Monday, December 10, 2012

Standard but Poor: Understanding Northwestern Bulgaria

Standard but Poor: Understanding Northwestern Bulgaria

by Kristina Georgieva

Since August 2012, people in the Bulgarian capital, Sofia, have been riding on one of the sexiest metro lines on the Old Continent. It is fast, it is arty, it is fancy, and it is the pride and joy of the ruling party Citizens for European Development of Bulgaria. Ironically, less than 100km north, you can find a rather underdeveloped region; in fact, the poorest in the European Union - Northwestern Bulgaria.

So what does the poorest region in the European Union look like? 

The Northwestern region of Bulgaria encompasses five municipalities between the Danube river and the Balkan mountain: Vidin, Montana, Vratsa, Pleven, and Lovetch with total population of approximately 800 000 people (as of 2011). Ten years ago, it used to be around 20% more; however, due to high migration and low natural population growth, Northwestern Bulgaria has been shrinking rapidly. Its scores are in the worst possible ranges in almost all indicators presented in the Eurostat regionalyearbook 2012. The GDP and the primary income of households in the region are below 50% of the EU 27 average; it has the lowest population change and life expectancy, and to top it all off, Northwestern Bulgarians are also the least educated. In short, the situation is pretty dreary, and the forecasts for the future do not look much brighter. And these are merely the statistics behind the personal tragedies of the many people struggling and failing to make a living there.

But why so surprised?

Bulgaria joined the EU a mere five years ago, it hasn’t yet adopted the Euro, nor is it even near entering the Schengen area, and since somebody has to be the poorest in the EU, why not Northwestern Bulgaria? In fact, economic theory gives us quite a few answers to this question. To begin with, one of the borders of the Northwestern Bulgarian region is the Danube River, which should create better conditions for economic activity, as it allows cheap trade with other cities on or in proximity to the river. Considering that some of those cities are major European Capitals (Vienna, Bratislava, Budapest, and Belgrade), the economy of Northwestern Bulgaria should be benefiting largely from this major geographical asset. But it is not. It should also be benefiting from Bulgaria’s accession to the EU, which should trigger convergence, and thus rapid growth in the natural process of catching up. In fact, this growth should be even more explicit in the Northwestern region than in others, as it is on the western Bulgarian border, which should be the entry point of all new investment. But it’s not; the situation in the region has even deteriorated since the accession in 2007. Thus, it is surprising that contrary to economic logic, a region close to a major European river, in a new EU Member State, and in relative proximity to the “center” of the Single Market is not growing, but actually shrinking to the point of being the poorest in the EU.

How did this happen?

One possible explanation of why Northwestern Bulgaria’s economy is performing so poorly is its inability to adapt from making goods to making ideas – the most demanded product of our time. Similarly to the case of Detroit, Michigan, manufacturing in Northwestern Bulgaria was specialised in mass production of tangible goods: in Detroit it was cars, and in Northwestern Bulgaria: ceramics, accumulators, and automobile tires. With the sole goal of increasing production and decreasing costs on the assembly lines, firms both in Detroit and in Northwestern Bulgaria ended up creating a disincentive for innovation and an oblivious labour force. This archaic practice of cheap mass production cannot meet the consumers’ increasing demand for variety and constant quality improvement. Since it is incompatible with the changing market dynamics, Northwestern Bulgaria, like Detroit, is bound to struggle to stay above water.

But there’s more. Unlike Detroit’s economy, that of Northwestern Bulgaria did not always accommodate perfect competition or the right to private property, nor was it influenced by the forces of supply and demand. So when in 1989 the Berlin wall collapsed, so did the Bulgarian economy. It could not survive in the highly competitive capitalist market: production was no longer subsidised and became unsustainable, factories closed, unemployment shoot up, and people accustomed to working on the assembly line were incapable of running a business. While that story is the same across all of Bulgaria (and the other transition countries), the case of Northwestern Bulgaria is worse as the region was more industrialised than the others.

Still, there is light in the end of the tunnel with the recent opening of three IKEA factories, and another two – one for batteries and one for bikes. A new road bridge across the Danube is planned to open soon providing a connection between Vidin, Bulgaria and Calafat, Romania. So there is an opportunity for growth even in the poorest region, but bringing back the assembly lines and simply combating the physical distance from the market will not save Northwestern Bulgaria. If the Bulgarian politicians and policy-makers would like to achieve something more than reelection, they should shift the focus from convenient infrastructure projects to long-term investment in human capital and innovation, so that the region can adapt to the dynamic economic environment. If not, Northwestern Bulgaria will continue to reign as the “EU’s poorest” region.


The metro line in Sofia:


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