A critical assessment of the shadow economy, corruption and low labor productivity in Bulgaria

Raya Lecheva

Bulgaria should fight the gray economy, corruption and low labor productivity, said the Secretary General of the Organization for Economic Co-operation and Development (OECD) during a joint briefing with Prime Minister Galab Donev. In Bulgaria, fiscal policies are the main lever for controlling inflation, the Secretary General of the OECD also said. Matthias Korman is visiting our country on the occasion of the official presentation of the report "Economic Review of Bulgaria", prepared by the OECD.

The Bulgarian economy has performed well in recent decades, GDP growth is 2.3% and the economic forecast for growth is relatively good, but in 2023 it will be lower compared to other countries in Europe and only in 2024 we can expect recovery, Korman stressed.

Combating the gray economy and increasing labor productivity

Controlling inflation is a top priority, as well as increasing labor productivity, where there is currently a shortage of skilled labor in the communications and IT sectors, but it will continue to expand to lower-skilled labor as well. This is the estimate despite low unemployment rates of 3.5% in the first three months of 2023.

Financial system well liquid, capitalized in general, financial policy is stable, but even greater financial consolidation and sustainability are needed. 

Among the recommendations of the OECD to fight poverty. Additional measures can be taken by improving the performance of the revenue part and avoiding cases of underpayment and the shadow economy. Korman emphasized as an important step to have incentives to report lower wages, many employees report being paid under the table. Half of taxpayers are insured on the minimum wage. Hardly half of the people in Bulgaria receive the minimum wage, Korman said.

The large gray sector is related to low trust in public institutions, a multi-pillar strategy is needed, incentives to digitize transactions, to provide more information on how tax revenues are used, to improve the work of the labor inspectorate, Korman said.

A country must work to reverse the demographic trends compared to other countries, a contraction of the working-age population by 19% since 2010, and this trend will worsen. The report also highlights the higher share of youth unemployment compared to countries in Europe.

Childcare is not adequate, having a child is difficult and there must be progress in this area, only 15% of children in Bulgaria go to daycare and kindergarten, in 11% of families none of the adults work. Legislation for free kindergartens is a step in the right direction, but the quality of services in them and their number must be improved. The return of emigrants is a great source of personnel, ambitious efforts to raise children, careers, to know the Bulgarian diaspora better, reducing restrictions on the work of foreigners to overcome the demographic problem. A large percentage of people are not trying to enter the labor market, but have a higher education, 1/6 of the population receives disability benefits, which is a high level, and could return to the labor market, the findings indicate.

In the medium and long term, it is necessary to create a predictable business environment and regulations. It is necessary to control corruption, it has a heavy price, according to the findings of the report. Authorities to investigate any level of corruption, transparency and independence of authorities are important pillars in this direction.

Take more measures to retrain people for the Green Transition

35% of energy comes from nuclear power and green renewables, but coal is still heavily used. To reach the 2038 goal of phasing out coal, action must be taken, it may seem far away, but it will come now, Korman said.

Moreover, there are challenges to transform the Stara Zagora, Kyustendil, Parnik regions, retraining must be guaranteed, the land reclaimed and the people in the mining industry given the opportunity to raise their families.

The energy strategy must match the public investment strategy and match the zero-emissions roadmap, Korman added.

In response, Galab Donev commented that the state will continue to work with the OECD to ensure that it can meet all targets. In social policy, it works to provide training to increase the digital skills of the employed and unemployed. He did not directly name the gray economy, but called it informal, which somewhat shows our refusal to openly admit our problems and call them by their real names.

But recognized that undeclared work and informal economy are a challenge, effective measures are key to guarantee workers' rights, competitiveness and stability of the state. There are two strategically important topics of society - the negative trends of low birth rates and increased emigration, as well as measures for the development of human potential.

Challenges to the budget are a number of tax reductions, as well as social and unrealized investment programs. Bulgaria is experiencing obstacles to a stable fiscal position and fulfillment of the criterion of social stability, Donev said. We support a level of corruption prevention and accept recommendations, a top priority of the last few governments, he added.

The top challenges if we have to summarize are: a clear need to reverse unfavorable demographic trends, to ensure fiscal organization, to strengthen productivity, Korman emphasized once again.

The minimum wage has increased by 20%, but it is still not enough, and this depends mostly on labor productivity. Our entry into the club of the rich depends on the commitment of government and parliament, it became clear from Korman's words. Galab Donev said that the official cabinet will introduce the State Budget Law by April 30. He agreed that tax collection is very important for the stability of government finances, it has risen by 20% in the first three months of the year compared to last year. But there are difficulties related to the collection of local taxes and said that work is being done to balance financial decentralization and the collection of local taxes.

After all, it depends on the country's economic and social policy and our strong commitment whether we will join the OECD, the organization that shows the high level of welfare of the countries that are members inside.