




Going west for the good life (Der Spiegel, March 2007)
Leaving Bulgaria for the UK? (BBC news, September 2006)
Bulgaria hit by population slump (BBC news, November 2006)
In shrinking Bulgaria, where are the people? (International Herald Tribune, November 2006)
See also

EU job market squeezes Slovakia (BBC news, October 2007)
Extract 3: EU accession for Bulgaria fuels Greek bank explosion
in Balkans
Comments:

This extract is about foreign direct investment by Greek banks into the financial services
industries of several Balkan countries.

FDI is taking place mainly through subsidiaries – these are defined as ‘a company whose
voting stock is more than 50% controlled by another company, usually referred to as the parent
company.’ For example, United Bulgarian Bank (UBB), 90 per cent of which was bought by
the National Bank of Greece controls more than 10 per cent of the Bulgarian market.

The successful entry of Greek banks into the Balkans is evidence that financial service markets
in these countries (including markets for traditional banking services, insurance, business
advice and so on) are contestable in nature. There will be some entry barriers, but these do not
appear to have been significant. Greek-owned subsidiaries now have over 20% of the market.

What makes Romania and Bulgaria attractive for foreign banks? Mainly the potential for fast
economic growth leading to higher per capita incomes
o Rising incomes increases the opportunity to save out of disposable income.
o A higher level of household and business saving (e.g. from profits) increases the level of
retail bank deposits.
o These deposits can be used by the banks as fund for lending to businesses and
households.
o Trade between Bulgaria and the rest of the EU is expected to grow strongly. Banks can
make money by helping to finance this trade.
o Rising incomes will boost consumer spending and the demand for retail loans and
overdrafts including credit to pay for new consumer durables. Banks are also set to gain
from the boom in the Bulgarian property market.
o Banking services have a high income elasticity of demand especially in countries
where there is an emerging middle-class earning higher salaries. The banking system in
Bulgaria (still in many ways a transition economy) is under-developed. For example, in
2006 there were just nine bank branches for 100 000 population in Bulgaria, compared
to 30 in Greece and an average of 50 in the EU.

Greek banks are already well established in the Balkans, this might give them ‘first-mover
advantage’ in breaking into the Bulgarian and Romanian financial services industry. Greece
would appear to have a comparative advantage in financial services and is looking to exploit
this.
o Joining the EU should give Bulgaria and Romania greater economic stability – which
will make their economies more attractive to foreign investors
o Reduced political risks for overseas banks
Related article: This article from the International Herald Tribune in October 2006 provides a good
complement to the material covered in the first part of extract 3: Greek banks embark on expansion
drive http://www.iht.com/articles/2006/10/02/bloomberg/bxbank.php
The Household Borrowing Boom in Bulgaria
6
5
5
4
4
3
3
2
2
billions
BGN (billions)
Million Lev per month
6
Loans for home purchase
1
1
Consumer loans
Overdrafts
0
0
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
Comments:

The Bulgarian private sector is said in this extract to be fairly heavily concentrated in the
hands of a few larger scale firms – some foreign owned.

Productivity is rising but there appears to be an efficiency gap between the larger businesses
and SMEs (small and medium enterprises)

The relative inefficiency of smaller businesses will be the result of a mix of factors:
o Under-exploitation of internal economies of scale
o Many are perhaps sheltered from the forces of European and global competition
o Inadequate funds to train and re-skill workers
o Legacy of poor management and weak incentives from the communist days
o Poor access to up to date IT equipment and inadequate infrastructure
o Ageing population effect and labour drain of younger skilled workers
o Lower wages in smaller business units e.g. contrasted with pay offered by foreign
multinationals based in Bulgaria

The extract claims that foreign direct investment (FDI) is positively associated with higher
productivity – reasons?
o Access to a better stock of capital equipment i.e. more advanced and newer machinery
o Improved management techniques
o Access to technical know-how and other best-practice from businesses from advanced
western nations

The majority of FDI is located in service industries and only 30% in ‘traded goods industries’
i.e. sectors of the economy that exports to or competes with imports from other countries

What is exported from Bulgaria is dominated by unskilled labour-intensive products
o A reflection perhaps of where Bulgaria’s revealed comparative advantage lies
o Bulgaria is a net exporter of many primary products including Apples, Barley, Cattle,
Coal, Lead, Natural Gas, Poultry, Sheep, Sunflower Seeds, Tobacco and Timber
o It is also export heavy in basic chemicals, cigarettes, meat and wines and spirits.
o Many of the export-industry jobs involve basic processing and packaging – often done
in a labour-intensive fashion. An attraction for foreign multinationals is the relatively
low level of wages.
o Although extract C does not state this directly, the balance of foreign direct investment
into Bulgaria is changing (remember the data in extract C only goes up to 2003 and the
data in extract 1 covers the period 2000-2005). In the last few years there has been a
surge in overseas investment in sectors such as textiles, pharmaceutical products,
cosmetics, and mobile telephony.
Motivations for foreign direct investment in a country
In this section there are some notes on some of the economic motivations behind foreign direct
investment. Read through them and then consider why Bulgaria might remain a favourable venue for
inward investment in the years to come. Three main motives for FDI can be identified:



Resource seeking – where a business seeks specific resources which are unavailable in the
home country or which are costly when sourced domestically.
Efficiency seeking – FDI in which businesses aim to produce goods and services at lower
average cost than at home. This could include firms seeking to benefit from a more productive
workforce, lower wages or from the external economies of scale available from past
investments of businesses already located in a country.
Market seeking – This is business investment which seeks to gain access to fast-growing
overseas markets where incomes and spending is growing.
Another way of classifying FDI is as either vertical or horizontal:
Vertical FDI is where a company splits its production process across a number of locations depending
on where costs are lowest, for example locating the labour-intensive part of production in a low-wage
country and the research-intensive part where there are high skill levels. For example, Nokia produces
mobile phone components and batteries in Hungary and assembles the completed phones in Germany
and Finland, where it also has research and development facilities. This is also known as out-sourcing.
Horizontal FDI is where a company locates the same production process in a number of different
locations, for example car manufacturers which invest in several European countries
Many factors affect foreign investment decisions – including some of the following:
1.
2.
3.
4.
5.
6.
7.
Corporate taxation
Financial incentives from host governments for new inward investment projects
Wage costs per unit of output (affected by basic wage levels and productivity)
Quality of government e.g. in protecting the property rights of foreign multinationals
Skills of the labour force
Quality of industrial relations e.g. relationships with domestic trade unions
Access to fast growing markets
8. Reliability and capacity of national infrastructure including transport, energy supplies and
telecommunications
9. Complexity of business regulations e.g. labour laws and health and safety regulations
10. Overall economic and political stability
Bulgaria has attracted a rising level of foreign direct investment into their economy in recent
years. Outline some of the economic benefits and costs of this investment.
Direct Investment into Bulgaria
20.0
20.0
17.5
17.5
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
Q1
Q2
Q3
04
Q4
Q1
Q2
Q3
05
Q4
Q1
Q2
Q3
06
Q4
Q1
billions
EUR (billions)
Billion Euros per quarter
Q2
07
Source: Reuters EcoWin
Extract 4: EU Enlargement and Labour Migration:
Comments






Extract 4 focuses on the transitional arrangements for limiting the free movement of labour
within the European Union single market.
Some countries including Spain and the UK have moved to limit the geographical mobility of
people from Bulgaria and Romania following their accession to the EU in January 2007.
The UK government announced in October 2006 that it would introduce restrictions on
movement of unskilled workers that will remain in force until at least the end of 2008.
UK controls limit low-skilled migrant workers from Bulgaria and Romania through a quota
system. Only 20,000 were able to seek jobs in agriculture and food processing under a specific
scheme. But (according to the BBC website, ‘EU rules mean Romanians and Bulgarians are
free to live in the UK, and to take any job if self-employed.’
The extract asks us to consider some of the factors that influence the direction and scale of
labour migration between countries. The ‘incentives for the newest EU members to move west
for work are powerful’.
Spanish unions claim that
o “Crowding-out” effects may happen in the labour market with immigrant workers
displacing home workers
o Uncontrolled inward migration encourages ‘unscrupulous employers to squeeze wages’
– this is hinting that employers with monopsony power may use this to drive down
wages below fair levels and reap the reward of higher profits.
The economics of labour migration
What factors can affect migration flows? In general, the incentive to migrate is strongest when the
expected increase in earnings exceeds the cost of relocation.
1. The wide dispersion of wages for equivalent jobs
2. Access to the benefits system of host countries including social security, state education,
housing and health care
3. Employment opportunities vary between nations
4. Desire to travel, learn a new language, pick up new skills and qualifications
5. Desire to escape political repression
6. The impact of satellite television in changing people’s expectations
7. The effects of cheaper trans-national phone calls and the internet
8. Cheaper air travel and coach travel for example within the European Union
9. The unwillingness of people within the domestic economy to take certain “drudge-filled” jobs
such as porters, cleaners and petrol attendants
Labour market restrictions



Subject to restrictions: Czech Rep, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia,
Slovenia (all 2004); Bulgaria, Romania (2007)
Open doors for 2004 entrants: Finland, Greece, Ireland, Portugal, Spain, Sweden, UK
Open doors for 2007 entrants: Finland, Sweden, Cyprus, Czech Republic, Estonia, Latvia,
Lithuania, Poland, Slovakia, Slovenia
Average Monthly Wages in Bulgaria
Bulgarian Lev - per month
450 Construction
450
400
400
350
350
300
300
250
250
200
200
150
150
100
100
BGN
378
Hotels and restaurants 311
Manufacturing
402
Total
434
00
01
Construction
02
03
Hotels and restaurants
04
05
Manufacturing
06
07
Total
Source: Reuters EcoWin
The costs and benefits of migration
This is a politically sensitive issue but economists have plenty to say on the economic impact of
migration flows between countries. Authors such as Phillippe Legrain are very positive on the effects
of migration. Some of the advantages he has put forward include the following:
1. Diversity: Greater economic and social diversity
2. Fresh skills: Migrants can provide complementary skills to those of domestic workers, which
can raise the productivity of both (a Brazilian child minder provides good quality child care at
an affordable price which might then allow a highly paid female magazine editor to continue to
work)
3. Driver of innovation and entrepreneurship: Inward migration can also be a driver of
technological change and a fresh source of potential entrepreneurs. Much innovation comes
from the work of teams of people who have different perspectives and experiences. If migration
promotes this diversity, there are positive externalities from the innovation that might flow
4. Pressure on government to reform: Labour migration can also put political pressure on
failing governments and regimes e.g. a mass exodus of productive workers from Zimbabwe
5. Efficiency in the use of scarce resources: Immigration can allow a nation’s capital, land, and
technology to be used more efficiently
6. Multiplier effects: New workers create new jobs, there is a multiplier effect if they find work
and contribute to a nation’s gross domestic product through a higher level of aggregate demand
7. Reducing labour shortages: Migration can help to relieve labour shortages and thereby help to
control wage inflation. In technical terms, this can reduce the non-accelerating inflation rate of
unemployment (the NAIRU)
8. Income flows: Remittances sent home by migrants can add substantially to the GNP of the
home nations
9. Tax revenues: Legal immigrants in work pay direct and indirect taxes and are likely to be net
contributors to the government’s finances
Supporters of allowing free movement of labour argue that labour mobility is a positive-sum game
rather than a zero-sum game. This is mentioned in the second part of extract 4.
On the other side there are several pressure groups campaigning for tighter restrictions on migrant
workers. Some of the arguments include:
1. Welfare costs: Increasing cost of providing essential public services as migrants come into a
country
2. Worker displacement: Possible displacement effects of domestic workers (this too is
mentioned briefly in the extract)
3. Wage cuts: Migrant workers may lower the wages of people in other jobs
4. Social pressures: Social tensions arising from the problems of integrating hundreds of
thousands of extra workers into local areas and regions
5. Pressure on property prices: Rising demand for housing which forces up house prices and
rents
6. Benefit claims: Many immigrants find it hard to secure work and act as a drain on the social
security system
7. Who really gains? The benefits of migration are focused mainly on employers, especially those
who take on illegal workers at low wages.
8. Poverty risk: Migration may have the effect of worsening the level of relative poverty in a
society
Suggestions for further reading









UK bans non-EU unskilled workers (BBC news, December 2007)
Heads seek more migrant funding (BBC news, November 2007)
Record trends in UK migration (BBC news, November 2007)
EU worker restrictions to remain (BBC news, October 2007)
Joining the immigrant underclass (BBC news, April 2007)
Access limited for new EU nations (BBC news, November 2006)
EU free movement of labour map (BBC news, November 2006)
European panel: Movement of workers
Migrants do not pull wages down (BBC news, February 2007)
Strong inflows of labour into the economy can have the effect of increasing the labour supply – this
puts downward pressure on real wages (for a given level of labour demand) e.g. through helping to
relieve labour shortages in particular industries and occupations
If migration provides a boost to the labour supply and to average labour productivity, there is the
prospect of an outward shift in a country’s long run aggregate supply
LRAS1 LRAS2
Labour Supply
Real
Wage
Rate
Labour
Supply
with
migration
W1
W2
P1
P2
Labour
Demand
AD
d
E1
E2
Employment
Real National
Income (Y)
The longer term benefits and costs of increased labour migration are hard to quantify and estimate.
Much depends on

The types of people who choose to migrate from one country to another. Evidence suggests that
migrants from the new EU states are much more likely to find work and therefore not act as a
drain on a government’s welfare state.

The ease with which they assimilate into a new country and whether they find full-time
employment.

Whether a rise in labour migration stimulates capital spending by firms and by government.

Whether workers who come into a country decide to stay in the longer term (this may involve
members of their extended family joining them) or whether they regard migration as essentially
a temporary exercise (e.g. to gain qualifications, learn some English) before moving back to
their country of origin.
Monopsony power of employers
Extract 4: “Unscrupulous employers may squeeze wages”
Unscrupulous is variously defined as behaviour that is devoid of scruples; immoral, dishonest,
oblivious to or contemptuous of what is right or honourable.
Some wages are driven down by discriminatory behaviour by employers – there is always a risk of
this when they are employing migrant workers who have different racial, ethnic and social
backgrounds.


Discrimination is a cause of labour market failure and a source of inequity in the distribution
of income and wealth and it is usually subject to government intervention e.g. through
regulation and legislation.
Discriminatory treatment of minority groups leads to lower wages and reduced employment
opportunities, including less training and fewer promotions. The result is that groups subject to
discrimination earn less than they would and suffer a fall in relative living standards.
Why does discrimination occur in the labour market?
1. The 'Taste' Model - Discrimination arises here because employers and workers have a distaste
for working with people from different ethnic backgrounds or final customers dislike buying
goods from salespeople from different races i.e. people prefer to associate with others from their
own group. They are willing to pay a price to avoid contact with other groups. With reference to
race, this is equivalent to racial prejudice.
2. Employer ignorance – Discrimination arises because employers are unable to directly observe
the productive ability of individuals and therefore easily observable characteristics such as
gender or race may be used as proxies – the employer through ignorance or prejudice assumes
that certain groups of workers are less productive than others and is therefore less willing to
employ them, or pay them a wage or salary that fairly reflects their productivity, experience and
applicability for a particular job.
Monopsony power
A monopsony producer has significant buying power in the labour market when seeking to employ
extra workers. A monopsony employer may use their buying-power to drive down wage rates. The
monopsonist knows that they face an upward sloping labour supply curve, in other words, to attract
more workers in their industry, they must pay a higher wage rate – so the average cost of employing
labour rises with the number of people taken on. Because the average cost of labour is increasing, the
marginal cost of extra workers will be even higher, since we assume that an increase in the wage rate
paid to attract one extra worker must also be paid to existing workers.
A monopsony is a market dominated by a single buyer. A monopsonist has the market power
to set the price of whatever it is buying (from raw materials to labour inputs)
Wage
Rate
(W)
Marginal Cost of
Labour (MCL)
MRPL
Labour
Supply
(ACL)
Wq
Demand =
MRPL
Eq
Employment of Labour (E)
The profit maximising level of employment is where the marginal cost of labour equates with the
marginal revenue product of employing extra workers. In the diagram, Eq workers are taken on, but the
monopsonist can employ these workers at an average wage rate of Wq – a pay level below the marginal
revenue product of the last worker. In this sense the monopsonist is exploiting labour by not paying
them the full value of their marginal revenue product.
Trade unions may seek to counterbalance the monopsony power of an employer by controlling aspects
of the labour supply and by using whatever collective bargaining power they possess to negotiate
wages higher without being at the expense of employment levels.
Extract 5: Economic benefits of EU membership
Comments:

Before joining the EU, Bulgaria had to meet the accession criteria, basically a 90 page rule
book which outlined the conditions that had to be settled before it was given the green light to
enter the EU.

Some of these conditions (agreed in the 1993 Treaty of Copenhagen) included:
o The stability of political institutions guaranteeing democracy, the rule of law, human
rights and respect for and protection of minorities.
o A fully functioning market economy, which can deal with the market forces of the EU
– this requires countries to introduce widespread micro-economic reforms to their
economies to extend the scope of the market in allocating resources.




o The adoption and implementation by each country of the “acquis communautaire”
– this is the body of existing and new EU law – including labour market laws and
regulations concerned with the operation of the Single Market including competition
policy and social regulations.
Bulgaria began its economic reforms under the free-market "king", Simeon Saxe-Coburg, the
former child-monarch who returned from exile half a century later as prime minister.
Bulgaria was given the final go ahead in October 2006, just a few months before accession!
This BBC news audio-video is good on some of the preparations of Bulgarian business for
joining the single market.
Although now part of the European Union, Bulgaria is in many ways still an economy and a
country ‘in transition’ (see below)
Bulgaria hopes that membership of the EU will be a stimulus to her growth and development
(we consider some of the reasons why in the next section).
Transition economies – moving towards the market!
Ten of the twelve states that have joined the EU since 2004 were socialist economies allocating their
scarce resources under a command economy system until at least 1989. In the intervening eighteen
years most have made huge strides in transforming their economies into ones based on western freemarket rules.
The European Bank for Reconstruction and Development publishes each year a set of economic
transition indicators, containing nine separate criteria for judging whether a country meets the standards
of a market-based economic system. The measurement scale for the indicators ranges from 1 to 4+,
where 1 represents little or no change from a rigid centrally-planned economy and 4+ represents the
standards of an advanced market economy such as the UK or France. Since 1989 Bulgaria has made
good progress, slightly ahead of Romania who also joined the EU in January 2007. For instance, the
private sector share of GDP in 2006 was estimated at 75%.
Transition
Indicators
Bulgaria
Romania
Large scale
privatisation
Enterprise
restructuring
Price
liberalisation
Trade
&
Forex
system
Banking
reform &
interest rate
liberalisation
Overal
l
198
9
200
6
1.00
1.00
1.00
1.00
1.00
1.0
4.00
2.67
4.33
4.33
3.67
3.6
198
9
200
6
1.00
1.00
1.00
1.00
1.00
1.0
3.67
2.67
4.33
4.33
3.00
3.5
Advantages of EU membership for Bulgaria
Some of the benefits from joining the EU might include:
1. Trade opportunities: Membership of the EU allows countries to develop and exploit their
comparative advantage in industries where they have a price or cost advantage and increase
exports by “dining at the rich man’s table”. Exports should rise in improved market access and
Bulgaria may be able to import cheaper investment goods that would help improve the
competitiveness of firms operating in Bulgaria in the medium term.
2. Investment opportunities: The free movement of capital should make Bulgaria an even more
attractive location for inward investment; we have considered this earlier in the tool-kit.
Technology transfers and increased investment in training and skills arising from an increase in
FDI will have a positive effect on the productive capacity (LRAS) of the new EU countries. In
2005-06, more than 60% of inward foreign direct investment was in three sectors – namely
property, construction and financial services. Bulgaria has embraced the idea of flat-rate taxes.
The government introduced a 10 per cent flat corporate tax rate in January 2007 and is
proposing a 10 per cent flat income tax rate and reduced social security rates from January 2008
3. Competition and productivity: Increasing competition within the EU single market should act
as a boost to productivity. Underperforming businesses not meeting consumer needs and wants
will lose market share. The possible gains in productive efficiency might be complemented by
gains in dynamic efficiency from a higher rate of innovation
4. Access to EU funding: EU funding to promote growth and development. The Financial Times
reported recently that “Bulgaria can expect between 2007 and 2009 €2.3bn in structural funding
and a total €1.6bn in rural development support from 2007 to 2013. For small and relatively
poor countries, these additional EU funds can provide a major boost to their investment and
lead to improvements in universities, under-funded health-care systems and transport and
telecommunications infrastructure. Bulgaria will be a net recipient of EU funds.
5. ‘Protection against excessive globalization’ – this is mentioned in the extract and perhaps
refers to the common external tariff on goods and services coming into the EU from outside.
The country would expect to take advantage of ‘trade creation’ effects that come from removing
tariff and other barriers to trade with fellow EU members.
Some of the costs of joining the EU
1. Fiscal costs: Extra government spending has been required to improve national infrastructure
and meet the requirements of EU entry. This has placed great pressure on government finances
with most countries already running sizeable budget deficits.
2. Vulnerability to EU and global competition – although protected by tariff barriers, there is no
guarantee that Bulgaria will be competitive in her key industries when facing intensive
European competition. This could lead to a loss of jobs and further pressure on younger skilled
workers to leave. Bulgaria has faced growing competition in EU markets from regional peers
such as Romania and Croatia.
3. Rising trade deficit: In recent years the Bulgarian economy has seen a growing trade deficit.
Bulgaria’s large current account deficit reached a 2007 year-end record high of 19.6% of GDP
and is a significant threat to the country’s macroeconomic stability
4. Labour drain effects as workers move to find work – discussed earlier in the toolkit
Bulgaria - Exports and Imports as a share of GDP
Per cent
130 Exports of goods & services, %
130
120
120
110
110
100
100
78.5
Imports of goods & services, % 124.3
Imports
%
90
80
90
80
Exports
70
70
60
60
50
50
40
40
30
30
95
96
97
98
Exports of goods & services, %
99
00
01
02
03
04
05
06
07
Imports of goods & services, %
Source: Reuters EcoWin
Comments:
o This extract is positive about the early outcomes of the 2004 enlargement
o It claims that membership of the EU has added to each nation’s trend rate of growth i.e. the long
run sustainable growth rate
o It talks of a ‘win-win’ situation, i.e. there will be net economic benefits for both the new and
existing members of the EU and for producers and consumers
o Possible benefits to EU consumers?
o Lower prices from trade creation effects e.g. cheaper food and raw materials from
Eastern Europe
o A cleaner environment as new EU nations have spent millions on meeting strict
environmental targets
o Increased choice of products
o Opportunities to travel and work in new EU member states (e.g. the tourism boom and
the property boom with thousands of UK citizens buying homes in Bulgaria)
o Possible benefits to producers in established EU countries?
o Export potential especially in countries where income and consumer spending is rising
o Investment opportunities e.g. the entry of Greek banks into Bulgarian financial
services
o Chance to further exploit economies of scale and reduce costs through out-sourcing
o High levels of labour migration from the new member nations have helped to relieve
labour shortages and keep wage inflation and price inflation down
o No data is provided in the extract on the estimated employment effects and the extent to which
increasing the number of countries has actually benefited consumers
o Making estimates of the direct effects of the enlargement of the EU is extremely difficult
o The extract does not mention some of the costs from expanding the size of the EU to 27 nations
o Higher budgetary costs for the EU
o Possible displacement of foreign investment to the new member states, especially
those that have brought down corporate taxes to low levels (e.g. ‘flat-rate tax’ countries)
o Richer nations now have a larger group of countries that are relatively poor and which
will require EU regional funding for many years / decades to come.
European Union Membership in December 2007
Large
Small
Relatively Rich
United Kingdom
France
Italy
Germany
Belgium
Luxembourg
Netherlands
Ireland
Denmark
Sweden
Austria
Finland
Relatively Poor
Spain
Poland
Portugal
Greece
Estonia
Hungary
Czech Republic
Slovakia
Slovenia
Cyprus
Malta
Lithuania
Latvia
Bulgaria
Romania
Here is a selection of wider reading on the enlargement issue:
 Doing business now much easier in EU-10, says World Bank (Euro Active, September 2006)
 'Enlargement beneficial to UK economy' (November 2006)
 “EU expansion boosts UK economy” (BBC news, November 2006)
 UK Parliamentary Report on enlargement
 Enlargement two years on: Economic success or political failure? (CER Report, April 2006)
 EU hardens tone on further enlargement (December 2006)
 EU set to raise the bar on new members (December 2006)
 Europe's booming Baltic corner – focus on Estonia and Latvia (December 2006)
Real GDP Growth Rate - Selected New EU States
Annual percentage change in real GDP
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
0.0
-2.5
-2.5
%
12.5
-5.0
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Poland
Romania
-7.5
-10.0
95
96
97
98
99
Bulgaria
Czech Republic
00
Estonia
Hungary
01
02
03
Latvia
Poland
04
05
06
6.2
4.9
6.2
3.4
6.2
5.2
5.8
-5.0
-7.5
-10.0
07
Romania
Source: Reuters EcoWin
Unemployment in selected New Member States
Percentage of the labour force, annual average, source: Eurostat
20.0
20.0
Poland
18.0
18.0
Slovakia
16.0
14.0
16.0
Lithuania
Estonia
14.0
Percent
12.0
12.0
EU25 average
10.0
10.0
8.0
6.0
8.0
6.0
Czech Republic
Hungary
Slovenia
4.0
4.0
2.0
2.0
0.0
0.0
98
99
00
01
02
03
04
05
06
Source: Reuters EcoWin
Convergence on Euro Zone Interest Rates
Main monetary policy interest rates for each country (%)
20.0
20.0
Poland
18.0
16.0
16.0
14.0
14.0
Hungary
12.0
Percent
18.0
10.0
12.0
10.0
Slovenia
8.0
8.0
6.0
6.0
Bulgaria
4.0
4.0
2.0
2.0
Euro Zone
0.0
0.0
99
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
Labour Productivity per Person Employed
Index of productivity as % of the EU25 average
90
80
Czech Republic
Hungary
Estonia
Slovenia
Poland
Romania
Bulgaria
90
74.7
76.4
70.2
88.7
63.5
41
37.5
80
Slovenia
EU25=100
70
70
Hungary
60
60
Czech Republic
50
50
Estonia
Poland
40
40
30
30
Bulgaria
Romania
20
20
95
96
97
98
99
Czech Republic
Hungary
Estonia
00
01
02
03
Slovenia
Poland
Romania
04
05
06
07
08
Bulgaria
Source: Reuters EcoWin
The Bulgarian Stock Market Boom
Index
SOFIX Index, Daily close
2000
2000
1750
1750
1500
1500
1250
1250
1000
1000
750
750
500
500
250
250
0
0
00
01
02
03
04
05
06
07
08
Source: Reuters EcoWin
Ease of Doing Business
World Competitiveness Report 2006
Bulgaria
(#46 overall)
Indicator
Starting a business
Dealing with licenses
Employing workers
Registering property
Getting credit
Protecting investors
Paying taxes
Trading across borders
Enforcing contracts
Closing a business
World Ranking
#100
#103
#57
#62
#13
#33
#88
#89
#90
#72
World’s best
Australia
St. Vincent & the Grenadines
United States
New Zealand
United Kingdom
New Zealand
Maldives
Singapore
Hong Kong, China
Japan
Key Terms in the Extracts
External links have been added to some of the terms for students wanting to access internet resources.
These links are to Tutor2u, the Economist, the BBC website, Wikipedia and European Union official
sites.
Introduction
European Union
EU Enlargement
Command economy
Transition economy
Market economy
Per capita income (living standards)
Labour productivity
Investment
Foreign direct investment
Multinationals
GDP
Migration
Demography
Extract 1
Economic growth
Inflation
Unemployment
Extract 2
Macroeconomic stability
Trend growth
Economic convergence
Productivity
Human capital
Physical capital
Extract 3
Subsidiaries
Financial services
Trade
Comparative advantage
First mover advantage
Private sector
Privatization
Small-medium enterprises
Efficiency and inefficiency
Extract 4
Labour mobility
Incentives
Monopsony power
Employer discrimination
Zero sum game
Positive sum (‘win-win’) game
Extract 5
EU Accession Treaty
Accession criteria
Globalization
Consumer and producer welfare
Map of Transition Countries
Source: European Bank of Reconstruction and Development Annual Review 2007
Source: European Bank of Reconstruction and Development Report on Bulgaria, Jan 2007