The structure of incomes and social protection during the transition: The case of Bulgaria

Abstract

BULGARIA IS A LOWER-MIDDLE INCOME COUNTRY with a population of about 8.5 million. In late 1989 it began introducing radical political and economic changes aimed at transforming the country into a pluralistic, market-based democracy. Up to that point, practically all segments of economic activity were controlled by the state, with the exception of small family plots in agriculture and most private housing. Like most economies in transition, Bulgaria had a comprehensive social safety net, including a commitment to and virtual achievement of full employment, comprehensive retirement and disability pensions, and free health and education services. No unemployment benefits existed and social assistance was virtually non-existent, as full employment and social insurance rendered them unnecessary. Furthermore, explicit income inequality was very low, compared with market economies, as the explicit wage scale was highly compressed. However, some elements of society had greater access to in-kind income, to rationed commodities, to Western goods, and to better quality medical services, indicating that implicit income inequality was higher than measured inequality, as was typical for former communist societies. The economic outcome of the transition in Central and Eastern Europe so far has been a dramatic decline in output, a sharp drop in real wages, and a rapid rise in the level of unemployment. In this respect Bulgaria is no exception. These pose difficult problems for social policy, not least of which is the issue of how effective the existing social safety net is in reaching the poor. The objective of this article is to analyse the sources of income, income inequality, the characteristics of lower income groups and their implications for the social safety net in Bulgaria, in the midst of the transition. Bulgaria is a good case study for several reasons. First, Bulgaria suffered a large external demand shock as a result of the transition-possibly the largest in Eastern and Central Europe-owing to its trade dependence on Council of Mutual Economic Assistance (CMEA) economies and other countries (Libya, Iraq, the Federal Republic of Yugoslavia) affected by UN sanctions. As a result, it has endured one of the largest drops in output and incomes in the former CMEA countries. After experiencing a massive contraction in output between 1989 and 1993 (cumulative decline in GDP of about one-third) the Bulgarian economy grew by 1.4% in 1994. This improvement in the real economy seems to have been maintained in 1995.