Competitiveness of the Bulgarian Economy

Abstract

The paper studies Bulgaria's cost and trade competitiveness in the triple challenge of transition, accession to the EU and currency board arrangement. It studies unit labor cost (ULC) dynamics in the industrial sectors and their impact on export shares. Bulgaria's textile and apparel industries scored considerable competitive gains in the period 1997-2002 both in terms of ULC and export share. Those seem to reflect mainly significant drop in wages rather than productivity gains. Conversely, in footwear industry export expansion occurred despite deteriorated ULC. Other traditional export earners such as ferrous metals preserve their leading share in export receipts, but show deterioration in export/import ratio. This mixed evidence should be accepted as indicative and preliminary, rather than conclusive, due to the large share of the shadow economy and underreporting of labor costs. Emerging patterns of competitive advantages and export specialization, however clearly show, that Bulgaria has not entered yet into competition in differentiated products. It rather sustains and develops competitive advantages in the homogenous labor-intensive and material-intensive products, where cost competitiveness has primary importance. In this context the major short-term challenges in the policy agenda of competitiveness are seen here in increasing labor market flexibility, alleviation of payroll tax burden, reduction of administrative and regulatory costs of doing business and liberalization of the market of services. In the medium and long run the major policy challenge would be to facilitate the transition of the manufacturing sector from competition in homogenous material and labor intensive products into technology and knowledge intensive products. This would depend on the economic policy's capacity to encourage technology diffusion and innovation.