PRODUCTIVITY GROWTH IN BULGARIA: TRENDS AND …siteresources.worldbank.org/INTPROSPECTS/Resources/334934... · PRODUCTIVITY GROWTH IN BULGARIA: TRENDS AND OPTIONS Doerte Doemeland

PRODUCTIVITY GROWTH

IN BULGARIA:

TRENDS AND OPTIONS

Doerte Doemeland - The World Bank

Washington, DC – February 8, 2016

THE RATIONALE FOR

BOOSTING

PRODUCTIVITY GROWTH

Productivity growth is essential for

accelerating long-term output growth.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2000 2005 2010 2015 2020 2025 2030 2035 2040

Re

al

GD

P p

er

ca

pit

a i

n E

UR 5% annual labor

productivity

growth

4% annual labor

productivity

growth

EU 28

Bulgaria

3% annual labor

productivity

growth (2000-

2013 average)

Source: WB staff simulations.

It can mitigate the economic impact of

Bulgaria’s demographic change.

Source: Eurostat.

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Bulgaria’s working-age population/

total population

Source: NSI data; WB staff simulations.

Productivity growth can help boost

employment and wages.

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

Young/Small Young/Large Medium/Small Medium/Large Old/Small Old/Large

An

nu

al

Gro

wth

TFP growth Employment growth

Total Factor Productivity and Employment Growth

2009-2012

TRENDS AND

PATTERNS

Bulgaria experienced extraordinary per capita

growth between 2000 and 2008.

0

5,000

10,000

15,000

20,000

25,000

1880 1900 1920 1940 1960 1980 2000 2020

GD

P p

er

ca

pit

a (

19

90

In

t. G

K$

)

GDP per capita

Bulgaria W. Europe

Source: Maddison; WB staff calculations.

Yet, productivity gains contributed relatively

little to Bulgaria’s GDP growth.

Source: Eurostat; WB staff calculations.

-1

0

1

2

3

4

5

6

7

8

9

10

Capital labor TFP Structural change Change in GVA per capita Output per worker

Annual Change in GVA per capita and Output per

Worker 2000-2008

Large inefficiencies continue to exist in the

Bulgarian economy.

At the macro-economic level, inefficiencies in

the allocation of labor across sectors persist.

Had Bulgaria’s allocation of labor similarly efficient

than in Romania between 2000 and 2008 - annual

GDP per capita growth would have been 2

percentage points higher.

At the firm-level, TFP growth was

relatively strong in the services sector and

weak in the manufacturing sector.

Source: Non-financial enterprise data from

NSI; WB staff calculationsSource: Eurostat.

Annual firm-level TFP growth

2008-2012

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

The manufacturing suffered from an inefficient

allocation of workers.

Distance from production

possibility frontier

Source: Non-financial enterprise data from

NSI; WB staff calculations.

Gains from Removing

Firm-level Inefficiency in Manufacturing TFP in the

manufacturing sector would increase by an estimated 80 percent if the allocation of resources would become fully efficient.

Inefficiency is higher in sectors with a high share of pre-transition firms and less competition.

0

20

40

60

80

100

120

Perc

enta

ge g

ain

s f

rom

re

movin

g ineficie

ncy

Though Bulgaria experienced rapid export growth, the

income potential of its export basket has stagnated.

0 2000 4000

Hungary

Croatia

Estonia

Romania

Poland

Slovak Republic

Slovenia

Czech Republic

Latvia

Bulgaria

Change in export basket

income potential 1996-2012

Source: WITS WB staff calculations.

Export basket income potential

HOW CAN BULGARIA

BOOST

PRODUCTIVITY

GROWTH?

POLICIES?

Distance from production

possibility frontier

Benchmarking and policy diagnostics: Which are the area that

are important for productivity growth and where Bulgaria is

lagging?

Macro: Run cross-country regression of structural change or TFP

growth on policy variables of interest –

Firm-level data: Which firms have the highest productivity

growth? How did changes in the regulatory environment affect

firm-level productivity growth?

Invest in human capital

380

400

420

440

460

480

500

520

540

Bu

lga

ria

Hu

ng

ary

Slo

va

k R

ep

ub

lic

Reg

ion

al c

om

para

tors

OE

CD

Czech

Rep

ub

lic

Au

str

ia

Germ

an

y

Po

lan

d

Bu

lga

ria

Slo

va

k R

ep

ub

lic

Reg

ion

al c

om

para

tors

Hu

ng

ary

Au

str

ia

Czech

Rep

ub

lic

OE

CD

Germ

an

y

Po

lan

d

Mathematics Reading

Mean PISA 2012 Scores Improve access to

early childhood

development

programs for

disadvantaged

groups;

Improve the quality of

basic education;

Promote life-long

learning;

Strengthen tertiary

education.

Source: World Bank (2015)

Push the boundaries

Distance from production

possibility frontier

Source:WB staff calculations.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0

0.5

1

1.5

2

2.5

3

Import Upstreamness (left axis)

Export Upstreamness (left axis)

Domestic GVC Length (right axis)

Length of Domestic Global Value Chains

Increase public R&D spending and absorption of EU R&D funds;

Improve links between businesses, academia, public research;

Address infrastructure bottlenecks.

Improve governance

Accelerate resolution

of insolvency cases;

Ensure consistent

application of the law;

Improve mechanisms

to deal with corruption;

Strengthen

performance

monitoring of the

judiciary.

0

1

2

3

4

5

6Property rights

Intellectualproperty

protection

Diversion ofpublic funds,

Favoritism indecisions ofgovernment

officials

Efficiency oflegal framework

in settlingdisputes

Efficiency oflegal frameworkin challenging

regs.

Organizedcrime

EU15 Bulgaria Regional comparators

Judiciary Outcomes

Source: World Economic Forum 2014

Linking change in policies to firm-level

dynamics• 𝑙𝑛𝑇𝐹𝑃𝑖𝑗𝑡 = 𝜃 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑙𝑖𝑛𝑘𝑎𝑔𝑒𝑗𝑡−1 + 𝜃 𝑋𝑗𝑡 + 𝛿𝑖 + 𝛾𝑡 + 휀𝑖𝑡

•

• where 𝑙𝑛𝑇𝐹𝑃𝑖𝑡 is the physical productivity in logs measured as

TFP for each Bulgarian firm i in sector j in time t (Hsieh and

Klenow 2009, 2014).

• Services linkage: 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 𝑙𝑖𝑛𝑘𝑎𝑔𝑒𝑗𝑡 = 𝑘 𝑎𝑗𝑘 ∗ 𝑟𝑒𝑓𝑜𝑟𝑚 𝑖𝑛𝑑𝑒𝑥𝑘𝑡

• where 𝑎𝑗𝑘 is the amount of inputs sourced by any industry or

sector j from services sector k, computed as a share of the

overall input use.

• (van der Marel, Doemeland, Saez 2015)

Findings

• Reforms in the services sector are positively and

significantly related to the output performance of

firms using these sectors most intensely.

• Reforms that increase competition has the

biggest impact

• The pass-through effect to downstream users is

relatively weak. Higher productivity does not

seem to translate in lower input prices.

HOW DOES

PRODUCTIVITY GROWTH

AFFECT POVERTY AND

SHARED PROSPERITY?

Approach

• MAMS

• Open economy

• SAM for 2012

• Baseline assumptions in line with ageing report

• Technology (slightly labor augmenting), decline of labor

force and strong GDP growth lead to solid wage growth,

decline in unemployment and increase in real

consumption per-capita and a decline in poverty.

• Urban households with secondary and tertiary education

gain most.

Scenarios

• Increase in world market prices of Bulgaria’s

exports to simulate an increase in the demand for

Bulgaria’s exports’

• A gradual increase TFP growth relative to the

baseline

• Return migration

• Increases in LFP rates

• Higher FDI growth

• Combination

There may be a trade off.

Distribution of

low skilled workers across sectors

Source: WB staff CGE simulations.

Productivity growth would improve

welfare and reduce poverty.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Total Less thansecondary

Tertiary eduction

Baseline TFP High Combination

Annual increase

in real household consumption 2012-

2050

02468

101214161820

Change in FGT Poverty Indicators

2015 - 2030

A combination of reforms yields the highest

benefits.

-1

0

1

2

3

4

5

6

7

8

9

2015 2019 2023 2027 2031 2035 2039 2043 2047Dif

fere

nc

e f

rom

ba

se

lin

e G

DP

an

d s

um

of

co

nsti

tute

nt

sc

en

ari

os

(in

% o

f b

as

eli

ne

GD

P)

Comb 1 Comb 2

Comb 3

Source: World Bank staff simulations.

Conclusion

Bulgaria’s productivity growth would need to accelerate to

mitigate the economic impact of its demographic change

and to converge to the EU28 income level.

Bulgaria’s economy suffers from significant inefficiencies

– reducing them could yield large productivity gains.

Investing in education, boosting integration into global

value chains and innovation and reforming Bulgaria’s

judiciary are key reforms for accelerating productivity

growth.