66420
      A    WORLD         BANK   COUNTRY   STUDY




     Bulgaria:
     A Changing Poverty Profile
     Poverty Assessment




[E   T8B   O'RUlJM.NJt
Report No. 24516


Bulgaria
Poverty Assessment


October 29,2002




Human Development Sector Unit
Europe and Central Asia Region




Document of the World Bank
II                                               BULGARIA POVERTY ASSESSMENT
--~ ... --------~.--------------------------




               CURRENCY AND EQUIVALENT UNITS

                Currency Unit =Bulgarian Leva (BGN)
                         US$l = BGN 2.20
                          (on July 26,2002)
                           FISCAL YEAR
                       January 1 - December 31
                ACRONYMS AND ABBREVIATIONS
     ALMPs     Active Labor Market Programs
     ASME      Agency for Small and Medium sized Enterprises
     BIHS      Bulgarian Integrated Household Survey
     BPA       Birth Promotion Act
     CBA       Currency Board Arrangement
     CEE       Central and Eastern Europe
     CMEA      Council for Mutual Economic Assistance
     CPI       Consumer Price Index
     ECA       Europe and Central Asia
     ESGRAON   Standard Public Registry Number
     EU        European Union
     FDI       Foreign Direct Investment
     GDP       Gross Domestic Product
     GP        General Practitioner
     GMI       Guaranteed Minimum Income
     HBS       Household Budget Survey
     HH        Household
     ILO       International Labor Organization
     IDF       Institutional Development Grant
     IMF       International Monetary Fund
     IMR       Infant Mortality Rate
     ISSP      International Social Survey Program
     LFS       Labor Force Survey
     LSMS      Living Standards Measurement Survey
     MAF       Ministry of Agriculture and Forests
     MOF       Ministry of Finance
     MOLSP     Ministry of Labor and Social Policy
     NGO       Non-Governmental Organization
     NSI       National Statistical Institute
     NSII      National Social Insurance Institute
     OECD      Organization for Economic Cooperation and Development
     OSCE      Organization for Security and Cooperation in Europe
     OSI       Open Society Institute
     PIT       Personal Income Tax
     PPP       Purchasing Power Parity
     SIEP      Social Investment & Employment Project
     SME       Small and Medium Sized Enterprise
     UNDP      United Nations Development Programme
     UNICEF    United Nations Children's Fund
     VAT       Value Added Tax

                    Vice President:   Johannes F. Linn
                 Country Director:    Andrew N. Vorkink
                   Sector Director:   Annette Dixon
                  Sector Manager:     Maureen Lewis
                Task Team Leader:     Dena Ringold
Table of Contents                                                                      iii


                                    Table of Contents
Acknowledgements
Executive Summary
  A.    If'hat Happened to Poverty in Bulgaria Between 1995 and 2001?
  B.    Pockets of Poverty
  C.    Rural and Regional Poverty
  D.    Why is Unemployment so High in Bulgaria?
  E.    The Role of the Safety Nel
  F.    Non-Income Dimensions of Welfare: Education and Health
  G.    Conclusions and Policy Recommendations
Chapter 1: Poverty in Bulgaria
  A.    Background
  B.   Measuring Poverty
  C.    If'hat Happened to Poverty and Inequality in Bulgaria Between 1995 and 2001?
  D.   Pockets of Poverty
  E.    Muliivariate Analysis of Poverty
  F.   Findings and Policy Priorities
  Technical Annex
Chapter 2: Rural and Regional Poverty
  A.   Introduction
  B.   Rural Poverty
  C.   Aspects of Rural Welfare
  D.   Regional Poverty
  E.   Findings and Policy Implications
Chapter 3: Poverty and the Labor Market
  A.   Recent Labor Market Developments
  B.   Income Poverty and Labor Market Status
  C.   Non-Income Dimensions of Poverty at Work
  D.   Multiple Aspects of Vulnerability in the Labor Market
  E.   Findings and Policy Implications
Chapter 4: Why is Unemployment so High in Bulgaria?
  A.   Background
  B.   Macroeconomic Developments and the Investment Climate
  C.   Restructuring and Job Reallocation
  D.    The Regulatory Environment for Employment Growth
  E.   The Skills Gap
  F.   Findings and Policy Implications
Chapter 5: Coping with Poverty
  A.   Introduction
  B.   The Social Protection System
  C.   Unemployment Benefits
  D.   Social Assistance
  E.   Informal Coping Strategies
iv                                                          BULGARIA POVERTY ASSESSMEl'<T
          --------------,----------~-------------


     F.    Findings and Policy Implications
Chapter 6: Building Human Capital
     Education
     A.    Access to Education
     B.    Constraints to School Attendance
     C     Access and Education Reform
     D.    Findings and Policy Implications
     Health
     A.    Health Status
     B.    Barriers to Access
     C     Findings and Policy Implications
References


                                              Figures
Figure 1           Job Reallocation in the Public and Private Sectors, 2000
Figure 2           Poverty Rates With and Without Social Protection Benefits, 2001
Figure. 3          Attendance Rates by Quintile
Figure 1.1         Cumulative Density Function of Per Capita Monthly Expenses
Figure 1.2         Poverty Rates by Household Size, 2001
Figure 1.3         Poverty Rates by Age, 2001
Figure 1.4         Poverty and Educational Attainment, 2001
Figure 1.5         Poverty by Labor Market Status of the Household Head, 2001
Figure 2.1a        Urban
Figure 2.1b        Rural
Figure 2.3         Regional Development Index (28 New Regions)
Figure 3.1         Real GDP, Employment and Unemployment, 1995-2001
Figure 3.2         Unemployment Rate by Region, 2001
Figure 3.3         Employment Rates for Prime-Age Workers (25-54)
Figure 4.1         Job Reallocation in Comparison
Figure 4.2         Job Reallocation in the Public and Private Sectors, 2000
Figure 4.3         Job Reallocation by Region
Figure 4.4         Payroll Taxes in Comparison (% of salary)
Figure 5.1         Social Protection Expenditures (% of GDP)
Figure 5.2         Poverty Rates With and Without Social Protection Benefits, 2001
Figure 5.3         Coverage, Targeting and Effectiveness of Social Protection Programs
Figure 5.4         Paid Social Assistance Benefits as % of Planned (1998-2001)
Figure 5.5         Home Consumption by Quintile
Figure 6.1         Attendance Rates by Level
Figure 6.2a        Completion Rates by Ethnicity and Location: Urban
Figure 6.2b        Completion Rates by Ethnicity and Location: Rural


                                              Tables
Table 1            Poverty and Inequality Trends
                                                                                      v

Table 2      Selected Economic Indicators 1995= 100
Table 3      Poverty by Ethnicity
Table 4      Basic Health Indicators in Bulgaria
Table 1.1    Poverty and Inequality Trends
Table 1.2    Poverty Rates in Selected Countries of Central and Eastern Europe
Table 1.3    Poverty Rates Using Different Poverty Lines
Table 1.4    Sensitivity of the Poverty Rate to Changes in the Poverty Line
Table 1.5    Expenditure Budget Shares by Poor/Nonpoor Individuals
Table 1.6    Budget Shares by Expenditure Decile
Table 1.7    Housing Conditions by Location (%with access)
Table 1.8    Poverty Rates Adjusted for Economies of Scale
Table 1.9    Poverty by Ethnicity
Table 1.10   Selected Characteristics of Roma and Non-Roma Households
Table 1.11   Poverty by Main Source of Income and Location
Table 1.12   Determinants of Consumption (OLS estimates)
Table 1.13   Poverty and Inequality Based on 1994 and 2000 Seasonal Adjustment
Table 1.14   Poverty by Location, 2001
Table 2.1    Poverty in Rural and Urban Areas
Table 2.2    Decomposition of Changes in Poverty into Growth and Redistribution
             Component
Table 2.3    Wage Income by Quintile and Area
Table 2.4    Value and Distribution of Income and Transfers in Bulgaria, 2001
Table 2.5    Poverty Headcount for Adults over 15 years old, by Labor Force Status,
             2001
Table 2.6    Farms in Bulgaria, 1999/2000 estimates
Table 2.7    Selected Indicators of Regional Development, 9 old Regions
Table 2.8    Selected Indicators of Regional Development, 28 New Regions
Table A2.1   Rural Poverty Profile
Table A2.2   Reduced Form Welfare Regression
Table 3.1    Labor Force Participation, Employment and Unemployment, 1995-2001
Table 3.2    Reasons for Unemployment, 2001 (percent)
Table 3.3    Unemployment and Individual Characteristics (percent)
Table 3.4    Characteristics of Employment, 1995-2001 (percent)
Table 3.5    Mobility Rates by Type of Employment and Labor Market Status
Table 3.6    Dynamics of Absolute and Relative Minimum Wages, 1995-1999
Table 3.7    Wage Inequalities, 1995-2001
Table 3.8    Poverty Rates by Labor Market Characteristics
Table 3.9    Composition of the Poor by Labor Market Characteristics (%)
Table 3.10   Selected Non-income Measures of Job Quality among the Employed
             by Sector, around 2000
Table 3.11   Correlation Coefficients Between Various Measures of Job Quality
Table 3.12   Summary of Labor Market Outcomes and Vulnerable Groups
Table 4.1    Key Policy Developments and Job Creation
Table 4.2    Dynamics of Basic Macroeconomics Indicators 1995::;::: 100
                                                      BULGARIA POVERTY ASSESSMENT


Table 4.3    FDI Flows in Bulgaria
Table 4.4    Share of State Assets Privatized
Table 4.5    Decomposition of Employment Change (% changes)
Table 4.6    Labor Force Mobility in Composition
Table 4.7    Job Turnover by Firm Size, 2000
Table 4.8    Number of Enterprises by Size (in thousands)
Table 4.9    Job Reallocation by Industry
Table 4.10   Correlations Between Job Creation, Job Destruction and Other Indicators
             of Labor Market Conditions in 28 Districts, 2000
Table 5.1    Coverage of Social Protection Programs
Table 5.2    Poverty Levels With and Without Social Protection Benefits
Table 5.3    Effectiveness of Unemployment Benefits
Table 5.4    Benefit Incidence by (ex ante) Consumption Quintile
Table 5.5    Effectiveness of the Guaranteed Minimum Income Program
Table 5.6    Effectiveness of the Energy Benefit Program
Table 5.7    Energy Usage by Source (%)
Table 5.8    Arrears in Utility Payments, 2001
Table 5.9    Effectiveness of Child Allowances
Table 5.10   Impact of Remittances on Poverty Rates, 2001
Table 5.11   Second Jobs, by Area and Type
Table 5.12   Net Migration in Comparison (immigrants minus emigrants, thousands)
Table 5.13   Reason for an Absence at Time of Survey, % of Household members
TableA5.1    Coverage, Targeting and Adequacy for Selected Social Programs
             (ex ante)
Table 6.1    Highest Level of Education Attained, 2001 (% of population 15
             and above)
Table 6.2    Trends in Attendance Rates, (% of age group)
Table 6.3    Attendance Rates by Consumption Quintile (%)
Table 6.4    Out-of-pocket Payments for Basic Education, 2001
Table 6.5    Informal Private Expenditures in Basic Education (per year)
Table 6.6    Basic Health Indicators in Bulgaria
Table 6.7    Utilization of Health Services
Table 6.8    Reasons for not Seeking Treatment
Table 6.9    Out-of-pocket Payments for Health Care


                                    Boxes
Box 1.1      Why Do So Many Bulgarians Feel Poor?
Box 1.2      Who are the Roma?
Box 1.3      Building Poverty Monitoring Capacity in Bulgaria
Box 2.1      Bulgaria's Regions
Box 2.2      Developing a Poverty Map for Bulgaria
Box 3.1      Promoting Employment among the Roma
Box 3.2      The "Working Poor" in OECD Countries
                                                                        vii

Box 3.3   EU Accession Requirements for Labor
Box 3.4   Perceptions of Well-Being at Work
Box 3.5   Extending Social Protection to the Informal Sector
Box 3.6   ALMP's in Bulgaria
Box 4.1   How Does Enterprise Restructuring Affect Unemployment?
Box 4.2   Small Entrepreneurs Complain about the Business Environment
Box 5.1   Eligibility Criteria are Sometimes Hard to Enforce
Box 5.2   Poverty and Energy Prices
Box 6.1   School Drop-outs: The Case of Missing Children
Box 6.2   Scavenging in Rousse
Box 6.3   Desegregation of Roma Schools in Bulgaria: The Vidin Model
Box 6.4   Alternative Secondary Schools in Hungary
viii                                                      BULGARIA POVERTY ASSESSMENT



                              Acknowledgements


        This report was prepared by a team led by Dena Ringold and comprising Gero
Cadetto and Tomoki Fujii (poverty profile); Alexandre Kolev (labor markets and poverty);
Jan Rutkowski (labor market dynamics and employment creation); Cornelia Tesliuc (social
protection); David Sahn, Stephen Younger and Chad Meyerhofer (rural poverty); Moukim
Temourov (education and health); Petia Kabachieva and Ilia Iliev (qualitative study of edu-
cation); Stefan Ivanov (regional development) and Lilia Dimova (perceptions of poverty
and gender).
       Boryana Gotcheva coordinated the work in Bulgaria and provided valuable inputs
on social protection and gender. Stella Ilieva provided research assistance to the team.
Boryana Savova and Vessela Radeva Stamboliyska assisted during missions and with the
organization of the consultation workshops in Sofia.
        'The team benefited from the guidance and inputs of peer reviewers, Ana Revenga,
Mamta Murthi and Tamar Manuelyan Atinc, and Sandor Sipos, the Program Team Leader
for Bulgaria. Useful comments and substantive contributions at various stages were
received from John Innes, Henry Gordon, Dominic Haazen, Istvan Dobozi, Philippe
Egoume-Bossogo, Anna Georgieva, Ellen Hamilton, Kyle Peters, Peter Pojarski, Rosalinda
Quintanilla, Laura Tuck and Michael Mertaugh. Maureen Lewis provided feedback and
overall guidance throughout the preparation of the report. Annette Dixon supported the
team as Sector Director. Moukim Temourov provided editing and research support and
Ian Conachy prepared the document for publication .
       . The work was carried out under the direction of Andrew Vorkink, Country Director
for Bulgaria. The Country Unit and the Country Office, headed by Oscar de Bruyn Kops
provided valuable support during the preparation of the report.

         The team would like to thank the Government of Bulgaria for its cooperation, and
in particular Deputy Prime Minister Lydia Shouleva and her staff for their participation
and leadership during the consultation workshops. Useful comments on the draft report
were received from the Ministries of Finance, Economy, and Labor and Social Policy. The
team is grateful for the feedback provided by the many government officials, NGO mem-
bers, trade union representatives, academics and others who met with the team during the
preparation of the report and actively participated in the consultation workshops held in
April 2002 in Sofia.
Executive                                                                                                           ix


                                      Executive Summary


  A. What Happened to Poverty in Bulgaria Between 1995 and 2001?
          Bulgaria's economic progress in recent years has been notable. Since 1997, the
country has implemented a range of structural reforms alongside substantive fiscal and sec-
toral reforms. Measures have included the introduction of a currency board to stabilize the
lev and more aggressive privatization of large state owned enterprises. These developments
have led to a significant turnaround from the period of economic crisis in 1996-1997, which
was marked by a decline in real GDP of 18 percent and annual inflation of 579 percent in
1997. Growth resumed in 1998 and has been sustained. Bulgaria's current government,
which took office in July 2001, has affirmed its commitment to the objectives of macrosta-
bility, including a continuation of the currency board and market reforms.

        These reforms have been paying off. Living standards in Bulgaria rebounded dra-
matically since the 1997 crisis when poverty escalated to 36 percent of the population.
Poverty rates have declined since then with the recovery of consumption levels. Using
poverty lines updated from 1997, poverty fell by nearly two-thirds to 12.8 percent, and the
depth and severity of poverty have also improved (Table 1).1 Despite these improvements
since 1997, poverty remains at twice the levels of 1995. The Gini coefficient, a standard
measure of inequality, declined from 31 percent in 1997 to 29.5 percent in 2001, an increase
from 1995.
Table 1: Poverty and Inequality Trends
                                                                   1995               1997           2001
 Poverty measure
   Rate                                                            5.5                36.0           12.8
   Gap                                                             1.7                11.4           4.2
  Severity                                                         0.8                5.3            1.9

 Avg. per capita consumption
 (June 1997 leva)                                                   117,208         62,604           99,035
 Gini coefficient                                                   27.1           31.4              29.6
Sources: BIHS 1995, 1997,2001.
Noles: The "poverty rate" refers to the % of the popUlation that is helow the poverty line; "poverty gap" is the
average shortfall from the poverty line; and "poverty severity" is the average squared consumption shortfall as a
percentage of the poverty line, and is more sensitive to inequality among the poor.


        Why has poverty declined so remarkably since 1997? The improvement can be
attributed to growth and the economic recovery, which has lifted the consumption levels of

 The poverty rate used in this report is two-thirds mean 1997 per capita consumption.
x                                                                        BULGARIA POVERTY ASSESSMENT


many households following the crisis. GDP recovery has been accompanied by improve-
ments in productivity and wages, which has subsequently buoyed consumption for many
households (Table 2). Another important factor has been the social protection system, and
particularly pension benefits, which keep a significant share of the population above the
poverty line. Despite the declining poverty rates, many Bulgarians feel that their living stan-
dards have not improved dramatically. Qualitative surveys suggest that nearly three-quar-
ters of the population believe that they live in poverty.
Table 2: Selected Economic Indicators 1995 100     =
                        1996         1997        1998        1999        2000                Average
                                                                                             annual rate
                                                                                             of growth
                                                                                             (1996-2001)
                                                                                             %

GDP                     90.6        85.5        88.9         91.0        95.9        99.7    0.1
Employment              100.1       96.2        96.1        94.1         90.8        89.6    -1.8
Productivity            90.5        88.9        92.6        96.8         105.7       111.4   2.0
Wages                   81.2        67.7        81.7        87.3         88.3        90.9    -0.6
Source: National Statistical Institute and World Bank staff estimates.
Note: (*) Preliminary estimates for 2001. Productivity is defined as GDP per employee.

        A number of considerations are important in assessing the striking trends in poverty
rates since 1997. First, the magnitude of poverty was likely overestimated in the 1997
household survey data. Inflation reached a peak of 245 percent in February 1997 and
remained high through the survey period, complicating measurement of prices. The con-
sumer price index used for price adjustments may also have been overstated, and household
reporting of expenditures was also more subject to error, due to high price volatility.
Despite this potential for measurement error, consumption was undoubtedly lower in 1997
than 2001. In other words, while the overall magnitude of the decline in poverty rates since
1997 may have been less than two-thirds, there has been a notable improvement in living
standards since the crisis.

Poverty in International Comparison
         Absolute poverty in Bulgaria in 2001 is comparable to that in neighboring countries,
although it exceeds levels in the high-performing countries of Central and Eastern Europe
which have been at the front of the line for EU accession. Using the absolute poverty line
of $2.15 per day, poverty in Bulgaria was 7.9 percent, slightly higher than that of Romania
and Latvia. This is significantly higher than poverty Hungary and Poland. At a poverty
line of $4.30 per day, poverty in Bulgaria was 31.9 percent, which is comparable to condi-
tions in Ukraine in 1999 and Latvia in 1998.
Executive                                                                                   xi

                                B. Pockets of Poverty
         Despite the decline in overall poverty rates in Bulgaria since 1997, pockets of
extreme destitution persist in the country. Large rural households with young children
under 5 and low education levels are at greatest risk. Ethnicity is another clear correlate of
poverty, over 60 percent of the poor are ethnic minorities. As was the case in the 1997 pro-
file, education and labor market status are key determinants of welfare.
        Poverty in 2001 has become more concentrated among distinct and identifiable
groups within the population than in previous years. In this regard, the profile of poverty in
Bulgaria has come to resemble poverty patterns in other countries in Central and Eastern
European countries more closely. The strong link between unemployment and poverty,
and the emergence of children and households in rural areas as high poverty risk groups, as
well as ethnic minorities are features of poverty common to ED accession countries. While
the concentration of poverty among specific groups indicates that targeting interventions to
address poverty in Bulgaria will be easier, on the other hand, these pockets of chronic
poverty are more resilient and harder to reach than shallower poverty linked to transient
declines in incomes. These developments highlight the need for a long term commitment to
poverty reduction in Bulgaria which will require continuity in policy, as well as on-going
monitoring and evaluation.
        Rural Residents. One of the most striking aspects of the 2001 poverty profile is its
strong rural dimension. Poverty is not only worse in rural than urban areas, but it appears
that rural households have fallen further behind their urban counterparts over the past
decade. Rural poverty affects a large share of the population. In 2001, nearly 33 percent of
Bulgarians lived in rural areas. However, households in rural areas comprised 66 percent of
the poor. Poverty rates four times higher in rural areas, at 23.7 percent in comparison with
5.9 percent.
         Children in Large Households. Poverty in Bulgaria is concentrated among distinct
demographic groups. Children, and particularly those in rural households with many chil-
dren, are over represented among the poor. Large households of five or more members
make up almost 30 percent of the population, but represent nearly 60 percent of the poor.
Consistent with the results from previous years, and those from most other countries in the
region, most pensioners are not poor, with the exception of elderly pensioners over 75 years
old living alone, and in rural areas.
        The results on poverty and household size are very sensitive to economies of scale,
as per capita measures of poverty do not renect differences in the demographic composi-
tion of households, and the fact that children may consume less than adults. When these
differences are taken into account, poverty levels among the elderly increase, and decline
among larger households with children. However, the main finding remains unchanged.
xii                                                                BULGARIA POVERTY ASSESSMENT
      -------------------------------
Households with three or more children are at highest risk of poverty, even after taking
economies of scale into consideration.
        The Poorly Educated. Individuals with less than secondary education represent only
36 percent of the population 18 and above, but make up nearly 80 percent of the poor.
Poverty levels for individuals with no formal education are almost four times the average
poverty rate and ten times the poverty rate of individuals with a secondary school diploma.
Education also affects welfare through the labor market - as a key correlate of unemploy-
ment. The vulnerability of children in Bulgaria indicates that education contributes to a
vicious circle of poverty, as poor households with low education levels face the greatest
obstacles in sending their children to school.
        Ethnic Minorities. The differences in the level and depth of poverty across ethnic
minorities are remarkable, particularly for Roma. Roma are ten times more likely to be
poor than ethnic Bulgarians, while Turks are four times more likely to be poor than
Bulgarians. Ethnic minorities comprise over 60 percent of the poor population. Although
Roma only represent 8.8 percent of the individuals in the sample, they constitute half of the
poor (Table 3). As well as being more likely to be poor, Roma are also much poorer on
average than their non-Roma counterparts, as they alone are responsible for almost three
quarters of the poverty depth index. As is the case in other countries in the region, poverty
among poor Roma communities is multidimensional, encompassing substandard housing
conditions, low education levels, and poor health status, all compounded by social exclusion
and discrimination within society.

Table 3: Poverty by Ethnicity
                                          Rate                   Gap               Severity
                           %
                       population Percent        Share   Percent       Share   Percent   Share
Ethnic Bulgarian          82.3      5.6          39.6      1.1         25.5      0.4      18.8
Turks                      7.1     20.9          12.8      5.3         10.4      2.2      9.3
Roma                       8.8     61.8          46.5     25.9         63.4     13.6      71.7
Other                     1.8      7.6            1.2      1.2          0.6      0.2      0.2
Total                     100      11.7           100      3.6          100      1.7      100
Source: BIHS 2001.


        The Unemployed and the Working Poor. Individuals in households in which the
head is unemployed make up 15 percent of the popUlation, but nearly 40 percent of the
poor. Poverty is highest among rural unemployed. In 2001, over one-half of unemployed
adults in rural areas were poor. Poverty is also exceptionally high among the long-term
unemployed and some groups of the working poor, such as those in agriculture and infor-
mal sector employment.
Executive   ~u:mnrtar                                                                      xiii

                          C. Rural and Regional Poverty
         Poverty in Bulgaria has a significant spatial dimension. While there has been con-
siderable economic recovery in urban areas since 1997, the rural poor have not benefited
from improving living standards. This reflects the falling level of overall rural incomes, as
well as increasing inequality in rural areas since the beginning of the crisis. Related to the
rural element of poverty is the diversity of regional development in Bulgaria. Living stan-
dards across Bulgaria vary substantially, as Bulgaria's regions reflect contrasting levels of
development. In particular, there is a notable difference between the capital city, Sofia,
and the rest of the country.

         Rural welfare has been constrained by low levels of income, driven by low wages in
rural areas, high unemployment, and low levels of agricultural productivity. The factors
behind low productivity include lack of access to functioning markets, inadequate invest-
ment and constraints to land use stemming from the restitution process, a recent drought,
as well as lower levels of human capitaL Agricultural incomes are responsible for most of
the relative decline of incomes in rural areas. Between 1995 and 2001 per capita wage
income fell by 21 percent (15 percent for households receiving wages) for rural households,
pensions fell only slightly, but agricultural income declined considerably. Average net agri-
cultural income from sales and home consumption declined by more than half, from 79
leva per capita to 37 leva per capita for all rural households in the samples.

         A critical force behind the stagnation of gro\V1h in rural areas is the high level of
unemployment. While the unemployment rate nearly doubled in both urban and rural areas
between 1995 and 2001, rural unemployment has consistently remained twice as high as in
urban areas. In rural areas, only 24 percent of people older than 15 were working in 2001.
Rural unemployment is also closely linked to poverty. In 2001, 52 percent of unemployed
adults in rural areas were poor. For those who are employed, low wages in agriculture con-
tribute to poverty in rural areas, as agriculture is the lowest paid sector of the economy.
         MUltiple job-holding plays a significant role in poverty reduction in rural areas. In
urban areas, poverty is much lower for workers with one job than it is for the unemployed,
but workers who hold a second job (which can include self-employment or agricultural
activity) have a poverty rate similar to those with one job. In rural areas, however, while
poverty is lower for those with one job, the difference is not as great as in urban areas.
More importantly, the poverty rate continues to decline considerably for workers with two
jobs. Because the vast majority of second jobs are in farming for own-consumption, this
highlights the importance of subsistence agriculture for rural welfare.

        Differentials between rural and urban areas in labor markets, availability of assets,
and levels of human capital contribute to substantial variation across regions. Analysis of
different indicators of development was undertaken at the regional level to obtain a more
xiv                                                                       BULGARIA POVERTY ASSESSMENT


detailed picture of rcgional diversity. An index of regional development illustrates that the
city of Sofia is far ahead of all other regions on every dimension. 2 The differences between
the remainder of the 28 regions are much less pronounced, because of variation across indi-
cators. Varna, Bourgas, Gabrovo and Sofia region are all above the national average, while
seven regions fall at the bottom: Smolyan, Kardjali, Vidin, Targoviste, Silistra, Montana
and Razgrad. These results highlight the need for a more detailed understanding of spatial
differences in development, through the development of a poverty map. 'This will be espe-
cially important, given the anticipated in flux of EU resources for regional development in
upcoming years.

                  D. Why is Unemployment so High in Bulgaria?
         Unemployment remains one of Bulgaria's greatest challenges. At 19.5 percent in
the first quarter of 2002, unemployment in Bulgaria has been growing steadily since 1996,
and is among the highest in the region. Long-term unemployment is especially high. In
2001, 64 percent of the unemployed in Bulgaria had been out of work for more than one
year. The labor market is also characterized by low flows out of unemployment into jobs,
and a high share of discouraged workers - those workers who have given up looking for a
job and drop out of the labor force all together.
        Poverty is closely linked with income poverty, however this relationship is much
more nuanced than it might suggest. Poverty rates for some groups of the employed are
quite high, particular for workers with temporary contracts and those working in agricul-
ture. Working conditions also have an important influence on welfare, particularly for
workers in the informal sector. The groups which are at greatest risk of adverse labor mar-
ket outcomes, including unemployment, inactivity, low paid work and poor working condi-
tions are also those that emerge as most vulnerable in the poverty profile. In particular,
persons with little, or no education and Roma are at greatest risk
        The trends in poverty and unemployment appear paradoxical - why has poverty
declined since 1997, while unemployment has increased? There are a number of factors
behind these contrary developments, including: (i) use of coping strategies, including remit-
tances, informal employment and own production of food, which mitigate the income
effects of unemployment; (ii) a decline in the share of the working poor, due to real wage
recovery since the crisis; as well as (iii) the expanded coverage and adequacy of social pro-
tection benefits, which keep a significant share of the population out of poverty.

         Restructuring has led to larger flows into unemployment. The fall in employment
has reflected substantial productivity gains achieved through large scale shifts away from
old less productive jobs toward new more productive jobs. At the same time, outflows from
unemployment have been limited, due to skill and spatial mismatches, as well as labor mar-
2 The index is an unweighted eomposite of selected indicators, See Chapter 2 for further information,
Executive Summary                                                                           xv

ket rigidities stemming from the employment protection legislation. These factors com-
bined - restructuring and productivity improvements along with labor market mismatches
and rigidities - have led to the marked increase in unemployment. Accordingly, unemploy-
ment in Bulgaria seems mainly structural, and to a lesser extent demand deficient.

Job Reallocation
          Job reallocation in Bulgaria in 2000 was quite substantial as a result of the
increased pace of enterprise restructuring. Job gains in Bulgaria have been achieved main-
ly through employment expansions in continuing firms , rather than through firm entry
(business start-ups). Job losses have occurred largely in contracting firms , rather than as a
result of firm exit (closures). These two dynamics indicate that there are still significant
obstacles to the entry and exit of firms in Bulgaria. Job creation in Bulgaria is moderate,
while job destruction is high by international standards.

          The private sector is the main source of labor market dynamism in Bulgaria. Job
destruction in the public sector exceeds job creation, while the opposite is true for the pri-
vate sector, which is a net creator of jobs (Figure 1). Small firms are a key to job creation.
Job creation is much higher in small firms than in large firms. The small firm sector is
expanding and offering job opportunities, while the large firm sector is shrinking and shed-
ding labor. Business start-ups playa particularly important role in job creation. Newly
established firms created as much as 36 percent of all new jobs in 2000.

                    Figure 1: Job Reallocation in the Public and Private Sectors, 2000
             %
             30.-------------------------------------------~

             25

            20

             15

             10

              5

              o
                      Jo b creation          Job destruction   Job reallocation


Source: NSI data (2000), Bank staff calculations.


The Business Environment
         Despite the marked increase in the number of businesses in Bulgaria, there are still
xvi                                                         BULGARIA POVERTY ASSESSMENT


considerable obstacles to new entry and business growth. The legal framework is inconsis-
tent, which creates scope for arbitrary decision making and abuse. Registration and licens-
ing procedures are more difficult and lengthy than in other countries. Another constraint
to small business growth is the level of business taxation in Bulgaria, which is among the
highest in the region. The tax wedge between labor costs to employers and take home pay
amounts to 41 percent in Bulgaria.

         Relative to some of the other transition countries, regulatory barriers to labor mar-
ket flexibility in Bulgaria are modest, and are broadly in line with those in other transition
economies with relatively flexible labor markets. The Bulgarian Labor Code was amended
in March 2001 with the objective of adjusting it to the needs of a market economy and
improving labor market flexibility. Despite these changes, rigidities remain which impede
the environment for employment growth. There is room for enhanced flexibility in proce-
dures for dismissals, use of fixed-term contracts, overtime pay and wage adjustments.

The Skills Gap
         An important factor contributing to high unemployment in Bulgaria is the skills gap
and the poor ability of the unemployed to compete for new jobs. The unemployed, and
especially the long-term unemployed, have lower educational attainment and skills than the
employed. Nearly 20 percent of the unemployed cannot find a job because their skills fall
short of employer needs. Poor skills prevent a substantial share of the unemployed from
effectively competing for jobs. The unemployed in Bulgaria often lose in the competition
for new jobs to those who are already employed. The unemployed account for only 40 per-
eent of new hires, while the remainder is aecounted for by persons who change jobs (40
percent), and new entrants to the labor market (20 percent). The skills gap points to a sub-
stantial gap in the quality of the education system, which is failing to produce workers able
to function in a market environment.

                          E. The Role of the Safety Net
        Bulgaria's social protection system plays a substantial role in keeping many house-
holds out of poverty (Figure 2). In comparison with other countries in the region Bulgaria's
system is effective and well targeted. Indeed, the system has become more pro-poor over
time and is partly responsible for the reduction in poverty rates which has occurred since
1997. Although it is not explicitly designed to address poverty, the pension system keeps
many pensioners above the poverty line. In the absence of pension benefits, the poverty
rate would be over twice as high. Social assistance and unemployment benefits also pro-
vide important relief for those households which receive them, but have a much lower
aggregate impact on the poverty rate. In addition to these formal, public programs, infor-
mal coping strategies, including remittances, migration, working mUltiple jobs and own pro-
duction of food provide important sources of income for those households which use them.
Executive                                                                                     xvii

             Figure 2: Poverty Rates With and Without Social Protection Benefits, 2001


            Without all benefits



               With all benefits



          Without non-pension
                      benefits

             With non-pension
                      benefits


                                   o   5   10       15       20       25       30        35
Source: BIHS 200 L



Social Assistance Benefits
        Social assistance programs are designed to be a safety net for the poorest house-
holds. The effectiveness of Bulgaria's social assistance programs in rcaching and addressing
the needs of the poor has improved over the decade. In particular, the two main cash ben-
efit programs, the Guaranteed Minimum Income (GMI) and energy benefit programs,
have high incidence among the poor. In 2001 the 'extended GMI' program-encompassing
cash and in-kind benefits-channeled 68 percent of resources to the poorest 20 percent of
the population, while 53 percent of the energy benefit went to the bottom quintile.
         However, despite these achievements, there is scope for further improvements to
the effectiveness of social assistance in Bulgaria. Coverage of the benefits among the poor
is low because of weaknesses in intergovernmental financing arrangements. Less than 30
percent of poor households reeeive the GMI benefit, and for those who do receive it, bene-
fits are frequently paid irregularly or in-kind. In 2001, only 16 percent of GMI beneficiaries
received regular cash benefits, 11 percent received one-time cash benefits, and the remain-
der received benefits in-kind, as food, or clothing.

         Intergovernmental financing arrangements limit the capacity of municipalities to
provide benefits, and particularly for the poorest municipalities which generally have the
greatest need. Responsibility for finaneing social assistance benefits is currently shared
equally between the state and municipal budgets. Beginning in 1999, the Ministry of
Finance incorporated earmarked funding for social assistance programs into the system of
intergovernmental transfers to municipalities. This financing arrangement covers the main
social assistance programs, including the GMJ, energy benefit and ehild allowances. While
this has improved coverage, many municipalities continue to have difficulty in mobilizing
their share.
xviii                                                       BULGARIA POVERTY ASSESSMENT
                          ~~---~~~--------




        The payment of benefits in-kind is linked to local budget constraints. When munic-
ipal social assistance offices lack resources to pay benefits, they revert to paying benefits
infrequently, or in the form of goods. In-kind benefits are in general less effective than
cash, because they distort consumption and reduce welfare. They are also frequently - as
reported by beneficiaries - provided in the form of inferior goods (e.g. low quality canned
goods), and can generate secondary markets if beneficiaries sell or trade the goods. These
benefits also represent an inefficient subsidy to the canned food industry. In-kind benefits
should be eliminated in favor of the cash GMI benefit.
         There is also scope for refining the targeting of benefits to reach the remainder of
poor households and to reduce leakage. Over 70 percent of individuals in poor households
live in a household that does not receive benefits through the GMI program. Reasons for
weak targeting may be related to the eligibility criteria in the Social Assistance Law, chal-
lenges social workers face in enforcing these criteria, as well as administrative capacity.

Child Allowances
        Given the high level of poverty among households with many children, social assis-
tance benefits targeted to children can playa potentially important role. Under the current
system, child allowances have high coverage in the popUlation. However, the current
scheme is poorly designed to have a real impact on child welfare as benefit levels are too
low to reduce poverty. The level of the child allowance has been frozen in real terms, at 8.6
leva per child per month, since May 1997. Even for poor households, the child benefit
amounted to less than 10 percent of pre-consumption household income.
         In 2002, the Parliament adopted a new Law on Family Benefits which aims to
improve the adequacy of child benefits and target them to poor households. Under the
new Law, the benefit level is doubled to 15 leva per child, and benefits are to be income
tested, such that only households with income under 150 leva per capita per month would
receive benefits. The proposed change to the benefit level is too low to have a significant
impact on the poverty rate, and the income threshold is too high to effectively concentrate
the program on poor families. Under the new law, 1.15 million children are expected to
receive child allowances, a decrease of 50,000. However, the new law would cover children
who are currently not receiving the benefit, so the reduction in the number of beneficiaries
would be greater. The increased child allowance will contribute to a modest reduction in
poverty among households with two or more children, but will have no impact on the con-
sumption distribution of families with one child.

        F. Non-Income Dimensions of Welfare: Education and Health
      According to official data, Bulgaria is on track to meet the Millennium
Development Goal target for education in 2015. Enrollments in education are close to 100
Executive Summary                                                                          xix

percent and infant mortality is declining toward OEeD levels. However, a closer look
reveals that under the surface, the picture is not as positive. Gaps in access to both educa -
tion and health services are real, particularly for vulnerable groups, including the poor, and
especially those in rural areas and among ethnic minorities.

Education
         Despite the rosy picture provided by the administrative data, attendance rates from
the survey raise concern, particularly for preschool and secondary education, which have
both declined below 1995 levels. Between 1995 and 1997, attendance in preschool educa-
tion fell sharply from 44 to 14 percent. Attendance rates for Turks and Roma are consis-
tently lower than for ethnic Bulgarians across education levels, however the magnitude of
the difference is much higher for Roma. These developments are notable, particularly given
the overall demographic decline in Bulgaria and the higher fertility among Roma and
Turks. The relative share of these minority groups among the school age population will
increase in coming years. Secondary enrollments for Roma remain in the single digits, at
six percent, in comparison with a national level of 46 percent. Attendance rates are
increasingly correlated with income (Figure 3). Most disturbing, the large income differen-
tials have been growing over time - particularly for basic and secondary education.
                            Figure 3: Attendance Rates by Quintile

          100.-------------------------------------

           80

           60
                                                                           • Preschool

                                                                           • Basic
           40
                                                                           ~Secondary

           20

            o
                              2             3             4          5
                                   Consumption Quintile

Source: BIHS ZOOt

        Gaps in access exist along a number of dimensions. A qualitative study commis-
sioned for this report found that in some cases children do not attend school at all, while in
other cases children drop out of school, or are enrolled but do not attend. Despite percep-
tions that non-attendance is an ethnic phenomenon, specific to Roma, the study found that
many ethnic Bulgarian children do not go to school, as well as Turks and Pomaks
(Bulgarian Muslims). However, some of the constraints do vary across ethnic groups. The
main factors keeping children out of school relate to economic circumstances, demand and
xx                                                                  BULGARIA POVERTY ASSESSMENT


motivation of parents and students, and specific issues facing ethnic minorities such as lan-
guage, and social exclusion in the case of Roma.
         The costs of education to households in Bulgaria are significant. These costs can be
both direct, in the form of payments for school materials, or indirect, as opportunity costs to
households, if children are needed to participate in housework or other activities. For poor
families, the costs of education can be a critical deterrent to participation in education. The
case studies highlighted the multidimensional relationships between education and poverty.
Low income on its own is not always sufficient to keep children out of school. Rather
poverty is interlinked with exclusion and marginalization, which combine to affect atten-
dance. The study found high levels of non-attendance and dropouts among some of the
most geographically remote communities. In many cases, poor children who were unable to
attend school were those with the most difficult family circumstances, including those who
are victims of domestic violence, alcoholism and abuse, and those with parents in jail.

Health
         Health indicators in Bulgaria have stagnated, and in some cases have worsened,
during the transition period (Table 2). Life expectancy at birth has declined over the past
decade, while it has increased in most other countries in Central and Eastern Europe.
Although infant mortality has fallen slightly over the transition in 1998, the decline in infant
mortality has been less than for other countries in the region. Increasing incidence of cer-
tain infectious diseases, particularly tuberculosis and hepatitis is of particular concern as it
suggests failures in public health efforts.

Table 4: Basic Health Indicators in Bulgaria
                             1990      1995        1996      1997          1998   1999   2000

Infant Mortality
(per 1,000 live births)    14.8     14.8         15.6        17.5          14.4   14.6   13.3
Maternal Mortality Rate
(per 100,000 live births) 20.9      19.5         19.4        18.7          15.3   23.5
Tuberculosis Incidence
(new cases per 100,000)   25.9      40.5        37.2        41.3           49.9   45.5
Poli,o Immunization Rate  99.7      96.8         95.4       95.9           96.5   97.2   94.4
Hospital Beds (per 1,000) 10.3      10.6         10.7        10.4          8.6     7.8   7.4
Source: UNICEF-IRC, TransMONEE database; Ministry of Health of Bulgaria.


       While little is known about the extent to which trends in health status have had an
impact on the poor, analysis has indicated that ethnic minorities, especially Roma, are
more susceptible to health problems stemming from overcrowding, lack of sanitation and
substandard housing conditions in settlements. Reports of outbreaks of communicable dis-
Executive                                                                                  XXI


eases, including hepatitis, polio, diphtheria and tuberculosis in Roma neighborhoods are
not uncommon.

        There is also evidence that poor households face barriers to accessing health care,
because of the prevalence of formal and informal out-of-pocket payments. Gaps in health
insurance coverage for uninsured groups are also a problem, particularly in poor municipal-
ities which lack resources to pay contributions on their behalf. As is the case with educa-
tion, Roma are more likely to fall through the cracks of the health system than other
groups, because of lack of necessary identification and registration papers, and poor com-
munication with health providers which is compounded by social exclusion.

                G. Conclusions and Policy Recommendations
        Ine sharp reduction in poverty since the 1997 crisis highlights the role of effective
economic stabilization policies and the social safety net in improving the living conditions
of the population. The nature of poverty in Bulgaria has changed since 1997, when poverty
for many households was a transient phenomenon resulting from the immediate shock of
hyperint1ation and sharply increasing unemployment. Poverty in 2001 is more entrenched,
concentrated among clearly defined groups. Most strikingly, poverty is highest among cth-
nic minorities, which comprise 60 percent of the poor. Roma are over represented among
this group. Ibis trend highlights the need for Bulgaria's poverty reduction strategy to focus
on measures to address inclusion of ethnic minorities within society.

        Despite the improvements since 1997, there are indications of underlying fault lines
which threaten the trend of rising living standards. In particular, if the high level of unem-
ployment is maintained, or continues to increase, poverty will go up. While unemployed
households have managed to stay out of poverty by relying on the safety net and private
coping strategies, the close link between poverty and unemployment indicates that {hese
trends are not sustainable. Similarly, the importance of the skills gap suggests that declin-
ing access to education will contribute to poverty over the long-term.
        The priority for the Government is to maintain its reform path and sustain the
growth levels of the past five years. A combination of policies which address the underly-
ing causes of unemployment, expand opportunities through building human capital, and
protect the poor through well targeted programs are the pillars of an effective anti-poverty
strategy. Improvements in poverty monitoring and communication with the public are also
key. Despite the improvements in living conditions since 1997, opinion surveys indicate
that nearly three-quarters of the population think that they live in poverty. Addressing
these perceptions and expectations is critical to maintain public trust in government institu-
tions and the reform process.
xxii                                                        BULGARIA POVERTY ASSESSMENT
~-------------~--~---~----~--------------




Reducing Unemployment
         Addressing severe unemployment remains one of Bulgaria's most pressing chal-
lenges. In the first place, policies to reduce unemployment and strengthen the environment
for employment growth, are critical. Another central policy issue is mitigating the impact
of adverse labor market outcomes on vulnerable groups, including unemployment and poor
working conditions. Many of the measures needed to improve labor market performance
lie outside of the labor market, including structural reforms within the economy as a whole.
Bulgaria has made considerable progress in regaining macroeconomic stability, as well as
restructuring and closing non-functioning state owned enterprises (SOEs) and banks, and
privatizing non-infrastructure SOEs.

         Bulgaria's on-going reform agenda includes measures which will - in addition to
maintaining macrostability contribute to employment growth, including: (i) sustaining struc-
tural reforms in the enterprise sector with emphasis on the restructuring of the energy, rail-
way, telecommunications, and water sectors; (ii) strengthening market institutions, focusing
on entry and exit policies, regulatory costs, delivery of public services, competition, and
judicial reform; (iii) deepening the financial sector, addressing the constraints to increased
lending by the banking system and the deVelopment of financial markets; (iv) improving
governance, including implementing the anti-corruption strategy, strengthening local gov-
ernments, and reforming core public administration; and (v) investing in human capital and
strengthening social programs, focusing on education, health, and pension reforms and social
assistance effectiveness.
        Improving the business environment. Small private firms are the engine of growth in
Bulgaria's economy. Existing barriers to entry and constraints to growth of existing firms
should be removed to encourage the development of the new, more productive sector of
the economy. Improving conditions for business entry should involve (i) easing require-
ments and reducing licensing and permit procedures to a minimum; (ii) reducing the tax
burden, including labor taxes, to foster both labor supply and demand. These measures
together will lower costs of moving from the informal to the formal sector and reduce infor-
mal sector employment.

        Increasing labor market flexibility. Reforms should be based on three principles:
(i) deregulation of labor relations through changes to the Labor Code; (ii) devolution of
the responsibility for determining the labor relations to social partners, which entails ade-
quate and genuine representation of employers and employees in social dialogue, and (iii)
decentralization of collective bargaining by strengthening firm level bargaining.
       Enhancing employment opportunities for Roma. Because of the extreme nature of
unemployment among some Roma communities, specific measures can be tailored to
enhance their employment opportunities. In particular, specific attention is needed to
Executive                                                                                xxiii

address the additional barriers of lower education status, geographic isolation and discrimi-
nation. Improving access to credit is an important aspect of increasing opportunities for
Roma and other low income groups to engage in entrepreneurial activity. Providing anti-
discrimination legislation and provisions for appeals is another important element.
Mechanisms should be put into place at the local and regional level to monitor compliance
with anti-discrimination legislation and provide job seekers with an opportunity to appeal
violations.

Expanding Opportunities through Education
         Addressing the skills gap. The importance of the skills mismatch in Bulgaria points
to the role of the educational and training systems in addressing the problem of low, nar-
row and inadequate skills. While the training system can sometimes address the problem of
inadequate skills at the margin, the overall educational system needs to playa much more
fundamental role in producing trainable, rather than trained, workers. That is, workers who
are first of all capable of permanent learning, and are able to acquire new skills in response
to ever changing job requirements. Thus, building human capital should be perceived as a
central component of an effective employment policy.
        Improving the database. A major impediment to addressing gaps in access to edu-
cation in Bulgaria is the lack of reliable information on school attendance which comple-
ments the broader enrollment rate. Education officials simply lack accurate information on
how many children are there are. In most cases it is the poorest and most marginalized
children who are missed in the data. Improving the information base will require dose
coordination at the local level between local government officials, municipal social assis-
tance offices and the police.
        Overcoming economic barriers to school attendance. Measures to help poor house-
holds overcome the costs of education are critical for facilitating attendance. An important
step in this regard is to make preschool attendance affordable for all children by waiving
fees for low income households. For compulsory education, a number of the approaches
introduced at the local level could be scaled up nation-wide, including making receipt of
social benefits contingent on school attendance, and providing cash and in-kind support for
school materials to low income families.
        Identifying at risk children. The relationship between poverty and attendance is a
complex one. In many cases extreme poverty is linked with adverse household circum-
stances, including family dissolution, if one or more parents travel abroad for work, alco-
holism and even abuse. Children in these circumstances are at risk of falling through the
cracks and losing contact with schools and other institutions which can provide support,
such as municipal social assistance offices. School counselors and social workers have a
potentially critical role to play in providing support to these children. The recently passed
xxiv                                                         BULGARIA POVERTY ASSESSMENT


Child Protection Act establishes the institutional framework for reaching children at risk.

        Improving education for Roma. The wide gaps in educational attainment and
enrollments for the Roma population highlight the need for focused interventions to
address the needs of this particular group. At the policy level a number of measures can be
undertaken including: (i) addressing the language constraint for Roma who do not speak
Bulgarian at home; (Ii) teacher training to prepare teachers for work in a multicultural envi-
ronment; (iii) supporting Roma teachers assistants; (iv) facilitating secondary school atten-
dance by providing support to prevent students from dropping out; and (v) reducing the
prevalence of segregation into "Roma schools" and classrooms.

Protecting the Poor
        Addressing rural poverty: Policy priorities to address rural poverty cannot be limited
to specific interventions in rural areas, rather they are linked to cross-cutting issues dis-
cussed throughout this report, including improving the environment for employment
growth, building human capital and strengthening the safety net. In each of these areas
attention needs to be paid to ensure that rural areas are not left behind. For example, that
investment reaches rural areas, that children in rural areas are able to attend school and
that rural households receive child allowances.

        Specific priorities for addressing rural poverty include, exploring opportunities for
increasing off-farm employment. The high level of rural unemployment and low agricultural
wages highlight the need for greater access to off-farm employment opportunities in rural
areas. The specific conditions in rural areas need to be considered in the design of active
labor market measures, and opportunities for developing and targeting small and medium
sized enterprises in rural areas need to be identified. A further priority is improving the
information base on rural poverty to assess the linkages between agricultural policy and
poverty. In particular, access to land needs further analysis to assess the extent to which
transaction costs in land markets limit access. Future household surveys need to be
designed in order to capture these issues.

          Strengthening the safety net. The Guaranteed Minimum Income (GMI) program is
Bulgaria's main cash transfer mechanism for low income households. While the program is
an effective mechanism for reaching the poor, it can be further improved through: (i) cen-
tralizing financing or strengthening local government finances to ensure that all municipali-
ties, including the poorest, are able to pay benefits to all eligible households; (ii) reducing
payment of benefits in-kind; and (iii) further strengthening the admir,istration for benefit
delivery. This can be done by better training of social workers to identify poor households;
improving information systems to facilitate means-testing and reduce payment of duplica-
tive benefits; and expanding communication activities to inform beneficiaries about eligibil-
ity criteria and application procedures.
Executive                                                                                    xxv

        Reaching poor children. Because of the high level of child poverty in Bulgaria, child
allowances are a potentially critical instrument. However, the current program is ill-suited
to address poverty. Under the new Law on Family Benefits, passed in 2002, benefits
remain too low to have a real impact on poverty. The Government faces a number of
options to maximize the impact of these resources on poor households with children includ-
ing: (i) expanding coverage to poor households currently not covered by child allowances;
(ii) lowering the eligibility threshold to provide higher benefits to fewer children; and (ii)
eliminating child allowances while increasing coverage and raising benefits for households
with children under the GMI program.
        Addressing the gender pay gap. While the labor force participation of women in
Bulgaria is high, there is a significant gender pay gap. Given the higher poverty rates of
some single female headed households, this is an important issue. In order to develop an
appropriate policy approach, further analysis of this phenomenon is needed to determine
the extent to which this gap is due to differences in the characteristics of the workers them-
selves, and that which is due to differences in job characteristics. Effective monitoring and
implementation of existing regulations on gender pay equity is an important first step.
        Improving working conditions. Attacking the non-income dimensions of poverty in
the workplace remains an important challenge in Bulgaria. Despite the transposition of
most EU requirements in the labor area into Bulgarian legislation, implementation remains
the challenge. A large gap exists in practice, and the real level of workers' protection is far
below what is stipulated in the Labor Code. Measures to further the improvement of work-
ing conditions can include encouraging the formalization of employment through a reduc-
tion in social security contributions and taxation; simplifying registration of firms; facilitat-
ing dismissal procedures, and easing use of temporary contracts; and raising awareness
among informal employers on the links between working conditions and productivity.
        Ensuring health insurance coverage for the non-working population. The current sys-
tem of financing contributions for the unemployed and poor through municipal budgets is
not financially viable for the poorest municipalities. Alongside measures to strengthen the
system of intergovernmental finance in Bulgaria, measures should be introduced to ensure
coverage for vulnerable groups. Possibilities include shifting responsibility for payments to
general revenue, or providing earmarked transfers to municipalities to cover contributions.

       Preparing for upcoming price shocks. Prices for electricity and district heating will
increase over the near term. This will have a disproportionate impact on poor households.
The current energy benefit program is a useful mechanism for reaching the poor, however
careful analysis of the proposed tariff adjustment for energy is needed to ensure that bene-
fit levels are adequate to cover the price increase, and that coverage is extended to all
households in need of the benefit. For electricity, the introduction of life-line pricing,
                                                             BULGARIA POVERTY ASSESSMENT


which subsidizes a basic level of consumption, is another possibility.

Monitoring Poverty
        Building capacity for poverty monitoring. Bulgaria's existing statistical instruments
are ill-suited for comprehensive analysis of poverty. Regular, quality information is not
available for shaping or evaluating policies. In this regard, the current initiative of the gov-
ernment to revamp its household budget survey and introduce regular living standard sur-
veys is well-timed. In particular, this survey should include improved coverage of rural
poverty and the connections between agricultural policy and poverty. The next Bulgaria
Poverty Assessment should be based upon a survey implemented by the government, using
a nationally recognized and accepted poverty line. The high level of intra-regional differen-
tials in development also underscores the importance of developing a poverty map for
Bulgaria which will allow for the estimation of reliable local level estimates of poverty.
        Communicating with the public. The disconnect between the population'S subjective
assessments of welfare and the objective measures analyzed in this report suggest that bet-
ter and more regular communication by the government on the nature, objectives and
progress of reforms would mitigate high expectations among the popUlation and provide
people with a more realistic understanding of Bulgaria's reform path and achievements.
                                                                                                           1


                         Chapter 1: Poverty in Bulgaria3

                                            A. Background
         Bulgaria's economic progress in recent years has been notable. Since 1997, the
country has implemented a range of structural reforms alongside substantive fiscal and sec-
toral reforms. Measures have included the introduction of a currency board to stabilize the
lev, and more aggressive privatization of large state owned enterprises. These develop-
ments have led to a significant turnaround from the period of economic crisis in 1996-1997)
which was marked by a decline in real GDP of 18 percent and annual inflation of 579 per-
cent in 1997. Growth resumed in 1998 and has been sustained. Bulgaria's current govcrn-
ment, which took office in July 2001 has affirmed its commitment to the objectives of
macrostability, including a continuation of the currency board and market reforms.

         These developments have put Bulgaria on a stable reform path headed toward EU
accession. However, despite these dramatic changes in the macroeconomic context, there
has been limited analysis of its impact on the welfare status of the population since 1997.
The last World Bank poverty study for Bulgaria, based upon a 1997 household survey, iden-
tified approximately 36 percent of the population (about 3 million people) as poor and liv-
ing under a poverty line of two-thirds mean per capita income. 4 The objectives of this
poverty assessment are to provide the government and the World Bank with an updated
picture of the extent and characteristics of poverty in the country and to identify policy
strategies for poverty reduction. 5

                                      B. Measuring Poverty
        Poverty is a multidimensional phenomenon that goes well beyond a narrow lack of
material consumption or resources. As defined in the World Bank's 2000/2001 World
Development Report, Attacking Poverty, poverty encompasses many other aspects of depri-
vation, including the psychological pain of being poor, a sense of vulnerability to external
events, and powerlessness towards the institutions of the state and society (World Bank,
2001). Ibis report draws on multiple information sources to assess these different aspects
of poverty and welfare. This first chapter presents a profile of poverty in Bulgaria using
quantitative measures of consumption. Further chapters flesh out the picture through fur-
ther analysis of some of the non-income dimensions of welfare, including links between
3 This chapter draws from the background paper, "An Update on Poverty in Bulgaria:' by Gero Carletto and
Tomoki Fujii.
4 "Bulgaria: Poverty During the Transition," Report No. 18411.
5 This report complements the recent public expenditure review: "Bulgaria: Public Expenditure issues and
Directions for Reform: A Public Expenditure and Institutional Review." Report No. 23979-BUL.
2                                                                          BULGARIA POVERTY AsSESSMENT
------------~----------------~-------------


labor market status and welfare and access to public services including education and
health.

Data
         Living standards are assessed using a measure of per capita consumption, based
upon reported household expenditures on food and non-food items, including own con-
sumption. Consumption measures of welfare are preferable to income for a number of
reasons. Particularly in economies with high levels of informal sector activity, such as
Bulgaria, underreporting can be notable. Secondly, consumption tends to fluctuate less
than income as a result of seasonal shifts and shocks, and thus provides a better picture of
living standards over a longer time period. Finally, individuals may be reluctant to report
income from informal activities in surveys for fear of having to pay taxes and other obliga-
tions. 6

        The main data source for this report is the 2001 Bulgaria Integrated Household
Survey (BIHS) conducted by the Gallup survey organization. The 2001 BIHS is the third
such survey since 1995. The first BIHS was conducted in 1995 on a sample of approxi-
mately 2,500 households. The second round was conducted in 1997 using the 1995 sample,
including a panel of 2,048 households. In 2001 the panel was abandoned and a new cross
section was drawn. This was because of the high level of expected attrition, due to the large
time lag from the last survey and the high level of internal and external migration since
1997. The 2001 sample was constructed using the same stratified two-stage cluster design
adopted in 1995. The sample was drawn by the National Statistical Institute (NSl) from the
pre-census listing of the 2001 Population Census.

Poverty Lines
        Poverty measurement is based upon a poverty line - under which the population is
defined as being "poor." There are many types of poverty lines, and the line selected ulti-
mately depends on the objectives of the analysis. Absolute poverty lines are anchored to a
minimum standard of living which is typically based on a basket of food items, plus an
allowance for basic non-food necessities. The advantage of an absolute poverty line is that
welfare changes can be monitored against a fixed threshold. Relative poverty lines are gen-
erally set as a share of median or mean consumption and define poverty in relation to a
national average welfare standard. Subjective measures of poverty are being increasingly
used to take into account respondents' perception of their living standards. In addition to
these measures, the World Bank uses two absolute poverty lines for comparisons across
countries: US$2.15 purchasing power parity (PPP) per capita per day; and US$4.30 PPP
per capita per day.
~                          -~----~---~.~~--




6 See Carletto and Fujii, 2002 for details on the construction of the consumption aggregate.
            1                                                                                                        3

        Different poverty measures are used throughout this report. However, the main
line used is two-thirds of 1997 average per capita consumption, deflated to 2001 prices. This (

                                              -
line amounted to 61.5 leva, or about US$ 2.76 per person per day. This line was selected to
allow for direct comparison with the poverty rates in the last World Bank Poverty
Assessment for Bulgaria, which was published in 1999 and was based upon the 1997 BIHS
survey.? Although the poverty line is based upon a 1997 relative poverty line (two-thirds of
average per capita consumption in 1997), in practice it functions as an absolute poverty line
in 2001, as it is fixed in real terms. The 1997 line was also adjusted backwards to 1995
prices to allow for comparison with the 1995 BIHS data. A lower poverty line, based on
one-half of 1997 average per capita consumption is used for analysis of severe poverty. As
discussed below, the poverty trend over time is maintained, regardless of the poverty line.

          c. What Happened to Poverty and Inequality in Bulgaria
                                      Between 1995 and 2001?
        Living standards in Bulgaria have rebounded dramatically since the 1997 crisis
when poverty escalated to 36 percent of the population. Poverty rates have declined since
then, as consumption levels have recovered from the crisis. Using the poverty lines updated
from 1997, poverty fell by nearly two-thirds to 12.8 percent, and the depth and severity of
poverty have also improved (Table 1.1). Despite these improvements since 1997, poverty
remains at twice the levels of 1995.
          Inequality has fallen relative to 1997. The Gini coefficient in 2001 is 29.6, lower than
Table 1.1: Poverty and Inequality Trends8
                                                     1995                     1997                     2001
Poverty measure                               High          Low        High          Low        High          Low
 Rate                                          5.5           2.9       36.0          20.2       12.8           7.5
  Gap                                          1.7          0.9        11.4           5.9        4.2           2.2
 Severity                                      0.8           0.4        5.3          2.7         1.9          0.9

A vg. per capita consumption
(June 1997 leva)                                  117,208                   62,604                   99,035
Gini coefficient                                   27.1                      31.4                     29.6
Sources: BIHS 1995, 1997,2001.
Notes: The "poverty rate" refers to the % of the population that is helow the poverty line; "poverty gap" is the
average shortfall from the poverty line; and" poverty severity" is the average squared consumption shortfall as a
percentage of the poverty line, and is more sensitive to inequality among the poor (see Ravallion, 1993 for details).

 "Bulgaria: Poverty During the Transition," Report No. 18411.
8 Data in Tahle 1.1 are hased upon price adjusted data using seasonal adjustment factors from the 2000
Household Budget Survey. The remainder of the analysis in this study is hased upon the 1994 adjustment factors.
The differences are minimal and are discussed in the Annex to this chapter. Tahles 1.2, 1.3, and 1.4 use data
adjusted with the 2000 HBS.
4                                                             BULGARIA POVERTY AsSESSMENT


it was in 1997, at 31.4, but higher than in 1995, at 27.1. Other measures of inequality illus-
trate similar dynamics. The 90/10 ratio, which measures the ratio between the consumption
level of the poorest individuals in the bottom decile, and the level of the richest people in the
tpo decile was 4.1 in 2001, up from 3.9 in 1995. Consumption-based inequality is higher in
rural areas than in urban areas. In 2001 the Gini coefficient in rural areas was 33, in com-
parison with 27 in urban areas. These inequality measures are comparable, or lower than in
other Central and Eastern European countries. In 1997 the consumption-based Gini mea-
sure was 28 in Hungary and Slovenia. While in Poland it was 34 and 47 in Russia.
         A number of considerations are important in assessing these striking trends in
poverty rates since 1997. First, the magnitude of poverty was likely overestimated in the
1997 household survey data. Inflation reached a peak of 245 percent in February 1997 and
remained high through the survey period, complicating measurement of prices. The con-
sumer price index used for price adjustments may also have been overstated, and household
reporting of expenditures was also more subject to error, due to high price volatility.
Despite this potential for measurement error, consumption was undoubtedly lower in 1997
than it was in 2001. In other words, while the overall magnitude of the decline in poverty
rates since 1997 may have been less than two-thirds, there has been a notable improvement
in living standards since the crisis.
        Second, improvements in welfare since 1997, have not been distributed evenly
across the population. Poverty rates have declined less for some groups than others. For
example, while urban areas experienced a more significant drop in poverty levels, from 33.5
to 5.9 percent, poverty rates were less than halved in rural areas, declining from 41.2 to 23.7
percent. Similarly, poverty rates for other high risk groups, including individuals with low
education levels and ethnic minorities have fallen less than for the popUlation as a whole.
This indicates the persistence of "pockets of poverty" which have not benefited from the
economic recovery. The nature of these pockets are discussed in Section D of this chapter.

Poverty in International Comparison

        The World Bank uses two absolute poverty lines for comparisons across countries:
US$2.15 purchasing power parity (PPP) per capita per day and US$4.30 PPP per capita per
day. These lines allow comparisons of real values across countries. The $2.15 line is gener-
ally used in poorer countries, while the $4.30 line provides a more meaningful comparison
for middle income countries, such as Bulgaria.

        Absolute poverty in Bulgaria in 2001 is comparable to that in neighboring countries,
although it exceeds levels in the high-performing countries of Central and Eastern Europe
which have been at the front of the line for EU accession (Table 1.2). Using the absolute
poverty line of $2.15 per day, poverty in Bulgaria was 7.9 percent, slightly higher than that
of Romania and Latvia. This is significantly higher than poverty in the high performing
                                                                                                                   5

countries in Central and Eastern Europe such as Hungary and Poland. At a poverty line of
$4.30 per day, poverty in Bulgaria was 31.9 percent, which is comparable to conditions in
Ukraine in 1999 and Latvia in 1998.
Table 1.2: Poverty Rates in Selected Countries of Central and Eastern Europe
Country                      Survey Year                        ------~--~------------
                                                   at $2.15 ppp/day         at $4.30 ppp/day
Bulgaria                          1995                     3.1                     18.2
Bulgaria                         2001                      7.9                    31.9
Romania                           1998                     6.8                     44.5
Latvia                            1998                     6.6                     34.8
Ukraine                           1999                      3                     29.4
Hungary                           1997                     1.3                     15.4
Poland                           1998                      1.2                     18.4
Source: Making Transition Work for Everyone, World Bank, 2000. BIHS 1995, 2001.

         Comparing Poverty Lines. The drop in poverty between the 1997 ~nd 2001 surveys
is striking. The trend holds, regardless of which poverty line is chosen for the analysis.
This is illustrated by the downward shift of the cumulative density function, which shows
the change in consumption across the survey years (Figure 1.1).9 Consumption in 2001 is

               Figure 1.1: Cumulative Density Function of Per Capita Monthly Expenditures
                                           (1995, 1997, 2001)


          09

          08

     Il. 01
     :J
     !    06
      t
     ... 0 S
     Z
     iE   04
     0
     U 03

          02

          01

           0
                     l5                    4.S                        H           6    6.S
                                                 LotI of hr Co...... ''''''''-'




Source: BIHS 1995, 1997, 2001.
Note: The cumulative density (CDF) function shows, on the y-axis, the share of the population below a given level
of per capita expenditures (on the x-axis). Curves that are higher show greater poverty, because a larger share of
the popUlation falls below any expenditure level.

  The cumulative density function shows, on the y-axis, the share of the population below a given level of per capi-
ta expenditures (on the x-axis). Curves that are higher show greater poverty, because a larger share of the popula-
tion falls below any given expenditure level.
6                                                                          BULGARIA POVERTY ASSESSMENT


higher for all segments of the population, relative to 1997, but remains consistently above
the 1995 line. The figure illustrates that for every poverty line selected on the x-axis, the
curve for 2001 remains below 1997, but above 1995.
        Although Bulgaria does not currently have an official poverty line, a number of
lines are currently used in the country for different purposes. The Guaranteed Minimum
Income (GMI) threshold and Minimum Social Pension in 2001 were set at leva 37.4 and
leva 40, respectively. These levels are somewhat comparable to the lower poverty line, set
at leva 46.1. It should be noted that these are benefit eligibility lines, driven by budgetary
considerations and do not ref1ect suitable consumption needs. Table 1.3 shows several
poverty lines and corresponding poverty rates for comparison.

Table 1.3:                                                Lines
                                                                                Level        Poverty rate
                                                                             (2001 leva)
                                                                                                 ----------
Guaranteed Minimum Income(*)                                                    37.4              4.9
Minimum Social Pension (**)                                                      43               6.6
Lower poverty line (based on 1/2 median consumption in 1997)                    46.1              7.5
$2.15 PPP line                                                                  47.9              7.9
Higher poverty line (based on 2/3 mean consumption in 1997)                     61.5             12.8
2001 relative line (112 median consumption)                                     62.9             12.6
2001 relative line (2/3 median eonsumption)                                     83.8             22.2
$4.30 PPP line                                                                  95.8             31.9
Source: BIHS 2001.
Notes: (') latest available figure is 2000. Based on past trends, assumed that no adjustment to the level has been
made in 2001.
('.) latest available figure is leva 40 at 2000. Assuming a CPI deflator of 1.066, the 2001 level is assumed to be
leva 43.


Sensitivity to the Poverty Line
        Poverty in 2001 is shallower than it was in 1997. This is reflected in the poverty
depth figures in Table 1.4 which illustrate the average distance of households from the
poverty line. In other words, in 2001 consumption of poor households was, on average, 4.2
percent below the poverty line. This is down from a peak of 11.4 percent in 1997, but high-
er than 1.7 in 1995. There are also a large number of households clustered close to the
poverty line in 2001. Raising the poverty line by 10 percent would increase the share of
poor individuals in poverty by over 20 percent.

        Table 1.4 shows the results of a simple simulation in which different poverty lines
are shifted both upwards and downwards by small percentages. This illustrates how many
individuals move in and out of poverty as a result. In the middle column (in bold) are the
original poverty rates based on each of the poverty lines. The left column shows a decline
         1                                                                                       7

in the poverty line by 5 and 10 percent, while the right column assumes an increase in the
lines of the same magnitude.

Table 1.4: Sensitivity of the Poverty Rate to Changes in the Poverty Line
                                             Poverty Rate
                                PL PL+5%PL+IO%               PL-IO%PL-5%
-"~"~"   -------------------------------
2001 Poverty Line (2/3 mean 1997 per capita consumption)    10.7   11.8     12.8   14.5   16.1
2001 relative line (112 median consumption)                 10.4   11.2     12.6   13.9   15.2
2001 relative line (2/3 median consumption)                 18.1   20.3     22.2   24.3   26.9
US$2.15 PPP per person per day                              6.5    7.3       7.9    9.3    9.8
US$4.30 PPP per person per day                              25.4   28.5     31.9   35.8   39.4
Source: BIHS 2001.

         This analysis illustrates that, although poverty rates based upon both absolute and
relative poverty measures are considerably lower in 2001 than they were in 1997, a signifi-
cant share of the population lives close to the poverty line and is vulnerable to shocks.
Both a negative welfare shock, equivalent to an increase in the poverty line, and a positive
shock, equivalent to a downward shift of the poverty line, would produce greater than pro-
portional changes in poverty. Negative shocks would have the largest impact, as more indi-
viduals are concentrated right above the poverty lines than below. This underscores the
importance of on-going monitoring of poverty and living standards to assess the impact of
economic developments and specific policy changes on the population.
                                                                              BULGARIA POVERTY ASSESSMENT



                                       Box 1.1: Wby Do So Many Bulgarians FecI Poor?

            One of the most striking things about the results from the 2001 household survey is their stark con-
  trast with the sentiments among the Bulgarian population. Many Bulgarians feci that their living standards
  have not improved notably since 1997. Existing surveys of Bulgarian's perceptions of their well-being show
  that not only does a large share of the population feel poor, but that the proportion of Bulgarians in this group
  has increased since 1989.

              For example, based on a nationally represented survey conducted in 2001 by the Agency for Social
  Analysis, 73 percent of the popUlation said they were poor, in contrast with 26 percent in 198910 In addition,
  63 percent of men and women surveyed noted that their living standards were 'worse' or 'much worse' than in
  November 1989. Perceptions have also declined since 19<)7. Thc share of the population which categorized
  itself as "poor" or "rather poor" increased from 63 percent in 19<)7, to 73 percent in 200 I.

            Why is there such a large disconnect between these subjective assessments and the objective mea-
  sures analyzed in this report? There are a number of possible explanations. Subjective assessments reflect a
  broader conception of welfare than the income poverty measured by the BIHS. Perceptions are also shaped
  by higher expectations and a greater availability of goods which households may not be able to afford.

              In many cases perceptions about welfare status over the transition period may reflect an increased
  sense of vulnerability and insecurity following the collapse of central planning. ""'bile prices and wages were
  artificially supported during the socialist period, and employment was guaranteed regardless of productivity
  concerns, the restructuring process has eroded this false sense of security. Since then, unemployment has
  emerged as a widespread phenomenon and consumption levels have remained below pre-transition levels.

          The sense of selective nostalgia for the past is reflected in many recent qualitative studies. These
 sentiments are most readily expressed by those on fixed incomes, such as pensioners and the unemployed.

            Life was much easier before. We all used to have regular incomes. It was not like now when we stay       at
 home alld do /lot meet other people. Maybe it is because of the lack of mOlley.I have challged a lot sillce 1989.
 311 year old single mother, employee, small town.

         It has /lever been worse than now. And I think that it could /lot be worse. Even my gran dllUJtiJ er cannot
 remember worse times. - 48 year old unemployed woman, small town.

            My parents had a house. car, regular income when I was born. I do no! have any of this. They probably
 lived beller, more secure. Bur on the other hand they were worse off hecause they were not free to take risks, to
 improve themselves. - Young married woman, town.

           The comparison of poverty levels between 1997 and 200 I has little resonance within the popUlation.
 While most Bulgarians accept that their living conditions have improved since the aberrant crisis year of 19<)7,
 for most the relevant benchmark for comparison is the outset of the transition period in 1<)89. While eompara-
 ble data from earlier years are not available, the BIHS surveys show that average consumption in 2001
 remained 16 percent lower than it was in 1995.

            Perceptions of well-being are important and may be retlectcd in levels of political participation and
 trust in institutions, voting patterns and other areas of social and political life. The gulf between perceptions
 and reality in Bulgaria suggests that people lack information with which to gauge and understand their circum-
 stances. Improved information, including regular monitoring of poverty and living standards would be an
 important mechanism for improving the availability and quality of information on the welfare of the country.
 Similarly, better and more regular communication hy the government on the nature, objectives and progress of
 reforms would mitigate high expectations among the popUlation and provide people with a more realistic
 understanding of Bulgaria's reform path.

         Agency for Social Analyses.


to "Poor" refers to those ranking themselves at 4 and 5 on a 5-point scale.
           1                                                                                 9


Consumption Patterns
         Household consumption patterns in 2001 differ markedly from the previous survey
years. In particular, the share of resources spent on food has declined notably, particularly
for non-poor households. The decline in the food share reflects the growth in overall con-
sumption levels since 1997, as well as increasing prices of non-food items, particularly utili-
ty costs associated with housing. In 2001, individuals spent, on average, slightly less than 50
percent of their resources on food items. This is in comparison with 70 percent in 1997 and

Table 1.5: Expenditure Budget Shares by Poor/Nonpoor Individuals
Item                                            Non-Poor           Poor           Total
Food                                              46.9             62.1           48.7
   Cereals                                         7.7             21.3            9.3
   Fruits & Vegetables                             14.3            20.5            15.0
   Meat & Diary                                    18.6            13.3            18.0
   Fats & Sugars                                   2.6             4.9             2.9
   Other Food                                      3.7              2.0            3.5
NonFood Items                                     23.3             16.2           22.5
   Alcohol                                         2.1              1.5            2.0
   Tobacco                                         2.8              4.0            2.9
   Personal Items                                  3.6              2.1            3.4
   Cleaning                                        1.6              2.6            1.7
   Gasoline                                        2.0              0.7            1.8
   Other transport                                 3.0              1.3            2.8
   Clothing                                        2.9              1.6            2.8
   Health                                          2.8             2.1             2.7
   Entertainment                                   2.0             0.4             1.8
   Insurance                                       0.2             0.0             0.2
   Other nonfood                                   0.4             0.1             0.3
Housing                                           27.0             19.0           26.1
   Central Heating                                 1.6             0.3             1.4
   Electricity                                     7.7             6.4             7.6
   Gas                                             0.6             0.1             0.6
   Other Energy                                    6.9             4.6             6.7
   Water                                           2.7             3.8             2.8
   Fees                                            1.9             1.5             1.9
   Telephone                                       4.8             2.2             4.5
   Other Housing expenditures                      0.7             0.1             0.7
Education                                          2.8             2.8             2.8

Total                                               100            100             100
Number of Cases                                    6472            854            7326
Source: BlHS 2001.
 10                                                                      BULGARlA POVERTY ASSESSMENT


61.5 in 1995. 11 Expenditures on housing nearly doubled between 1995 and 2001 - from 12.7
percent to 26.1 percent. The share of household budgets spent on education also rose,
from 1.6 in 1995 to 2.8 in 2001, as a result of increasing formal and informal out-of-pocket
payments for education. 12
        Consumption patterns differ significantly between the poor and non-poor (Table
1.5). In comparison with better-off individuals, the poor allocated 62 percent to food, in
contrast with 47 percent for the non-poor. The poor also consume more staples and a
smaller share of expensive products such as meat and dairy products. Conversely, the share
of non-food expenditures is also higher for the non-poor, who spend more on items such as
entertainment, personal items, gasoline and transportation. On average, Bulgarians spend
more than one quarter of their budget on housing and utilities, with significant differences
between the poor and non-poor (27 versus 19 percent, respectively).
         A closer look at budget shares by deciles in Table 1.6 illustrates the decline in food
budget shares as one moves up in the income ladder. The higher than average food shares
are mostly concentrated among the lowest decile, while the food share of the eight middle
deciles is otherwise close to the average. Individuals in the richest decile spend close to 60
percent of their income on non-food items and housing, in comparison with only 30 per-
cent among those in the lowest decile.
Table 1.6: Budget Shares by Expenditure Decile
                                                          Deciles                                       Total
                           1       2       3       4      5       6       7       8       9       10
Food                     67.5    51.7     52.2    47.9   49.3   48.6    46.8     45.4    44.7    38.8    48.7
Non-Food                 14.9    18.8     17.3    20.5   20.4   22.4    24.1     26.0    27.0    30.4    22.5
Housing                  15.4    26.4     27.8    29.1   27.5   26.3    26.3     25.2    25.5    28.5    26.1
Education                 2.2     3.2      2.7    2.5    2.9     2.7     2.8     3.4     2.8      2.3     2.8
Total                     100     100      100    100    100     100     100     100     100     100     100
Source: BIHS 2001.


Housing
         Access to basic services like clean drinking water and sanitation have a direct
impact on household welfare and health status, and can be suitable indicators of well being
in their own right. Table 1.7 compares poor and non-poor individuals by location in rela-
tion to their access to basic services and some other non-monetary measures of living stan-
dards. Access to basic services and housing characteristics are strongly correlated with
location, as well as to living standards. Differences in access to improved sanitary facilities
are large across regions, as well as between poor and non-poor. Only one individual in 10
] 1 Similar patterns have been found in other transition economies: based on the longitudinal study of income and
expenditures, food shares in the Russian Federation in 2000 were only 69% of its 1995 levels.
12 This will be discussed further in Chapter 6.
              ]                                                                                      11


Table ].7:                Conditions
                                                     Other Urban        Rural        Total
                                  l2Qr    NonPoor   l2Qr    NonPoor fuQr NonPoor Poor NonPoor
        Type of Toilet
Flush Toilet                       88.0    97.6     45.2      85.4   13.Y    23.7    26.6    69.9
Pit Latrines                       12.0     2.4     54.8      14.6   86.7    76.3    73.4    30.1
Other                              0.0      0.0      0.0      0.0     0.0     0.0     0.0     0.0
                          Total   100.0    100.0    100.0    100.0   100.0   ]00.0   100.0   100.0
            Electricity
0-23 hrs/day                       10.0     0.8      1.7      2.1     3.9     3.0     3.6     2.2
23+ hrs/day                        90.0    99.2     98.3     97.9    96.1    97.0    96.4    97.8
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
                  Water
0-23 hrs/day                       0.0      1.8     15.5     11.0    10.6     5.8    11.4     8.1
23+ hrs/day                       100.0    98.2     84.5     89.0    89.4    94.2    88.6    91.9
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
              Cooking
Electricity                       90.0     93.1     69.5     68.4    13.5    33.6    33.6    62.4
Gas Cylinder/Natural              0.0      6.3      0.8      19.0    0.0      6. J    0.2    13.4
Coal/Kerosene/Wood                 10.0     0.6     29.7     12.6    86.6    60.3    66.2    24.2
                  Total           100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
              Heating
District Heating                  32.0     72.0      2.9      7.1     0.0     0.0     2.7    15.1
Electric Heating                   4.0     14.4     34.7     39.0     1.2     3.6    10.8    25.2
Wood/Coal Fire                    64.0     13.3     61.5     51.9    98.8    96.1    86.3    58.4
Oil                                0.0      0.0      0.8      1.0     0.0     0.3     0.2     0.6
Gas                                0.0      0.4      0.0      1.1     0.0     0.1     0.0     0.7
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
              Sewage
Public Sewage                     86.0     95.0     55.7     87.3     7.1    26.7    25.3    71.4
Septic tank                       14.0     5.0      44.4     12.7    92.9    73.3    74.7    28.6
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
                  Phone
Available                         58.0     84.4     38.1     86.7    23.4    70.4    29.5    81.7
Not Available                     42.0     15.6     61.9     13.3    76.6    29.6    70.5    18.3
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
            Crowding
0-1 persons/room                   0.0     11.0      5.0     19.7     6.0    33.8    5.4     22.3
1-2 persons/room                  82.0     62.5     36.4     55.4    37.4    51.4    39.7    55.4
2+ persons/room                   18.0     26.6     58.6     25.0    56.6    14.8    54.9    22.3
                          Total   100.0    100.0    100.0    100.0   100.0   100.0   100.0   100.0
Number of Cases                    50      1002     239      3646    565     1824    854     6472
Source: BIHS 2001.
12                                                           BULGARIA POVERTY ASSESSMENT


among the rural poor has access to a flush toilet, compared with nearly 100 percent among
the nonpoor living in Sofia. Access to public sewage follows a similar pattern.
        As expected, the poor rely more on energy sources like coal and wood for both
cooking and heating. The percentages are even higher among the rural poor, with virtually
everyone in this group relying on these sources for heating and 9 out of 10 for cooking.
Access to district heating is concentrated among nonpoor living in Sofia (72%). Even in
urban areas, the use of other sources like coal and kerosene is very common among the
poor. The use of electric heating is highest among individuals living in urban areas other
than Sofia (35% and 39%, respectively, for poor and nonpoor). Use of natural gas for
heating is very limited, with only one tenth of nonpoor individuals relying on this source,
and virtually no poor households doing so.

                                D. Pockets of Poverty
        Despite the decline in overall poverty rates in Bulgaria since 1997, pockets of
extreme destitution persist in the country. Large rural households with young children
under 5 and low education levels are at greatest risk. Ethnicity is another clear correlate of
poverty, over 60 percent of the poor arc ethnic minorities. Roma households are especially
at risk of poverty. Even when controlling for all other socio-demographic factors, Roma
households are still likely to consume only two-thirds of that of non-Roma households. As
was the case in the 1997 profile, education and labor market status are key determinants of
welfare, Regardless of the indicator selected, poverty is markedly higher in rural areas.
The specific issue of poverty in rural areas is addressed in the next chapter.
        Poverty in 2001 has become more concentrated among distinct and identifiable
groups within the population than in previous years. In this regard, the profile of poverty in
Bulgaria has come to resemble poverty patterns in other countries in Central and Eastern
European countries more closely. The strong link between unemployment and poverty,
and the emergence of children and households in rural areas as high poverty risk groups, as
well as ethnic minorities, in some cases, are features of poverty common to all EU acces-
sion countries. This section discusses these correlates of poverty and identifies those groups
in the popUlation that are at greatest risk of falling into poverty. Throughout the discussion,
poverty is defined using the poverty line of two thirds of average ] 997 per capita consump-
tion deflated at 2001 prices.

Demographics
       Poverty in Bulgaria is concentrated among distinct demographic groups. Age and
household size are important factors. Children, and particularly those in rural households
which have many children, are over represented among the poor. This contrasts with the
conventional wisdom in the country, which holds that pensioners are at greatest risk of
Chapter 1                                                                                              13

poverty. Consistent with the results from previous years, and those from most oth er coun-
tries in the region, most pensioners are not poor, with the exception of elde rly pensioners
over 75 years old living alone and in rural areas .

              Household Size. Average household size in Bulgaria is 2. 9 persons. Large house-
holds of five or more members make up almost 30 percent of the population, but represent
nearly 60 percent of the poor. The poverty rate among large households is 24 percent,
almost double the national level and four times the rates exhibited by smaller households of
three or fewer members (Figure 1.2). These households are also the most destitute among
the poor, as reflected in very high poverty shares in both depth and severity indexes (68.3
percent and 74.5 percent, respectively). These higher than average rates are almost entirely
concentrated among larger rural households. The poverty rates for large households in
Sofia is 9.6 percent, while it was 39 percent in rural areas. The population living in these
households makes up nearly 30 percent of the total population, and over 63 percent of the
rural population.

              Age.   Poverty in Bulgaria is concentrated a mong young people (Figure l.3) .
Although children aged 10 and under represent only 10 percent of the population , they
comprise almost 20 percent of the poor. Severe poverty is widespre ad among both children
and teenagers (age 18 and under) who bear almost 40 percent of the poverty share based
on the severity index. The poverty rate among individuals over 55 was 7.3 percent, below
the national average . In urban areas, poverty rates for this group was 4 percent. Among
the poor, on average, older people fare better than their younger counterparts, highlighting
the role of pensions in protecting the incomes of pen sioners. The poverty rates among
rural children is staggering. Half of all children under five in rural areas lives below the
poverty line. Poverty rates are lowest among 18-45 year-old adults living in Sofia.

                            Figure 1.2: Poverty Rates by Household Size, 2001
      45.0
      40.0
      35.0                                                                                  .Sofia

 v    30.0                                                                                  .Other U
:;;
~     25 .0                                                                                 • Rural
Q
 <;
 >    20. 0                                                                                 DTotal
0':
      15. 0
      10.0
       5.0
       0.0
                                  2               3              4              5 or more
                                            Household Size
Source: BIHS 200 1.
14                                                                           BULGARIA POVERTY ASSESSMENT


                                     Figure 1.3: Poverty Rates by Age, 200 1
      60,-------- -------------------------------- -- -- ------------ -- - - ,

      50
                                                                                                       !II Sofia

      40                                                                                               .Other Urba


      30

      20

      10

       o
           less than 5   5-10 yrs   11-17 yrs   18-25 yrs    26-45 yrs   45-55 yrs   56-65 yrs   66-75 yrs    above 75

Source: BIHS 2001.




        Some pensioners are poor. In particular, elderly pensioners, over 75 years old liv-
ing in rural areas have poverty rates over the national level - at 16 percent. There are no
strong gender differences by age and poverty. Poverty rates for elderly female headed
households are less than one percent higher than for male headed households.

         Economies of Scale. The findings that children are the main poverty risk group are
sensitive to the method of analysis. So far, this report has used per capita measures of wel-
fare, assuming that each household member consumes the same amount of resources. This
assumption is misleading, as it does not reflect differences in the demographic composition
of households, and the fact that children may consume less than adults. In order to test the
robustness of the findings, equivalence scales were used to adjust for differences in the
needs of households of different size and composition. 13

           As expected, the demographic profile of poverty is quite sensitive to the assumption
of economies of scale. Table 1.8 shows the changes in poverty rates across a range. Theta
(9) is a parameter which adjusts consumption for economies of scale. A higher value for
theta implies reduced economies of scale, and 1 is equal to the per capita measure. Elderly
households appear less poor under the per capita assumption than younger households with
children. Increasing economies of scale raise poverty levels among the elderly, and reduce
them among larger households with children. Female-headed households become poorer
at increasing economies of scale as a result of a negative correlation between the type of
household and household size, since female-headed households are generally smaller.
However, irrespective of the sizeable drop in rates among larger households with children,

13 For a discussion of the methodology refer    to   Carletto and Fujii, 2002 and World Bank 2000, Making Transition
Work for Everyone, Appendix A.
           1                                                                                                        15


Table 1.8: Poverty Rates Adjusted for Economies of Scale
                                                       e                                         o EeD-measures·
Economies of Scale             0.5     0.6    0.7      0.75    0.8      0.9          l(per       OLD       NEW



Elderly Households
(all age 65+)                  41.8    36.3   31.3     28.8    25.6     20.7         16.9       27.1      34.8
Female-headed
Households                     29      27.6   26.5     25.4    23.7     21.6        20.2        23.5      27

Households with
no children                    20.8    19.4 18.3       17.3    16.3     15.1        13.4        17.5      19.9
1 Child                        13.7    14.9 15.4       15.6    16.7     17.3        19.4        15.5      14.3
2 Children                     17.1    19.4 20.6       21.1    22.1     23.2        24.2        20.6      18.4
3+ Children                    50.4    50.4 53.5       60.4    61.6     66.7        68.3        61.6      52.3

Children                        21.4 22.7 23.7 25.1 26                    27.2        28.3        24.4     21.7
Elderly (age 65 + )             31.7 28.6 25.5           23.9 22.1        19.3        16.6        23       27.7
Source: BIHS 2001.
Notes: 111e poverty line for this simulation is the bottom quintile of the population, to allow for comparisons of the
different equivalence scales. (·)The older OECD equivalence scale is N =O.3+0.7·adults+O.5·children.
Currently, OECD uses a scale with stronger economies of scale: N=O.5+0.5·adults+O.3*children.



the main finding is unchanged. Households with three or more children are at highest risk
of poverty, even after taking economies of scale into consideration.

Education
        The results highlight a strong link between poverty and educational attainment.
The overall education level of the popUlation is moderately high. Household heads have an
average of 11.8 years of education. However, this figure masks substantial differences
among population groups. Heads of poor households have on average only 7.6 years of
schooling, in comparison with more than 12 years among their better-off counterparts.

        Individuals with less than secondary education represent only 36 percent of the
population 18 and older, but make up nearly 80 percent of the poor (Figure 1.4). They are
also marginally poorer. Poverty levels for individuals with no formal education are almost
four times the average poverty rate and ten times the poverty rate of individuals with a sec-
ondary school diploma. University education provides the best deterrent against poverty -
poverty rates for individuals with any type of post-secondary education are less than two
percent. Poverty rates are highest among younger, less educated individuals. Almost two
thirds of those in the age group 18-21 with primary education or less are poor.
16                                                                               BULGARIA POVERTY ASSESSMENT


                            Figure 1.4: Poverty and Educational Attainment, 2001
        40

        3S
        30

  v     2S
 :0
 '-
 »
 t::    20                                                                                                    • % of populatin
 v
 >
 0
 p..                                                                                                         • poverty rate
        15

        10

         S
         0
             Basic school   Secondary    Secondary       Secondary           University      Other post-
               or less       general      technical      vocational                          secondary
                                                                                             vocational

Source: BIHS 2001.



             As with the other aspects of the profile, the discrepancies in educational attainment
between poor and non-poor individuals are more pronounced in rural areas: 80 percent of
individuals in Sofia and 70 percent of individuals in other urban areas have a secondary
diploma, while only 15 percent of the rural poor have a secondary diploma. This under-
scores the importance of expanding educational opportunities in rural areas .

Ethnicity

             Poverty in Bulgaria has a significant ethnic dimension. The differences in the level
and depth of poverty across ethnic minorities are remarkable, particularly for Roma.                                          A
Roma individual is ten times more likely to be poor than an ethnic Bulgarian, while poverty
rates for Bulgarian Turks are four times higher than for ethnic Bulgarians. Although Roma
only represent 8.8 percent of the individuals in the sample, they constitute half of the poor.
As well as being more likely to be poor, Roma are also much poorer on average than their
non-Roma counterparts, as they alone are responsible for almost three quarters of the

Table 1.9: Poverty by Ethnicity
                                                              Rate                     Gap                 Severity
N=7326                           % population         Percent        Share    Percent Share Percent                Share
Ethnic Bulgarian                        82.3            5.6          39.6        1.1         25.5      0.4            18.8
Turks                                   7.1            20.9          12.8        5.3         10.4      2.2            9.3
Roma                                    8.8            61.8          46.5       25.9         63.4     13.6            71.7
Other                                   1.8            7.6            1.2        1.2         0.6       0.2            0.2
Total                                   100            11.7           100        3.6         100       1.7            100
Source: BIHS 2001.
          1                                                                                                     17


                                               Box 1.2: Who are tbe Roma?

            Roma, or 'gypsies,' are a unique minority in Europe, Unlike other groups, Roma have no historical
             and are found in nearly all countries in Europe and Central Asia, Current estimates suggest that
            7 and <} million Roma live throughout Europe, making them the largest minority in Europe.
 Historical records indicate that Roma migrated from northern India into Europe in waves between the ninth
 and fourteenth centuries. While some Roma groups are nomadic, the vast majority of Roma in Bulgaria are
 settled, some during the Austro-Hungarian and Ottoman empires, and others more recently under socialism,
            According to preliminary data from the 2001 census, 4,6 percent of the Bulgarian popUlation is
 Rama a total of 365,797, However, these figures are thought to be considerably underestimated. Census data
 are limited in their ability to estimate the size of the Roma popUlation, because they rely on self-reporting, A
 large share of Roma in Bulgaria are thought to respond as Bulgarians or Turks. Unofficial estimates by local
 governments and Roma leaders suggest that the size of the Roma population is closer to 8 to 10 percent of the
 popUlation.
            Throughout Central and Eastern Europe, Roma have emerged as the most prominent poverty risk
 group. As indicated in the BIHS, poverty rates for Roma are strikingly high, \Vhy are Roma so much poorer
 than other groups? In many respects Roma are caught in a vicious circle of impoverishment. Their unfavor-
 able starting point at the outset of the transition period - with low education levels and overrepresentation
 among low-skilled jobs - led to disadvantages on the labour market. Compounded by discrimination and low
 expectations of employers, Roma have had more difficulty re-entering the job market than other groups.
 Poverty in many Roma settlements is related to substandard housing conditions, including a lack of basic
 infrastructure and sanitation facilities, and poor health status (Revenga, et aI., 2002),
            Additional barriers, including a lack of access to credit and property ownership, combined with an
 over-dependence on social benefits create a poverty trap and precludes many Roma from improving their liv-
 ing conditions, or starting their own businesses. Persistent disadvantages in education, including low school
 attendance and overrepresentation in special schools intended for the mentally and physically disabled, which
 limit future opportunities, create a high probability that without policy interventions the next generation of
 Roma will continue to remain in poverty. These issues are common to Roma living in other countries in the
 region (Ringold, 2000),


poverty depth index.
        Roma households were oversampled in the 2001 survey to allow for a more rigor-
ous examination of their characteristics. The results show significant gaps in the welfare of
the Roma and non-Roma populations across multiple dimensions. Regardless of the vari-
able, the differences between Roma and the rest of the population, including the other
minorities, is striking, and highlights the multidimensionality of Roma poverty and the need
for innovative and multifaceted policy approaches.
         Roma households are younger and larger than non-Rama households. In Rama
households the head is 12.5 years younger than non-Roma, and household size is 5 persons,
in comparison with 3 among non-Roma. Roma household heads are also less educated,
with over 80 percent not reaching secondary school, in comparison with 35 percent in non-
Roma households. Differences in access to basic services are also evident, with four Roma
households in five lacking access to modern toilets, and only one household in four with
access to public sewage. Only one Roma household in ten has access to a telephone. Less
than one-third of Roma households use upgraded cooking facilities, such as electric or gas
stoves, in comparison with three quarters among non-Roma households. Three out of four
18                                                              BULGARIA
                                                   ---------------------POVERTY AsSESSMENT
Table 1.10: Selected Characteristics of Roma and Non-Roma Households
                                                    Non-Roma        Roma                                  Total
Number of Observations                                 2367           266                                 2633
Household Size                                          2.8           4.5                                  2.9
Educational attainment HH head (%)
   No education                                         1.0          10.2                                  1.9
   Primary                                              6.7          20.3                                  8.1
   Middle                                              27.2          52.6                                 29.8
   Secondary                                           45.5          16.2                                 42.6
   University and higher                               19.6           0.8                                 17.7
Age of Household Head (years)                          55.1          42.6                                 53.8
Rural (%)                                              30.5          58.7                                 33.3
Electricity> 23 hours/day (%)                          98.1          94.4                                 97.7
Water >23 hours/day (%)                                91.7          89.1                                 91.4
Type of Toilet (%)
   Flush Toilet                                        69.0          16.5                                 63.7
   Pit Latrine                                         31.0          83.5                                 36.3
Main Source of Energy for Cooking (%)
   Electricity                                         62.3          27.1                                 58.7
   Gas cylindersiNatural Gas                           12.0           0.0                                 10.8
   Coal!KeroseneiWood                                  25.7          72.9                                 30.5
~ain Source of Energy for Heating (%)
   District Heating                                    15.8           0.8                                 14.2
   Electric Heating                                    26.5           4.1                                 24.2
   Wood/Coal Fire                                      56.3          95.1                                 60.2
   Oil                                                  0.8           0.0                                  0.7
   Gas cylinders/Natural Gas                            0.6           0.0                                 0.6
Sewerage (%)
   Public Sewerage                                     70.1          25.6                                  65.6
   Septic Tank                                         30.0          74.4                                 34.5
Telephone connection (%)                               78.8          12.4                                  72.1
Average Household Consumption (leva)                  416.8         306.3                                 405.6
Average Per capita Consumption (leva)                 147.6          67.9                                 135.5
Source: BIHS 2001.

Roma households are still using coal or wood for cooking, and virtually aU households use
coal and wood for heating.

Poverty and Income
       In addition to the consumption aggregate, the 2001 BIHS also allows for the esti-
mation of welfare based on income and the analysis of income by source. Despite con-

14 The two aggregates are moderately correlated, with a Spearman correlation coefficient equal to 0.45.
           1                                                                                               19

cerns that income would be underreported, the average per capita income and consumption
figures are comparable. Average per capita income was estimated at 127.8 leva, about 9
percent lower than estimated per capita consumption.1 4 Income was computed as the sum
of income from wages, self-employment, agriculture, pensions, remittances, social benefits
and real estate. Social benefits include survivor and disability pensions, unemployment
benefits, maternity benefits, child allowances and all other cash and in-kind social insur-
ance transfers.

        As with consumption, the income measure yields considerable differences between
rural and urban areas. Average per capita income in rural areas is less than 60 percent of
average income of urban individuals. 15 The composition of income also differs substantially
between urban and rural area, with a heavier reliance on wage income in urban areas and
on agriculture and social assistance in rural areas. The income-based Gini coefficient is
also significantly higher than the consumption-based index, measuring 48 in 2001, up from
41 in 1995.
Table 1.11:               Main Source of Income and Location
                                                                           Total      %of      poverty
Main Income Source*
                                        Sofia Other Urban Rural                     population share
Poverty rates
    Earned Income                        4.8         3.8       16.6          6.6       51.7        29.3
      Agriculture                                    0.0       12.8          7.8        5.3         3.5
         Pension                         5.1         5.8       16.6         10.3        19.5        17.2
    Social Benefits                      2.4        29.2       64.4         45.6       10.6        41.3
         Mixed                           4.4         3.7       13.9         7.8        13.0         8.7
                         Total           4.8         6.2       23.7         11.7       100.0       100.0
Poverty gap
    Earned Income                        0.5         1.0       4.7           1.6       51.7        23.7
      Agriculture                                   0.0         2.9          1.7        5.3        2.6
         Pension                         0.4         1.0        3.8         2.1         19.5       11.6
    Social Benefits                      0.8        10.6       27.4         18.6        10.6       54.9
      Mixed                              0.4        0.6        4.2          2.0         13.0        7.2
                         Total           0.5         1.7       8.0          3,6        100.0
Poverty depth
    Earned Income                        0.1         0.3        2.3         0,7        51.7        20.9
      Agriculture                                    0.0        1.1         0.7         5.3         2.2
         Pension                         0.0         0.3        1.2         0.7        19.5         7.7
    Social Benefits                      0.3         5.3       14.6         9.8        10.6        62.3
      Mixed                              0.1         0.2        2.0         0.9        13.0         6.8
                         Total           0.1         0.7        3.9         1.7       100,0        100,0
Number of Cases                         1052        3885         2389       7326
Source: BIHS 2001,
Notes: (*) Main income source is defined as the income source from which the household derives 50% or more of
its income.
20                                                                           BULGARIA POVERTY ASSESSMENT


          Poverty is lowest among wage earners, while people relying on social benefits as
their main source of income are four times more likely to be poor than the national aver-
age (Table 1.11). Although they only make up one tenth of the population, those relying on
social assistance represent more than 40 percent of the poor and are responsible for almost
two-thirds of the poverty share, using the severity index. Rural pensioners are more likely
to be poor than their urban counterparts, with rates as much as five times higher (16.3 per-
cent vs. 3.1 percent in Sofia). Poverty is highest among people in larger households relying
on social assistance as primary source of income, with two thirds of people in this group
falling below the poverty line.

          Social protection benefits in general have become an important source of income
for many households. In 2001, over 80 percent of Bulgarians received at least one type of
benefit. These benefits keep many from fal1ing into poverty and have played a role in the
overall reduction of poverty since 1997. In the absence of social protection benefits, the
poverty rate would be 18 percentage points higher. This will be discussed further in
Chapter 5.

       Labor Market Status. These findings underscore the close connection between
labor market status and poverty (Figure 1.5). Individuals in households in which the head
is unemployed make up 15 percent of the population but nearly 40 percent of the poor.
Poverty is highest among rural unemployed. In rural areas, even households with an
employed head still exhibit poverty rates above average. These issues will be analyzed fur-
ther in Chapter 3.
                  Figure 1.5: Poverty by Labor Market Status of the Household Head, 2001
             45,--------------------------------------------,

             40

             35

             30
             25

             20                                                                         • Sofia

                                                                                        • Other Urban
             15
                                                                                        I[l Rural
             10
              5

              o
                    Unemployed          Employed       Out of the Labor         Total
                                                             Force

Source: BIHS 2001.


15 leva 83.7 in rural areas vs. 136.6 leva in Sofia and 152.6 in other urban areas.
                                                                                             21

                       E. Multivariate Analysis of Poverty
        The discussion in the previous section focused on single variable analysis.
However, many household characteristics are often correlated. For example, the discussion
above found that households where the head has a low level of education are more likely to
be poor. However, household heads with low education may also face a higher probability
of being unemployed. And being unemployed is also correlated with a higher probability of
being poor. Does low education increase the risk of poverty directly, or through its impact
on employment status? Or through both? To answer these questions multivariate analysis
was undertaken to control for the differential influences of diverse factors.
        The regression model looks at the effect of a range of independent variables on log
per capita consumption Crable 1.12). The coefficients in the table can be interpreted as thc
amount of change in consumption that would result if the independent variable for that
coefficient were changed by a unit amount. As expected, the education level of the house-
hold head is an extremely important factor in explaining monetary welfare. The relation is
monotonic, additional schooling by the household head above primary level has a strong
and significant impact on household consumption. Individuals in households where the
head of the household has completed secondary education have consumption levels 28 per-
cent higher than their counterparts in households with an uneducated head. The difference
between this group without education and households in which the head holds a university
degree is almost 50 percent.
        The gender of the household head does not have a significant influence on con-
sumption, indicating that, all else being equal, households headed by women are not poorer
than households headed by men. However, single female households are likely to have
lower consumption. This may reflect the relatively unfavorable position of single, elderly
(over 75) female pensioners, who have higher life expectancy than their male counterparts
and tend to live alone.
          Minorities, and Roma households in particular, have a significantly higher probabil-
ity of living in poverty than other groups, cven after controlling for many of the characteris-
tics associated with ethnicity, such as large family size. Holding all other variables con-
stant, Bulgarian Turks consume about 83 percent and Roma about 69 percent of ethnic
Bulgarians. This latter gap is huge and confirms the need for targeted initiatives to reach
Roma to address specific constraints which they face in accessing public services and par-
ticipating in economic activities. These issues are discussed in subsequent chapters.

        The employment status of the household head does not seem to be as important as
the total number of employed people in the household in determining average per capita
consumption in the household. The regression results suggest that, other variables held
constant, around 13 percent of the increase in average per capita consumption can be
22                                                                           BULGARIA POVERTY ASSESSMENT


Table 1.12: Determinants of Consumption (OLS estimates)
Independent Variables                                 Coefficient            t-Value      Significance
Household demographics
   Household Size                                        -0.092                  -10.01       **
   No. of Children (0-5)                                 -0.044                  -1.71
   No. Elderly (65 + )                                   -0.041                  -2.43        **
   Age HHhead                                            -0.005                  -5.03        **
   Gender of HH head                                     0.062                    1.21
   Single HH headship                                    0.126                   3.89         **
   Single Female HH headship                             -0.195                  -3.16        **
Education of household head
   Primary                                               0.109                   1.40
   Middle school                                         0.152                   2.03         **
   Secondary                                             0.246                   3.18         .*
   University and higher                                 0.377                   4.74         **
Ethnicity
   Turks                                                 -0.190                  -4.51        **
   Roma                                                  -0.370                  -7.51        **
   Other Ethnicity                                       -0.016                  -0.23
Employment
   HH head employed                                      0.037                   1.21
   No. Employed in HH                                    0.131                   7.03         **
Assets and HH conditions
   Own Dwelling                                         0.005                    0.15
   Own Other Real Assets                                0.153                    7.38         **
   Cultivate Crops                                      0.057                    2.23         *.
   Own Livestock                                        0.110                    3.94         ••
   Crowding Index                                       -0.119                   -7.47        ••
Rural household                                         -0.174                   -6.74        **
Regions
   Bourgas                                               0.015                   0.41
   Varna                                                -0.057                   -1.56
   Montana                                              -0.055                   -1.52
   Lovetch                                               0.048                   1.16
   Plovdiv                                              -0.050                   -1.47
   Rousse                                               -0.032                   -0.81
   Sofia Region                                         -0.084                   -2.34        .*
   Haskovo                                              -0.088                   -2.30        **
Constant                                                 5.182                   48.14        ••
Adjusted R2 = 0.37
**/* Coefficient significant at 95/90 percent confidence levels, respectively.
Source: BIHS 2001.
                                                                                                        23

expected from a unit increase in the number of employed people in the household.
         As one may expect, household assets are also an important factor in explaining wel-
fare. Possession of livestock and real estate other than the place of residence are positive
factors in consumption. It is worth noting that owning the dwelling in which the household
lives docs not explain differences in welfare, since in Bulgaria the majority of dwellings are
owner-occupied. However, (imputed) rents are not included in the consumption aggregate.
Information indicating the size and quality of the dwelling would more adequately capture
thesc differences. In fact, crowded housing tends to be correlated with poverty16.

         Finally, significant gcographic differences were found. As discussed, people in
rural areas tend to be poorer than those in urban areas. Controlling for other factors, aver-
age per capita consumption is 16 percent lower in rural areas. Gaps in consumption across
geographical regions were also observed. People in Sofia Region and Haskovo consume
significantly less than those in Sofia city.

                            F. Findings and Policy Priorities
         Transitions from planned to market economies have oftcn been associated with
growing poverty and inequality. Macroeconomic stabilization and growth has not always
translated into real benefits for the most vulnerable groups of the population. In Bulgaria,
average living standards have greatly improved since the introduction of reforms in 1997,
and absolute poverty has declined; however concerns remain for some pockets of extreme
destitution that persist in the country. Although poverty levels in 2001 are less than one
third the ones observed during the economic crisis of 1997, they remain stubbornly above
the pre-crisis levels. Despite the increasing concern about spiraling inequality in transition
economies, the consumption distribution of Bulgarians is moderately equitable. Large dis-
parities remain concentrated in the bottom and top deciles, with individuals in the former
group consuming on average only one tenth of that of individuals in the latter category.
         Poverty in 2001 appears very much concentrated among easily identifiable groups.
Large, poorly educated, rural households with two or more small children are by far the
most at risk of being poor. Ethnicity is another clearly delineating factor. Even after con-
trolling for all other socio-demographic factors, Roma households are still likely to con-
sume only two-thirds of an ethnic Bulgarian household. Also, individuals in female single-
headed househoids are more likely to live in poverty. While the concentration of poverty
among specific groups indicates that targeting interventions to address poverty in Bulgaria
will be easier, these pockets of chronic poverty are more resilient and harder to reach than
shallower poverty linked to transient declines in incomes. This highlights the need for a
long term commitment to poverty reduction in Bulgaria which will require continuity in pol-
   The crowding index is computed as the ratio between number of residing household members and the number
of rooms the household lise in the dwelling, excluding kitchen, bathrooms, corridors, etc.
24                                                           BULGARIA POVERTY ASSESSMENT


icy, as well as on-going monitoring and evaluation.
        The findings of the profile point to lessons for policy which will be explored further
in subsequent chapters:
         Economic refonn works. Improvements in living standards since 1997 indicate that
the recovery of growth combined with a better targeted and expanded safety net are having
a positive impact. However, the persistence of high unemployment indicates that addition-
al steps to improve the environment for employment growth are needed.
        The safety net is effective. Social insurance and social assistance protect a large
share of the population from poverty. However, additional efforts are needed to target the
poorest. The persistence of pockets of poverty suggest that targeting of social assistance
programs can be refined to reach the remainder of poor households. In other cases, more
innovative approaches may be needed to address the needs of marginalized communities,
such as ethnic minorities.
         Education is essential. Education emerges as the key correlate of monetary poverty,
as well as a an indicator of living standards in its own right. In spite of the quite high aver-
age educational attainment of the population as a whole, major discrepancies exist, particu-
larly in secondary school achievement and above.
         Better information about living standards is needed. Bulgaria's existing statistical
instruments are ill-suited for a comprehensive analysis of poverty. Regular, quality infor-
mation is not available for shaping or evaluating policies In this regard, the current initia-
tive of the government to revamp its household budget survey and introduce regular living
standard surveys is wellTtimed (Box 1.3).
        Similarly, better and more regular communication by the government on the
nature, objectives and progress of reforms would mitigate high expectations among the
population and provide people with a more realistic understanding of Bulgaria's reform
path and achievements.
         1                                                                                                       25


                               Box 1.3: Building Poverty Monitoring Capacity in Bulgaria
           Monitoring poverty using regular household surveys is an important input to policy making. Analysis
of living standards is essential for designing and evaluating programs and policies to address poverty, as well as
for assessing the effect of overall government policy on living standards. Bulgaria's existing statistical instru-
ments are ill-suited for comprehensive analysis of poverty. The government is currently undertaking steps to
institutionalize regular multi-topic household surveys within the National Statistical Institute.
          The National Statistical Institute (NSI) conducts monthly Household Budget Surveys (HBS). While
the HBS is currently the only source of updated information on household income and expenditures in the
country, and is widely used for poverty estimates, it suffers from a number of methodological shortcomings
including: (i) high non-response rate; (ii) high burden on respondents who are required to fill in an extensive
diary of consumption and expenditure for each day within a 12-month period and an enumerator-assisted
questionnaire; and (iii) incomplete consumption information. The main objective of the HBS is not to mea-
sure poverty and inequality, and policy analysis, and as a result, the information it collects is insufficient for
constructing a full consumption aggregate, among other deficiencies.
          In order to ensure long-term capacity to monitor poverty within Bulgaria, the World Bank and gov-
ernment are collaborating to institutionalize poverty monitoring capacity through the implementation of regu-
lar Living Standards Measurement Surveys (LSMS) and improvements to the HBS methodology. The Bank
approved an Institutional Development Grant (IDF) to support these activities, implementation of which
began in 2002. The grant will provide technical assistance and training for NSI staff to generate high quality
data and build capacity for data and policy analysis. A central focus of the grant will be to create capacity
within the NSI, MOLSP and other relevant government bodies for policy assessment of the incidence of gov-
ernment programs and their effects on income distribution, assets and living standards.
           This work will be coordinated by an interagency Data Users' Group of representatives from the
MOLSP, the LSMS Unit of the NSI, line ministries, NGOs, donors and academics. The Group will contribute
to the process of data prodUction and analysis and will develop a coherent monitoring and evaluation strategy.
It will serve as a wider forum for the government to receive feedback and publie endorsement for generating
poverty data and outputs.
26                                                                           BULGARIA POVERTY ASSESSMENT



                                             Technical Annex
Seasonal adjustment of the Consumption Data
          Survey data, including the BIHS, are typically carried out at a given point in time.
To the extent that seasonal consumption shifts are significant, the mean consumption
expenditures, as captured during the survey pc dod, will not yield a representative picture of
the average consumption expenditures of households throughout the whole year. For this
reason, seasonal adjustment factors were computed to account for these fluctuations in
consumption. For the initial preparation of the poverty profile, such factors were based on
the 1994 Household Budget Survey (HBS) figures of the National Statistical Institute, as at
that time only these data were available.

         The 1994 figures were also used for both the 1995 and 1997 analyses. Thc underly-
ing assumption behind using 1994 HBS monthly consumption figures to adjust later survey
data is that over time, there has been no significant structural change in the seasonal alloca-
tion of expenditures by the households. While this assumption was certainly valid in 1995,
it may be in doubt for 1997. Despite these issues, for lack of more recent data and in order
to maintain consistency with the 1995 and 1997 data, the same adjustment factors were
used in the main report for 200l.

        The 2000 HBS figurcs became available latcr on during the process of preparing this
report. The data were analyzed in order to compare with the previous figures based upon
the 1994 HBS data. As seen in the table below, the poverty figures are not significantly dif-
ferent. The poverty headeount based on the high povelty line (set at two thirds of 1997 aver-
age per capita consumption, det1atcd at 2001 prices) is 12.8 percent, about 1 percentage
point higher that the poverty rate from the original analysis using 1994 data (11.7 pereent)17.
Table 1.13: Poverty and Inequality Based on 1994 and 2000 Seasonal Adjustment
                                    1994 fIBS seasonal               2000 HBS seasonal
                                     adjustment factors               adjustment factors
                       ----
                                  Higb              Low             High              Low
Headcollnt                         11.7              6.0            12.8              7.5
Gap                                3.6               1.9             4.2              2.2
Depth                               1.7              0.8             1.9              0.9


Gini                                                  29.5                                      29.6

Per capita consumption (leva)                       103,767                                    99,035
Note: To allow comparability with the earlier World Bank study, we used identical poverty lines, deflated at 200 I.
The high poverty line is set at two thirds of 1997 average per capita consumption, deflated at 2001 prices using CPI
figures, while the Low line is set at one half of the sall!e 1997 consumption level.
17 Also note that the figures are marginally different due to the use of April and May, 2001     cpr    figures. At the
time of the analysis eontained in the original analysis, March 200 I was the latest available monthly figure.
           1                                                                                    27

        As it was not possible to update the entire body of analysis conducted for this
report using the 2000 adjustment factors, the majority of the report uses calculations based
upon the 1994 HBS. There are a few exceptions to this, as noted in the text, including the
tables presenting the main poverty results (Tables 1.1-1.3) and the sensitivity analysis of the
poverty lines (Table 1.4). To ensure that the main findings of the poverty profile in the
main text hold even after the new seasonal adjustment, the analysis of the poverty profile
was checked. I8
         No large differences are observed in the updated profile. The only notable differ-
ence was an increase in poverty in other urban areas, relative to Sofia and rural areas. This
is apparently a result of considerable shifts in spending allocations since 1994. Although
still lower than average, poverty in other urban areas is adjusted to 10.3 percent, in compar-
ison with 6.2 percent before the 2000 HBS adjustment.

Table 1.14: Poverty by Location, 2001
                                                      Based on 1994 HBS     Based on 2000 HBS
                                                      seasonal adjustment    seasonal adjustm
                                                            factors             ent factors
Sofia                                                           4.8                2.0
Other Urban                                                     6.2               10.3
Rural                                                           23.7              21.7
Total                                                           11.7              12.8



The Roma Identification Experiment
        Sampling of minorities in household surveys is particularly challenging because of
problems with surveying minority households which may not be included in standard popu-
lation registers, and the reluctance of many minorities to identify themselves. To address
these issues, the questionnaire for the BIHS 2001 survey was revised to allow for greater
coverage of minority groups, particularly Roma, which are consistently under sampled.
This was done in two ways. First, by expanding coverage through the inclusion of an over-
sample of 133 Roma households, and, second, through the addition of multiple questions
for identifying ethnicity. Information on ethnicity was collected from various sources to
allow triangulation of responses and to improve the assessment of the ethnicity of house-
holds.
         Information on ethnicity was first elicited directly from the respondent. After that,
the interviewer was asked to make her own assessment of the respondent's ethnicity, as well
as to report on the criteria used for the identification and the level of confidence of the
assessment. In those cases in which the interviewer did not concur with the respondent, the
interviewer was asked to select three key informants that knew the respondent well and
  Results are reported in Carletto and Fujii (2002), Annex 4.
28                                                                                BULGARIA POVERTY ASSESSMENT


asked them about his ethnicity. In these cases, ethnicity of the respondent was determined
based on the concurring assessment of the key informants with either the interviewer or the
respondent.
         A total of 31 discrepancies between respondent's and interviewer's responses were
found, but with very few exceptions, discrepancies were limited to a presumption (on the
part of the respondent) that the household was Roma. On the basis of the criteria adopted
in the experiment, 23 households out of 133 Roma households (17%) would have been mis-
classified if we had based the classification merely based on the respondent's self-assess-
ment. The self-reported ethnicity variable was adjusted based upon this analysis and a total
of 23 households were re-classified as Roma. After the adjustment the sample includes 133
Roma households (5.3%), instead of the 110 self-reported (4.4%) 19.




   To allow for more significant comparisons, in addition to the nationally representative sample, the BIHS 2001 oversampled 133
additional Roma households, for a total of 266 observations.
          2                                                                                     29


                Chapter 2: Rural and Regional Poverty

                                       A. Introduction
         One of the most striking aspects of the 2001 poverty profile is its strong rural
dimension. Poverty is not only worse in rural than urban areas, but it appears that rural
households have fallen further behind their urban counterparts over the past decade. Rural
poverty affects a large share of the population. In 2001, nearly 33 percent of Bulgarians
lived in rural areas, however this group comprised 66 percent of the total poor. While there
has been considerable economic recovery in urban areas since 1997, the rural poor have
not benefited from improving living standards. This reflects the falling level of overall rural
incomes, as well as increasing inequality in rural areas since the beginning of the crisis.

        Related to the rural element of poverty is its regional diversity across the country.
Living standards across Bulgaria vary substantially, as Bulgaria's regions reflect contrasting
levels of development. In particular, there is a notable difference between the capital city,
Sofia, and the rest of the country. As the BIHS data provide a limited snapshot of the
regional dimensions of poverty, this chapter draws on other datasets to highlight the diversi-
ty of regional development. The first section of this chapter looks at the dynamics of
poverty in rural areas, and its determinants, while the second half assesses the regional
dimension.

                                    B. Rural Poverty20
         Poverty rates are four times higher in rural than in urban areas, at 23.7 percent in
comparison with 5.9 percent (Table 2.1). The rural poor arc also considerably poorer in
comparison with the poor living in urban areas. This is reflected in much higher poverty
gap and severity figures. In comparison with 1997, urban areas experienced a much more
significant drop in poverty levels, from 33.5 to 5.9 percent, while poverty rates in rural areas
were only less than halved, from 41.2 to 23.7 percent. The ratio between rural and urban
Table 2.1:           in Rural and Urban Areas
                                                 Urban             Rural             Rural
                                                                                    poverty
                                                                                     share
Poverty rate                                       5.9              23.7              66.2
Poverty gap                                        1.5              8.0               72.5
Poverty severity                                  0.6               3.9               76.5
Source: BIRS 2001.

   This section draws from the background paper by Sahn, et aI., 2002. "Rural Poverty in Bulgaria:
Characteristics and Trends."
30
------------------------------------------- BULGARIA POVERTY ASSESSMENT
poverty has also grown dramatically since 1997 when it was 1.2, in comparison with 4 in
2001. In other words, the relative risk of being poor in rural areas in comparison with
urban areas was only 20 percent higher in 1997, while it was three times as high in 2001.
         The profile of the poor in rural areas is consistent with that of the total population
discussed in the previous chapter (Annex Table A2.1). Poverty rates are highest for those
living in households with 4 or more children, the poorly educated, ethnic minorities, and
those in households where the head is unemployed or out of the labor force. The dispropor-
tionate share of large households is striking, household with 4 to 5 members comprise near-
ly 82 percent of the rural poor. Similarly, those with basic education or less comprise 81
percent of the rural poor and ethnic minorities make up 74 percent of the rural poor.
         The gap between rural and urban areas indicates that consumption levels have not
recovered in rural areas in the same way that they have in urban areas. Figure 1.1 in the
previous chapter showed the national cumulative density function for per capita expendi-
tures in Bulgaria in 1995, 1997, and 2001. 21 As discussed, no matter where the poverty line
is set, there were many more Bulgarians living below that line in 1997 than in 1995, and
many fewer in 2001 than in 1997. But the recovery is incomplete, as living standards did
not recover to their 1995 levels by 2001. A closer look at the dynamics in rural and urban
areas reveals that the lack of recovery in rural areas is responsible for the lag in 2001.
Figure 2.1 shows comparable cumulative density functions for urban areas only in Bulgaria.
While living standards fell sharply between 1995 and 1997, they increased by almost as
much between 1997 and 2001 in urban areas. Especially at the lower end of the expendi-
ture distribution, the recovery is almost complete.

                                              Figure 2.1a: Urban


                   OJ




                   0,
                                     ...
                             "
                                                                             .,
                                              "              "                               "
                                           Log of Per Capita Ex pendlture
                                    I·,,,,, " 1995 • • • ·1997     --2001]
   The cumulative density function shows, on the y-axis, the share of the popUlation below a given level of per
capita expenditures (on the x-axis). Curves that are higher show greater poverty, because a larger share of the
population falls below any given expenditure level.
Chapter 2                                                                                     31

        For rural households, however, the recovery has been far less satisfactory. Figure
2.2 shows the same dramatic shift in the cumulative density function for 1995 to 1997, but
the 2001 curve shifts much less to the right for the rural sample, especially at the lower end
of the expenditure distribution. As a result, rural residents are falling further behind.
Although the population as a whole suffered greatly from the 1996-97 crisis, urban residents
have recovered, while rural residents have not.
                                             Figure 2.1b: Rural


                r, 0'
                ~ 0'
                 =
                 G,j

                 ~
                       .,


                 G,j   ••
                ~

                 ...
                 G,j   .,


                i      04

                :;     01

                 E .,
                 =
                U 0'

                              "
                                         -
                                         Log of Per Capta Elpenciture
                                                                                 "

                                     '"'''''''', 1995 - - - ·1997 --2001   I
Source: BIHS 2001.



Growth and Distribution
         Poverty can fall for two reasons: the entire distribution of expenditures can shift up,
leaving fewer people below the poverty line, or inequality can fall - the distribution shrinks
towards its mean - again leaving fewer people below the poverty line. 22 Between 1995 and
1997, average expenditures per capita fell from 164 to 88 leva per person per month in
urban areas, and 146 to 86 leva per person per month in rural areas. 23 Not surprisingly, this
negative growth had a substantial effect on poverty in this period. At the same time, the
Gini coefficient for per capita expenditures increased from 0.28 to 0.30 in urban areas and
from 0.28 to 0.32 in rural areas. This increased inequality also contributed to higher pover-
ty, by spreading out the expenditure distribution to the left. But overall, the enormous
growth (or contraction) effect was more important, accounting for 87 and 85 percent of the
overall increase in poverty between 1995 and 1997 in urban and rural areas, respectively.

       Between 1997 and 2001, average per capita expenditures rose from 88 to 152 leva
per person per month in urban areas, and 86 to 114 leva per person per month in rural
   See Sahn, Younger and Meyerhoefer (2002) for further information.
23 All figures in 20011eva.
32                                                                        BULGARIA POVERTY ASSESSMENT



Table 2.2: Decomposition of Changes in Poverty into Growth and Redistribution Component
                                                             Share Attributable to:
                         Change in Poverty
Years                    Headcount Index           Growth       Redistribution      Residual
                                                               (% Contribution)
1995-1997    Rural              0.31                 84.6            16.9             -1.6
             Urban              0.26                 86.9             9.1              4.0
                      ---
1997-2001    Rural             -0.15                100.2           -24.8             24.6
             Urban             -0.25                 88.5             9.0              2.5
1995-2001    Rural             0.16                  45.4            39.9             14.7
             Urban             0.01                  58.0            13.9             28.1
Source: BIHS 1995. 1997, and 2001.
Note: Sahn, et al. 2002. Methodology based on Datt and Ravallion, 1992.

areas, contributing to an overall decline in poverty. In urban areas, the inequality of expen-
ditures for households below the poverty line also declined, so that the improved equality of
income also contributed to a reduction in urban poverty.24 So on both growth and inequali-
ty fronts, the deterioration between 1995 and 1997 was reversed. In rural areas, however,
inequality below the poverty line continued to worsen, even as per capita expenditures
recovered. Indeed, the growth component in rural areas accounted for 100 percent of the
decline in poverty over the latter period, while worsening inequality between 1997 and 2001
detracted from that improvement by 25 percent.

                                  C. Aspects of Rural Welfare
        Why have rural areas lagged behind? Ine following sections look at some of the
issues underlying the trends in living standards. In general, rural welfare has been con-
strained by low levels of income, driven by low wages in rural areas, high unemployment,
and low levels of agricultural productivity. Bulgaria's agricultural sector has been unable to
recapture export markets in the transition period, following the loss of CMEA markets. A
drought over the past three years has also contributed to the fall in agricultural productivity.
Other factors driving poor economic conditions in rural areas are discussed in depth in sub-
sequent chapters, including low education levels and attendance (Chapter 6) and poor
labor market conditions (Chapter 3). Availability of coping strategies is another critical
issue. As discussed in Chapter 5, rural households are less likely to receive remittances
than urban households.

Income Sources
         For both urban and rural households the most important sources of income are
24 The Gini coefficients actually remained constant in both areas. This apparent contradiction is resolved by not-
ing that the Datt-Ravallion decomposition measures the dispersion of expenditures for households below the
poverty line, while the Gini measures the dispersion of all households' expenditures.
           2                                                                                                 33

pensions, wages, and agricultural income. Table 2.2 presents various components of
income for 1995 and 2001 for households on a per capita basis. Broadly speaking, incomes
could decline for two reasons. Either the unit return to an activity (wage, pension per per-
son, etc.) fell, or the number of people living in households that earn or receive such
income felP5 For that reason, the table also includes a column for the share of the sample
living in households that received each type of income, and the means and medians for
those households only. Asset income is also important for urban households.

        For urban households, asset income rose sharply, and pension receipts per capita
increased slightly from 1995 to 2001, while wages decreased slightly, although for the subset
of urban households receiving wages, there is no change. Average net agricultural income
from sales and home consumption declined from 16 leva per capita                  to   11 leva per capita for
all urban households in the samples.

         For rural households, the changes are more dramatic. Per capita wage income fell
by 21 percent (15 percent for households receiving wages) for rural households, pensions
fell only slightly, but agricultural income declined considerably. Average net agricultural
income from sales and home consumption declined by more than half, from 79 leva per
capita to 37 leva per capita for all rural households in the samples. Thus, even though rural
households were losing ground on several fronts, agricultural incomes are responsible for
most of the relative decline of incomes in rural areas during this period.

         While there are declines in the number of rural residents benefiting from wage and
agricultural income, the change is not as dramatic as the decline in the wage rate and in the
agricultural earnings among households engaged in these activities. An important concern
that arises from Table 2.4 is the varying degree of under-reporting of income across time
and place. In 1995, reported urban incomes are significantly below expenditures, while
income and expenditure are reasonably close in rural areas. This produces the anomalous
result that average income per capita was higher in rural than urban areas in 1995. In 2001,
however, it is rural areas that have a high degree of income under-reporting when com-
pared to expenditures, while the two values are similar for urban areas. Since much of the
decline in rural incomes is coming from agricultural income, which is difficult to measure,
we are left with the doubt that these changes may simply reflect errors in the data.

         The decline in agricultural income was driven by a drop in agricultural production.
Although the survey data indicate no clear pattern in real crop prices across the survey
years, physical production fell for almost all major crops that households produced in
Bulgaria. It is difficult to explain this decline from the survey data, as input data between
1995 and 2001 are not comparable. It does appear that use of pesticides and purchased
seeds increased over the                For fertilizer, there was a 15 percent decline in use, how-
------------------~~----
25 There is a further possibility: that households receiving (say) wage income had fewer hours worked, possibly
because of unemployment of secondary wage earners, hut still not zero hours.
34                                                                         BULGARIA POVERTY ASSESSMENT


ever the decline is not sufficient to explain the drop in output.

        Although declines in wage income per capita for rural households were less dramat-
ic than the fall in agricultural incomes between 1995 and 2001, they are nevertheless impor-
Table 2.3: Wage Income by Quintile and Area
(mean household, leva)
                                                                       Quintile
                                                         2                3                 4               5
1995
                 Urban                 37.95           54.54            69.03             79.83           106.10
                 Rural                 26.82           30.36            39.18             38.77           55.95
2001
                 Urban                 27.96           51.23            64.38             76.51           100.67
                 Rural                 15.46           26.89            34.29             42.20           60.79
Source: BIHS 1995 and 2001.

Table 2.4: Value and Distribution of Income and Transfers in Bulgaria, 2001, leva
                                        Urban                        Rural
                           All Earners/Beneficiaries Only'"    All Earners/Beneficiaries Only
2001                     Mean Median Mean Median(share) MeanMedianMean Median(share)
Net Agricultural income,
    marketed                   2.38    0.00    15.14    0.00    0.16      11.81    0.00    18.39   0.71     0.64
Net Agricultural income,
    home cons                  8.79    4.19    13.40    8.73    0.66      25.09 18.42 28.57        22.36    0.88
Gross Agricultural
    income                    17.37    0.00    86.32   5.55     0.20      20.48   4.34     28.51   9.65     0.72
Agricultural home
    cons 1 (inc)              14.15    0.00    82.23   6.00     0.17       6.03   2.29      9.59   6.13     0.63
Agricultural home
    cons 2 (inc)               0.03    0.00    6.78    4.55     0.01      0.32    0.00      8.76   2.44     0.04
Agricultural home
    cons 3 (inc)               0.72    0.00    26.27   4.03     0.03      1.51    0.00      6.94   3.45     0.22
Agricultural costs            0.98     0.00     5.73  1.84      0.17      4.63  0.92        7.26   2.99     0.64
Pensions                      22.45    0.00    52.58 41.52      0.43      27.14 15.00 46.62        32.83    0.58
Social assistance              6.54    2.13    11.58   4.69     0.56      6.41 2.31 11.16          6.37     0.57
Unemployment                   2.07    0.00    17.90 14.85      0.12      2.17 0.00 12.69          9.21     0.17
Wages                         68.54 56.44 98.69 82.60           0.69      30.50   0.00        51.34
                                                                                           66.09            0.46
Self-employment               12.29 0.00 137.84 100.77          0.09      5.06    0.00 137.43 75.08         0.04
Net remittances               3.85 0.00 16.56 13.24             0.23      -1.14   0.00 -6.16 -3.30   0.19
Other income                  0.70 0.00 69.24 22.13             0.01      0.12 0.00 58.42 86.24 0.00
Asset income                 23.62 0.00 89.51 20.44 0.26                  6.36 0.00 20.48 4.32 0.31
Total income                 156.44 111.79 157.65 112.77 0.99            92.47 75.12 93.33 76.45 0.99
Total expenditure            152.67 134.91 152.67 134.91 1.00            114.08 102.31 114.08 102.31 1.00
Note: C*) Includes only those individuals who receive the income source or transfer.
           2                                                                                                        35

Table 2.4 (continued) - Value and Distribution of Income and Transfers in Bulgaria, 20tH, leva
                                       Urban                        Rural
                          All Earners/Beneficiaries            All EarnersIBeneficiaries
1995                     Mean Median Mean Median(share) Mean Median Mean Median(share)
Net Agricultural income,
    marketed             5.40          0.00    27.03     0.35    0.20     37.84    0.21    55.22     3.90    0.69
Net Agricultural income,
    home cons            10.89         1.73    19.48 11.78       0.56     41.53 35.05 45.87         40.34    0.91
Gross Agricultural
    income               11.15         0.00    42.38 16.82       0.26     79.50 33.68 96.59         47.18    0.82
Agricultural home
    cons 1 (inc)               3.50    0.00    16.13     9.55    0.22     24.19 11.45 36.53         21.82    0.66
Agricultural home
    cons 2 (inc)               1.53    0.00    12.81 10.61       0.12     9.67     4.29    15.81    11.02    0.61
Agricultural home
    cons 3 (inc)              0.94     0.00     7.26      4.42   0.13     6.66     3.41    9.35      6.34    0.71
Agricultural costs            1.68     0.00      9.40     3.08   0.18     10.71    1.74    16.99     6.16    0.63
Pensions                      17.84    0.00     44.84   36.09    0.40    29.04     16.64    47.28   39.21    0.61
Social assistance             6.29     1.38     12.43     7.02   0.51     5.86     0.00     14.17     7.67   0.41
Unemployment                  0.47     0.00     8.67     7.11    0.05     0.73     0.00     10.04     7.14   0.07
Wages                        71.00    63.69    98.22    83.20    0.72    37.00     0.00    75.91     65.43   0.49
Self-employment               6.44     0.00    107.28   74.54    0.06     5.10     0.00    95.84    62.09    0.05
Net remittances               3.04     0.00     10.47    10.56   0.29     -3.64    0.00    -15.48   -15.04   0.23
Other income                  2.36     0.00    29.42     10.10   0.08      1.07    0.00    20.60     10.51   0.05
Asset income                  5.64     0.00    28.55     15.58   0.20     5.95     0.00     22.15    7.52    0.27
Total income                 122.54   101.91   124.97   103.95   0.98    149.89   110.05   153.85   111.26   0.97
Total expenditure            163.65   143.46   163.65   143.46   1.00    146.35   133.06   146.35   133.06   1.00
Source: BIHS 1995, 2001.
Note: C*) Includes only those individuals who receive the income source or transfer.


tant. Furthermore, the declines were concentrated in the lower end of the expenditure dis-
tribution, and therefore had a larger impact on poverty (Table 2.3).

The Labor Market
         A critical force behind stagnation of growth in rural areas is the high level of unem-
ployment. While the unemployment rate nearly doubled in both urban and rural areas
between 1995 and 2001, rural unemployment has consistently remained twice as high as in
urban areas. In rural areas, only 24 percent of people older than 15 were working in 2001.
Rural unemployment is also closely linked to poverty. In 2001, 52 percent of unemployed
adults in rural areas were poor.

       For those who are employed, low wages in agriculture contribute to poverty in rural
areas. Agriculture is the lowest paid sector of the economy. Manufacturing, construction,
 36                                                                          BULGARIA POVERTY ASSESSMENT


communications, other production activities, and arts/culture/etc. all have wages that are
more than 20 percent higher than agriculture, on average and holding all else constant.
Only the trade sector has (slightly) lower wages than agriculture, but the difference is not
statistically significant.

         Multiple job-holding plays a significant role in poverty reduction in rural areas. In
urban areas, poverty is much lowcr for workers with one job than it is for the unemployed,
but workers who hold a second job (which can include self-employment or agricultural
activity) have a poverty rate similar to those with one job. In rural areas, however, while
poverty is lower for those with one job, the difference is not as great as in urban areas and,
more importantly, the poverty rate continues to decline considerably for workers with two
jobs. Because the vast majority of second jobs are in farming for own consumption, or
"own-account farming", this highlights the importance of subsistence agriculture as a safety
net for rural welfare. These issues will be discussed further in the discussion of coping
strategies in Chapter 5.

Table 2.5:             Headcount for Adults over 15                       Labor Force        2001
                               Unemployed       Inactive                One Job     Two Jobs      National
Urban                               24.5         0.14.3                   6.8         5.3           12.5
Rural                               52.1         0.30.2                  28.0         17.9         33.3
National                            35.6         0.20.4                  10.0         11.6          19.2
Source: BIHS 2001.
Note: Poverty line set at 83.8 leva per capita per month.



Land and Assets
        The Bulgarian farming sector consists of a majority of small subsistence-oriented
farms, with a very small share of farms involved in large-scale agricultural production. In
1999/2000, 99 percent of farms were using 20 percent of the cultivated land, while the
remaining 1 percent cultivated 80 percent of the land. Small farms are generally family
farms engaged in subsistence agriculture. The average size of these farms was quite small
at 0.9 hectare. This is consistent with the picture above that suggests that most rural house-
holds engage in agriculture as a secondary activity.

          The BIHS survey is poorly designed to capture land usage, so the impact of land-
holdings on welfare is difficult to assess.2 6 However, multivariate analysis of the determi-
nants of rural welfare was undertaken to examine the impact of landholdings and agricul-

   The filter question at the beginning of the BIHS questionnaire asks households to report only land that is used,
this excludes land which is caught up in the restitution process. There are also penalties for not cultivating restitut-
ed land, so households have disincentives to report. Therc are many other reasons why houscholds are not culti-
vating (e.g. high input costs, droughts, low import prices). In addition, the filter asks households to report land
where they "participate in management decision making ... " this is unclear and compounds underreporting.
Chapter 2                                                                                                      37

Table 2.6: Farms in Bulgaria, 1999/2000 estimates
Type of farm                   Number        % oftota)               Used area in % of used         Average
                               of farms       farms                   hectares      area            used area
                                                                                                    in hectares
Interviewed      Physical             755300            99%             708000           20%             0.9
farms            persons (not
                 registered
                 anywhere)
                 Legal persons           5400           1%            2893000            80%           535.7
                 and sole
                 traders

                 Total:               760700           100%          3601000            100%             4.7
Source: "Agrostatistics" department, MAF, June 2001.

tural assets on household welfare (Annex Table A2.2). The analysis found that the follow-
ing grouping of landholdings all have significant positive correlations with household wel-
fare: restituted land; inherited land; cropland, coop land, and land rented to others. In con-
trast, land rented out, orchard and pasture land, as well as the other land type category
included in the survey did not have a significant correlation.
         Among the asset variables, while non-agricultural assets have positive effects on
household welfare, non-land agricultural assets do no1. 27 Assuming that animals are a form
of assets, ownership of livestock raises household welfare, with an effect twice as strong for
cattle as for sheep. Poultry has an even smaller effect on household per capita expenditures.
         These results indicate that participation in agriculture has an important effect on
welfare. However, the limited land data in the BIHS, as well as other data sources high-
light the fact that only a small share of the arable land in Bulgaria is cultivated by family
farmers. In addition to the high level of fragmentation of land into small family farms, pro-
duction is limited by rigidities in land tenure, limited access to rural finance markets and
low levels of private investment. These issues and their implication for household welfare
require further analysis.

                                        D. Regional Poverty
        Differentials between rural and urban areas in labor markets, availability of assets,
and levels of human capital contribute to substantial variation across regions. The BIHS
survey was designed as a national household survey, and a result provides limited insights
into the extent of variation in living conditions across the country. In order to get a more
27 There is a valid argument that unlike in Africa or Asia, livestock are not correctly considered assets, but
instead, are more of a consumption good that is effected by household expenditure levels. To the extent that this
is the case, caution is warranted in interpreting these coefficients.
38                                                                           BULGARIA POVERTY ASSESSMENT


detailed understanding of regional development across regions, analysis of different indica-
tors was undertaken at the regional level. The picture that emerges is highly differentiated.
The analysis was undertaken at the level of the current 28 regions, the nine "old" regions of
Bulgaria, as well as the municipal level, to highlight the intraregional diversity. In 1999 the
administration of the country was redrawn into 29 smaller regions (Box 2.1).
                                              Box 2.1: Bulgaria's Regions

               Under the current administrative organization of the country, Bulgaria is divided into 262 municipali-
    ties and 28 districts. Prior to the 1999 administrative reorganization, there were nine districts with an average
    territory of 12,300 sq. km and an average population of 932,000. Each district covered about 29 municipali-
    ties. With the new territorial division into 28 districts the average size was reduced to 2,964 sq. km and the
i   average population to 296,000. Districts are governed by a regional governor appointed by the eXeC1Itlve.

                    1999.


       Table 2.8 shows selected indicators for each of the nine old regions. Sofia City
stands out as having the highest level of development across multiple dimensions.
Enrollment rates are the highest of all the nine regions, unemployment and infant mortality
lowest. FOI and GOP per capita are also notably higher than the other regions. The pic-
ture among the rest of the regions is less clear. Bourgas has the second highest level of
GOP per capita in the country, while IMR and enrollment rates are among the lowest.
Similarly, Varna has a high level of GOP and FOI, however the unemployment rate and
IMR are among the highest. 'These data further suggest that there is significant variation in
development within regions. In the case of Bourgas and Varna, economic activity is likely
concentrated in certain industries in the Black Sea port cities, with the rest of the re&ion
lagging behind.

Table 2.7: Selected Indicators of Regional Development, 9 Old Regions
               Primary and      Unemployment Infant Mortality       %                        FDI per GDP per
              Secondary Net          Rate       Rate (per 1,000 Urban                         capita  capita
             Enrollment Rate                      live births)                              (thousand (leva)
                                                                                               US$)
Bourgas                 84.6                 19.9                 16.5            68.2         0.05        2,946
Varna                   89.4                 20.6                 15.7            71.0         0.23        2,670
Lovech                  91.3                 19.6                 12.1            65.1         0.22        2,377
Montana                 90.3                 26.8                 16.1            58.4         0.01        2,436
Plovdiv                 88.3                 19.1                 15.6            65.6         0.04        2,232
Rousse                  85.8                 26.3                 13.6            55.8         0.06        2,250
Sofia-city              94.9                 4.5                  7.9             95.6         0.79        4,917
Sofia-region            90.4                 15.1                 9.8             62.0         0.26        2,445
Haskovo                 82.0                 16.4                 14.7            60.3         0.05        2,586
Bulgaria              88.6                 17.8                   13.3            68.4         0.24        2,841
Sources: NSr, MOF.
NOles: Enrollment rates include children 0-18 years-old.
           2                                                                                                        39

        A look at data at the level of the new 28 regions underscores the level of diversity
within regions. The regions which include the cities of Bourgas and Varna are among the
best off in terms of GDP per capita, low unemployment and limited social assistance
expenditures per capita. However, the same indicators for Shumen, a more rural new
region which was part of the old Varna region, are among the poorest. The same is the
case for Yambol, a new region which was formerly part of Bourgas. On the other side of
the spectrum, Gabrovo, an urbanized new region which was part of Lovech, is a relatively
highly deVeloped region, within one of the poorest of the old regions.
        The picture is even more differentiated at the municipal level. Among the 262
municipalities, the unemployment rate varies by more than 48 percentage points. This sug-
gests that for policy purposes a more detailed map of living standards across localities
would be useful. The World Bank has developed a methodology called poverty mapping,
which allows for the estimation of local level poverty estimates (Box 2.2).

                                  Box 2.2: Developing a Poverty Map for Bulgaria
           The high differentiation in regional poverty rates, unemployment and other indicators in Bulgaria indi-
 cate that a more detailed picture of welfare at the local level is needed in order to direct policies and programs
 more effectively to localities in need. The poverty mapping technique involves combining a household survey
 with census data to formulate a more disa~'Tegated picture of poverty than can be obtained from the survey
 alone, The methodology has been applied in a number of countries in Central America, Asia and Africa.

           The exercise involves detailed analysis of two main sources of data: a household survey (such as the
 BIHS); and the popUlation census, in the first phase of the analysis the two data sources are subjected to very
 close scrutiny with an eye towards identifying a set of common variables. In the second phase the survey is
 used to develop a series of statistical models which relate income to the set of common variables identified in
 the preceding step. in the final phase of the analysis, the parameter estimates from the previous stage are
 applied to the population census and used to predict income for each household in the population census,

           Once such a predicted income measure is available for eaeh household in the census, summary mea-
 sures of poverty (and/or inequality) can be estimated for a set of households in the census. Statistical tests can
 be performed to assess the reliability of the poverty estimates that have been produced, If the estimates are
 judged not to be sufficiently reliable, it may be necessary to undertake further model specification,
 Alternatively, it may be necessary to increase the number of households over which the poverty measure is
 estimated (issues of statistical reliability will guide whether the poverty map can be reliably produced at the vil-
 lage, sub-district, or district level).

            Bulgaria is well positioned to develop a poverty map, because hoth a household survey - the 2001
 BIHS and a census are availahle, and both were sampled at the same time. Analysis of these datasets will
 indicate how detailed and accurate a poverty map can be - whether it will provide information at the munici-
 pal level, or below. Such a map has the potential to he an extremely useful tool for formulating policies at the
 local level and for targeting projects under EU structural funds, or the Social Investment and Employment
 (SIEP) project which is being developed by the World Bank and the government.

           Source: Hentschel et a!. (2000),


         A regional development index was created m order to rank the relative develop-
ment levels of the 28 regions. 28 The index was based on unweighted averages of a set of

  Based on S. Ivanov (2002).
40                                                           BCLGARIA POVERTY ASSESSMENT



Table 2.8: Selected Indicators of Regional Development, 28 New Regions
Varna                    GDPper        % urban    Unemployment Social assistance expenditures
                          capita      population     rate (%)          per capita (leva)
             Varna         2,796         79.5          17.0                  27.9
           Shu men        2,310          61.4          26.1                  32.9
           Dobrich         2,764         63.8          22.6                  24.2
Bourgas
           Bourgas        3,293          69.9          17.4                  23.3
           Yambol         2,638          66.0          23.5                  41.3
              Sliven      2,524          66.7          22.0                  30.3
Lovech
            Lovech        2,420          60.5          19.5                  17.3
          Gabrovo         2,796          77.7          11.9                  12.5
             PI even      2,189          62.7          21.1                  26.2
   Veliko Turnovo         2,338          63.8          22.2                  19.8
Rousse
           Razgrad        1,997          43.8          30.1                  27.7
              Russe       2,527          69.8          21.1                  26.1
            Silistra      2,078          43.6          23.2                  24.9
       Targovishte        2,194          50.3          34.9                  37.3
Montana
              Vidin       2,032          58.1          27.0                  42.4
             Vratsa       3,031          57.9          26.4                  42.0
          Montana         1,934          59.4          27.2                  44.5
Haskovo
     Star a Zagora        3,396          68.4          16.8                  28.5
           Kardjali       1,717          33.1          15.8                  15.4
          Haskovo         2,117          68.6          16.2                  19.1
Plovdiv
          Pazardjik       2,118          57.2          24.9                  23.2
          Smolyan         2,069          51.6          25.9                  21.0
            Plovdiv       2,313          72.0          15.0                  18.3
Sofia Region
     Sofia Region         2,583          59.4          15.3                  23.2
      Blagoevgrad         2,311          56.4          15,5                  16.0
             Pernik       2,128          75.6          14.2                  21.6
         Kustendil        2,787          65,3          15.1                  25.7
Sofia City 4,917           95.6          16,8           5.4
Sources: NSI, MOF.

indicators selected for their relevance, as well as the quality and availability of data at the
regional leveL The index provides a rough estimate of where regions stand based on key
indicators, but does not provide a rigorous ranking. The index includes four sub-sets of
Chapter 2                                                                                                      41

indicators including:
            Human capital: demographic structure, primary and secondary enrollment rate,
fertility rate, rate of natural population increase, life expectancy, infant mortality and edu-
cational attainment;
      - Labor market: unemployment rate, long-term unemployment rate, average wage,
employment rate, employment by education level;
       - Infrastructure: share of urban population, road density, share of agricultural
employment, number of settlements per health facility, share of population connected to
water and sewage, geographic area per general school;
        - Economic development: FDI per capita, GDP per capita, capital expenditures per
capita, patent tax per capita, social assistance expenditures per capita, share of arrears in
social assistance, local tax revenues per capita.

                         Figure 2.3: Regional Development Index (28 New Regions)
200

180

160

140
                                                                                                                   i
120
                                                                                                                   I
100

 80

 60

 40

 20

  0
                  .                                                                .
        J i j .a oS vli'l1111 !                                                                 ;
                                                                                   ::
      .~                                                        ~     ~
                                                                            ~ !          "
                                                       J J J '5 1 s: 1i I
                                                                                            S
                         '6                                                             :9 '5 .!II   j 1,
                                                             ~       § >-   > ]    J    > ·s r:      g l:I
      i       i ~'3i     "-
                               IX!   ..
                                     iii
                                           X
                                               !II"-
                                               ~
                                                       :>       c..           '"
                                                                                            0
                                                                                             1: '"
                                                                                            ....
                                                                                                     ::!l   <t::




Source: Ivanov (2002).


         The index illustrates that the city of Sofia is in a different league when it comes to
virtually all aspects of development (Figure 2.3). The differences between the remainder of
the 28 regions are much less pronounced, as the index blurs distinctions at the aggregate
level. Varna, Bourgas, Gabrovo and Sofia region are all above the national average, while
seven regions fall at the bottom: Smolyan, Kardjali, Vidin, Targoviste, Silistra, Montana
and Razgrad. These results again highlight the importance of a more differentiated
approach toward the analysis of regional development. A more detailed understanding of
spatial differences in development is useful in tailoring projects and policies. This is espe-
42                                                            BULGARIA POVERTY AsSESSMENT
                      ------------------------------~


cially critical given the expected in flux of EU resources for regional development in
upcoming years.

                       E. Findings and Policy Implications
        Poverty in Bulgaria has an important spatial dimension, including lagging growth in
rural areas within particular regions of the country. High poverty rates in rural areas are
driven by limited labor market opportunities, lack of access to functioning markets, inade-
quate investment and constraints to land use. The low level of human capital in rural areas
is another critical factor which is discussed further in Chapter 6. These issues suggest the
need for a comprehensive strategy toward poverty reduction that takes into account the
particular constraints of rural Bulgaria, as well as regional conditions. Further information
is needed to facilitate this, including an understanding of the impact of agricultural policy
on household welfare and a more disaggregated picture of poverty at the local level.
            It is clear that own-account agriculture plays a crucial role in preventing poverty.
The decline in small-scale agricultural enterprises is, along with declining wage earnings,
largely responsible for the increase in poverty in rural areas since the mid-1990s. There is
strong evidence that the non-poor realize that status in large measure through their access
to, and use of small-scale holdings. Work on household plots is rarely the primary source
of earnings for the household. However, the second and third job that people and house-
holds engage in ~s small scale "farmers" is clearly important for preventing deeper poverty
and enabling households to cope with the economic stress of the incomplete recovery of
the rural economy in the wake of Bulgaria's economic transition.
        There is little question that poverty reduction in rural Bulgaria is going to be driven
primarily by a reversal of the declining wage employment opportunities and falling produc-
tivity that presumably underlies the falling real wage payments to those working.
Agriculture will playa crucial role in this process. First, it will continue to be a source of
complementary livelihood and opportunity that enables households to cope with poor eco-
nomie prospects in the formal sector. But second, presumably there are large forward and
backward linkages from agricultural, and that revitalizing this sector, like others, will help
generate new opportunities for those that have been especially hard hit by Bulgaria'S eco-
nomie crisis.

         Policy priorities to address rural poverty cannot be limited to specific interventions
in rural areas, rather they are linked to cross-cutting issues discussed throughout this report,
including improving the environment for employment growth, building human capital and
strengthening the safety net. In each of these areas attention needs to be paid to ensure
that rural areas are not left behind. For example, that investment reaches rural areas, that
children in rural areas are able to attend school and that rural households receive child
allowances. Other policy considerations include:
         2                                                                                  43

         Improving the information base: The BIHS survey provides limited information on
the causes of low agricultural incomes and the roots of inequality in rural areas. The agri-
cultural module of the survey is poorly designed to capture use of land and other agricultur-
al inputs, and as such is a weak instrument for understanding the linkages between agricul-
tural policy and poverty. In particular, access to land needs further analysis to assess the
extent to which transaction costs in land markets limit access. A priority in this regard is to
revise this module for future household surveys. Further analysis should also be undertaken
using other datasets, including the recent census.
        Increasing opportunities for off-farm employment. The high level of rural unemploy-
ment and low agricultural wages highlight the need for greater access to off-farm employ-
ment opportunities in rural areas. The specific conditions in rural areas need to be consid-
ered in the design of active labor market measures. Opportunities for developing and tar-
geting small and medium sized enterprises in rural areas need to be identified.
44                                                                     BULGARIA POVERTY AsSESSMENT


Annex Table A2.l: Rural                Prome
                                         Poverty Rate    % of Rural Population   Rural Poverty Share
Household size
                        1 member              9.7                    6.5                  2.7
                        2 members             9.6                   22.6                  9.2
                        3 members             9.9                   15.2                  6.4
                        4 members            25.0                   17.4                 18.4
                             5+              39.1                   38.3                 63.4
                            Total            23.7                  100.0                100.0
Age
                               <5            48.3                    4.9                10.1
                        5-10 years           35.8                    7A                 11.2
                       11-17 years           34.8                   7.5                 11.0
                       18-25 years           37.6                   9.8                 15.6
                       26-45 years           26.1                   23.4                25.8
                       46-55 years           15.9                   11.3                7.6
                       56-65 years           10.3                   14.7                6.4
                       66-75 years           12.8                   13.4                7.3
                         above 75            16.0                   7.6                 5.1
                             Total           23.7                  100.0               100.0
Education
            Basic school or less             26.4                  61.3                 80.8
             Secondary general               10.7                  12.2                 6.6
            Secondary technical              10.9                  12.1                  6.6
          Secondary vocational               11.2                   9.9                 5.5
                     University              4.6                   2.3                  0.5
Other post-secondary vocational              0.0                   2.2                  0.0
                             Total *         20.0                  100.0               100.0
Ethnicity
                        Bulgarians              9.4                  65.8               26.0
                             Turks             28.3                  14.1               16.8
                             Roma              79.4                  16.5               55.4
                             Other             11.6                   3.6                1.8
                              Total           23.7                  100.0              100.0
Labor Market Status of HH bead
                     Unemployed                42.1                  20.6               36.6
                        Employed               17.4                  26.5               19.5
              Out of Labor Force               19.6                  52.9               43.9
                              Total           23.7                  100.0              100.0
Source: BIHS 2001; Note (*) excludes those still in school and <18.
           2                                                   45

Annex Table A2.2: Reduced Form Welfare
                                         Parameter
Variable                                  Estimate   t Value


Bourgas                                   -0.12587       -1
Varna                                    -0.12642    -0.99
Lovetch                                  -0.05765    -0.46
Montana                                  0.000855     0.01
Plovdiv                                  -0.05939    -0.49
Rousse                                   -0.06176    -0.49
Sofia Region                             -0.08904    -0.73
Haskovo                                  -0.00816    -0.06
Household size                           -0.01944      -1.4
No. of children (0-5)                    -0.15106    -3.23
No. of Eldedy (65+)                      -0.08293    -2.57
Age of HH head                           0.000608     0.08
Age of HH head squared                   -1.2E-05    -0.18
Female HH headship                         0.06349    0.56
Single HH headship                          0.0735    1.22
Single Female HH headship                -0.16319    -1.22
Education of HH head - Primary             0.14744    1.51
Education of HH head - Middle School       0.19432    2.01
Education of HH head - Secondary           0.35614    3.39
Education of HH head - University           0.4458    3.55
Ethnicity - Turkish                      -0.27825     -4.5
Ethnicity - Roma                         -0.70085    -9.76
Other Ethnicity                          -0.11428    -1.15
Fired or Laid-Off from 1995 Job          -0.06412     -1.2
Retired from 1995 Job                     0.04926     0.81
Variables With Per Capita Scaling:
Public and Private Pensions              0.000442     0.66
Disability and Survivor Pensions          -0.00061   -0.32
Social Benefits                            0.00375    0.97
Non-Agricultural Assets                  3.51E-05     6.21
Agricultural Assets                      6.21E-08     0.51
No. of Cattle Owned                        0.06556    1.21
No. of Sheep Owned                        0.03429     2.61
No. of Goats and Pigs Owned               0.01142     0.76
No. of Poultry Owned                      0.01059     2.79
Restituted Orchard and Pasture Land      -0.02821    -1.47
Restituted Crop Land                      0.01477     1.49
Inherited Orchard and Pasture Land         0.0056     1.44
Inherited Crop Land                       0.02548     2.49
46                                                                       BULGARIA POVERTY ASSESSMENT


Other Orchard and Pasture Land                                                   -0.00567               -0.06
Other Crop Land                                                                  0.00289                 0.04
Coop Orchard and Pasture Land                                                    -0.68635                -0.7
Coop Crop Land                                                                   0.10306                 1.27
Rented Orchards and Pasture Land                                                 0.59271                   3.2
Rented Crop Land                                                                -0.05142                -0.96
Restituted Non-Use Ag Land - Rented                                              0.03157                  1.5
Restituted Non-Use Ag Land - Not Rented                                          0.00214                 0.22
Inherited Non-Use Ag Land Rented                                                -0.24864                -1.26
Inherited Non-Use Ag Land - Not Rented                                           0.00423                 0.74
Other Non-Use Ag Land - Not Rented                                               0.70628                 0.52
Restituted Non-Use Coop Land                                                     0.00913                  2.9
Inherited Non-Use Coop Land                                                     0.000993                 0.35
Other Non-Use Coop Land                                                          0.02505                 1.61
Source: BIHS 2001.
Note: Omitted variables include the city of Sofia, an indicator that the household head has no education, and the
Bulgarian ethnicity. In addition,the primary method of land acquisition for the "Other" land category is purchas-
es, although additional methods include "Given by Government", "FreeH,and "Other".
            3


                Chapter 3: Poverty and the Labor Market 29


                          A. Recent Labor Market Developments
Background

        While Bulgaria's economic performance over the past five years has been notable,
marked by macroeconomic stability under the currency board and a resumption of real
GDP growth, unemployment remains one of the country's greatest challenges. At 19.5 per-
cent in the first quarter of 2002, unemployment in Bulgaria has been growing steadily since
1996, and is among the highest in the region. 30 Employment in Bulgaria has declined sub-
stantially since the 1996-97 crisis. In mid-200l, employment remained at 90 percent of
1995 levels (Figure 3.1). The decline in employment has been accompanied by a rapid
increase in open unemployment,31 Between 1995 and mid-200l, an estimated an 124,000
people became unemployed. The spike in unemployment in 2001 reflects the increase in
restructuring of large state-owned enterprises.
                     Figure 3.1: Real GDP, Employment and Unemployment, 1995-2001
                                            (Indices 1995 =100)
                          - - - Real GOP -         -   -   Employment· ••••• Unemployment

              130.----------------------------------------------
              125+-----·------------------------------------------~

              1~+---------------------------------------------~
                                                                                            .'
              115~·~------------------------------------------~--
              110+---------------------------~~~~------7_----
                                                               ...
              105+-------~-----------.-.~.~~·L.~-~------------~. ~~----~

              100~~~~.~=.:~.7.~~-=---------------------~--=-----~---
                                       __
               95~~~~~,-----------~~~~-=--~~----------------
                90+--~--------~--------~--------------~~~~~~
                85   c----------""<:'\..········--7~£.........---------~------
                80                         ,~
                75   ~...... ---------------------------------------------

                 1995        1996          1997             1998      1999        2000           2001

Source: IMF estimates for GDP, Labor Force Surveys for employment and unemployment data.
Note: First quarter of each year for GDP; employment and unemployment data refer to yearly average, except for
2001 where the data are for June only.


29 This chapter draws from the background papers on labor markets by J. Rutkowski and A. Kolev.
30 March 2002 Labor Force Survey (LFS) Data. This study relies on survey data rather than administrative data to
describe labor market patterns and trends. Survey data are generally considered as more reliable, as they are not
influenced by (changing) incentives to register.
31 Some of this can be explained by the change in the sample of the Labor Force Survey in 2001. See Kalev,
2002, p. 4 for details.
48                                                                       BCLGARIA POVERTY ASSESSMENT


         These trends appear paradoxical - why has unemployment been rising since 1997,
while poverty has been coming down? There are a number of factors behind these contrary
developments, including: (i) the expanded coverage and adequacy of social protection ben-
efits, which keep a significant share of the population out of poverty; (ii) increasing use of
coping strategies, including remittances, informal employment and own production of food,
which may mitigate the income effects of unemployment; and (iii) a decline in the share of
the working poor, due to real wage recovery since the crisis.
         This chapter explores this question in the broader context of the linkages between
labor market status and welfare. The picture is much more complex than a first glance
might suggest. Vulnerability in the labor market has multiple dimensions, including income
and non-income aspects. The risks of unemployment and inactivity, as well as low pay and
poor working conditions for the employed all contribute substantially to welfare. The
groups at greatest risk of falling into these labor market states are, in most cases, those
identified in the previous chapter as the main poverty risk groups. In particular, workers
with low education levels and Roma are at greatest disadvantage in the labor market.
         Following a discussion of the main labor market developments and characteristics,
this chapter looks at poverty and labor market status, the non-income dimensions of welfare
and analysis of the characteristics associated with different types of labor market vulnerabili-
ty. The discussion of the labor market continues in the next chapter, which examines the
factors driving high unemployment in Bulgaria and the barriers to employment generation.
Key issues related to mitigating the impact of unemployment on income poverty, including
the role of social protection and coping strategies will be discussed in Chapter 5.

Unemployment
         In 2001 unemployment approached 20 percent, increasing from a relatively low level
of 12 percent in 1998 Cfable 3.1). This rate is higher than in some of the other high unem-
ployment countries in Central and Eastern Europe, where unemployment has been between
18 and 19 percent in recent years. Long-term unemployment in Bulgaria has been consistent-
ly higher than in most countries in the region, including Poland, Lithuania and Slovakia. As
early as 1995, over 67 percent of the unemployed in Bulgaria had been out of work for more
than one year. In 2001, this share was 64 percent of the unemployed. On average, an unem-
ployed worker in Bulgaria looks for a job for about 2 years32. This is a particularly worrisome
feature of unemployment in Bulgaria, as long-term unemployment is closely connected to
poverty and social exclusion, and tends to undermine chances of finding a new job. The
longer a worker remains unemployed, the more difficult it is to escape unemployment.

   Estimates by the MOLSP of average unemployment duration are 8.6 to n.s months (based on registration
data). There is no inconsistency here, as this report refers to the average duration of completed spells of unem-
ployment, which is on average twice the duration of uncompleted spells.
          3                                                                                            49

Table 3.1: Labor Force Participation, Employment and Unemployment, 1995-2001
                                             1995 1996 1997 1998 1999 2000                      2001
Labor force participation rate               52.2 52.5 51.9 51.6 50.2 49.8                      50.4
Employment rate                              44.0 45.4 44.8 45.3 43.1 41.7                      40.6
Unemployment rate                            15.7 13.5 13.7 12.2 14.1 16.3                      19.4
Share of long term unemployment              67.5 65.7 62.2 63.9 58.7        na                 63.7
Sources: Labor force surveys; NSI.
Notes: June data; Labor force participation rate = (Employed + Unemp]oyed)/Popu!ation aged 15; Employment
rate Employed/Population aged 15+; Unemployment rate = Unemployed/Labor force



        Unemployment in Bulgaria also has an increasing regional dimension, a phenome-
non observed in all transition countries engaged in industrial restructuring. The variation in
the unemployment rate across regions in Bulgaria increased from 13 percentage points in
1995 to 32 in 2001. This level of variation is higher than in the Slovak Republic, another
high unemployment transition country with significant regional variation (World Bank,
2002b). In mid 2001, the region with the highest unemployment was Montana (Table 3.2).
Other regions with unemployment rates above the national average were Rousse and
Varna. The concentration of unemployment in particular areas reflects, to a large extent,
the presence of large formerly-state owned enterprises that are being restructured.
                          Figure 3.2: Unemployment Rate by Region, 2001
                    60

                    50
              ~
              r:    40

              i
              >.
              0
                    30

              ~
              u     20
              '"
              ::I


                    10

                     0




Source: BIHS 2001.

        The main reason for unemployment was redundancy, while fewer workers became
unemployed because of the end of seasonal work, or because their temporary empioyment
contracts were not renewed. Another important reason for unemployment is the entry into
the labor force of school Ie avers and young people completing their military service and
without prior work experience.
50                                                                     BULGARIA POVERTY ASSESSMENT



Table 3.2: Reasons for Unemployment, 2001 (percent)
                                                                    Total           Male             Female
Leaving school/completing military service and
looking for first job                                               15.5             18.0             12.6
Others looking for first job                                         7.7              5.9             10.0
Made redundant                                                      44.5             44.4             44.6
Seasonal/temporary job has ended                                     6.9              7.0              6.8
Unsatisfied with working conditions                                 3.6               3.9              3.2
Other reasons                                                       21.7             20.8             22.8
Total                                                               100              100              100
Source: Labor Force Survey, June 2001.
Note: Refers to population of working age (16 and above).


Who are the Unemployed?
        The composition of the unemployed varies significantly across individuals with dif-
ferent characteristics. There are large differences across age and ethnic groups.
Individuals between 26 and 45 composed the biggest group among the unemployed (45 per-
cent), followed by young people from 16-25 (29 percent) and prime-age adults aged 46-55
(21 percent) (Table 3.3). The majority of the unemployed were ethnic Bulgarians (56 per-
Table 3.3: Unemployment and Individual Characteristics (percent)
                                  Share among all the unemployed                    Unemployment rate'"
All                                            100.0                                       33.7

Female                                                      51.4                             34.0
Male                                                        48.6                             33.4

Age 16-25                                                   29.4                             55.9
Age 26-45                                                   45.4                             29.8
Age 46-55                                                   20.8                             27.8
Age 56+                                                      4.4                             25.9

Bulgarian                                                   55.7                             24.2
Turkish                                                     10.6                             50.6
Roma                                                        31.1                             77.0
Other                                                        2.6                             45.1

Primary education or less                                   8.0                               71.7
Incomplete secondary                                       36.1                               59.8
Secondary                                                  47.3                               29.3
University                                                  8.6                               13.5
Source: BlHS, 2001.
Note: (*) Definition is the # of unemployed divided by the labor force (unemployed and employed).
          3                                                                                                  51

cent), but a large share were Roma (31 percent) and Turks (11 percent). The share of
Roma and Turkish unemployed was higher than their overall share in the population. The
unemployed were nearly evenly divided between men and women.
        The incidence of unemployment also indicates marked differences among groups.
The same table shows that the unemployment rate was almost identical for men and
women. There are, however, large disparities by age. Unemployment among young people
16-25 (56 percent) is double that of p~ime age adults aged 46 and above. The incidence of
unemployment is also disproportionately high among ethnic minorities. Compared with
ethnic Bulgarians, the unemployment rate is three times higher among Roma (77 percent)
and two times bigger among Turks (51 percent). The incidence of unemployment is also
much higher than the national average for individuals with little education. The high level
of Roma unemployment highlights the need for specific interventions in this area (Box 3.1)

                              Box 3.1: Promoting Employment among the Roma

            Programs in both Eastern and Western Europe have been adopted to promote employment and
 income generating opportunities among Roma communities. One of the most established is the Autonomia
 Foundation in Hungary which provides grants and interest-free loans to develop employment programs for
 Roma. Small-income generating initiatives include livestock breeding, agricultural programs, and small enter-
 prise development.
           The success of Autonomia's projects, as measured by the repayment rate of its loans, has increased
 greatly since it was established in 1990. In 1998 repayment rates reached nearly 80 percent, in comparison
 with 10 percent during the first year. Autonomia attributes this improvement to the involvement of trained
 monitors, some of whom are Roma, who work closely with project teams throughout the implementation of
 the project. Autonomia is now in the process of expanding its programs to other countries in the region. In
 2000, the first group of Roma began training in preparation to start small grant and loan programs for Roma
 in four CEE countries, including Slovakia. Further evaluation on the project should examine the impact of the
 project on the welfare of participants.
           A different type of employment program is the Acceder Programme run by the Asociaciyn General
 Gitano in Madrid, Spain. The program provides individualized support to participants in identifying and
 preparing for employment. While the program is open to all interested applicants, 79 percent were Roma in
 1999. Roma mediators work closely with job-seekers and employers to identify their skills, training needs and
 employment opportunities. The mediators provide support to applicants throughout the training and job
 search process.

           In 1999 there were 304 active job seekers enrolled in Acceder and 63 percent found employment.
 However, the job retention rate is not known, and rigorous cost-benefit analysis of the program is not avail-
 able. Staff of the Asociaciyn and participants noted that the strengths of the program are its individualized
 approach in assessing and matching skills and jobs and the use of mediators who can bridge the gap between
 gitanos (Roma) and non-Roma. Challenges include the difficulty of providing adequate and appropriate train-
 ing for individuals with low education levels, persistent discrimination on the labor market and incentives.
 Participants may be reluctant to accept low paying jobs and risk losing access to social assistance benefits.

          Sources: Ringold, 2000.
52                                                             BULGARIA POVERTY ASSESSMENT


Employment and Labor Force Participation
         High unemployment is only one symptom of labor market stagnation in Bulgaria.
The employment-to-population ratio reached its lowest level since the beginning of transi-
tion in 2001.      Consistent with other high unemployment transition economies, the
Bulgarian labor market can be characterized by low employment of prime age men, rela-
tively high employment of prime age women, and low labor force participation of both
younger and older workers. These features imply that Bulgaria is significantly underutiliz-
ing its labor resources and faces a major policy challenge to expand labor market opportu-
nities for working age adults.

         In Bulgaria only 70 percent of the men aged 25-54 are employed, in comparison
with close to 90 percent in the OECD (Figure 3.3). This 20 percentage point differential
underscores the high degree of underutilization of labor resources in Bulgaria, which direct-
ly translates into lower output and higher poverty. High unemployment and low labor force
participation among prime age men are main reasons for the low employment rate. This is
likely a function of the large number of "discouraged workers," who have given up looking
for a job and have dropped out of the labor force. Thus, not only do fewer prime age men
have jobs in Bulgaria than in the OECD, but fewer of them are searching for a job.

                         Figure 3.3: Employment Rates for Prime-Age Workers (25-54)
                                 100.---------------------,
                                  90
                                  80
                                  70
                                  60
                                  50                               • AJ I workers
                                  40                               .Men
                                  30                               0
                                                                   , Women
                                  20
                                  10
                                   o
                                          Bulgaria    OEeD

Sow-ce: Labor Force Survey Data, June 2001.


         In contrast, the employment rate among prime age women is relatively high in
Bulgaria, despite the high unemployment. rate. Two-thirds of women of prime working age
are employed in Bulgaria, which is somewhat higher than in the OECD . This reflects the
high female labor force participation rate of 81 percent in Bulgaria versus 68 percent in the
OECD. The female employment rate in Bulgaria is nearly as high as it is for males, in con-
         3                                                                                     53

trast to the situation in OECD countries.
         Another facet of the underutilization of labor resources in Bulgaria is low labor
force participation and employment of young and older workers. Only one-fifth of young
people (up to 24 years of age) are employed in Bulgaria, in comparison with close to one-
half in the OECD. This may indicate greater participation in education among youth.
Similarly, less than one quarter of older workers (55 to 64) are employed in Bulgaria, in
comparison with slightly below one-half in the OECD. This reflects labor market slack in
Bulgaria, but probably also cultural norms and, especially in the case of older persons, rela-
tively lax rules for the receipt of social benefits, such as disability pensions. Low employ-
ment of older workers also reflects the high fixed cost of adapting to layoffs and a shorter
working life to recover the costs. Regardless of the reasons, low employment among young
and older workers implies unutilized potential and negatively affects living standards.

         To some extent, the recent resumption of economic reforms in Bulgaria has already
contributed to some visible changes in the nature of employment, through increasing labor
market flexibility. In mid-200l, wage employment constituted the vast majority of total
employment in Bulgaria, at about 90 percent, but there have been signs of a small increase
in self-employment and temporary work since 1995. The incidence of part-time employ-
ment has remained limited, comprising only 11 percent of total wage employment in 2001
(Table 3.4). For comparison, the share of part-time employment in total employment rep-
resented about 16 percent in the European Union, and 15 percent in OECD countries
(OECD,2001).

         Underemployment, as measured by the share of wage employed willing to work
more, was also relatively low (7 percent). 1ne low incidence of underemployment may
explain why the share of individuals with two jobs was also very limited (less than 2 per-
cent), at least compared with other transition countries. However, a large share of the
wage employed were also engaged in some agricultural activities (17 percent). As discussed
in Chapter 5, home production has indeed been an important coping mechanism in many
transition countries. Temporary work, increased to 34 percent in 2001, in comparison with
23 percent in 1997 and 29 percent in 1995. What is remarkable is that in mid 2001, nearly
one out of three temporary jobs were in the informal sector, that is, not governed by a labor
contract.

Labor Force Mobility
        A worrisome feature of the Bulgarian labor market is the low flows out of unem-
ployment. There is a growing pool of unemployed workers in Bulgaria which is stagnant
such that it is very difficult for these workers to exit into jobs. This is a trend that has been
worsening over time. Negative labor flows - such as from employment into unemployment
and from unemployment into inactivity - have increased, while positive flows - such as
54                                                                         BULGARIA POVERTY ASSESSMENT



Table 3.4: Characteristics of Employment, 1995-2001 (percent)
                                                     1995                           1997                  2001
All employed                                        100.0                           100.0                 100.0


Wage employed                                                   93.0                92.9                  91.1
Self-employed                                                    7.0                 7.1                   8.9


All wage employed                                               100.0               100.0                 100.0


Part-time                                                       10.2                 7.1                  11.0
     Looking for more work                                       1.0                 0.7                   1.7
     Not looking for more work                                   9.2                 6.4                   9.3
Full-time                                                       89.8                92.9                  89.0
     Looking for more work                                       5.8                 4.3                   5.2
     Not looking for more work                                  84.0                88.6                  83.8


Underemployed                                                    6.8                 5.0                   6.9


Has a second job                                                 1.2                 0.8                   1.5


Spent time in agricultural activities                           30.8                16.5                  16.7


Contract - indefinite term                                      70.8                76.8                  65.7
Contract - temporary                                            20.7                17.3                  24.1
No contract - temporary                                       8.5                   5.8                   10.2
Source: BIHS, 1995, 1997 and 2001.
Notes: Among working age adults (16 years and above) in employment in the past 7 days at the date of the interview.


from unemployment to employment - have decreased. For example, inflows from employ-
ment into unemployment are currently twice as high as they were in the mid-1990s. At the
same time, outflows from unemployment into work are presently only at two-thirds of what
they were in the mid-1990s. In the same vein, movements from unemployment into inactiv-
ity are now about one-third larger than a few years ago.3 3
        Large flows from unemployment to inactivity indicate a substantial "discouraged
worker" effect. Many unemployed in Bulgaria have ceased looking for a job, discouraged
by the lack of job opportunities. The scale of this effect is striking, as much as 40 percent
of the unemployed withdraw from the labor force within one year. 34 This is much higher
   Data on labor force transitions for 1995-1996 are taken from Garibaldi et al. (2001).
34 The magnitude of transitions from unemployment to inactivity may be overestimated, however, as previous
labor force status was determined based on respondents self-assessment. Some respondents who categorized
themselves as unemployed one year earlier might in fact had been out of the labor force (if they were not actively
looking for or not available for a job.
~lJlo.LJl"'l   3                                                                             55

than in other high unemployment transition economies. For example, in Poland and
Lithuania, only about 15 percent of the unemployed withdraw from the labor force within a
year, and this proportion is still smaller in Slovakia (5 percent), (Rutkowski, 2002b, World
Bank 2001a and 2001b).

         Table 3.5 provides an indication of the extent of mobility across different types of
employment and different labor market states by showing the employment status of individ-
uals, as reported by them for different points in time. The following picture emerges: first,
immobility rates are relatively higher among the inactive and those employed under an
indefinite contract, and relatively lower among formal temporary workers (with contracts)
and the unemployed. In absolute terms, the repetition of unemployment over time appears
worrisome. Among the unemployed in 2001, about 65 percent were also unemployed three
years earlier in 1998, and 70 percent were unemployed six years earlier in 1995.

        Second, temporary work - both formal and informal tends to be the main entry
point into employment for the inactive and the unemployed. This reflects increasing labor
force flexibility. For instance, among temporary workers in 2001, about 34 percent were
inactive and 8 percent were unemployed three years earlier. Among permanent workers in
2001, however, only 6 percent were inactive and 2 percent were unemployed in 1998.
Temporary work is also the second most important destination, after unemployment, for
those workers who lost their permanent job status after 1998.

          Third, the extent of immobility within informal employment (with no contract) is high
relative to that in formal temporary jobs (with contract). For instance, the share of individu-
als who remained in the same status between 1998 and 2001 was 75 percent among informal
workers compared with 64 percent among formal temporary workers. Most of the new infor-
mal workers in 2001 were either inactive (11 percent) or permanently employed (6 percent)
in 1998, and very few were unemployed or formally temporary employed (3 percent). A low
exit rate from informal work is also observed even after a longer period. In 2001, 72 percent
of informal workers were in the same status 6 years before. The immobility rate for informal
employment is also higher than that of unemployment, suggesting that it may be even more
difficult for an individual to exit informal employment than unemployment.

        Finally, in 2001, the newly unemployed were mainly individuals previously
employed under an indefinite contract, likely in former state-owned enterprises, and per-
sons who were not in the labor force, presumably students. This is consistent with the rea-
sons for unemployment discussed earlier.

Wages
       An important factor behind declining poverty since 1997 has been the recovery of
real wages, which has improved the welfare status of workers. The share of the employed
56                                                                                     BULGARlA POVERTY ASSESSMENT



Table 3.5: Mobility Rates by Types of Employment and Labor Market Status
                             Employment status in 1998         Employment status in 1995
                                ...
                                I::     i::'                                                 I:i         i::'
                                <!)     :oj                                                  <!)         oj
Employment status               I::     .....                                                I::         .....
                                «!      0                                                    oj          0
in 2001                         S
                                .....
                                        0...                                                 S
                                                                                             .....
                                                                                                         0...
                                        S                  '"tl
                                                            (1)                              <!)         S                 '"tl
                                                                                                                            <!)    '"tl
                                1:L     B       g           S
                                                                    '"tl
                                                                     ~,
                                                                                             0...        B          t)      S       ~,
                                                                                              I                     «!
                                1.      1.      .....      0.                                            1.                0.
                                u
                                «!
                                .....
                                'E      -
                                        u
                                        «!
                                        .....
                                        I::
                                                'E
                                                u
                                                 0
                                                           S
                                                           <l)
                                                           ~
                                                                    %
                                                                     S
                                                                             <l)

                                                                            .~
                                                                             u
                                                                                             t)
                                                                                             «!
                                                                                             .....
                                                                                             'E
                                                                                                         u
                                                                                                         ...
                                                                                                         oj

                                                                                                         'E
                                                                                                                    !:l
                                                                                                                    C
                                                                                                                    0
                                                                                                                    u
                                                                                                                           S
                                                                                                                           (1)
                                                                                                                           ~
                                                                                                                                   l<!)
                                                                                                                                           .~
                                                                                                                                           t)

                                                                                                                                           -
                                                                     <l)
                                                                             «!                                                             :oj
                                 0      0       0          "'ij      I::                      0          0          0      "'ij     I::
                                                                             I::                                                            I::
                               U        U       Z          IZ!      ~       ......          U            U         Z       IZ!     ~

Contract- permanent     90.8 1.2 0.1 0.4 1.8 5.7                                            86.1 1.3 0.3                  0.4     3.1      8.8
Contract- temporary     6.0 64.0 OJ 0.6 5.1 24.0                                             8.4 56.5 0.3                 0.0     6.3     28.5
No contract - temporary 6.3 3.1 74.6 2.3 3.1 10.6                                           4.8 2.1 71.9                  0.8     4.3     16.1
Self-employed           5.3 1.5 0.0 86.9 1.4 4.9                                            13.9     3.4           1.0    70.2    4.8     6.7
Unemployed              17.2 5.6 1.2 1.0 65.4 9.6                                           9.7      3.3           1.4    0.6     69.9 15.1
Inactive                5.5 0.6 0.1 0.2 1.5 92.1                            6.9           0.2        1.2                  0.5      1.1 90.1
Source: BIHS 2001.
Note: These mobility rates are based on the records provided by the respondents in the 2001 survey.


in the bottom quintile of the consumption distribution fell from 32 percent in 1997 to 19.7
in 2001. While real wages were 56 percent of 1994 levels in 1997, by 2000 they had nearly
recovered.

        Wage inequality peaked in 1997, although the 1997 data may be underestimated
because they were eollected during a period of very high inflation (Rutkowski, 1998). A
better comparison is to look at the inequality measures in 2001, relative to 1995. According
to the Gini coefficient, there was only a slight increase in overall wage inequalities between
1995 and 2001.

Table 3.6: Dynamics of Absolute and Relative Minimum Wages, 1995-1999
                                       1994 1995 1996 1997 1998 1999                                                      2000 2001

Real minimum wage (1995=100)                         100          84.5     66.5      40.4         54.7           68.4
Real wage (1995=100)                                 100          85.9     65.6      56.3         63.0           71.9     99.5      103
Minimum wage
   (as a % of gross national wage)                  37.1          33.5     33.4      26.8         28.4           31.2             36.6 *
Source: Bulgarian authorities and Bank staff estimates. Note: (*) 02-2001


         Although the aggregate increase in wage inequality has been small, what is of con-
cern, is that the increase has been driven by a relative decline in the position of low paid
workers, while the relative position of top paid workers has remained almost unchanged
(Table 3.7). In other words, there are signs that the wage gap between top paid and low
           3                                                                                                         57

paid workers (P90/PlO) has increased slightly, not because better-off workers have seen
their relative earnings position improved (P901P50), but because low paid workers have
seen their relative wage status slightly decline (PlOIP50). The same Table 3.7 shows that
private wages remained below public wages in 2001.

Table 3.7: Wage Inequalities, 1995-2001
                                               1995                     1997                          200]
                                         Monthly Hourly           Monthly Hourly            Monthly      Hourly
Gini coefficient (x100)                    28.13        32.33       43.97        45.82        28.57          34.36
PlO/P50                                     0.55        0.55         0.36         0.37         0.50          0.52
P90/P50                                     1.89        2.00         2.77         2.87         1.87          2.00
P90/PlO                                     3.20        3.63         7.55        7.73         3.75           3.84
Private to public wage ratio                1.16         1.01        0.96        0.95         0.98           0.96
Source: BIRS 1995, 1997 and 2001.



       Analysis of the determinants of wage levels found that the factors influencing wages
and the extent of their influence are not necessarily identical in low and high paid jobs,
reflecting a form of segmentation in the labor market. 35 In low-paid jobs, being Roma, hav-
ing health problems, and being employed in the private sector have a negative effect on
pay, while these characteristics do not seem particularly significant in better-paid jobs.
Another difference is that the return to education and the gender pay gap were more pro-
nounced in high-paid jobs. However, in both low-paid and high-paid jobs, lower wages are
observed for women, older workers, workers with limited education, workers in agriculture,
trade, social services, commercial services and transport, and people working in regions
with high unemployment levels.
        As the survey data show, the gender wage gap persists in Bulgaria indicating that
women face a form of wage discrimination, even after controlling for other factors like job
tenure, education and industries. What is remarkable is that the gender wage gap is less
pronounced in low-paid jobs. The size of the gap is 18 percent in low-paid jobs (bottom
quartile), compared with respectively 21 percent in middle-paid jobs (middle quartile) and
25 percent in high-paid jobs (top quartile).3 6 Interestingly, a higher level of gender wage
discrimination in better-paid jobs has been observed in other countries of Eastern Europe
and Central Asia (Newell and Reilly, 2000).




   Simultaneous-quantile regression analysis was run on the Jog hourly wage of workers in the 25th , 50th , and 75 th
percentiles to capture the variation in determinants across wage levels. For full results sec Kolev, 2002.
36 The gender pay gap declined since 1995, where the wage gap accounted for 23 percent in low paid jobs, 29 per-
eem in middle paid jobs, and 34 percent in high paid jobs.
58                                                                          BULGARIA POVERTY ASSESSMEl\'T



                    B. Income Poverty and Labor Market Status 37
         The relative welfare status of the unemployed has deteriorated relative to the
employed. Between 1995 and 2001 the incidence of poverty has been highest among the
unemployed and lowest among the employed. In mid-2001, 41 percent of the unemployed
fell below the relative poverty line, in comparison with 23 percent for the inactive and 12
percent for the employed.
       These aggregate poverty measures by labor market status only provide a limited
snapshot of the most vulnerable groups in the labor market For example, in mid-2001 the
incidence of poverty was the highest among the long term unemployed, at 46 percent
Poverty was also very high among certain groups of workers, such as those in agriculture,
where the poverty rate was 39 percent. Those in informal employment (33 percent) were at
a higher risk of income poverty than the short term unemployed, and where poverty rates
ranged from 24 percent to 28 percent respectively. While poverty has declined on average
among the wage employed, it has actually increased among workers in informal jobs.
        These results indicate the growing risk of social exclusion among certain groups of
workers and point to the importance of adopting a comprehensive approach to vulnerabili-
ty that monitors not only trends in unemployment and unemployment duration, but also
changes in the nature and quality of employment. The issue of the working poor has
become a growing concern in DECO countries (Box 3.2).

                                Box 3.2: The "Working Poor" in OECD Countries
             A key message that emerged from the 200] OECD Employment Outlook is that poverty among work-
  ing households in OECD countries affects large numbers of individuals. Evidence in the OECD countries
  shows that the overlap between work and poverty is quite high, and increases when work over a multi-year
  period is considered. There are important differences across OECD countries regarding the incidence of work
  and poverty. Compared to the EU member states, a greater share of total time spent in poverty in the United
  States is experienced by households with substantial labor market participation. Among working-age house-
  holds which are poor in a given year, only 2 out of 5 households contained no adult worker in the EU and 1
  out of those 5 in the USA. Moreover, among those who were "permanent-income" poor over three years, the
  shares without employment fell to 1 in 4 and 1 in 10 respectively. This suggests that low-paying and precarious
  jobs better characterize the experience of some poor households than do continuous exclusion from the labor
  market. Accordingly, an effective employment-oriented social policy should also pursue the objects of insuring
  income adequacy among working households, improving employment retention among those who exit from
  poverty, and helping low-paid workers to move-up job ladders.

  Source: OECD (2001).



       Between 1995 and 2001, the relative share of inactive workers among the poor
remained virtually constant, at around 47 percent, while the share of the unemployed rose

37 For the analysis of poverty and the labor market in this section, poverty is defined as the bottom quintile of per
capita household expenditure.
Chapter 3                                                                                59

from 13 percent to 34 percent. During the same period, the share of the employed - the
"working poor" - dropped from 40 percent to 20 percent. The changing composition of the
poor mirrors, to some extent, the sharp decline in employment and the large increase in
unemployment observed in the labor market. However, in mid-200l the unemployed tend-
ed to be disproportionately concentrated among the poor. Among the poor unemployed,
there is evidence of a rising share of both the long-term unemployed and the very short-
term unemployed (less than 3 months). In mid-200l, about two-thirds of the poor unem-
ployed had been unemployed for over one year.
         Private and part-time employees were over-represented among the working poor.
In 2001 the working poor were predominantly in the private sector, while the reverse was
true in 1995 and 1997. This changing composition of the working poor can be explained by
the growth in private sector employment where the poverty rate is higher. The largest share
of the working poor, one out of five, was employed in agriculture. This is also higher than
the overall share of agriculture in total employment. Other large groups among the work-
ing poor were workers in social services and in manufacturing/industry, but these groups
were less numerous among the poor than among the non-poor.
         For the unemployed, multivariate analysis revealed that an important risk factor
associated with poverty is the presence of young children in the household. The risk of
being poor for the unemployed with children is three times higher than it is for the
employed. Other factors which increase the poverty risk for the unemployed are the pres-
ence of other unemployed workers in the household, and inactive adults and low paid work-
ers. These factors lower the probability of being poor for the employed and inactive as
well, however the extent of the impact varies. The non-employed tend to be more vulnera-
ble to a deterioration of the household labor market environment (e.g. a greater number of
unemployed in the household), or the presence of children than the employed.
Interestingly, the presence of pensioners increases the poverty risk for the employed, while
it does not seem to have an impact on the poverty status of the unemployed, and to some
extent, of the inactive adults. 38
        These results point to the importance of a comprehensive approach to poverty
reduction that tackles the different sources of income poverty at the household level.
Given the disastrous welfare repercussion of unemployment, as well as inactivity and low-
paid work, sound policies which facilitate the development of a modern formal private sec-
tor are essential, as do measures which assist workers in moving out of low-paid jobs.




  See Kolev (2002) for the full regression results.
60                                                                       BULGARIA      POVERTY ASSESSMENT


Table 3.8:                     Labor Market Characteristics
                                                1995                      1997                     2001
Labor market status
Out of the labor force                          26.7                      23.6                      23.1
Unemployed                                      32.6                      35.2                      41.1
Employed                                        16.6                      16.8                      12.1

Unemployment duration
0-3 months                                       9.3                      11.3                      24.4
3-6 months                                      l3.3                      27.4                      28.5
6-12 months                                     31.0                      37.3                      35.6
More than 12 months                             41.8                      39.9                      45.7

Nature of employment
Wage employed                                   16.9                      17.0                      12.4
Self-employed                                   9.0                       12.0                      8.2

Type of wage employment
Contract permanent                              12.7                      152                        8.9
Contract - temporary                            20.5                      19.9                      13.2
No contract temporary                           26.6                      24.3                      32.6

Public                                          14.4                      15.9                      9.8
Private                                         20.4                      18.6                      15.0

Part-time looking for more work                 26.3                      33.3                      21.2
Part-time not looking for more work             16.9                      10.7                      13.5
Underemployed                                   24.5                      16.1                      19.2

Sector of employment
Manufacturing and industry                      15.7                      l3.6                      10.5
Construction                                    18.7                      18.7                     13.6
Agriculture and forestry                       25.1                       30.7                     39.2
Transport and communication                     8.0                       l3.9                     12.1
Trade                                          12.3                       13.7                      7.9
Commercial services                            21.7                       25.4                     17.6
Finance                                        22.1                       14.6                     13.9
Social services                                12.0                       15.5                     8.3
Source: BIHS 1995, 1997 and 2001.
Note: Among working age adults (16 years and above). Poverty refers as   the bottom quintile of per capita house-
hold expenditure.
            3                                                                                                    61

Table 3.9: Composition of the Poor by Labor Market Characteristics (%)
                                         1995                1997                                  2001
AIl working age adults                   100.0               100.0                                 100.0


Out of the labor force                          46.7                      48.6                     46.4
Unemployed                                      13.0                      19.1                     33.9
Employed                                        403                       32.2                     19.7


AIl unemployed                                  100.0                     100.0                    100.0


0-3 months                                       5.2                       6.8                      7.2
3-6 months                                       5.9                      19.4                      7.8
6-12 months                                     28.8                      28.3                     20.0
More than 12 months                             60.1                      45.5                     65.0


All wage employed                               100.0                     100.0                    100.0


Contract indefinite term                        58.1                      69.7                     47.5
Contract - fixed tenn                           27.3                      21.8                     25.7
No contract                                     14.6                       8.5                     26.8


Part-time                                       11.8                       8.7                     13.3
Full time                                       88.2                      91.3                     86.7


Private                                         24.0                      27.3                     61.6
Public                                          76.0                      72.7                     28.4


Manufacturing and industry                     28.6                       21.5                     18.1
Construction                                    9.1                        7.1                     5.7
Agriculture and forestry                        12.0                      10.4                     19.2
Transport and communication                     5.0                       8.1                      10.9
Trade                                           7.9                       7.1                      7.5
Commercial services                             8.8                       10.8                     10.6
Finance                                        10.2                       7.4                      9.1
Social services                                18.4                       27.6                     18.9
Source: BTHS 1995, 1997, 2001.
Note: Among working age adults (16 years and above) in bottom quintile   of per capita household expenditures.



                 C. Non-Income Dimensions of Poverty at Work
       The previous section has focused on the income dimension of poverty, identifying
and quantifying the contribution of household labor market performance and other house-
hold characteristics on each individual's poverty status. It has shown that the traditional
62                                                                          BULGARIA POVERTY AsSESSMENT


dichotomy for a poverty profile, between the employed and the unemployed has limitations,
given the heterogeneous nature of jobs and the high incidence of income poverty among
particular groups of workers. The aim of this section is to complement the understanding
of income poverty and labor market outcomes by investigating some non-income aspects of
workers' well-being in Bulgaria.
        Improvement of working conditions in Bulgaria is an important policy goal. As
with inadequate earnings, poor working conditions can have strong negative effects on
workers' well-being and their families. They can also result in low labor productivity, which
in turn fuels the vicious cycle of poverty and burdens the productivity of the Bulgarian
economy. Last, but not least, the recognition of certain workers rights and the standardiza-
tion of working conditions to the EU is a condition for EU accession (see Box 3.3).
        The protection of the health and rights of workers has long been a part of
Bulgarian labor legislation. The Labor and Social Security Codes provide the legal basis
for regulation of working conditions, along with a number of acts and regulations issued by
the Ministry of Labor and Social Policy, and the Ministry of Health (Garibaldi et aI., 2001).
Since the beginning of transition and the move towards EU accession, several changes and
amendments have been introduced to suit the needs of a market eeonomy and EU require-
ments in the field of labor. To date, most EU requirements have been transposed into

                                   Box 3.3: EU Accession Requirements for Labor
           Equal opportlmities for Men and Women: Stage I of Accession measures require the country to com-
 ply with directives 75/l17/EEC and 76/202/EEC, which contain provisions regarding (1) equal pay; (2) equal
 treatment for men and women in access to jobs, promotion, training and working conditions. Stage H mea-
 sures require the country to comply with directives 79/7/EEC and 86/378/EEC, which apply the principle of
 equal treatment for men and women to statutory and occupational social security schemes.
          Coordination of Social Security Schemes. The EU's provisions regarding social security legislation are
 based on four principles: (1) the legislation of only one country can be applicable; (2) workers from other
 member states receive equal treatment; (3) workers retain the rights they have acquired; and (4) periods of
 insurance or residence are aggregated.

            Health and Safety at Work: Measures at Stage I require compliance with Directive 89/39/EEC which
 stipulates that employers must assess the risks to safety and health at work, ensure that workers receive appro-
 priate safety and health information, and provide workers with adequate safety and health training.
 Legislation must also include provisions regarding protective and preventive services, health surveillance, and
 the participation of workers in health and safety issues at work. At Stage II, countries are required to comply
 with a set of 13 directives that include regulations on maintaining the health and safety of workers in the most
 critical areas (workplace equipment, safety signs, chemical exposure).

            LalJour Law and Working Conditions: At Stage I countries are required to ccmply with the contents
 of four directives that protect workers' rights in the areas of (1) collective redundancies; (2) undertakings, busi-
 ness or part of business; (3) insolvency of employers; and (4) young people at work. At Stage II, they are
 required to comply with three additional directives that regulate working conditions, working time and infor-
 mation and consultation with workers.

 Source: Garibaldi et at (2001).
           3                                                                                            63

Bulgarian legislation. The adoption of the labor component of the Aquis Communautaire,
which implies the recognition of certain rights to workers and the standardization of work-
ing conditions to those in the EU, should therefore not be a problem for Bulgaria.

        There are some concerns, however, that the lack of an effective enforcement and
monitoring system of working conditions has led to a substantial gap between principles
and reality. Table 3.10 presents several measures of working conditions and job quality
across sectors in Bulgaria. The first indicator is the incidence of "work without labor con-
tract" which is a useful, although likely understated, estimate of informal employment. The
data show that a national average of 10 percent of the employed were working in the infor-
mal sector, and thus are not covered by the Labor Code, or any other regulations. Informal
jobholding was also not evenly distributed across sectors. A high concentration of informal
workers was observed in agriculture and construction, where their share reached 41 percent
and 31 percent respectively. In trade, the incidence of informal jobs was also high, at near-
ly 17 percent.

          Another important indicator of the quality of employment is job stability. This can
be captured, although imperfectly, by the average length of time a worker has spent with
their current employer. A longer job tenure, which refers to longer continuous spells of
employment, is often considered a desirable aspect of a job given the positive links between

Table 3.10: Selected Non-income Measures of Job Quality among the Employed
  Sector around 2000
                                  No contract     Job tenure Work-related      No social
                                                                injuries and  insurance
                                                                  diseases   contributions
                                                                                             paid by
                                                                                            employers
                                            (percent)           (years)       (number per   (percent)
                                                                                thousand
                                                                                workers)

All                                            10.2              10.8                2.5      25.6

Manufacturing and industry                      4.3              11.5                7.1      17.2
Construction                                   30.9              1L8                 3.7      41.9
Agriculture and forestry                       41.5               9.6                0.6      61.1
Transport and communications                    5.0              12.0                4.1      17.3
Trade                                          16.9              5.4                 0.5      45.6
Commercial services                            10.1              10.7                0.3      25.4
Finance                                        7.5               10.8                0.6      28.7
Social services                                3.6               12.3                0.2      14.4
Source: BIHS 2001; 1999 data from Bulgarian authorities for work-related injuries.
64                                                                              BULGAR1A POVERTY ASSESSMENT
                  ----------------------------------------------
tenure and earnings, and between tenure and job satisfaction. The same table shows large
disparities in job tenure by sectors. Job tenure tends to be particularly low in trade and
agriculture, and much higher in social services and transport. This indicator needs to be
treated with caution. A long job tenure may reflect a worker's low level of job opportuni-
ties, rather than a strong level of satisfaction with the current job. A long job tenure can
also mean a worker is stuck in a sector that is declining during transition. Earnings are
indeed concave in job tenure in Bulgaria, they increase up to an estimated average of 17 to
20 years of tenure and then start to decline.

                                         Box 3.4: Perceptions of Well-Being at Work

            Besides direct measures of working conditions, it is useful to look at workers' perception of well-
 being at work. For this purpose, the International Social Survey Programme 39 (ISSP) provides a unique
 opportunity. The 1997 module on work contains a number of questions on working conditions as perceived
 respondents in 25 countries, including Bulgaria. However, considerable caution is required when drawing
 international comparisons based on these subjective measures. There can bc subtle differences between coun·
 tries in the way the questions about working conditions are asked and interpreted, and in the timing of the sur-
 vey. This may be a particular issue for Bulgaria, as 1997 was a particularly difficult year, and many workers
 may have felt more insecure about their labor market status.

          Given these limitations, broad differences in opinions regarding job security emerged in 1997
 between Bulgaria and other transition countries, and between Bulgaria and the EU. For instance, the propor-
 tion of workers who were very worried to lose their jobs amounted to 24 percent in Bulgaria, compared with
 an average of 12 percent among represented EU countries and of 15 percent among CEE countries.

                                 Figure 3.4: Well-Being at Work (% of employed)

      Very or completely satisfied
                      in main job


     Always come back from work
                        exhausted
                                                                                           • Bulgaria
       Always work in dangerous                                                            • eEE Average
                       conditions
                                                                                           OEU Average

                    Very worried
                       to lose job


          Strongly agree than job
                         is secure


                                     o        10       20        30        40         50


Source: International Social Survey Program, 1997.
Note: EU and CEE average are non-weighted averages of included countries (see Kolev, 2002 for list).

 More information on the programme can be found at www.issp.org.
            3                                                                                65

         The incidence of registered work-related injuries and diseases reported in the same
table provides a rough estimate of the extent of safe and healthy conditions of work. The
data show large disparities across sectors, with the most dangerous work concentrated in
industry, transports, and construction. Inadequate safety and health standards are of con-
cern, given both their disastrous impact on the quality of life and income of workers and their
families, and also on firms' productivity, and on the overall performance of the economy.

        There is evidence of low enforcement of regulations regarding social insurance
taxes, 25 percent of all employees in Bulgaria had an employer who did not pay any
mandatory social security contributions. Non-payment of social security contributions was
dramatic in agriculture, where it reached 61 percent of employment, and in trade and con-
struction, where it was respectively 46 percent and 42 percent. This reflects the disincentive
effect of high social security taxes. This issue is discussed in the next chapter.
        Health and safety at work also appeared to be distinctly worse in Bulgaria, and in
Central and Eastern Europe in general, than in the EU. The percentage of workers that
reported always working in dangerous conditions was double in Bulgaria than in the EU.
Bulgaria also has the second largest share, after Portugal, of jobholders that reported
always coming back from work exhausted. Addressing the issue of health and safety at
work therefore seems to be particularly important for Bulgaria, which would need to find
cost-effective ways to support investments in working conditions in the most dangerous sec-
tors. These could include, for instance, the provisions of loans conditional on a better
enforcement of working conditions.

         Not surprisingly, poor working conditions - including low-paid work, lower paid
annual leave and lower job tenure are particularly evident in the informal sector, and to a
lesser extent, in temporary jobs in the formal sector. The data illustrate a strong correlation
between informal jobs, on the one hand, and poor working conditions on the other (Table
3.11). This is particularly worrisome given the low probability of escaping informal employ-
ment in Bulgaria discussed earlier. Permanent employment, on the other hand, was associ-
ated with a lower incidence of low-paid work, lower evasion of social-security contributions,
higher provision of paid annual1cave and higher job stability.

Table 3.11: Correlation Coefficients Between Various Measures of Job Quality
                                                    Nature of employment
                                        No contract Contract-fixed tenn Contract-permanent
Low paid job                               0.10**           0.04*             -0.11**
No social insurance contributions         057**              0.01             -0.41 **
Average days of paid leave                -0.53**          -0.07* *           0.42**
Average job tenure                        -0.19**          -0.15**            0.25**
Source: BlHS 200J.
Note: (**) and (*) means statistically significant at 1% and 5 % levels respectively.
    66                                                                          BULGARIA POVERTY ASSESSMENT


        Lessons from ILO pilot studies on extending social protection to informal workers
point to the importance of raising the awareness of informal employers on the linkages
between working conditions and productivity, and to the importance of a pragmatic and
gradual approach that fully recognizes the constraints faced by small enterprises (Box 3.5).
There is a need to make social protection more affordable to small enterprises through a
reduction in social security contributions. However, to be effective, the reduction in social
security contributions often needs to be accompanied by other measures that increase
incentives for small enterprises to register formally.

                                   Box 3.5: Extending Social Protection to the fnfonnal Sector

               The fLO launched an Interdepartmental Project (I:-':TERDEP) on the informal sector in 1994. The
     aim of r:-':TERDEP was to develop a comprehensive strategy to extend social protection and improve working
     conditions of informal sector workers. As a first step, three case studies on occupational safety and health and
     working conditions in the informal sector of cities in developing countries in Latin America and East Asia
     were carried out.

               These projects concentrated on (I) the development of hasic forms of access to health care through
     mutual funds; (2) the improvement of safety and health standards through the introduction of measures for the
     improvement of informal sector workers' working conditions and living conditions and the reduction of acci-
     dents and diseases; (3) management skills development and (4) capacity huilding. Due to their success, some
     of these projects were extended through technical cooperation after the end of the INTERDEP in 1996.

               The safety and health aspects of these projects were quite innovative, and were based on the local
     capacity of the informal sector operators to undertake low-cost improvements at the micro-enterprise level,
     prevent injuries and diseases and enhance aceess to health care. Training modules were produced to show the
     link between productivity and improvement of working conditions, and to raise the awareness of occupational
     safety and health hazards in micro-enterprises. The learning modules were implemented for small groups by
     occupation. In parallel, preventive services were provided to informal sector workers through existing primary
i    health care structures at the municipal or district level with the collaboration of local communities, NGOs and
     community-based organizations.

    Source: Forastieri (1\19\1).


             D. Multiple Aspects of Vulnerability in the Labor Market
        The discussion has highlighted that the linkages between poverty and the labor mar-
ket are much more nuanced than a simple relationship between poverty and unemployment
suggests. Poverty rates for some groups of the employed are quite high, particular for
workers with temporary contracts and those working in agriculture. Working conditions
also have an important influence on welfare, particularly for workers in the informal sector.
The groups which are at greatest risk of adverse labor market outcomes, including unem-
ployment, inactivity, low paid work and poor working conditions are also those that emerge
as most vulnerable in the poverty profile. In particular, persons with little, or no education
and Roma are at greatest risk (Table 3.12).

            Youth face a somewhat different situation, as their main problem is to find a first job
'-AllaUTLl   3                                                                                                 67

Table 3.12: Summary of Labor Market Outcomes and Vulnerable Groups
                                Unemployed     Long-term    Inactive                       Low-       Poor
                                              unemployed                                   paid      working
                                                                                                    conditions
Low educated                                   X                 X              X           X           X
Roma                                           X                 X                          X           X
Turks                                          X                 X                                      X
Youth                                          X                                            X          X
Disabled                                                         X              X           X
Living in a depressed area
Individuals close to retirement age                                             X           X
Adults with children                                                            X
Living in a rural area                          X
Source: Based on regression analysis in Kolev (2002).
Note: "Inactive" excludes pensioners and those in education. X means correlations are statistically significant at
the 5 or 10 percent level.

in the formal sector. Turks also face a high risk of unemployment and poor working condi-
tions, but they do not seem to experience any disadvantage in tcrms of wages. Conversely, the
problem for women is not so much in terms of unemployment, as their risk of being unem-
ployed is only slightly higher, but more in terms of a gender wage gap. Thus, while young peo-
ple and Turks are likely to benefit from policies promoting job plaeement in formal sector jobs,
for women, a greater emphasis should be paid on the enforcement of equity in pay, as stipulat-
ed in the Constitution of Bulgaria. Location also plays an important role on the employment
prospects of people in Bulgaria, as well as on their pay, and people living in depressed areas
would most likely benefit from more decentralized and loeally driven programs.
         Another group composed of individuals close to the retirement age and individuals
with disabilities and illne~ses faces a high risk of being excluded from the labor market, or of
being low-paid if employed. Given the low level of labor demand in Bulgaria, the scope for
reintegrating this group into employment may be limited, and social protection measures
may be more suited to lift them out of poverty. However, in a period of economic growth
and increasing employment opportunities, the opening of active labor market programs for
discouraged workers and the development of disabled-friendly work arrangements and facili-
ties, as well as a better enforcement of the Labor Code regarding the provision of specific
jobs for the disabled, can be expected to increase somewhat the participation of older and
disabled individuals, and thus to reduce the extent of labor market exclusion.

        Exclusion from the labor market is also visible among adults with children, who
tend to have difficulties in combining family responsibilities with work. Policies which help
households balance work and family responsibilities could, in this respect, be vital for
increasing the employment rates of parents, and reduce poverty in the labor market. These
68                                                          BULGARIA POVERTY ASSESSMENT


can include encouraging child care services (whatever form they take) and developing more
flexible work arrangements.

                      E. Findings and Policy Implications
          Addressing severe unemployment remains one of Bulgaria's most pressing chal-
lenges. The next chapter examines the roots of unemployment and the barriers to employ-
ment growth in detail. In the first place, policies to reduce unemployment and strengthen
the environment for employment, are critical, this will be the subject of the following chap-
ter. Another central policy issue is mitigating the impact of adverse labor market outcomes
on vulnerable groups, including unemployment and poor working conditions. Although
poverty has declined since 1997 while unemployment has risen, high poverty rates among
the unemployed suggest that these trends are not likely to be sustainable, and that poverty
is likely to increase if labor market conditions do not improve.
         Protecting the Unemployed. Unemployment benefits and social assistance provide
important sources of protection for many unemployed. The effectiveness of these mea-
sures is discussed in Chapter 5. Specific groups face multiple labor market risks and may
benefit from additional targeted programs. Poorly educated people and Roma experience a
higher risk of being unemployed, remaining longer in unemployment, and if employed, of
being low-paid, and working under poor working conditions. Other groups facing multiple
risks in the labor market were the youth, the Turks, people with disabilities and individuals
living in depressed areas.
        In this regard, Active Labor Market Policies (ALMPs) may be useful instruments
for reaching vulnerable groups in the labor market. Bulgaria currently provides a number
of programs, covering about 11 percent of the registered unemployed. Expenditures
amounted to 0.2 percent of GDP in 2000. A recent evaluation of ALMPs in Bulgaria
found that all of the programs studied have a positive net impact, and therefore do improve
the employment prospects of some groups of participants, although for some programs the
impact is minimal (Box 3.6). This implies scope for improved targeting of programs.
However, the result needs to be treated with caution, as the analysis does not give an indi-
cation of the sustainabiIity of the new businesses created. Outcomes should be tracked
over a longer period of time, at least two years.

        The positive results of the study for Bulgaria, compare favorably with analysis of
ALMPs in Central and Eastern Europe and Western Europe. In many countries results are
negative. For example, in Poland and Hungary public employment programs were found
to lower the prospects of becoming employed. The outcomes suggest the need to focus on
programs which are well targeted, either on equity grounds (e.g. to the most vulnerable
groups, such as ethnic minorities); or on efficiency grounds (e.g. to groups which benefit
the most from program participation). The Government's National Action Plan for
Chapter 3                                                                                                          69

Employment incorporates lessons from the net impact survey.
          Enhal1dng Employment Opportunities for Roma. Because of the extreme nature of
unemployment among some Roma communities, specific measures can be tailored to
enhance their employment opportunities. In particular, attention is needed to address the
additional bariers of lower education status, geographic isolation and discrimination.
Improving ac:ess to credit is an important aspect of increasing opportunities for Roma and
other low incDme groups to engage in entrepreneurial aetivity. NGOs can play an impor-
tant role in training and eapacity building among communities to initiate projects (Box 3.1).
Partnerships between these organizations and banks are needed to establish credit mecha-

                                                 Box 3.6: ALMPs in Bulgaria
            The Bulgarian National Employment Service undertook a net impact evaluation of the main active
  measures in 19~8 in order to assess the contrihution of ALMPs to improving the re-employment prohabilities
  of participants. The study was hased on a representative survey of 6,101 individuals who had participated in
  the programs, z.s well as a control group.40 The following results emerged from this study:

           Temporary employment program had a significant positive net impact on the prohability of heing
  employed in particular among individuals facing specific difficulties, such as individuals aged 4S and ahove, the
  least educated, the long-term unemployed and those unemployed living in particularly depressed area.
  Temporary employment programs had nonetheless the highest COStS per placement. This called for targeting
  temporary emr)oyment programs to the most vulnerable groups in the labor force, like unemployed people
  from the Roma minority, who cannot rely on any other program to improve their chances of finding a job.

            Training with non-guaranteed jobs had also a significant overall positive net impact on the prohability
  of being employed. hut tended to henefit more those with lower or secondary education and the youth. This
  program was aim among the least expensive, in terms of costs per placement.

            Trainlng with guaranteed jobs tended to he more effective to increase the chance of finding a job
  among the older unemployed. For other groups, however, training with guaranteed jobs was as effective as
  training withoUi guaranteed johs, and only slightly more expensive.
           Subsidized employment led significant results for all-sub groups, but the biggest effect were found for
  new entrant~, females, those living in incomplete families and the unemployed with general secondary level of
  education. Subsidized employment was the program with the lowest costs per placement.

            Employment associations provided mixed results. Their effects varied a lot hy gender and level of
  education, and:hey were an expansive program.

           Self-employment programs tended to he extremely effective for those with more education and those
  with shorter spell of unemployment. Their costs per placement were nonetheless higher than that of subsi-
  dized and training programs.

            Source: Walsh and al. (2001).


40 It is important to note that although such studies are useful, they only provide a partial picture. Among other
issues, net impact studies refer to the impact of program participation on the =:.:..;..:==who participated in the
programs, not on the impact on unemployment at large. Accordingly, these studies tell us little on "macro" impact
of ALMPs. This:5 because they account only for deadweight loss, but not for substitution/displacement effects.
Also, extrapolation of results can be misleading due to diminishing returns to scale. Programs that perform well
on a small scale do not necessarily perform well if expanded and run on a          scale. This is because small scale
program tend to attract both best (most motivated, etc.) unemployed and hest program operators.
70                                                           BULGARIA POVERTY ASSESSMENT


nisms. Providing anti-discrimination legislation and provisions for appeals is another
important element. Mechanisms should be put into place at the local and regional level to
monitor compliance with anti-discrimination legislation and provide job seekers with an
opportunity to appeal violations.
         Addressing the Gender Pay Gap. While the labor force participation of women in
Bulgaria is high, there is a significant gender pay gap. In order to develop an appropriate
policy approach, further analysis of this phenomenon is needed to determine the extent to
which this gap is due to differences in the characteristics of the workers themselves, and
that which is due to differences in job characteristics (Paci, 2002). Regardless, effective
monitoring and implementation of existing regulations on gender pay equity is an impor-
tant first step, particularly in the context of EU emphasis in this area.
        Improving working conditions. Attacking the non-income dimensions of poverty in
the workplace remains an important challenge in Bulgaria. Despite the transposition of
most EU requirements in the labor area into Bulgarian legislation, a large gap remains in
practice and the real level of workers' protection is far below what is stipulated in the Labor
Code. Measures to further the improvement of working conditions can include encourag-
ing the formalization of employment by through a reduction in social security contributions
and taxation, simplifying registration of firms, facilitating dismissal procedures, easing use
of temporary contracts; and raising awareness among informal employers on the links
between working conditions and productivity.
Chapter 4                                                                                  71


  Chapter 4: Why is Unemployment so High in Bulgaria?41

                                          A. Background
        The previous chapter has shown that the Bulgarian labor market is performing
poorly. High levels of unemployment and inactivity indicate low utilization of labor
resources, and are compounded by low flows out of unemployment into jobs. This section
examines the forces underlying these poor labor market outcomes, looking in turn at key
macroeconomic developments and changes in the investment climate that influence labor
market performance, enterprise restructuring, and specifically job creation and job destruc-
tion, the extent of the skills gap, and the role of labor market regulations as a possible
source of rigidities and distortions. In summary, there are three main forees driving high
and increasing unemployment in Bulgaria: (i) intensive enterprise restructuring; (ii) the
poor business environment; and (iii) a persistent skills gap.

         Macroeconomic conditions and the investment climate have improved substantially
in Bulgaria since 1997, improving the environment for job growth. Despite this overall pos-
itive trend, there is still much scope for improvement of the business environment.
Restructuring has led to larger flows into unemployment. The fall in employment has
largely reflected substantial productivity gains achieved through large scale shifts away from
old less productive jobs toward new more productive jobs. At the same time outflows from
unemployment have been limited, due to skill and spatial mismatches, as well as labor mar-
ket rigidities stemming from the employment protection legislation. These factors com-
bined - restructuring and productivity improvements along with labor market mismatches
and rigidities - have caused the marked increase in unemployment. Accordingly, unem-
ployment in Bulgaria seems mainly structural, and to a lesser extent demand deficient.

     B. Macroeconomic Developments and the Investment Climate
        After a period of stagnation until the crisis of the mid-90's, Bulgaria has undergone
far-reaching industrial restructuring. These developments have led to a better allocation of
resources, including labor, creating the preconditions for economic and employment
growth. The major policy developments and their impact on employment developments are
summarized in Table 4.1. In particular, the environment for long term employment growth
has been facilitated by price stability under the currency board, strengthening of the bank-
ing sector and expansion of the private sector.

        During the crisis, output contracted by more than 16 percent in real terms. While
the level of employment remained almost unchanged, the output decline was reflected in
  This chapter is based on the background paper by Jan Rutkowski.
72                                                                 BULGARIA POVERTY AsSESSMENT



Table 4.1: Key Policy Developments and Job Creation
Policy area                                              Change            Impact on job creation
                                                                            and 1J m'rn,,,,,,
Monetary policy (Currency board arrangement)          Improvement                 Positive
Fiscal policy                                         Improvement             Overall: Positive
 Reduction of subsidies and the imposition
 of hard budget constraint on public firms            Improvement           Short term: negative
Long tcrm: positive
 Budget deficit within 2% of GDP                      Improvement         Positive in the long term
Financial Intermediation                              Improvement                  Positive
 Privatization of state-owned banks                   Improvement                  Positive
 Increased supply of bank credits                     Improvement                  Positive
Privatization and enterprise restructuring            Acceleration            Overall: Positive
 Reallocation of labor                                Aceeieration          Short term: negative
                                                                            Long term: positive
 Productivity                                         Improvement           Short term: negative
                                                                            Long term: positive
Business Environment                                      Stable               Overall: Mixed
 Scope of arbitrary decision making and attitude
 towards private businesses                               Stable                 Negative
 Entry and licensing procedures                    Stable/Deterioration          Negative
 Business regulation, including labor              Modest improvement            Positive
 Taxation                                                 Stable                 Negative
 Reduction of price controls                          Improvement                Positive
Source: Stoev (2002).


productivity dynamics, which fell 15 percent during the crisis. Real wages were even more
sensitive, losing nearly one-third of their value. In other words, during the crisis, adjust-
ment was borne by wages rather than employment (Table 4.2).
         Average productivity has been growing and reeovered its pre-erisis levels in 2001.
Productivity grew by almost 19 percent between 1998 and 2000, although the paee of
growth has slowed more recently. These productivity gains have been largely achieved
through public sector downsizing, which brought productivity in the public sector up to the
level prevailing in the private sector (the ratio of productivity in the private sector to the
public sector narrowed from 1.5 in 1995 to 1.0 in 2000). This narrowing of inter-sectoral
differences in productivity is a positive phenomenon, as it indicates successful restructuring
of public firms, and progress in transition (World Bank 2002). Real wages have followed
rising productivity and their recovery has proceeded at a similarly high pace, although their
level in 2001 was still some 10 percent below their pre-crisis level.

         The introduction of the currency board in 1997 strengthened the environment for
           4                                                                                               73


Table 4.2 Dynamics of Basic Macroeconomic Indicators 1995 100               =
                                                                                                 annual rate
                               1996        1997         1998         1999       2000     2001*    of growth
                                                                                                 (1996-2001)
                                                                                                     %
GDP                           90.6          85.5        88.9         91.0       95.9     99.7        0.1
Employment                    100.1         96.2        96.1         94.1       90.8     89.6       -1.8
Productivity                   90.5         88.9        92.6         96.8       105.7    111.4       2.0
Wages                          81.2        67.7         81.7         87.3       88.3     90.9       -0.6
Source: National Statistical Institute and World Bank staff estimates.
Note: (*) Preliminary estimates for 2001. Productivity is defined as GDP per employee.


employment growth by introducing a strict monetary policy regime. The immediate
impacts of the new monetary regime were price and exchange rate stabilization and thc
restoration of confidence in commercial banks. The currency board eventually led to a
more stable and predictable business environment conductive for a higher economic activi-
ty and thus higher job creation; and stabilized interest rates and gradually narrowing mar-
gins between deposit and lending rates, which encourage new business entry and the expan-
sion of existing companies.

         Fiscal prudence following 1997 has been beneficial for businesses, as it made it pos-
sible to lower interest rates. The high budget deficit prevailing in Bulgaria until the crisis
period led to high levels of nominal interest rates which discouraged economic activity.
The budget deficit has been kept close to zero since 1997, permitting the lowering of inter-
est rates and thus, along with relatively low in11ation, creating incentives for private invest-
memo The volume of investments and their share in GDP have also been increasing since
1997. Foreign direct investments (FDI) accelerated markedly following the stabilization
policies. Greenfield investment, new non-privatization foreign investment, more than dou-
bled in 1998 in comparison with the previous year (Table 4.3). This substantial increase in
investments, including FDI inflows, is indicative of an overall improvement in the invest-
ment climate in the aftermath of the stabilization program.

         Since 1997 privatization has gained momentum and three-fourths of the privatizable
assets have been transferred from the public to the private sector over the past 5 years.
Consequently, the proportion of private sector employment has increased dramatically
from 42 percent in 1996 to 71 percent in 2001. Privatization has contributed to faster struc-
tural change. There is evidence that productivity improvements in privatized enterprises
since 1997 have outpaced those in new private enterprises. This is associated with the fact
that productivity growth has been faster in large companies than in small and medium sized
enterprises (SMEs). However, restructuring and rapid productivity growth have led to
74                                                                           BULGARIA POVERTY ASSESSMENT


downsizing and employment loses concentrated in large privatized firms. These have been
only partially offset by the employment opportunities created by private SMEs.

Table 4.3: FDI Flows in Bulgaria
      Year                                               Volume (USD million)
                           Privatization           Capital Market               Greenfield                   Total
      1995                       26                                                 137                       163
      1996                       76                                                 180                       256
      1997                      421                        30                       185                       636
      1998                      156                        64                       400                       620
      1999                      306                        53                       447                       806
      2000                      480                        20                       500                      1000
     2001*                      n.a.                      n.a.                      n.a.                      522
     Total                     n.a.                   n.a.                  n.a.                             4 003
Source: Bulgarian Foreign Investment Agency and Bulgarian National Bank; reported in Stoev (2002).
Note: (*) Includes the period January - October 2001.


        The next phase of privatization involves the restructuring of the energy, railway,
telecommunications, and water sectors with the objective of improving efficiency of service
delivery through greater private sector investment.

Table 4.4: Share of State Assets Privatized
                                   1995       1996       1997       1998      1999         2000     2001       Total
% of all state assets              1.07       4.09       18.36      4.48      16.96        4.43      1.10      52.49
% of privatizable assets           1.62       6.19       27.80      6.78      25.69        6.70      1.67      79.48
Source: Privatization Agency; reported in Stoev (2002).
Notes: Privatizable assets are 66% of all state assets. According to law the following are not subject to privatiza-
tion: nuclear power stations, the distribution of electricity and natural gas, some hospitals, schools and universities.
The methodology employed by the Privatization Agency in reporting an asset as privatized requires that either the
asset is directly sold, or the company that owns it is fully privatized (more than 2/3 of the company's shares are
private).


        As in other transition countries, privatization contracts in Bulgaria have included a
commitment of the new owner to maintain employment levels for a certain agreed period
(usually a few years). Given that the privatization process was heavily concentrated in
1997, some portion of the substantial decline in employment that occurred in 2000 can be
attributed to the expiration of the labor preservation clauses in the privatization contracts.
        Why has employment declined in Bulgaria? One way to answer this question is to
look at the dynamics of productivity as well as aggregate demand and its components:
domestic consumption, exports, and imports. Given the rate of growth of output, the faster
the growth of productivity, the slower the growth of employment. Growth of domestic con-
sumption and exports is conducive to employment growth, while the growth of imports
           4                                                                                                   75

means that foreign labor is substituted for domestic labor. Thus, given the output level,
growth of imports leads to a fall in domestic employment. 42
         Despite increasing imports in Bulgaria, the growth in domestic demand has had a
stronger job-creating effect than export growth. However, the job-creating impact of
exports is markedly smaller than the job-displacing impact of imports. But the strongest
negative effect on employment has been brought about by the substantial growth in produc-
tivity, which has offset the growth of aggregate demand (Table 4.5). This provides further
support to the argument that an important cause of growing unemployment has been inten-
sive enterprise restructuring leading to fast productivity improvements, which in turn have
led to shedding of redundant labor. These developments are part of the transition process
which will have a negative impact on employment over the short-term, while leading to
longer-term growth.

Table 4.5: Decomposition of Employment Change (% changes)
                                     1997/98        1998/99        1999/2000        Average            Total
                                                                                  1997/2000        1997/2000
Employment                              0.2            2.1           -4.9            -2.4              - 6.8
Aggregate demand                        3.4            2.3             5.5             3.7              12.1
 Domestic demand                       11.7            7.3             3.7             7.6              24.0
 Exports                             - 11.2          -2.8             16.8             0.9               4.3
 Imports (-)                          - 2.9            2.2            15.1             4.8              16.2
Productivity (-)                        3.5            4.4             9.9             5.9              20.3
Total contribution                    - 0.2          -2.0            -4.4            -2.2              - 8.2
Source: Stoev (2002) and author's calculations.


Labor Flows
        Based on summary measures of mobility the Bulgarian labor market appears to be
dynamic at first glance, as there are considerable movements across labor force states tak-
ing place over a one year period (Table 4.6).43 Relatively few workers remain in their origi-
nal labor force state after a year. For example, only 37 percent of persons unemployed in
March 2000 were still unemployed one year later. In comparison with other transition
economies in Central and Eastern Europe, the Bulgarian labor market is relatively dynam-
ic. Table 4.6 shows a comparison using the ShoITock's index, which is a summary measure
42 These relationships are captured by the following decomposition of the rate of employment growth:




where r denotes the growth rate of employment (E), domestic demand (D), exports (X), imports (M), and produc·
tivity (P), while Q represents total output.
43 The analysis of labor flows draws on Kotzeva (2002).
76                                                                          BULGARIA POVERTY ASSESSMENT



Table 4.6: Labor Force  in
Country                Period            Shorrock's index (* 100)
    --~~----------------------------------
Bulgaria 44            2000-01           43.6
                       1995-96           36.7
Lithuania              2000-01           31.0
Poland                 1997-98           31.3
Russia                 1995-96           38.5
Slovakia               1999Q1-Q4         17.6
USA                    1992-93           61.6
Note: The Shorrocks index is defined as S=(n-tr(P»/( noll and is proportional to the fraction of persons who
changed their status within a given period. Where: n denotes the number of states and tr(P) is the trace of the
transition matrix P. S takes the value of 0 when nobody changed their status, and the value of n/n-1 when every-
body changed their status.
Sources: Bulgaria: Garibaldi et at. (2001) for 1995-96, Kotzeva (2002) for 2000-0J. Lithuania: Rutkowski (2002h).
Bank staff calculations.



of mobility across labor force states.
         Howcver, upon closer inspection, it turns out that underlying the considerable labor
flows is a depressed labor market. There are negative dynamics, characterized by: (i) large
t10ws from employment into unemployment; (ii) limited outflows from unemployment to
jobs; and (iii) substantial t10ws from unemployment to inactivity. These labor flows help
explain the trend of rising unemployment and the declining labor force participation rate.
Large inflows into unemployment are not matched by proportionate outt1ows. About 9
percent of workers lost their jobs in 2000 and became unemployed. This proportion is high,
even by standards of other transition economies in Central and Eastern Europe, where the
annual int10w rate into unemployment usually does not exceed 5 to 6 percent.
         Outt1ows from unemployment into jobs are very low by the standards of dynamic
market economies, and are in the lower end of the range characteristic of transition
economies. In Bulgaria only 22 percent of the unemployed found a job within a year, com-
pared with about 35 percent in Poland. Thus, prima facie reasons behind high and rising
unemployment in Bulgaria are high int10ws into unemployment, coinciding with low out-
t10ws from unemployment into work. This contrasts with the model of a genuinely dynam-
ic labor market, where high inflows into unemployment are matched by high outt1ows from
unemployment into jobs.




   The magnitude of the flows is likely to be overestimated due to different categorization of labor force states in
the surveys. This particularly refers to flows from unemployment to inactivity.
            4                                                                                                          77


                           c. Restructuring and Job Reallocation
         Restructuring in Bulgaria has had many facets: the changing industrial structure of
output and employment, changes in the ownership structure, thc growing share of foreign
capital, and the development of the SME sector. All of these changes entail profound job
and labor flows. They have created opportunities for some categories of workers, mainly
the younger and better skilled and, worsened the employment prospects of others, mainly
the older and less skilled. Restructuring has created winners and losers, and as such has
had an impact on the level and composition of poverty.

        The most visible manifestation of economic transition has been the changing struc-
ture of output, namely a shift away from manufacturing, that was overdeveloped during the
communist period, towards services which were previously underdeveloped. This change in
the structure of output entails a change in the structure of labor demand. The fall in
demand for blue collar workers and physical labor has occurrcd alongside a rise in demand
for white collar workers with skills required in the service sector. The transition from man-
ufacturing to services is not an easy one, as the newly created jobs differ substantially from
the old ones in terms of necessary skills. Thus, for many workers who lost their jobs in the
old sector, finding work in the new sectors is a difficult process, often leading to unemploy-
ment or withdrawal from the labor force.

        In order to examine the impact of restructuring on employment at the firm level,
analysis of job reallocation within the economy was undertaken to examine where employ-
ment growth is taking place within the economy, and where job destruction persists. The
high level of unemployment in Bulgaria implies that more jobs are being destroyed in the
economy than are being created. 45 The database used for this analysis is the NSI's annual
survey of employment and wages. The survey covers all registered enterprises which are
subject to VAT and apply double-entry accounting standards46 The survey also covers the
public administration and services (e.g. education and health). In 2000 the dataset includ-
ed 52,721 firms. 47


45 The primary concepts underlying the measurement of labor market flexibility are those of job creation and job
destruction. The gross job creation rate is measured as the sum of all employment gains in expanding firms in a
given year, divided by total employment at the beginning of the year. The gross job destmetion rate is defined as
the sum of all employment losses in contracting firms in a given year divided by total employment The sum of
gross job creation and gross job destruction gives a measure of gross job turnover (reallocation), and the difference
yields the rate of employment growth. The excess job reallocation rate is defined as the job reallocation rate minus
the absolute value of net employment gro'Y.'th. The excess job reallocation rate is determined by the lesser of the
job creation and job destruction rates.
46 Double-entry is an accounting concept which applies to larger firms. Small firms apparently use simplified
accounting rules.
47 For more information on the dataset refer to Rutkowski, 2002, Annex lB.
78                                                                        BULGARlA POVERTY ASSESSMENT


           Job reallocation in Bulgaria in 2000 was quite substantial. This contrasts with earli-
er research which found that turnover was relatively low in the mid 1990s, indicating limited
restructuring and the existence of labor market rigidities (Faggio and Konings, 1999,
Garibaldi, 2001). The excess job reallocation rate illustrates that the extent of enterprise
restructuring in Bulgaria is similar or higher than mature market economies (including the
dynamic U.S. market) and relatively successful transition economies, such as Poland
(Figure 4.1).48 It is much higher than in Slovakia, where the labor market is rigid and stag-
nant, although is markedly lower than in Lithuania, which has one of the most dynamic
labor markets in Central and Eastern Europe. Thus, by international standards Bulgaria is
undergoing far-reaching industrial restructuring, associated with intense job reallocation.
                                 Figure 4.1: Job Reallocation in Comparison

      30

      25
 ~
 "
 ~
      20
 0
0.                                                                                                   Job creation
 E    15
 "
<ii                                                                                                  Job destruction
 3
'0    10                                                                                             Job reallocation
t'<
       5

       0
            Lithuania      Bulgaria         USA          Poland        Germany        Slovakia
Sources: NSI data (2000), Bank staff calculations.


           lile comparison with other countries, leads to a few important observations. First,
job gains in Bulgaria have been achieved mainly through employment expansions in contin-
uing firms, rather than through firm entry (business start-ups) . Second, job losses have
occurred largely in contracting firms, rather than as a result of firm exit (closures) . These
two findings indicate that there are still significant obstacles to the entry and exit of firms in
Bulgaria. Third, the job creation rate is moderate in Bulgaria, while job destruction is high
by international standards. The job creation rate in Bulgaria was 11 percent, of which
slightly less than 7 percent are in continuing firms. At the same time, they destroyed 14
percent of jobs, of which nearly 11 percent are in continuing enterprises. As a result, the
overall number of jobs fell by over 3 percent. Despite barriers to entry, a significant share
of all jobs in Bulgaria are being created by business start ups. If barriers to entry were
removed, the job creation rate would be higher.


48 One would have expected that the excess job reallocation rates will he higher in transition economies than in
mature market economies, as the former need to redress the inherited problem of misallocation of resources.
Chapter 4                                                                                                        79

        Fourth, the high job destruction rate (especially in continuing firms) indicates that
dismissal costs are not so excessively high that they deter firing. However, they may be
high enough to discourage hiring. Finally, the high job turnover rate points to intensive
restructuring in Bulgaria and a highly dynamic labor market. This implies that there is a
fair amount of labor market flexibility. However, the modest gross and ·the negative net job
creation rates (i.e. the fall in the overall number of jobs) suggests that more flexibility may
be necessary to foster job creation and achieve positive employment growth.

          The private sector is the main source of labor market dynamism in Bulgaria. Job
destruction in the public sector exceeds job creation, while the opposite is true for the pri-
vate sector, which is a net creator of jobs (Figure 4.2). The job creation rate in the private
sector is high, at 15 percent, over twice as high as in the public sector (6 percent). The job
destruction rate in the private sector is also high, accounting for 13 percent, but lower than
in the public sector, which destroyed over 15 percent of jobs in 2000. Thus, it is the private
sector which provides job opportunities, while the downsizing of the public sector con-
tributes to unemployment increasing opportunities.

                   Figure 4.2: Job Reallocation in the Public and Private Sectors, 2000
             %
             30

             25

             20
                                                                                             •   Public
             15
        *                                                                                   • P ri vate

             10

              5

              0
                      Job creation           Job destruction         Job reallocation


Source: NSI data (2000), Bank staff calculations.

          Small firms are a key to job creation. Job creation is much higher in small firms
than in large firms. For example, the job creation rate in micro firms (which employ up to
ten workers) is as high as 27 percent, while in large firms (with 251-1,000 employees) it is
only 2 percent. 49 In contrast, the job destruction rate does not vary much by firm size.
Micro firms eliminate about 12 percent of jobs and large firms eliminate some 10 percent
of jobs per year. As a result, the small firm sector is expanding and offering job opportuni-

49 To some extent the high job creation rate in small firms reflects their low employment level. Accordingly, large
relative changes do not necessarily mean large absolute changes in employment.
80                                                                          BULGARIA POVERTY ASSESSMENT


ties, while the large firm sector is shrinking and shedding labor. It should be stressed, that
business start-ups playa particularly impOl;tant role in job creation. Newly established
firms created as much as 36 percent of all new jobs in 2000. This represents more jobs than
are created by all medium and large firms together. The birth of new firms and the devel-
opment of existing small private firms are therefore key for employment growth and unem-
ployment reduction.

Table 4.7: Job Turnover              2000
Firm size     Job creation Job destruction Job turnover                      Employment             Excess job
                  rate          rate           rate                                rate          reallocation rate
                  27.0          12.2           39.2                                                    24.3
Small             10.4          15.2           25.6                               -4.8                  20.8
Medium             5.2          17.3           22.5                              -12.1                  10.4
Large              2.1          10.2           12.3                               -8.1                  4.2
Notes: Micro: 1-10 employees; Small: 11-50 employees; Medium: 51-250 employee~; Large: 251-1000 employees,
Classification is based on the employment level in the initial year.
Sources: Survey of Employment and Wages (2000), National Statisticallnstitule; Author's c:alculations,


         In sum, small private firms are the engine of employment growth in the Bulgarian
economy. 50 These new firms drive the transition and provide a foundation for sustainable
growth. At the same time, the large firm sector, which was overgrown under central plan-
ning, has been gradually declining (Table 4.8). The number of enterprises has grown visihly
in Bulgaria since the mid 1990s, a positive sign which indicates improvements in the invest-
ment climat~. However, new firms (proxied by small firms) still account for a relatively low
shares of total employment and value added. The share of small enterprises in employment
was 38 percent and in value added was 24 percent in 1999, much lower shares than in lead-
ing reformers, such as the Czech Republic, Hungary in Poland (where it is well over 50 per-
cent»)! The share of small firms in employment in Bulgaria is below the threshold of 40
percent, which is considered a prerequisite for sustainable economie and employment
gro\\1h (World Bank, 2002a).
         The low share of employment in small enterprises in Bulgaria is of concern. A new
World Bank (2002) report on transition concluded that having a large SME sector is not
sufficient, unless it is aceompanied by substantial growth in the share of employment in
small firms. The low rate of new enterprise growth and the resulting low sharc of the new
sector in employment point to barriers to entry and unfavorable business environment in
Bulgaria. This may turn out to be a critical constraint for job creation and employment
growth. Relatively slow growth of new enterprises is one factor behind high unemployment

50 Firms are categorized as small if they employ up to 50 employees. and as medium jf they employ 51-250
employees.
51 \-10st recent (2000) NSI data show that the share of small firms in employment is 41 percent, which is still low,
 Chapter 4                                                                                                        81


  Table 4.8: Number of Enterprises by Size (in thousands)
 Enterprise size                 1996           1997                     1998           1999              2000
 Micro-enterprises              164.1          175. 1                    190.0         195. 3             205.9
 Small enterprises                9.1            9.8                     11.1              11.8           12.8
 Medium enterprises              2. 1            2.0                      2.2              2.1            2.1
 Enterprises employing
 over 100 people                  2.7            2.4                      2.4            2.2               2.2
 Total                          178.0           189.4                    205.6          211.3             223.1
 Sources: Agency for Small and Medium-sized Enterprises (ASME) and National Statistical Institute; reported in
 Stoev (2002).


 in Bulgaria, as the number of jobs created in the new, small enterprise, sector falls short of
 the number of jobs eliminated in the old, large enterprise sector.

 Regional differences

          Job creation and job destruction vary visibly, although not very strongly, by region,
 underscoring the spatial differentiation of labor market conditions in Bulgaria (Figure
 4.3).52 The regions with the highest job creation, and thus with the best employment
. opportunities, include Sofia City, Varna and Bourgas. In these regions the job creation rate
. is at 12-13 percent. In contrast, in depressed regions, which provide few job opportunities,
 the job creation rate is around 9 percent. These include Sofia district, Lovetch, Haskovo
 and Rousse.

          Regions which eliminate most jobs (relative to their employment) and where the
 risk of losing work is the highest are Montana, Rousse, Varna and Bourgas. In all of these
 regions the job destruction rate is very high, at between 15 to 18 percent. Regions where
                                   Figure 4.3: Job Reallocation by Region
                 20 ...--,-------------,- 2.0
                 18
                 16                                               0.0        _Job creation         rate
                 14
                 12                                               -2.0
                                                                                    Job destruction rate
                 10                                               -4.0
                 8
                 6
                 4
                                                                  -6.0
                                                                             ----.- Employment growth        I
                 2                                                -~                rate

                 o                                                -10.0



Source: NSI data (2000), Bank staff calculations.


52 Regional differentiation of labor market conditions and its sources are analyzed in Kotzeva (2002).
82                                                            BULGARIA POVERTY AsSESSMENT


the risk of job loss is relatively low include Sofia City and Region, and Plovdiv. However
even in the city of Sofia, where the job destruction rate is the lowest, it is nevertheless high
at close to 12 percent.
         In some regions, high job destruction goes hand in hand with high job creation.
These are high turnover regions where workers are able to switch between jobs relatively
quickly. These include Varna, Sofia City and Bourgas. In contrast, in some other regions
the labor market is more stagnant, with less job turnover. In such regions once a worker
loses a job, it is extremely difficult to find a new one. Examples of low job turnover regions
include the district of Sofia, Lovetch and Haskovo.

Expanding and declining industries
         Growing industries which provide the best job opportunities include business activi-
ties, legal services, accounting, business counseling, marketing, personnel recruitment, etc.,
trade (wholesale and retail), the apparel industry, and car sale. Employment in these areas
increased by 13 percent in 2000 over the previous year (Table 4.8). The growth of these
industries reflects the market transition and the growing share of services in the economy,
Bulgaria's comparative advantage in international trade (the apparel industry), as well as
increasing standards of living (car sales). These industries provide job opportunities for
both highly skilled, white collar workers and less skilled service and blue collar workers.
         Declining industries, where jobs are at risk and declining, include agriculture and
forestry, health and education, manufacturing of transport and machinery equipment, and
the travel industry (Table 4.8). The magnitude of employment reductions in some of these
industries is indeed dramatic. For example, forestry decreased employment by about one-
third over a year. The decline of these industries reflects economic development (agricul-
ture), lack of comparative advantage (some manufacturing branche), and the downsizing of
the inefficient public sector (education and health).
         Job opportunities are provided not only in expanding industries, but also in indus-
tries characterized by high job turnover. These industries simultaneously create and close a
large number of jobs, implying that the jobs they provide are often temporary.
Nonetheless, for many workers they offer a chance to enter the labor market and gain work
experience. Such high turnover industries include sewage and sanitation, construction,
hotels and restaurants, food industry, and retail trade. For example, in the construction
industry, over 16 percent of jobs were reallocated from shrinking firms toward expanding
firms. These industries create employment opportunities largely for manual, less skilled
workers.
       Although it would be expected that during the course of economic transition jobs
would largely be reallocated between industries, it turns out that this is no longer the case in
           4                                                                                                 83


Table 4.9: Job Reallocation
A. Top 10 industries with            Job creation          B. Top 10 industries with        Job destruction
highest rates of job creation                rate          highest rates of job destruction            rate
Electricity, gas & hot water supplY-         34.2          Forestry                                    38.3
Other business activities                    23.8          Electricity, gas & hot water supply'        37.7
                                                                        .0
Wholesale trade                              21.9          Health care                                 36.7
Car sale                                     17.3          Agriculture                                 21.1
Hotels & restaurants                         17.1          Real estate                                 20.5
Retail trade                                 16.7          Transport equipment                         18.7
Sewage & sanitation                          16.4          Construction                                17.7
Construction                                 16.3          Wood                                        17.1
Leather                                      16.1          Sewage & sanitation                         16.6
Apparel                                      15.1          Machinery                                   16.1

C. Top 10 industries with highest             Job          D. Top 10 industries with               Employment
rates of job reallocation            reallocation          highest rates                            growth rate
                                             rate          of employment growth
Electricity, gas & hot water supply'         68.4          Other business activities                       13.0
Sewage & sanitation                          32.9          Wholesale trade                                 10.8
Construction                                 32.6          Apparel                                          6.5
Hotels & restaurants                         30.9          Car sale                                         6.4
Real estate                                  28.9          Leather                                          5.1
Wood                                         28.1          Water (distribution)                             4.0
Food                                         26.4          Retail trade                                     3.6
Retail trade                                 26.2          Public administration                            1.9
Furniture                                    25.2          Publishing                                       1.8
Agriculture                                  23.8          Hotels & restaurants                             1.6
(0) High job turnover in this industry reflects administrative changes and is largely spurious.
(*) High job destruction in the health sector in large part reflects changes in the type of employment
relationship (employees of medical centers turning into self-employed GPs) and is largely spurious.
Source: Survey of Employment and Wages (2000), National Statistical Institute; Author's calculations.



Bulgaria. In other words the country has already approached the equilibrium industry
employment structure, when job reallocation takes place mainly within industries.
Specifically, in 2000 only 17 percent of jobs were reallocated between industries, while as
much as 83 percent of jobs were shifted from shrinking toward expanding firms within an
industry.

        The dominance of within industry job reallocation over between industry realloca-
tions is good news from the perspective of unemployment. It is presumably easier for
workers who have lost their jobs to find a new job within the same industry, rather than in a
different industry. Skill requirements are similar across firms within an industry, and thus
84                                                              ----~
                                                                           BULGARIA POVERTY ASSESSMENT


the problem of skill mismatch is likely to be less severe, implying a limited need for re-
skilling and retraining. Still, the between industry component of job reallocation is non-
negligible, implying that a significant fraction of workers who have lost their jobs in declin-
ing industries need to acquire new skills in order to find new jobs in growing industries.
Job Turnover and Unemployment

        High job turnover may increase overall unemployment, but may also lower the
average duration of unemployment (Garibaldi et aI., 1996; Box 4.1). This is because high
job turnover implies larger inflows into unemployment, while simultaneously creating larger
outflows from unemployment to jobs. Conversely, low job turnover is expeeted to be asso-
eiated with longer duration of unemployment, although the overall unemployment pool
may be smaller.
                            Box 4.1: How Does Enterprise Restructuring Affect Unemployment?

             Restructuring and associated job reallocation can contribute to unemployment through two chan-
  nels: (i) productivity gains and (ii) frictional and structural unemployment:

             Productivity improvements. Joh reallocation hrings about productivity gains because it supposedly
  entails the destruction of low-productivity jobs and the creation of high-productivity jobs. Higher productivity
  implies that the same output can be produced with fewer workers, The negative effect of productivity increas-
  es on unemployment has a short-term nature, since in the longer term productivity increases result in lower
  unit labor costs and lead to new investments which bring about new jobs which thus mitigate unemployment 53

            Frictional and structural unemploymetJl, Job reallocation means that displaced workers need to
  search for new jobs, which takes time and requires acquiring information on new job opportunities. Moreover,
  jobs that have been destroyed usually differ in salient characteristics (e.g. skills rcquired to perform them, or
  location) from those which have been created. Workers need to acquire new skills and/or move to different
  locations to find new jobs. Given that workers are not perfectly mobile, structural (skill and spatial) mismatch-
  cs arise. That is, job reallocation gives rise to the mismatch between the skills dcmandcd and supplied in a
  given area, or causes an imbalanee between the supplies of and demands for workers across areas. Frictional
  and structural unemployment are thus an unavoidable consequenee of restructuring and associated realloca-
                                                   1986).




        Correlation analysis for 28 districts reveals that in Bulgaria, high job creation is
associated with a high employment-to-population ratio and a shorter duration of unemploy-
ment Cfable 4.9).54 However, surprisingly, on its own, a high job creation rate docs not
reduce unemployment (at a district level). This implies that while the working age popula-
tion at large benefits from greater availability of job opportunities, the unemployed may
not. This may point to the skills gap, which prevents the unemployed from competing suc-
cessfully for jobs with other members of the labor force.

53 This is under the assumption that productivity gains arc not fully consumed by higher wages but instead
improve the rate of return on investments.
54 The correlation analysis in this section shows an association between the variables and does not necessarily
imply causation.
               4                                                                                                   85

Table 4.10: Correlations Between Job Creation, Job Destruction and Other Indicators of Labor
Market Conditions in 28           2000
                                                 ejr     erate      urate      Itu       udur

jd                 -0.061        1.000
jt                 0.702         0.669       1.000
egr                0.739        -0.717       0.039        1.000
ejr                0.969        0.108        0.799        0.603        1.000
crate              0.471        -0.666      -0.124        0.774         0.333       1.000
urate              -0.140       0.789       0.460        -0.626        -0.015      -0.837       1.000
Itu                0.087        0.204       0.210        -0.074        0.144       -0.300      0.255       1.000
udur               -0.487       0.529       0.015        -0.693        -0.395      -0.851      0.732       0.415
Notes: jc job creation rate; jd job destruction rate; jt job turnover rate; egr employment growth rate;
         ::0                     ::0                       ::0                      ::0


ejr == excess job reallocation rate; erate = employment-to-population ratio; urate == unemployment rate;
Itu :::: long-term unemployed as a share of unemployment; udur        average duration of unemployment spells.
Note: correlations are weighted by the district's employment level.
Source: Author's calculations.


         Conversely, a high job destruction rate at the district level is associated with a low
employment-to-population ratio, a high unemployment rate, and longer unemployment
duration. This, combined with the previous finding, indicates that the regional unemploy-
ment rate in Bulgaria is strongly affected by inflows into unemployment which are a conse-
quence of job destruction, but is not sufficiently affected by the rate of job creation and
associated employment opportunities. This is a negative phenomenon, which does not
bode well for unemployment reduction in Bulgaria. Expectedly, it is the difference between
the job creation and job destruction rates (i.e. the net job creation rate) that plays a critical
role in determining labor market conditions. A higher net job creation rate implies higher
employment and lower unemployment, as well as shorter duration of unemployment spells.
         Net job creation, and therefore employment growth, tend to be higher in regions
undergoing faster restructuring. There is a significant positive correlation between regional
employment growth and the degree of enterprise restructuring as measured by the excess
job reallocation rate (r=0.60). A region's employment growth depends in equal measure
on job creation (r=0.74) as job destruction (r=-O.72). This implies, that a strategy to pro-
mote sustainable regional gro~1h should focus improving the environment for job growth,
rather than on preventing the destruction of unviable, low productivity jobs. In high
turnover regional labor markets (as measured by the excess job reallocation rate) unem-
ployment duration tends to be shorter. The correlation of these two variables is strong
(0.60). However, a high rate of job reallocation does not seem to contribute significantly to
unemployment. In other words, more intensive enterprise restructuring does not necessari-
ly lead to higher unemployment.
86                                                          BULGARlA POVERTY ASSESSMENT


         The share of long term unemployment is virtually unaffected by job turnover.
Specifically, a high job creation rate does not lower long-term unemployment. A large
fraction of the long-term unemployed can exist in both dynamic and stagnant labor mar-
kets. This suggests that the long-term unemployed are left out of the labor market and face
difficulties taking advantage of new job opportunities.
         In summary, the rate of job turnover has a visible impact on labor market condi-
tions in Bulgaria. There is evidence that higher job turnover reduces the duration of unem-
ployment spells. However, a disturbing feature of the relationship is the asymmetric reac-
tion of regional labor market conditions to changes in job creation and in job destruction.
Unemployment is highly sensitive to the rate of job destruction. However, it is virtually
insensitive to the rate of job creation. An increase in the rate of job destruction brings
about an increase in the unemployment rate and in the average duration of unemployment
spells. In strong contrast, an increase in the rate of job creation by itself does not lower
unemployment significantly, and does not reduce the share of long-term unemployment,
although it tends to shorten the job search duration.
        The likely reason for this asymmetric reaction is that the unemployed lack the skills
necessary to successfully compete for new jobs. These new jobs often differ significantly
from the old jobs as regards the skill content, occupation and necessary qualifications. This
problem is aggravated by the long duration of unemployment spells, which leads to the ero-
sion of skills and morale, and thus further undermines the effectiveness of job search and
renders the long-term unemployed unattractive to employers. This is a serious problem in
Bulgaria which limits the unemployment reduction potential of economic growth and job
creation.

        D. The Regulatory Environment for Employment Growth
Business Climate
          Despite the marked increase in the number of businesses in Bulgaria, there are still
considerable obstacles to new entry and business growth. The legal framework is inconsis-
tent, which creates scope for arbitrary decision making and abuse. Registration and licens-
ing procedures are more difficult and lengthy than in other countries. For example, as
many as seven different permits are needed to start a new firm in Bulgaria, in comparison
with two in the u.K., and three in Estonia and Poland. In addition, the number of busi-
ness activities that require a permit increased from 42 in 1995 to 100 in 2000 (Stoev, 2002).
Business activity is over-regulated creating scope for bureaucratic harassment. Box 4.2
illustrates problems faced by small entrepreneurs from a recent opinion survey.
        High taxes. Another constraint to small business growth is the level of business tax-
ation in Bulgaria, which is among the highest in the region. High labor taxes (personal
              4                                                                                               87


                               Box 4.2: Small Entrepreneurs Complain about the Business Environment
           Responses from a survey of small business entrepreneurs illustrate the problems they face in opening
  and running a business:

  "If I had to start again, I would not even think of opening a business."
   "I can not even remember how many times 1 went for each permit. It is just insanely long".
  "During the inspections they pick on every single thing. When they decide to pick up your money, there is no
  way out. They always find something to pick on."
   "You must hold a law degree to be able to open a cafeteria."
   "Instead of thinking how to be more efficient we spend 60 percent of our time thinking how to cope with tax
  authorities and inspectors."
  "There should be rules of the game, but clear ones and equally applicable to all".
  Source: Gancheva et al. (2000).


income tax (PIT) and payroll contributions for social insurance) are of particular concern,
as they negatively affect labor demand and job creation. The tax wedge between labor
costs to employers and take home pay amounts to 41 percent in Bulgaria. In other words,
of each 100 leva paid by an employer as labor compensation, employees receive only 59
leva, while the rest is taken in the form of taxes and contributions. These taxes and contri-
butions in most part are used to finance the provision of important public services, such as
education, health care, and social security. Nonetheless, the effect of a large tax wedge is
lower wages and lower employment, representing a "deadweight loss" of taxation. Thus,
reforms that improve the efficiency of public services can decrease social taxes and
increase incentives for private investment and new jobs.

                                   Figure 4.4: Payroll Taxes in Comparison (% of salary)

       60T-------------------------------------------------------~
       50
       40
       30
       20
       10
        o
              ~~     . _<>'b- ~"
                     ~ ~
                                     '"   ~'I>
          4,'bT
      <9..0       ~o ~q,.     +.§f~ ~~'M"
                      (y-
                  G""(;

Sources: Rutkowski (2002a), World Bank (2001).
88                                                                       BULGARIA POVERTY ASSESSMENT


Legal Constraints to Labor Market Flexibility
        Labor market institutions, including the regulatory framework anchored in the
Labor Code, can limit labor market flexibility and consequently employment growth. In
comparison with other transition countries, such as countries of the former Yugoslavia, reg-
ulatory barriers to labor market flexibility are modest in Bulgaria, and are broadly in line
with those in other transition economies with relatively flexible labor markets. 55 The
Bulgarian Labor Code was amended in March 2001 with the objective of adjusting it to the
needs of a market economy and improving labor markct flexibility. However, flexibility
remains limited in some areas. While these remaining rigidities are not overwhelming in
Bulgaria, there is room for enhanced flexibility along a number of dimensions.

        Employment protection legislation is not unduly restrictive in Bulgaria. On the
positive side, it includes relatively low monetary costs of dismissals (short advanced notice
and low mandatory severance pay), and an option to redistribute working hours, which
gives employers flexibility in adjusting labor input to fluctuations in product demand. In
some areas, however, existing legislation excessively restrains employers from adjusting the
size and composition of their workforce to changing economic conditions, with possibly
negative consequences for firm performance. These areas include:

         Procedural costs of dismissal56. The burden of proof that an employee lacks neces-
sary skills, performs poorly or violated work discipline rests on the employer. Courts tend
to exhibit a pro-labor bias, rule dismissal invalid and order reinstatement and/or payment of
compensation. Moreover, the Labor Code does not list economic (efficiency), technologi-
calor organizational reasons as valid reasons for dismissal. All this renders dismissals diffi-
cult in practice, especially in firms with strong union presence High dismissal costs, which
make it difficult for employers to fire redundant labor during a downturn, discourage hiring
during an upturn. This is because employers do not want to bc lockcd into an unprofitable
relationship and try to avoid future costs associated with redundancies.

         Strict limitation on the use of fIXed-term employment contracts. Fixed-term contracts
in Bulgaria are allowed only for work which is temporary or seasonal in nature, and can be
renewed only once. This explains the limited incidence of fixed-term contracts in Bulgaria,
and is likely to contribute to limited hiring. As mentioned, if employers eannot easily adjust
the size and composition of their workforce according to business needs, then they resort to
less hiring. Restrictions on the use of fixed term contracts especially hurt the employment
chances of less . . .,. .... ,...,"'. ,'u workers (e.g. those with little labor market experience or low
------------~-------------
55 Refer to Rutkowski (2002, Annex 1) for a comparative summary of Jabor legislation in 5 transition economies.
56 Procedural costs of dismissal relate to administrative, legal and judicial procedures necessary to carry out a
valid dismissal. 'Ibey should be distinguished from monetary costs of dismissal (such as severance pay). However
lengthy and difficult administrative procedures involve an opportunity cost and eventually translate into monetary
costs borne by the employer.
            4                                                                                                      89

skills). In other words, precisely those workers who are most affected by long-term unem-
ployment57 ,

         Restrictions on the use and high costs of overtime work. The use of overtime is in
principle prohibited in Bulgaria, except in emergency situations and in the case of intensive
seasonal work. The Labor Code also imposes a tight yearly limit of 150 overtime hours
(the limit in Hungary is twice as large). The use of overtime is also very costly for employ-
ers, as they have to pay a premium of at least 50 percent of the base wage. These restric-
tions limit the ability of employers to adjust the volume of production to fluctuations in
demand. However, on the positive side, a provision exists which allows employers to redis-
tribute working hours over the period of one quarter, i.e. to lengthen working hours during
peak demand and shorten them proportionately when demand is low, Still, greater working
time flexibility would improve the competitiveness of Bulgarian enterprises.

        Limitations on wage adjustments. According to the Labor Code, employers are
obliged to pay 100 percent of wages during a production stoppage, and hence cannot adjust
wages to changing demand conditions. While the intention of this provision is to protect
worker earnings, in practice it may hurt workers by compelling the employer to reduce
employment rather than wages during the period of depressed demand.

        In addition, limitations on wage adjustment come from the statutory minimum
wage. Until recently the minimum wage was low relative to the average wage, thus hardly
hurting the employment opportunities of low skilled and inexperienced workers. However
the minimum wage was raised in October 2001, which increased its "bite", Currently the
minimum wage is at around 38 percent of the average wage, which implies that it is likely to
limit employment opportunities of less skilled, less cxperienced workers in the depressed
regions of the country. It should be noted that the minimum wage is not an effective anti-
poverty tool, as often minimum wage workers are young persons who are secondary earn-
ers in non-poor families. At the same time, too high of a minimum wage hurts the poor,
whose productivity is often low, by locking them out of employment.




57 An objection can be raised that a widespread use of fixed term contracts may lead to higher poverty rates, as
workers with fixed-term contracts are more often poor than workers with permanent contracts (see Table 3.8).
This argument has a limited validity, however. First, as a rule it is the nature of a job, not contract, which deter-
mines the level of earnings. For example, temporary or seasonal jobs usually require less skills, and therefore are
low-paid, Second, often an alternative for hiring a worker on a fixed-term contract may be not hiring on a perma-
nent contract, but not hiring at all, Accordingly, to the extent that fixed-term contract encourage hiring they con-
tribute to lowering poverty, not increasing it. Admittedly, fixed-term contracts can be abused by employers, and
therefore some restrictions on their use for example a limit on cumulative duration - are justified, The point is
that these restrictions should not be excessive (as it is currently the case in Bulgaria) in order not to discourage
hiring.
90                                                                              BULGARIA POVERTY ASSESSMENT


                                             E. The Skills Gap
        An important factor contributing to high unemployment in Bulgaria is the skills gap
and the poor ability of the unemployed to compete for new jobs. The unemployed, and
especially the long-term unemployed, have lower educational attainment and skills than the
employed. In other words, there is an "excess supply" of poorly educated persons among
the unemployed, as there are not enough low skilled jobs to eliminate unemployment. 58
Consequently, unemployment is disproportionately concentrated among workers with low
educational attainment and poor skills.
         The size of this skills gap can be estimated by assuming that the number of job
vacancies is equal to the number of job seekers. The analysis suggests that nearly 20 per-
cent of the unemployed cannot find a job because their skills fall short of employer needs. 59
'This is a small increase from the mid-1990s, when the skills gap was estimated at 17 per-
cent. Not surprisingly, the extent of the skill gap is more pronounced among the long-term
unemployed than it is among the short-term unemployed, although the difference is rela-
tively small, and smaller than in other countries. These estimates imply that the skills gap is
responsible for over 20 percent of the current unemployment rate. This is a lower bound
estimate under optimistic assumptions. In reality, the problem of skill gap may be even
more pronounced.
        The inadequate skills of the unemployed, and especially of the long-term unem-
ployed, likely contribute to the relatively limited outflows from unemployment into work in
Bulgaria. Poor skills prevent a substantial share of the unemployed from effectively com-
peting for jobs, and can lead to their marginalization on the labor market. The high rate of
job-to-job movements (10 percent),60 compared with the low rate of exit from unemploy-
ment to work indicates that the unemployed in Bulgaria often lose in the competition for
new jobs to those who already have jobs. The unemployed account for only 40 percent of
new hires, while the rest is accounted for by persons who change jobs (40 percent), and

58 A critical variable that here is assumed to be constant is the structure of wages. A flexible wage structure,
entailing.the fall in relative wages of low skilled workers, would in theory help to absorb unemployment among
poorly educated workers. However, social norms embedded inter alia in the minimum wage, prevent wages from
adjusting to supply and demand conditions.
59 The formula to calculate the skill gap is: sg =   ~ (ui   ej) for Uj > ei' where ui and ei are percentage shares of the
i-th educational level in unemployment and employment, respectively, and L is the number of educational levels.
60 The rate of job-to-job movements means 10 percent of workers who were employed in March 2000 were in a
different job one year later. This rate is high compared with other transition economies. For example in
Lithuania and Poland job-to-job movements are of the order of 5-6 percent, and are thus smaller than in Bulgaria
in both absolute terms and in relation to movements form unemployment to employment. The relatively high rate
of job-to-job transitions means that employers prefer to fill in existing vacancies by bidding away workers from
other jobs, rather than hiring the unemployed. This suggests that the unemployed in Bulgaria are marginalized,
more so than in Lithuania and Poland.
         4                                                                                  91

new entrants to the labor market (20 perccnt). In other words, therc is some evidence that
employers prefer to hire from the ranks of the already employed rather than from the ranks
of the unemployed, whom they tend to perceive as less productive.

        The importance of the skills mismatch in Bulgaria points to the role of educational
and training systems in addressing the problem of low, narrow and inadequate skills. While
the training system can sometimes address the problem of inadequate skills at the margin,
the overall educational system needs to playa much more fundamental role in producing
trainable, rather than trained, workers. That is, workers who are first of all capable of per-
manent learning, and are able to acquire new skills in response to ever changing job
requirements. Thus, building human capital should be perceived as a central component of
an effective employment policy.

        As discussed in the previous chapter, there is also a regional dimension to the skills
gap. There are substantial and increasing differentials in the unemployment rate across
regions. This implies that there is a significant mismatch in the labor market across the
country and suggests that there are barriers to labor mobility, which prevent unemployed
workers from moving to areas where there are jobs. One such example is the limited hous-
ing market.

                       F. Findings and Policy Implications
        How can unemployment in Bulgaria be lowered? No single measure can reduce
unemployment on its own. However a package of measures can contribute to job creation,
and thus to the reduction of unemployment. Many of the measures needed to improve
labor market performance lie outside of the labor market, including structural reforms with-
in the economy as a whole. Bulgaria has made considerable progress in regaining macro-
economic stability, as well as restructuring and closing non-functioning SOEs and banks,
and privatizing non-infrastructure SOEs.

         Bulgaria's on-going reform agenda includes measures which will in addition to
maintaining macrostability contribute to employment growth, including: (i) sustaining strnc-
tural refolms in the enterprise sector with emphasis on the restructuring of the energy, rail-
way, telecommunications, and water sectors; (ii) strengthening market institutions, focusing
on entry and exit policies, regulatory costs, delivery of public services, competition, and
judicial reform; (iii) deepening the financial sector, addressing the constraints to increased
lending by the banking system and the development of financial markets; (iv) improving
governance, including implementing the anti-corruption strategy, strengthening local gov-
ernments, and reforming core public administration; and (v) investing in human capital and
strengthening social programs, focusing on education, health, and pension reforms and social
assistance effectiveness.
92                                                     -~-----
                                                                          BULGARIA POVERTY ASSESSMENT


          Closely related to the above, and within the labor market itself, three main areas of
reforms can be addressed:

          First, priority should be given to improving the business environment to facilitate the
growth of small enterprises. Existing barriers to entry and constraints to growth of existing
firms should be removed to encourage the development of the new) more productive sector
of the economy. Developing a friendly business environment comprises ereating transpar-
ent rules of the game, deregulation, less discretionary power for bureaucrats, and a lower
level of business and labor taxation.

          Improving conditions for business entry should involve easing requirements and
reducing licensing and permit procedures to a minimum. Second, the tax burden, including
labor taxes, should be reduced to foster both labor supply and labor demand. This requires
a substantial improvement in the efficiency of public services to reduce required revenues. 61
These two groups of measures can help to achieve a third important objective, reducing the
size of the informal sector, as they will lower costs of moving from the informal to the for-
mal sector. This in turn can set in motion a virtuous circle of broadening the tax base and
thus increasing budget revenues which will make it possible to further reduce tax rates.

          Second, labor markets should be reformed to improve fLexibility.                     Reforms should
be based on three principles: (a) deregulation of labor relations through changes to the
Labor Code; (b) devolution of the responsibility for determining the labor relations to
social partners, which entails adequate and genuine representation of employers and
employees in social dialogue, and (c) decentralization of collective bargaining by strength-
ening firm level bargaining.

          Third, educational and training systems should be improved to address the problem
of the skills gap and skill mismatches. While the education system should be reformed with
a view toward providing broad labor market skills to all students, and to produce trainable,
rather than trai~ed workers, adult training should be targeted at selected worker groups
with well identified labor market problems and tailored to the needs of employers.




61 For further discussion of public expenditure rdorm options in Bulgaria see the recent report: "Bulgaria: Public
Expenditure Issues and Directions for Reform," Report No. 23979-BUL
           5                                                                                                        93


                        Chapter 5: Coping with Poverty62


                                             A. Introduction
       Social protection mechanisms in Bulgaria help many households cope with the risks
of poverty and low income. Much of the dramatic decline in poverty since the 1997 crisis
can be attributed to the rolc of social protection programs in keeping households out of
poverty especially in the context of high and increasing unemployment. Unemployment
benefits, pensions and social assistance programs provide an important source of income
for many Bulgarians. In 2001, over 80 percent of Bulgarians received at least one type of
benefit. Total public spending on social protection increased from 9 percent of GDP in
1997 to 13 percent in 2000. In addition to these formal, public programs, many Bulgarians
rely on informal coping strategies, including remittances, migration, working mUltiple jobs
and own production of food.

       This chapter discusses the role of both formal and informal social protection mech-
anisms in addressing poverty and helping households manage risks. The relatively low
poverty gap - 0.7 percent of GDP in 2001, suggests that further improvements to the target-
ing and coverage of social protection programs could be made to increase the effectiveness
of the safety net in reaching the remaining pockets of poverty. The experience of the 1997
crisis and the dramatic impact of price shocks on household welfare also highlight the
importance of both public and private social protection mechanisms in helping households
cope with temporary shocks. Following an overview of the main features of the social pro-
tection system, this chapter examines the poverty alleviation impact and effectiveness of the
main programs. 63 It then discusses three of the programs which are most important from a
poverty alleviation perspective in more detail: unemployment benefits, social assistance and
child allowances. Finally, it discusses the role of informal eoping strategies.

                               B. The Social Protection System
          Bulgaria has a comprehensive social protection system consisting of three main cat-
egories of programs: (i) social insurance programs, including pension and unemployment
benefits; Oi) social assistance benefits, including cash and in-kind benefits; and (iii) family
benefits, including child allowances and maternity benefits. These programs comprise a
mix of programs inherited from the socialist period, such as family benefits, as well as new
programs, such as unemployment benefits, initiated during the 1990s to meet the needs of a

62 This chapter is based upon the background paper on poverty and social protection by C. Tesliuc.
63 Further information on the fiscal impact of social protection programs is provided in the 2002 public expendi-
ture review.
94                                                                                                 BULGARIA POVERTY ASSESSMENT


market environment. Prior to 1991, guaranteed employment served as the main social pro-
tection mechanism in the country. Social assistance had a relatively small role, with limited
programs for those who were not able to work, such as the elderly and the disabled. With
the economic restructuring and reforms of the late 1990s, the social protection system has
expanded to encompass welfare programs that explicitly help households to cope with the
new risks of poverty and unemployment.
         During the 1990s, social protection financing in Bulgaria averaged 12 percent of
GDP, peaking at 15 percent in 1993, and dropping to a low of 8.8 percent of GDP during
the crisis of 1997. Social protection spending increased at the outset of the transition peri-
od with the growth of unemployment and the influx of early retirees into the pension sys-
tem. Real social expenditures fell dramatically beginning in 1992, reaching 31 percent of
1991 levels by 1997. After 1997, social protection spending grew alongside GDP, attaining
13 percent of GDP in 2000, but only partially recovering its purchasing power. (Figure
5.1). As a share of total consolidated government expenditures, social protection expendi-
tures increased from 22 percent in 1996 to 28 percent in 2000.
                                     Figure 5.1 Social Protection Expenditures (% of GDP)

     1 6 . 0 , - - - - - - - - - · - - - - - -_ _ _..____-,

     14.0
                                                                                                          o Family and Short-
     12.0                                                                                                   Term Benefits
     10.0 •                                                                                               ~Pensions

     8.0
                                                                                                          • Labor Markets
     6.0
     4.0
                                                                                                          • Social Assistance
     2.0
     0.0 +----.-

          ~...
        ...      ...f?Jf?J""   ..,~".)   ..,#   ..,f?Jcj:J    c#' . f?Jf?J'\
                                                             ...    .          ... b
                                                                                 cfb'   ...f?J~ ""o!§l

Sources: MOLS'P, MOF.
Note: Labor market expenditures include active and passive measures.

Coverage
        Social protection programs in Bulgaria have wide coverage within the popUlation.
Over 80 percent of Bulgarians received at least one type of benefit in 2001 (Table 5.1).
Since 1995, coverage of unemployment benefits, child allowances, and social assistance,
including the extended Guaranteed Minimum Income (GMI) program (a combination of
cash and in-kind means-tested programs which comprise the main safety net program) has
become more widespread.
            5                                                                                                      95

         As a whole, social protection programs have become better targeted since the mid-
1990s. In 1995, the share of poor and non-poor households receiving benefits was nearly
identical. 64 Pensions and unemployment benefits had similar, outreach among poor and
non-poor households. This is not surprising, as the primary objective of these social insur-
ance benefits is income smoothing, rather than social assistance. Child allowances were
received more frequently by the non-poor than the poor and, as expected, social assistance
programs had a higher outreach among the poor. The pro-poor orientation of all social
protection programs-with the exception of pensions-increased in 1997, and further in 2001.
The share of poor households receiving all types of social assistance programs nearly dou-
bled, from 26 percent in 1995 to 49 percent in 2001.
Table 5.1: Coverage of Social Protection Programs: 1995, 1997 and 2001 (% of persons receiving
benefits·)
                                 Total              By Poverty Status of the Recipient
                                               Non-poor Poor Non-poor Poor Non-poor Poor
                         1995 1997 2001               1995             1997               2001
All social protection     80.4   79.4    83.6    80.4     82.1    76.9       83.8    82.5      92.0
Pensions                  52.7 52.3      53.8    52.4     57.4    47.9       60.3    54.6      47.7
Unemployment benefits 6.0         6.4    13.4     5.7     11.7     5.1       8.7     11.4      28.3
Child allowance           33.7 36.9 40.5         34.6     19.2    36.6       37.5    39.4      48.4
Social assistance         12.8 11.1      19.1    12.1     25.5     8.7       15.2    15.2      48.8
Extended OMI               2.6    6.3    7.1      2.3      7.0     5.0       8.8      4.3      28.5
Maternity and childcare   6.6     3.8    6.6      6.1     14.8     2.9       5.5      5.3      17.0
Sources: BIHS 1995, 1997,2001.
Note: (*) Beneficiary households weighted by household size. Poverty is defined as two·thirds 1997 mean per
capita consumption.


          The outreach of social protection programs is higher among the poor and in rural
areas where poverty is concentrated. Various social protection programs have different
outreach. Pensions have the largest incidence; almost half of the popUlation live in house-
holds receiving an old age, disability or survivor pension. Of these, old age pensions are
the most widespread, benefiting 25 percent of Bulgarians. The coverage of pension bene-
fits extends further within the popUlation; 50 percent of the population lives in households
where at least one household member receives an old age pension. The incidence of bene-
fits is higher in female headed households, with 88 percent receiving benefits, than in male
headed households, where the figure was 83 percent. This is mainly due to greater inci-
dence of survivor pensions among female headed households.

        After pensions, the child allowance is the second most widely received social trans-
fer, benefiting households in which 41 percent of the population lives. Although house-
holds with children benefit from virtually universal coverage, the survey data shows that as
64 Throughout this chapter the poverty line of two-thirds mean 1997 per capita consumption is used for the analysis.
96                                                                BULGARIA POVERTY ASSESSMENT


much as 25 percent of persons living in households with children do not receive child
allowances. This is a result of low coverage of benefits among the self-employed and other
uninsured households. The take-up rate drops rapidly for households with children over 14
years old. Incidence among households in rural areas is 10 percentage points lower than
for households in urban areas. The incidence of child allowance is higher in poor house-
holds, however 86 percent of recipients live in non poor households. About 13 percent of
the population lives in households receiving unemployment benefits, as do 38 percent of
those living in households where the head is unemployed.

Poverty Alleviation Impact
         Social protection programs, particularly pensions, keep many households from
falling into poverty. In order to quantify the impact of social protection benefits on pover-
ty, the poverty rate was measured with (ex post) and without (ex ante) benefits. It is impor-
tant to note that this simulation assumes no behavioral changes - in reality households will
face incentives to change consumption patterns in the absence of benefits. Assuming this
caveat, in the absence of social protection programs, poverty rates would be 18 percentage
points higher (Figure 5.2, Table 5.2). Although the main objective of pension benefits is
not poverty relief, these benefits are largely responsible for the reduction in poverty.
Without non-pension benefits - all unemployment and social assistance, benefits - the
poverty rate would be just two percentage points higher. The disproportionate role of pen-
sions also reflects the older age distribution of the population.

            Figure 5.2: Poverty Rates With and Without Social Protection Benefits, 20tH


            Without all benefits



               With all benefits



           Without non-pension
                       benefits

             With non-pension
                      benefits


                                   o   5    10      15       20        25      30         35
Source: BIHS 2001.

        Social protection programs combined to reduce the overall poverty headcount from
29.9 percent to 11.7 percent in 2001. Among benefit recipients, the poverty headcount fell
from a high of 35.1 percent before benefits (ex ante), to a low of 12.8 percent after benefits
(ex post). In relative terms, ex post poverty is 61 percent lower than ex ante poverty (a
weighted average of a 64 percent reduction among beneficiaries and 0 percent reduction
          5                                                                               97

Table 5.2: Poverty Levels With and Without Social Protection Benefits, 1995, 1997 and 2001
                          Recipient 1995 Total Recipient 1997 Total Recipient 2001 Total
                           Yes      No             Yes       No              Yes     No
Pop. Share:                     80     20    100     79    21     100    84     16     100
Poverty Headcount (%)
 Without                        24.2   5.0   20.5   52.7   28.4   47.7   35.1   6.4    29.9
                                 1.2   2.5   1.1     1.6   2.4     1.5    1.2   1.8    1.1
  With                          5.6    5.0   5.5    38.0   28.4   36.0   12.8   6.4    11.7
                                0.8    2.5   0.9     1.6   2.4     1.5    1.0   1.8    0.9
Poverty gap
 Without                        12.5   2.3   10.5   23.6   9.0    20.6   19.9   2.4    16.8
                                0.8    1.5   0.7    1.1    1.3     1.0   0.8    1.0    0.7
  With                           1.6   2.3   1.7    12.1   9.0    11.5   3.8    2.4    3.6
                                0.3    1.5   0.4    0.9    1.3    0.8    0.4    1.0    0.4
Poverty severity
 Without                        10.1   1.2   8.4    15.0   4.5    12.8   17.4   1.2    14.5
                                0.9    0.9   0.7    0.9    1.0    0.8    1.0    0.6    0.9
  With                          0.7    1.2   0.8    5.5    4.5    5.3    1.8    1.2    1.7
                                0.2    0.9   0.2    0.6    1.0    0.6    0.2    0.6    0.3
Source: BIHS 1995, 1997,2001.


among non-beneficiaries).
         The reduction in the poverty headcount provides only a partial picture of the
impact of social spending. The poverty headcount does not take into account the reduction
in poverty among those poor who are not lifted out of poverty by social protection pro-
grams. This can be addressed by examining the "poverty gap" and "poverty severity" mea-
sures, which are more distributionally sensitive. Social protection programs as a whole suc-
ceeded in reducing the poverty gap by 79 percent from its ex ante estimate, and poverty
severity by 89 percent. In 2001, non-pension social protection programs had a modest
impact in reducing the overall headcount rate from 13 to 12 percent, the poverty gap from
4.7 to 3.6, and the poverty severity measure from 2.6 to 1.7. Social assistance expenditures
amounted to 1.1 percent of GDP in 2000, and labor market expenditures 1.2 percent.

Effectiveness of Social Protection Programs
         How effective is the social protection system at reaching the poor? Three related
concepts are used to capture the capacity of the system in channeling funds to the poor.
First, coverage is defined as the share of the poor receiving a particular benefit, or more
specifically, the share of those who are poor before receiving the benefit and receive the
benefit. Second, targeting refers to the share of funds channeled to the poor before they
receive benefits. The complement of this measure is usually referred to as leakage, the
98                                                                                                                                           BULGARIA POVERTY ASSESSMENT


share of funds going to the non-poor. Finally, the adequacy of a transfer refers to the ratio
of benefits to the pre-benefit consumption for a particular household 65 .

          Figure 5.3 plots these three indicators on one graph for 2001 for most national
social protection programs, except pensions. The Annex Table at the end of this chapter
includes the data used for the figure. The program coverage of the poor is read on the x-
axis, and the targeting of resources to the poor on the y-axis. The adequacy of the program
is proportional with the size of the "bubbles", and is listed above each bubble. In Figure
5.3, a perfect program would be located in the upper-right quadrant, where it would have
100 percent coverage of the poor, and 100 percent targeting. For a program to be perfect
in terms of program adequacy it should provide benefits equal to the household consump-
tion deficit (poverty gap) before the transfer (accounting for incentive effects).

       None of the programs implemented in Bulgaria in 2001 are close to the upper-right
quadrant, or the "perfect program" benchmark of coverage or targeting. Programs can be
categorized into three groups based on targeting effectiveness. First, medical and transport

           Figure 5.3: Coverage, Targeting and Effectiveness of Social Protection Programs

                            How Well Does Social Assistance Assist the Poor?
                            l00% -, -- - - -------__- -__- -- - - -__--~--__- -____~
                                                            .                  .
                                            :---                                                                    ..
                                    ... --- - --- -1--- --..~ -.--- .-~- ------;- -- - ..-~- ------~- ----- -~-- -. _ ;
                                                                                  I                               "                                              ,

                            90%

                      ~     SO"l.   - - - - - - ':- - - - - - • ; - • - - - - •   ~-   - - - - - -;. - - • - - - -:- • -- - - - -: ' - - - - - - , - - - - -   - 1 •• - - - . - , • . .



                      .£!                        ,              .                 ,               :               ,              .               ,               ,              :
                      0)    70%     - - - - - - -;- - - - - - - ~ - . - - - . - .; - - - - - . - ~ - - - - . - -:- - - - . - - -: - - - - - - - { - - - - - - - i - - - ~. -.:- - . - ..
                      c:
                      '0                                                                          .
                                                                                                  ,
                                                                                                  ,   _   _   _. ', _ _ _
                                                                                                                                  ' "
                                                                                                                                 " ,_. _
                                                                                                                                    _ _ : _ __ •
                                                                                                                            _ _ .'. ______ J _ _ _ _                                  _   _
                      0>    60%                                                                                                                                                 ~




                      III
                      "0
                      c:
                      .a
                      '0
                      ~                                                                                               _. ' •. ____ - - --0 - _. _____ . ___ . _. _. ___ .
                      01                                                                                                                                                        ,
                      c:                                                                                                         "
                                                                                                                10%
                      ~
                      ~
                      ~.
                                                                                  ,             -:-----O· ·-·-~--·-- - -1- - - - - --:-· · -· ·-:----· - -
                                                                             - : - -- -- -- : - --- -. - ~ -- . . -- -:- - ---- - ~ --- - - --~ . - -- -- -: -- -
                                                                                  "                                              '               "



                                0%          10%            20% 30% 40% 50% 60% 70%                                                                             SO%         9O"k 100%
                                                              cO\erage (% of poor CO\ered)

                            o Lherrployrrent Benefn                           e Transport                                                 o Olild allow ance
                                                                              ~        Mat. & childcare                                   • Medical Benefits
                                                                              o Energy Subs idy                                           • GM:extended


Sources: BIHS 2001.


65 For few types of households and individual benefits, transfers exceed consumption, Thus, consumption in the
absence of the transfer goes to zero (it cannot be negative), and the adequacy indicator goes to infinity. In these
cases, we capped adequacy to a level of 200%.
Chapter 5                                                                                             99

benefits are targeting less money to the poor than their share in the population. These pro-
grams are regressive, and their design and implementation should be re-analyzed from a
poverty-reduction perspective. At the other extreme, among the good performers, are the
extended GMI program, which transfers 65 of funds to the poor. Two of its components,
namely the food subsidy66 and the GMI program, have targeting rates of 52 percent and 36
percent respectively. The remainder of the programs occupy a middle ground, with target-
ing rates at 16 percent for the child allowance, and 32-36 percent for the maternity and
childcare for uninsured, the unemployment benefits and, energy subsidy.

                                   c. Unemployment Benefits
         In 2000, nearly one-third of the registered unemployed in Bulgaria received unem-
ployment benefits. Unemployed workers are eligible for benefits if they are registered with
a local labor office, have been employed for 9 months during the last 15 months, and are
willing to accept a job or training, if offered. Benefits range from 85 percent to 140 percent
of the minimum wage and are paid for 4 to 12 months, depending on the length of prior
employment. The coverage rate of unemployment benefits has fallen dramatically over the
past decade with the high growth in long-term unemployment and the share of unemployed
workers who have exhausted eligibility for benefits. In 1990, 79 percent of registered unem-
ployed received benefits, while by 1994 this figure had fallen to 27 percent.
        Six months after the expiration of unemployment benefits, workers become eligible
for unemployment assistance. 67 Unemployment assistance amounts to 60 percent of the
minimum wage and is paid for six months. This benefit was introduced at the end of 1997
and replaced a means-tested allowance. Workers who remain unemployed following the
expiration of unemployment assistance become eligible for social assistance benefits. In
2000, 17,524 individuals received unemployment assistance, this marked a significant
increase over 1999, when 9,003 workers received the benefit.
        The main objective of unemployment benefits is insurance and temporary income
support for workers who have lost their jobs. Because of the tight link between unemploy-
ment and poverty, unemployment benefits are an important source of income for many
poor households. Overall, the poverty alleviation impact of unemployment benefits is mod-
erate. For beneficiary households, benefits reduce the poverty rate by 27 percent.
Although a large share of the poor are not eligible for unemployment benefits, because they
are among the long-term unemployed, the system has been reaching an growing number of
poor households over time (Table 5.3). In 2001, over one-third of those receiving benefits
were in poor households, and over one-third of the amount spent on benefits went to the
poor. Benefits also had a significant impact on household consumption for those house-
66 The food subsidy is the cash equivalent of in-kind food provided to poor households.
67 This benefit was eliminated with the enactment of the Employment Incentives Law in January 2002.
100                                                         BULGARIA POVERTY ASSESSMENT


holds who received them. Adequacy increased significantly in 2001, and comprised an
average of 117 percent of the pre-benefit consumption of the poor.

Table 5.3: Effectiveness of Unemployment Benefits
                                                          1995         1997         2001
Coverage (% of households who are poor)                   15.9          8.8         35.2
Targeting (% of resources received by poor)               24.3         46.9         32.9
Adequacy (ratio of benefits received by the poor
to pre-benefit consumption of the poor)                   34.3          5.1         117.0
Sources: BIHS 1995, 1997, 2001.



        The targeting of unemployment benefits in Bulgaria was lower than that of the
main social assistance cash transfer programs, discussed below. In 2001, roughly two-thirds
of the benefits went to the non-poor. This is a higher share than in other Central and
Eastern European countries. Only Estonia had a targeting rate of 31 percent, close to
Bulgaria's 33 percent. Benefit levels appear to be low enough not to have an adverse
impact on work incentives. In line with the trend in other countries of Central and Eastern
Europe, the replacement rate for unemployment benefits in Bulgaria has declined over the
decade. In 1997 the replacement rate was 0.3, consistent with that of Poland and the
Slovak Republic. However, further analysis of job search patterns of the unemployed is
needed to assess this, as it is the replacement rate for marginal workers which is important
for assessing incentives, not the average replacement rate.

                                    D. Social Assistance
         Social assistance programs encompass cash benefits and in-kind services. The main
benefits include: (i) the Guaranteed Minimum Income (GMI) benefit, a means-tested cash
benefit paid to low-income households below an income threshold; (ii) energy benefits,
cash benefits paid to low-income households during the winter heating season (November-
April); (iii) family benefits paid under the Birth Promotion Act, including child allowances,
maternity leave and birth grants for uninsured households; (iv) cash and in-kind benefits
for the disabled, including medical and transportation benefits; and (v) social care services
and institutions.

        The effectiveness of social assistance programs in reaching and addressing the
needs of the poor in Bulgaria has improved over the decade (Table 5.4). The two main
cash benefit programs, the GMI and energy benefit programs, have high incidence among
the poor. In 2001 the 'extended GMI' program-encompassing cash and in-kind benefits-
channeled 68 percent of resources to the poorest 20 percent of the population, while 53
percent of the energy benefit went to the bottom quintile.

         Despite these achievements, there is scope for further improvements to the effec-
            5                                                                                                       101

Table 5.4: Benefit Incidence                                        Quintile*
                                                                              GMI                            Energy
Quintile                    (including in-kind)                        (cash benefits only)                  Benefit
                     1995          1997         2001              1995        1997          2001              2001
                     47.3          18.4           68.3             54.7         20.3                60.5      52.9
2                    16.9          18.5           12.4              9.9          7.4                17.6      21.7
3                     2.7          11.6           8.2              0.2          17.4                12.4      11.9
4                    19.4          26.5           8.5              0.0          38.9                9.3       10.0
5                   13.8          25.0            2.5            35.2         16.1                  0.3       3.4
Sources: BIHS 1<)<)5, 1<)97,2001.
Note: (*) Table shows the incidence of the benefit, estimated in the absence of the benefit.




tiveness of social assistance in Bulgaria. Intergovernmental financing mechanisms for most
benefits are weak and lead to underfunding in poor municipalities. Benefits are frequently
paid irregularly or in-kind; and targeting can be refined to reach poor households which
remain outside of the safety net.

Social Assistance Financing Gaps
        Responsibility for funding social assistance benefits is currently shared equally
between the state and municipal budgets. Beginning in 1999, the MOF incorporated ear-
marked funding for social assistance programs into the system of intergovernmental trans-
fers to municipalities. This financing arrangement covers the main social assistance pro-
grams. While this has improved coverage, many municipalities, particularly the poorest,
continue to have difficulty in mobilizing their share. The amount of the state budget trans-
fer required is also consistently underestimated. In 2000, social assistance expenditures
were 90 percent of planned need (Figure 5.5). At the end of 2001 there were 40 million
leva (25 percent of the 2000 budget) of outstanding social assistance payments.
                  Figure 5.4: Paid Social Assistance Benefits as % of Planned (1998-2001)
         IOO.O~-------------------------------'



           90.0
                      .......... - -
           80.0                                                             • • • • - . Targeted bc-nefits


           70.0
                                                                                 ..      BPA benclilS

           60.0


           SO.o.!------...,---------.--------.--------1
                     1998         1999          2000       1st half·2001

Sources: MOLSP.
 102                                                                       BULGARIA POVERTY ASSESSMENT


         The effectiveness of the overall intergovernmental fiscal system needs to be
strengthened in order to ensure that local governments have sufficient resources to cover
their expenditure obligations, including social assistance. This will require adequate own
revenues at the municipal level, as well as a transparent, predictable and equitable system
of intergovernmental transfers. The current formula for allocating transfers is excessively
complicated and changes annually. In the case of the earmarked transfers for social assis-
tance, the transfers allocated do not cover local needs and, as a result, the central govern-
ment provides compensating transfers periodically, either in the fiscal year in which the
deficits accrue, or afterwards. This considerably limits the capacity of local governments to
plan expenditures.
         The 2002 budget law increases the share of funds coming from the central budget to
75 percent (25 percent to come from local budgets). This is a step in the right direction,
however, in order to secure the safety net for the poorest households, payments should be
fully centralized. The government is considering full centralization of social assistance ben-
efits in 2003. In the absence of centralized financing, the poorest municipalities will still not
be able to fully cover social assistance. Local governments will retain the discretion to pro-
vide additional benefits on top of the national programs. However, the basic safety net
needs to be guaranteed centrally. The energy benefit program, another social assistance,
provided during the November-April heating season, is 100 percent financed through cen-
tral transfers and experiences no delays in payments.

Guaranteed Minimum Income (GMI) Program
        The GMI program is the main national safety net benefit. The effectiveness of the
program has improved considerably over the past seven years, in terms of coverage and
poverty alleviation impact. In 2001, 31 percent of households receiving the benefit were
poor, a significant increase from 11 percent in 1995, and 53 percent of the funds spent on
the program were received by poor households (Table 5.5). The benefits had a substantial
impact on the welfare of recipient households. For the poor, benefits comprised nearly 94
percent of the households' pre-benefit consumption.

          These positive results mask a considerable weakness of the program - a large share

Table 5.5: Effectiveness of the Guaranteed Minimum Income
                                                                        1995             1997            2001
Coverage (% of households who are poor)                                  11.1             8.8             31
Targeting (% resources received by poor)                                26.9             39.7            53.1
Adequacy (ratio of benefits received by the poor
to pre-benefit consumption of the poor)                                  33.3             0.6             93.7
Notes: (*) GMI includes all benefits (in-kind and cash) paid under means-testing criteria defined in the Social
Assistance Act, including energy benefits. The poverty rate is 11.7 percent (see Box 1).
Sources: BIHS 1995, 1997,2001.
          5                                                                                                    103

of beneficiaries receive GMI benefits irregularly, or in-kind, substantially reducing the
poverty alleviation capacity of the program. Only 16 percent of beneficiaries received regu-
lar cash benefits, 11 percent received one-time cash benefits, and the remainder received
benefits in-kind, as food, or clothing.

        The payment of benefits in-kind is linked to the local budget constraints discussed
above. When municipal social assistance offices lack resources to pay benefits, they revert
to paying benefits infrequently, or in the form of goods. In-kind benefits are in general less
effective than cash, because they distort consumption and reduce welfare. They are also
frequently - as reported by beneficiaries- provided in the form of inferior goods (e.g. low
quality canned goods), and can generate secondary markets if beneficiaries sell or trade the
goods. These benefits also represent an inefficient subsidy to the canned food industry. In-
kind benefits should be eliminated in favor of the cash GMI benefit.

         There is also scope for refining the targeting of benefits to reach the remainder of
poor households and to reduce leakage. Over 70 percent of individuals in poor households
live in a household that does not receive benefits through the GMI program (Table 5.5).
Reasons for weak targeting may be related to the eligibility criteria in the Social Assistance
Law, challenges social workers face in enforcing these criteria (Box 5.1), as well as admin-
istrative capacity.


                          Box 5.1: Eligibility Criteria are Sometimes Hard to Enforce

           In Samokova, a municipality of 32,000, the local municipal social assistance office is confronted with
 a large number of applications for energy and GMI benefits, especially during the winter period, when local
 revenues are also limited. The office is overburdened, mainly with application from families with working age
 adults. The working age applicants have no difficulty proving they are unemployed and declare they lack a
 permanent income. It is easier for social workers to approve benefit eligibility based on categories, such as
 "long-term unemployed" rather than performing a means-test. In most cases working age applicants are very
 vocal, and particularly if they have children. Other categories in need, such as elderly or disabled, sometimes
 have to wait until groups that are more aggressive are served.

           Faced with such pressure, the municipal social assistance office has difficulty enforcing eligibility.
 Their problems are aggravated if the community is poor or the local municipality has other priorities than
 financing social assistance. Moreover, the administrative capacity of the local office is hindered by weak
 incentives due to low pay and high staff turnover. Low pay affects both social workers and management. In
 three years, municipal social assistance office in Samokova had three directors and the current one, who is
 very qualified, was actively looking for a job somewhere out of the social assistance area.



The Energy Benefit Program
        The energy benefit program is a cash supplement to the GMI program which is
paid during the winter heating season of November-April. For the 2000/2001 winter period,
the amount of the benefit was set at 37.4 leva (approximately US$ 17). In 2000, approxi-
104                                                                        BULGARIA POVERTY ASSESSMENT


mately 600,000 households received benefits under the program. A strength of the program
is its method of financing. As funds are provided directly to municipalities through ear-
marked transfers from the eentral budget, the program does not suffer from underfunding
or delays in payments which characterize the other social assistance programs which are
reliant on local funding.
         Coverage of the program is high at 28 percent. However, targeting and adequacy
are weaker than the GMI program. Over 65 percent of funds go to non-poor households.
This is a result of program design: while GMI benefits are provided to 'households,' energy
benefits are paid to 'families.' As a result, members of an extended family-although living
under the same roof with other family members-may claim benefits separately. In fact, the
distribution of beneficiaries by family size indicates that nearly 60 percent of those receiv-
ing energy benefits are one-member 'families', many of whom are likely to be pensioners
living together with other members of the family. Further efforts are, therefore, needed to
extend eoverage to large families, including revising eligibility eriteria to foeus the benefit
on poor households, and continued public information activities to reach potential benefi-
ciaries. The MOLSP is planning changes to the regulations of the Social Assistance Act in
2003 which will increase the eligibility thresholds for some vulnerable groups.

Table 5.6: Effectiveness of the Energy Benefit Program
                                                                                                        2001'
Coverage (% of households who are poor)                                                                  27.8
Targeting (% resources received by poor)                                                                 34.9
Adequacy (ratio of benefits received by the poor
to pre-benefit consumption of the poor)"                                                                   14
Notes: (*) Energy benefits could not be distinguished in the household survey until 2001; ( •• ) Estimated, assuming
benefit is received over a 6 month period.
Sources: BIHS 1995, 1997,2001.


         While the energy benefit program has been a relatively effective mechanism for
protecting the poor during the winter months, further analysis is needed to determine
whether the poor can absorb future price shocks. Once the tariff increase schedules for
electricity and district heating have been agreed, priority should be given to determining
what additional resources will be needed for the program and to estimating the number of
additional beneficiaries.

Child Allowances
         Given the high level of poverty among households with many children, social assis-
tance targeted to children can playa potentially important role. However, the current
scheme is poorly designed to have a real impact on child welfare. All children in Bulgaria
are eligible for child allowances through the age of 16 (18 if a student). Benefits are paid
           5                                                                                                    105


                                             Box 5.2: Poverty and Energy Prices
              The share of household resources which Bulgarian households allocate toward housing expenses has
  been increasing. Even among poor households, the increase in the share is substantial, from 14.1 percent of
  total consumption in 1997 to 19 percent in 2001. Planned energy price increases will have a disproportionate
  impact on the poor. Electricity prices, in particular, will affect the poor, as 93 percent of poor households use
  electricity. Usage of central heating is less widespread, at 4.2 percent.

  Table 5.7:
                                                           Non-Poor               Poor                 Total
  District heating                                            14.8                 4.2                  13.9
  Electricity                                                 97.6                 93.1                 97.2
  Wood                                                        45.1                 37.5                 44.4
  Gas                                                         14.7                 0.5                  13.4
  Coal                                                        25.7                 10.7                 24.4
  Oil                                                         1.8                  0.0                   1.7
  Source: BIHS 2001.

            Poor households already find it difficult to meet their monthly energy payments. One-fourth of poor
  households are late on their electricity bill for an average amount of 49 leva (approximately US$ 22), and over
  three-quarters of poor households using district heating are in default. Even amongst the non-poor, one
  household in seven is late on its payment for district heating. Suggesting that price increases would increase
  the rate of default across the population.

  Table 5.8: Arrears in Utility Payments, 2001
                                   Non-Poor                    Poor                    Total
                               %    Amount Months      %      Amount Months     %    Amount Months
                         defaulting                defaulting               defaulting
  District heating            14.8    230      5.6    77.8     477    13.5     16.5     260  6.5
  Electricity                 5.3     43       1.3    25.1      49    2.3      6.9      45   1.6
  Wood                        11.5    71       4.9    31.7      80    6.2      12.9     73   5.2
  Source: BIHS 2001.

through the social insurance system for children whose parents are employed, and through
municipal budgets, for children of uninsured parents. Children of the self-employed receive
benefits from the NSII if their parents pay contributions. In 2001 approximately 1.2 million
children received child allowances, and total expenditures amounted to 0.7 percent of
GDP.68

        Child allowances have high coverage in the population, because of their near uni-
versal eligibility, 50 percent of poor households received child allowances in 2001 (Table
5.7). However, in terms of beneficiaries, only 16 percent of the resources spent went to
these households. Benefit levels are also too low to have an impact on poverty. The level
of the child allowance has been frozen in real terms, at 8.6 leva per child per month, since
May 1997. Even for poor households, the child benefit amounted to less than 10 percent of

68 This comprises 0.3 percent of GDP from the MOLSP budget, paid through municipalities, and 0.4 percent paid
through employers and financed by the NSII.
106                                                                   BULGARIA POVERTY ASSESSMENT


Table 5.9: Effectiveness of Child Allowances
                                                              1995                       2001
Coverage (% of households who are poor)                        25.3         39.0          50.1
Targeting (% resources received by poor)                       5.1          37.0          15.8
Adequacy (ratio of benefits received by the poor
to pre-benefit consumption of the poor)                        11.8          3.2          9.6
Sources: BIHS 1995, 1997,2001.


pre-consumption household income.
         In 2002, the Parliament adopted a new Law on Family Benefits which aims to
improve the adequacy of child benefits and target them to poor households. Under the
new Law, the benefit level is doubled to 15 leva per child, and benefits would be income
tested, such that only households with income under 150 leva per capita per month would
receive benefits. The proposed change to the benefit level is too low to have a significant
impact on the poverty rate, and the income threshold is too high to effectively concentrate
the program on poor families. Under the new law 1.15 million children are expected to
receive child allowances, a decrease of 50,000. However, the new law would cover children
who are currently not receiving the benefit, so the reduction in the number of beneficiaries
would be greater. The increased child allowance will contribute to a modest reduction in
poverty among households with two or more children, but will have no impact on the con-
sumption distribution of families with one child.

                              E. Informal Coping Strategies69
        In addition to the public social protection system, many Bulgarian households make
use of private strategies to cope with the risks of low income and unemployment.
Discussion in the prior chapters has already highlighted the prevalence of some of the main
strategies in the Bulgarian economy including own production of food and informal
employment as a supplement to formal sector jobs. Other strategies include remittances
between ~ouseholds, having multiple jobs and migration. From a policy perspective it is
important to understand the prevalence of these strategies, their impact on poverty allevia-
tion, and the extent to which they may crowd out the formal transfer programs.

Own Consumption
       Home consumption is an important resource for many households in Bulgaria. On
average, nearly 22 percent of household food consumption comes from own produced
goods. However, poor households make less use of home consumption than the non-poor.
Households in the bottom expenditure quintile have the lowest share of home consump-

69 This section draws from the background paper by D. Sahn, et al.
                5                                                                                      107

tion, and this increases markedly across expenditure quintiles (Figure 5.6). In fact, the rate
of increase in home consumption income across the quintiles is more rapid than other
major sources of income, such as pensions and wages. This implies that one of the impor-
tant characteristics that distinguish the poorest households in rural Bulgaria is their inability
to engage in own-account agriculture for their own consumption. This is consistent with
findings discussed in Chapter 2 that suggest that a combination of land and labor con-
straints hold back the poorest households and contribute to the low level of earnings.
                                    Figure 5.5: Home Consumption by Quintile

                    60

        ~
        0
                    50
         a          40
        .tl
         0.
                                                                                     • Rural
                    30
         '"
         u
         ...                                                                         • Urban
         0..>
         0.         20
        Z

        "
        o:l         10

                     o
                                         2           3          4          5
Source: BIHS 2001.
Note: 1 is the poorest quintile, 5 is the richest.

Remittances
         Private transfers are an important source of income for many Bulgarians. Although
a relatively small share of households receives transfers, at 14 percent, the impact of trans-
fers for those households which do receive them is high. For households receiving remit-
tances, the average amount of remittances received was 111 leva per month, representing
34 percent of total household consumption. The impact on the poverty rate is low for the

Table 5.10: Impact of Remittances on Poverty Rates, 2001
                                      Receive Remittances           Do not Receive             Total
No. Observations                                     1037.0              6289                  7326
Percentage                                            14.2               85.8                   100
Before Transfer
Poverty rate                                             22.2            12.6                  13.9
Gap                                                      14.6             3.9                   5.4
Severity                                                 22.3             1.8                   4.7
After transfer
Poverty rate                                             6.3             12.6                  11.7
Gap                                                      2.0              3.9                   3.6
Severity                                                 0.9              1.8                   1.7
Source: BIHS 2001.
108                                                                            BULGARIA POVERTY ASSESSMENT


population as a whole, but is significant for those households receiving remittances (Table
5.10). Remittances reduced the overall poverty rate by two percentage points, but reduced
the poverty rate among recipient households by nearly 16 percentage points. Remittances
have a greater impact on households in urban areas. Rural households are net remitters
with the exception of rural households in the poorest two quintiles. They transfer more
resources to other households than they receive (Sahn et aI., 2002).

Second Job Holding
        Another coping strategy for impoverished households is to seek more work, 6.3 per-
cent of adults in Bulgaria hold second jobs, with the share being more than twice as high in
rural areas, 9.7 percent, than urban, 4.6 percent. In addition, the vast majority of secondary
jobs are in own-account agriculture.
Table 5.11: Second Jobs,
                                                       Wage work                 Self-employ     Farming
Urban                            95.4                      5                           5           3.7
Rural                            90.3                     4                            4           9.0
National                         93.8                        5                         4           5.4
Source: BIHS 2001.

         Although second job holding is not widespread, poverty is lower for individual
adults holding two jobs than it is for those holding only one, especially in rural areas. This
suggests that having a second job is an important coping mechanism for some households.
Multivariate analysis of the determinants of multiple job holding found that education is
highly correlated with having more than one job. Secondary graduates are 11 times more
likely to hold two jobs than to be inactive, in comparison to those with no education, and
university graduates are 18 times more likely to do so. Secondary and university graduates
are also twice as likely to hold two jobs rather than one.
         Another important finding is that land, both coop and owned, strongly increases the
probability that an individual has two jobs relative to being inactive, even though land hold-
ings do not affect the probability of holding only one job. Having restituted land also
increases the probability of second job holdings. This reflects the fact that the majority of
second jobs are in own-account agriculture. But, consistent with the household welfare
regressions discussed in Chapter 2, it highlights the policy importance of land holdings for
poverty reduction, especially in rural areas, and sheds a favorable light on the restitution
program. Finally, rural residents are significantly less likely to hold one job relative to inac-
tivity, but significantly more likely to hold two jobs. Again, the fact that own-account agri-
culture is the most common form of secondary employment seems to be behind this'?o


70 This is subject to the reservation that cluster fixed effects are not controlled for.
          5                                                                                 109

Migration
        One of the most extreme coping strategies is for an individual or household to leave
home, or even the country altogether. Data show that many Bulg;arians have left in search
of opportunities elsewhere. Since 1989, more Bulgarians have left the country than have
arrived. Net migration figures in Bulgaria have consistently been the lowest in the region,
far above figures for Poland and Romania, which have also had negative net migration
throughout the 19905 (Table 5.12).

        The BIHS survey only provides a limited picture of the extent of migration in
Bulgaria. Households which have left the country are simply not included in the sample,
and households which may travel for seasonal work are less likely to have been sampled.
The survey does have information on household members away from home. At the time of
the survey, 5.4 percent of household members were away from home, but only 1.6 percent of
these were away to work. Urban residents are somewhat more likely to migrate abroad to
work, while rural residents are more likely to move to another location within the country.

Table 5.12: Net Migration in Comparison (immigrants minus emigrants, thousands)
                  1989       1990     1991     1992      1993      1994       1995        1996
Bulgaria         -217.6     -87.6     -46.5    -67.7     -64.4     -62.7     -50.5        -64.5
Czech Republic      1.5       0.6      2.9      11.8      5.5        9.9        10         10.1
Poland            -24.4     -15.8     -15.9    -11.6     -15.5      -19      -18.2        -13.1
Hungary            23.9      22.6      17.3     10.8      13.3      13.1      13.2         12.1
Romania           -41.1     -96.9     -42.6    -29.4     -17.2     -16.3     -21.2        -19.5
Source: UNICEF-IRC TransMONEE.


Table 5.13: Reason for an Absence at Time of Survey, % of Household Members
                                         Urban                Rural            National
For work abroad                            0.7                 1.1               0.8
For work in Bulgaria                      0.9                  0.7               0.8
Other reason                              4.2                  2.9               3.8
Total                                     5.8                  4.7               5.4
Source: BIHS 2001.


        Only 4.3 percent of all people in the 2001 BIHS sample moved since 1995, and 5.4
percent since 1990, suggesting that migration of entire households is also not a major cop-
ing strategy in Bulgaria. Further, it is interesting to note that there is no clear dominance
of rural-to-urban flows - significant shares of both urban and rural residents move to rural
areas. Thus, unlike other developing countries, rural-to-urban migration does not seem to
be an important phenomenon in Bulgaria, particularly when considering the size of the
income declines observed in rural areas.
110                                                           BULGARIA POVERTY ASSESSMENT



                       F. Findings and Policy Implications
         Bulgaria's social protection system plays a substantial role in income support and
keeping many households out of poverty. In comparison with many other countries in the
region, Bulgaria's system is effective and well targeted. Indeed, the system has become
more pro-poor over time and is partly responsible for the reduction in poverty rates which
has occurred since 1997. The pension system, in particular, keeps many pensioners above
the poverty line. In the absence of these benefits, the poverty rate would be over twice as
high. Social assistance and unemployment benefits also provide important relief for those
households which receive them. Similarly, informal coping mechanisms play an important
role for many households.
         Policy priorities include ensuring that the existing system continues to function,
making refinements to improve effectiveness and ensuring that the system is sufficiently
flexible to address future potential shocks - such as further increases in energy prices.
Finally, on-going monitoring of poverty and program outcomes is essentiaL In particular,
the incentive effects require careful evaluation to ensure that benefits do not discourage
labor force participation.
       Strengthening the Safety Net. The GMI program is the country's main cash transfer
mechanism for low income households. While the program is an effective mechanism for
reaching the poor it can be further improved through:
          Centralizing financing to ensure that all municipalities, including the   poo~est,   are
able to pay benefits to all eligible households;
          Reducing payment of benefits in-kind; and
         - Further strengthening the administration for benefit delivery: by (i) training social
workers to identify poor households; (ii) improving information systems to facilitate means-
testing and reduce payment of duplicative benefits; and (iii) expanding communication
activities to inform beneficiaries about eligibility criteria and application procedures.

        Making Child Allowances More Effective. Because of the high level of child poverty
in Bulgaria, child allowances are a potentially critical instrument. However, the current
program is ill-suited to address poverty. Under the new Law, benefits remain too low to
have a real impact on poverty. The Government faces a number of options to maximize
the impact of these resources on poor households with children:
        - Expanding coverage to poor households currently not covered by child allowances.
The current system excludes children of the uninsured self-employed, a large share of whom
are poor. In 2001, 23 percent of the children not receiving benefits were poor, representing
24 percent of poor children in Bulgaria.
Chapter 5                                                                                                     111

        - Increasing coverage and raising benefits for households with children through the
GMI program. As the GMI program is an effective mechanism for reaching the poor, it
can be further built upon to expand coverage for households with children.
         - The cost of eliminating the poverty gap among households that do not receive
child allowances is approximately 0.37 percent of GDP indicating the proposed increase
under the new Law would be better spent if targeted to a smaller pool of beneficiaries.
This could be done by lowering the eligibility threshold.
        Preparing for Energy Price Increases. Prices for electricity and district heating will
increase over the near term. Consumer subsidies for energy amounted to 0.5 percent of
GDP in 2001 and are not sustainable. The current energy benefit program is a useful
mechanism for reaching the poor, however careful analysis of the proposed tariff adjust-
ment for energy is needed to ensure that benefit levels are adequate to cover the price
increase, and that coverage is extended to all households in need of the benefit. 71
         For electricity, the introduction of life-line pricing is another possibility. Under a
life-line an initial block of consumption (called the basic need level) is subsidized, while
consumption over the initial block is charged at full price. Life-line tariffs have been intro-
duced in other countries in the region, including Hungary and Moldova and are attractive
from the perspective of coverage and targeting (Lovei, et al., 2000).




71 For the 2002-3 heating season the MOLSP has made important changes to the energy benefit program, includ-
ing increasing benefit amounts and differentiating benefit amounts based on the type of energy used by the house-
hold.
112                                                                        BULGARIA POVERTY ASSESSMENT



Annex Table AS.I: Coverage, Targeting and Adequacy for Selected Social Programs, (ex ante)
Social Program:                Year           Coverage           Targeting          Adequacy
Child Allowances               1995              25.3                 5.1               11.8
                                                (6.6)               (1.5)              (0.0)
                                1997             39.0                37.0                3.2
                                                (2.2)               (2.7)              (0.0)
                               2001              50.1                15.8                9.6
                                                (4.2)               (1.9)              (0.0)
Unemployment Benefit           1995              15.9                24.3              34.3
                                                (5.6)               (7.8)              (0.0)
                               1997               8.8                46.9               5.1
                                                (1.3)               (8.0)              (0.0)
                               2001              35.2                32.9              117.0
                                                (3.9)               (4.0)              (0.0)
Social Assistance, of which:   1995              34.4                20.9              147.0
                                                (6.4)               (4.4)              (0.0)
                               1997              15.8               53.0                4.7
                                                (1.8)               (7.7)              (0.0)
                               2001              53.7                35.4             200.0
                                                (3.9)               (3.8)              (0.0)
    Mat. & childcare           1995              17.8                12.9               14.5
                                                (4.8)               (3.8)              (0.0)
                               1997               5.9               50.9               10.9
                                                (1.2)               (9.4)              (0.0)
                               2001              20.2               32.8               37.1
                                                (3.4 )              (5.3)              (0.0)
   Extended OM!                1995              11.1               26.9               33.3
                                                (4.8)              (13.6)              (0.0)
                               1997               8.8               39.7                0.6
                                                (1.2)              (10.2)             (0.0)
                               2001              31.0               53.1               93.7
                                                (4.4)               (6.8)             (0.0)
    Energy Benefits            2001             27.8                34.9                7.0
                                                (4.1)               (4.3)             (0.0)
Source: BIHS 200l.
Standard errors displayed in parentheses below values.
Note: Adequacy is capped to 200%. All programs that transfer more thall twice as much resource to households over
their illitial (before tramfer) elldowmellt are listed with 200% adequacy.
Note: coverage is the share of pre-benefit poor people receiving a benefit; targeting is the share of funds chan-
neled to the pre-benefit poor; adequacy of a transfer is the ratio of benefit to the pre-benefit consumption.
         6                                                                                  113


                 Chapter 6: Building Human Capital

        According to official data, Bulgaria is on track to meet the Millennium
Development Goal targets in 2015. Enrollments in education are close to 100 percent and
infant mortality is declining toward OEeD levels. However, a closer look reveals that
under the surface, the picture is not as positive. Gaps in access to both education and
health services are real, particularly for vulnerable groups, including the poor, those in rural
areas and ethnic minorities. Reforms in both sectors, including downsizing of the educa-
tion sector and the introduction of health insurance are creating gaps in coverage which
need to be addressed. These issues are critical for an overall strategy for poverty reduction
in Bulgaria.
        This chapter discusses education and health in turn, looking at levels of access and
the barriers, as well as policy implications. The greater availability of data on education in
the BIRS survey and qualitative information result in a more robust analysis. The lack of
information on health highlights the need for future work in this area.

                                        Education
                               A. Access to Education
        The poverty profile in Bulgaria highlights a close relationship between education
and living standards. Individuals with low education levels are at greatest risk of poverty,
while poverty levels for those with higher education are lower than for any other group.
Education also affects welfare through the labor market as a key correlate of unemploy-
ment. The vulnerability of children in Bulgaria indicates that education contributes to a
vicious circle of poverty, as poor households with low education levels face the greatest
obstacles in sending their children to school.
        Although official data indicate nearly universal enrollments in secondary education,
the survey data reveal gaps in access. This chapter examines these gaps and explores the
linkages between access to education and poverty. It draws from the BIRS data, as well as
a qualitative survey of ten contrasting communities commissioned for this study. The sur-
vey found that access to education is constrained by a combination of factors related to
economic costs, demand for education among parents and students, and specific issues fac-
ing ethnic communities. These' factors, combined with the on-going reform of the educa-
tion sector, pose substantial policy challenges.

Educational Attainment
       School attendance in Bulgaria is compulsory from ages 7 to 16. The education sys-
114                                                           BULGARIA POVERTY ASSESSMENT



tem consists of optional preschool education, eight years of basic school, secondary school
which was recently (beginning in the 1999/2000 school year) extended from three to four
years, and university and other post-secondary programs. Preschool education covers ages
3 through 7. Basic school is provided either in eight year schools, or a combination of
"junior school," covering the first four grades, and "middle school," covering grades 5
through 8. Urban areas tend to have large schools offering the complete primary cycle,
while small rural communities often have separate four-year junior and middle schools,
with few children in each grade. Because of higher unit costs in rural areas, rural schools
are generally kept to four grades, and children are bussed to bigger schools in larger towns
or cities for higher grades. There are three main types of secondary education: (i) general,
university-oriented secondary education; (ii) secondary vocational education which com-
bines academic and vocational classes and allows graduates to continue on to university,
and; (iii) secondary technical education which focuses on specific vocational training and
does not allow for further study.
         The educational attainment of the population is high, however there are disparities
across groups. Nearly sixty percent of total population has secondary or higher education
(Table 6.1). However, there are notable gaps between individuals in urban and rural areas.
In urban areas the share of population with secondary or higher education is almost 70 per-
cent, in comparison with just 46 percent in rural areas. More than 60 percent of individuals
from non-poor households have secondary or higher education, while the same share for
individuals from poor households is below 30 percent. There are notable differences in
attainment by ethnicity particularly for Roma. While 65 percent of Bulgarians have com-
pleted secondary or post-secondary education, for Roma this was just 10 percent. Gender
differences are not significant. Women have slightly higher levels of attainment most
notably for general secondary and university education, which suggests that they are better
Table 6.1: Highest Level of Education Attained, 2001 (% of population 15 and above)
                         No       Basic Secondary Secondary Secondary University         Total
                     education             General    Technical Vocational and Post
                                                                             Secondary
   Total Population      7.0      33.9       17.6        17.0        7.2        17.3     100.0
              Males      6.4      32.0       15.1       22.0         8.2        16.2     100.0
            Females      7.5      35.5       19.9       12.5         6.2        18.3     100.0
               Rural     7.0      57.0       12.6       11.7         7.2         4.6     100.0
              Urban      7.0      23.0      20.0        19.5         7.2        23.4     100.0
               Poor     9.7       63.5       9.1         9.9         5.3         2.6     100.0
          Non-Poor      6.7       30.5       18.6       17.8         7.4        19.0     100.0
          Bulgarians    6.4       28.1      18.9        19.0         7.5        20.1     100.0
              Roma      13.3      76.4       5.1         2.1         2.8        0.2      100.0
              Turks     8.6       61.0      13.8         6.4         7.2         3.0     100.0
Source: BIHS 2001.
Chapter 6                                                                                                         115

positioned to take advantage of labor market opportunities.

Enrollments

         According to official statistics, enrollment rates in Bulgaria are high and have been
increasing slightly since the mid-1990s. The latest figures from the NSI estimated gross
enrollment rates of 95.1 percent for primary education, and 65 percent for secondary edu-
cation, indicating that Bulgaria is on target to meet the education Millennium Development
Goal calling for universal primary enrollment by 2015. The BIHS survey data provide a
different picture. Survey data are believed to be more reliable for two reasons. Firstly,
administrative data rely on the 1992 censu data which is believed to be unreliable due to
large demographic changes, and second, survey data include children who attend school, in
contrast with administrative records which only record children who sign up for school, but
may not actually attend.
                          Figure 6.1: Attendance Rates by Level (% of age group)
            100,-------------------------------------------~

             90
             80
             70
             60
             50
                                                                                               • Preschool
             40
                                                                                               • Basic
             30
                                                                                               Ila Secondary
             20
             10
              o
                          1995                     1997                     2001
Source: BIHS 2001.


          Attendance rates from the survey data, indicate worrisome trends, particularly for
preschool and secondary education.72 While attendance in basic education have increased
slightly since 1995, attendance in preschool and secondary education in 2001 are both lower
than 1995 levels. Between 1995 and 1997, attendance in preschool education fell from 44
to 14 percent. This may reflect the effect of the economic crisis, as preschool fees became
too expensive for many households to bear during the contraction. The 2001 data show an
increase in attendance to 22 percent, which is still half of 1995 levels. Annual fees for
preschool are currently around 300 leva (approximately US$ 150) a year.

72 Here attendance rates refer to the ratio of the numher of children of official school age enrolled in school to
the number of chil.dren of official school age in the population (a "net" measure). It differs from the gross enroll-
ment rate, which is the ratio of all children, regardless of age, to the number of official school age.
116                                                                          BULGARIA POVERTY ASSESSMENT
---------------------------------------------------------
                             Box 6.]: School Drop-outs: The Case of Missing Children

             National administrative data paint a rosy picture of access to education in Bulgaria. Gross enroll-
  ment rates are nearly universal, and very few children are identified as being out of school. A qualitative sur-
  vey conducted for this report found that the reality is much more grim, In fact many children fall through the
  cracks, never attend school, and do not show up in the official administrative data, The children who are left
  out are frequently those from the poorest households. In the Nadezhda district, a Roma neighborhood in
  Sliven, the researchers found a total of 273 children who had never been to schoo\. \Vhy is this the case? The
  study identified a number of reasons:

                There are no records of children from households which lack residence requirements, This is a
  serious issue for poor households, particularly Roma families who live in unregistered settlements, or in prop-
  erties with illegal status.
             - Monitoring of children has weakened. Children are no longer required to enroll in the school in
  the district in which they live. There is no coordination between district schools to ensure that all children are
  enrolled, and there is no system to monitor whether children who have lcft one school enroll in another,
             - There are no mechanisms for following up on children who have been expelled, to find out what
  happens to them, and whether they have reenrolled in schooL Similarly, there is no follow up for children who
  leave school voluntarily, who are not officially considered to be drop outs.
             - School and local officials face incentives not to report drop-outs in order to maintain class sizes to
  avoid school closure,

            Source: Kabakchieva and Iliev (2002),


        Secondary attendance has followed a contrary trend. Attendance increased
markedly between 1995 and 1997, from 47 to 55 percent, and declined sharply to 46 percent
in 2001. The reasons driving the spike in attendance in 1997 may reflect a tendency of
young people to stay in education during the crisis period, rather than exiting into employ-
ment. However, the persistent high rate of youth unemployment does not confirm this
trend.
        Aggregate attendance rates mask considerable disparities in attendance within the
population, particularly between urban and rural areas and for ethnic minorities.
Attendance rates are lower at all levels of education for children in rural areas. The gap is
particularly pronounced for secondary education, where attendance rates are 31 percentage

Table 6.2: Trends in Attendance Rates, (% of age group)
                           Preschool education      Basic education                        Secondary education
                               1995      1997      2001     1995      1997      2001      1995      1997      2001
   Total Population           44          14        22       87        88        90        47        55        46
              Males           42          12        21       88        88        90        49        54        46
            Females           46          15        24       85        88        89        45        56        46
              Urban           46          13        24       88        90         92       52        63        53
              Rural           40          14        20       83        84        84        31        32        22
          Bulgarians          44          15        26       90        93        94        55        66        56
              Turks           53          10        19       88        93        90        10        30        34
              Roma            25          5         16       55        58        71         3        5          6
Source: BIHS 1995, 1997,2001.
         6                                                                                  117

points lower. The trend is also striking. While secondary attendance rates in 2001 are com-
parable to 1995 rates in urban areas, in rural areas they fell eight percentage points over the
period.
        Gaps for ethnic minorities are similarly pronounced. Attendance rates for Turks
and Roma are consistently lower than for ethnic Bulgarians across education levels, howev-
er the magnitude of the difference is much higher for Roma. Secondary enrollments for
Roma remain in the single digits, at six percent, in comparison with a national level of 46
percent. Despite this gulf, enrollments for Roma children in basic and secondary have
increased significantly between 1995 and 2001, from 55 to 71 percent at the basic level, and
doubling from three to six percent for secondary education.

       Figures 6.2a and 6.2b show completion rates by ethnic groups for 16 to 28 year
aIds. While ethnic Bulgarians maintain enrollment rates close to 100 percent throughout
                    Figures 6.2a and 6.2b: Completion Rates by Ethnicity and Location

                                                 Urban

               .;;
               >.    0.8
              00
              ';'
              ::!:   0.8
              '0
               .,
              l04
              [      0.2




                                               years of education

                                   [-+- Bulgarians   _    Turks - . - Roma     I




                                                 Rural


              ~ 0.8
             00
             ';'
             ::!:          +-------<l~ik:---;,__---II__----------
             ...
              o
                     0.6

             tc
                     0.4   +---··--------t-tl:...;;;jiIT----------
              '"
              l:
              tt     0.2 +-----.------\-----\:.s.----


                           o           5                 10               15           20
                                                years of education

                                    i-+- Bulgarians -         Turks - . - Roma     I
118                                                           BULGARIA POVERTY ASSESSMENT
--------------------------------------------~-


basic education, and close to 80 percent in secondary education, these numbers are signifi-
cantly lower for Turks and Roma. Drop-outs among ethnic Bulgarians occur mostly
between basic and secondary school, while drop-outs amongst Turks and, especially Roma
occur just after a couple of years of schooling. This is particularly evident among Turks
and Roma in rural areas.

Poverty and Access
         Attendance rates are highly and increasingly, correlated with income. While atten-
dance rates among the richest consumption quintile were nearly universal at 97 percent, the
rate for the poorest quintile was 77 percent. Most worrisome, the large income differentials
have been growing over time - particularly for basic and secondary education. In basic
education the attendance rate gap between the poorest and the richest quintiles grew from
15 percentage points in 1995 to 20 in 2001. The similar gap in secondary education did not
increase significantly, but remained quite high at 40 percentage points in 1995 and 41 in
2001.

Table 6.3: Attendance Rates by Consumption Quintile, (%)
                               Preschool           Basic education              Secondary
          Quintiles      1995 1997 2001 1995 1997 2001                   1995     1997      2001
         Quintile 1       33       12     17      74      75      77      23       38        14
         Quintile 2       35       7      17      92      92      94      49       55        53
         Quintile 3       44      22     32       90      95      94      51       60        50
         Quintile 4       56       19    28       91      92      91      46       60        63
         Quintile 5       60       12    23       89      90      97      63       65        56
  Total Population        44       14    22       87      88      90      47       55        46
Source: BIHS 1995, 1997, and 2001.


         Differentials in enrollments across quintiles are magnified in rural areas, particular-
ly for secondary education. In 2001 only 5 percent of the poorest children in rural areas
were enrolled in secondary school, in comparison with 24 percent in urban areas. The gap
in enrollments between the poorest and richest quintiles in rural areas (45 percent) was
nearly double that of urban areas (23 percent). For any given income group, an individual
living in rural areas obtains 3 years less education than their urban counterpart. In urban
and rural areas, an adult in the top expenditure quintile has on average 3 years more educa-
tion than one in the bottom quintile.

                         B. Constraints to School Attendance
         The widening gaps in enrollments are clearly of serious concern for Bulgaria.
Analysis of the labor market has shown that the skills gap is a real phenomenon. There is a
growing share of long-term unemployed whose labor market prospects are grim, because of
their lack of qualifications and preparation. In order to understand the constraints to par-
           6

ticipation in education for different types of households, a qualitative study was undertaken
for this report in January and February 2002. The study examined issues surrounding
access to education in ten contrasting sites in Bulgaria which were selected for their geo-
graphic, ethnic and socioeconomic diversity. While the study is not nationally representa-
tive, its findings highlight key issues which have important policy implications.73 The fol-
lowing section draws from the study results, as well as the BIHS data.
         The study found serious gaps in access along a number of dimensions. In some
cases children do not attend school at all, while in other cases children drop out of school,
or are enrolled but do not attend. Despite perceptions that non-attendanee is an ethnic
phenomenon, specific to Roma, the study found that many ethnic Bulgarian children do
not go to school, as well as Turks and Pomaks (Bulgarian Muslims). However, some of the
constraints do vary across ethnic groups. The main factors keeping children out of school
relate to economic circumstances, demand and motivation of parents and students, and
specific issues facing ethnic minorities such as language, and social exclusion in the case of
Roma.

Costs of Education
        The costs of education to households in Bulgaria are significant. These costs can
be both direct, in the form of payments for school materials, or indirect, as opportunity
costs to households, if children are needed to participate in housework or other activities.
For poor families, the costs of education can be a critical deterrent to participation in edu-
cation. Some parents explained that they could not afford suitable clothes for their chil-
dren, particularly shoes to walk to school in during the winter. A headmistress described
the situation of some of the poorest families:
         Those who drop out are those who have no motive to study. When you are hungry you
         lose motivation for learning. Dropouts are children from extremely poor families. I
         have two of them. One of the boys lives in an extremely poor family, in a hut in the
         vineyards. They have no electricity or money. When [the shopkeepers1 sell white
         brined cheese in the shop, they give this family tins with what is left of the brine. And
         the family takes the brine, adds flour and boils it. This is their staple diet. The often
         can't afford to buy bread.
        In some communities the opportunity costs of sending children to school are high,
and children are kept home to work, most commonly in agricultural activities, or helping
with housework and care of younger children. In Pomak (Bulgarian Muslim) and Turkish
villages, nearly all children were employed in tobacco farming. A teacher in
Chernoochene, explained that in May and June, when the tobacco is being planted, nearly
73 The full results of the study are availahle in the hackground paper "Access to Education in Bulgaria" hy
Kahakchieva and I1iev (2002).
120                                            BULGARIA POVERTY AsSESSMENT
      -----------------------------------------------------------------
everybody works, students, as well as teachers. In some cases children need to work to help
parents keep their jobs. A teacher from Haskovo explained:

         One of the parents finds a job, they have a young child in the family, and the family
         decides that it's better for the parent to take the job and that someone must look after
         the baby. So they decide to keep our student at home. Especially if the student is
         already in the ]St or 2nd grade. The mother decides that that's more important so that
         she won't lose the job.
       The case studies highlighted the multidimensional relationships between education
and poverty. Low income on its own is not always sufficient to keep children out of school.
Rather poverty is interlinked with exclusion and marginalization, which combine to affect
attendance. The study found high levels of non-attendance and dropouts among some of
the most geographically remote communities. In many cases, poor children who were
unable to attend school were those with the most difficult family circumstances, including
those who are victims of domestic violence, alcoholism and abuse, and those with parents
in jail (Box 6.2).

                                          Box 6.2: Scavenging in Rousse

            In Rousse three brothers aged 13, 11 and 7 from the Selemetya neighborhood cannot afford to go to
 school. To earn money, they search through garbage cans for waste paper which can be sold for recycling.
 They earn 70 stotinki to one lev per day, "just enough for a loaf of bread." Their father is in jail and any refer-
 ence to their mother made them tremble, they refused to say what had happened to her. The two younger
 brothers had never gone to school, while the oldest boy had attended school for two years when they were still
 living with their father. He was visibly unhappy that he had left school. Now they live with their bedridden
 grandfather, who receives a monthly pension of 47 leva (about US$ 24), and other people, "there are many of
 them and we don't know who they are."

 Source: Kabakchieva and Iliev (2002).


         Out-of-pocket payments. Nearly one-third of households in Bulgaria make pay-
ments for education. Parents are charged fees for preschool education. At the basic and
secondary school levels, there are no fees, although students are required to pay for educa-
tional materials and textbooks. The exception is first grade, when children are not expected
to pay for textbooks.

         Payments for school supplies were the most common, 70 percent of enrolled stu-
dents made such payments. The second most common payments were payments for school
meals, at 52 percent. Students from non-poor households pay for school meals more often
than students from poor households. Payments for extra-curricular activities were the most
expensive item averaging 32 leva, and also were more common among students from non-
poor households.

        In addition to the formal charges for education mentioned above, households also
Chapter 6                                                                                                         121


Table 6.4: Out-of-pocket Payments for Basic Education, 2001
                 Extra-curricular School meals  Lodging       Supplies       Total
                  % hhs Average % hhs Average % hhs Average % hhs Average % hhs Average % of
                  paid (leva) paid (leva)      paid (leva) paid (leva) paid (leva) average
                                                                                       monthly
                                                                                      household
                                                                                        expo
Non-poor             17.97     32.59    55.76   18.21   0.92 32.33      73.58   9.83     88.33    26.64   5.66
Poor                 3.03      9.67     25.25   9.32    0.00 ' 0.00     53.54   6.91     57.58    11.02   6.07
Total                16.00     32.02    51.73   17.64   0.80 32.33      70.93   9.54     84.27    25.23
Source: BIRS 2001.



Table 6.5: Informal Private Expenditures in Basic Education (per year)
                Refurbishments   Equipment         Gifts          Cultural    Total
              % paid Average % paid Average % paid Average % paid Average % paid Average
Non-poor        13.52        9.89      8.76     9.11    21.66    6.79      37.63       33.35     51.77    31.20
Poor            3.03         1.77      1.01     10.00   3.03     7.00       9.09       26.56     15.15    18.35
Total           12.13        9.62      7.73     9.13    19.20    6.79      33.87       33.11     46.93    30.66
Source: BIHS 2001.

make informal payments to schools, including payments for cultural activities, and for
refurbishment of school buildings. On average, informal payments were made more often
by students from non-poor households, at 52 percent, than those from poor-households, at
15 percent. The most common payments were payments for cultural activities, including
after school activities. Every third enrolled student from non-poor households made such
payments versus every tenth student from poor households. Gifts for teachers were com-
mon from students of better-off households (22%) than of poor households (3%). Same
was true about payments for school refurbishments and equipment. Nevertheless, students
from poor households spent a larger share (3.3%) of their monthly expenditure on informal
payments than students from non-poor households (1.7%).

        Migration. Work abroad in seasonal or longer term jobs is a common coping strat-
egy for many poor families. In the town of Slashten, more than 100 people left for Greece,
Spain or Portugal, while residents of Momchilgrad traveled to Turkey, Germany and
Belgium. In some cases entire families travel, leading children to drop out of the education
system entirely, In other cases, children from these families remain behind in Bulgaria in
the care of relatives. Teachers reported that children who are left behind frequently drop
out of school, as relatives tended to be lenient and do not monitor or encourage atten-
dance. A teacher from Haskovo explained.

        Many of the parents of our students are seasonal workers. Sometimes they migrate,
        move elsewhere to earn a living. There's no way those parents can leave their children.
122                                                         BULGARIA POVERTY ASSESSMENT


        They have an opportunity to complete school, but it doesn't work because they haven't
        attended classes. Such children usually deteriorate fast and ultimately go bad. Their
        interest in school drops, they have no motivation to study.

Demand for Education
        The motivation and attitudes of parents toward education can strongly influence
school attendance. In some cases parents actively discouraged their children from attend-
ing school, citing reasons such as concern for their children's safety, the need for children
to work, and the low value they placed on education. In many cases motivation is linked to
poor economic conditions. Poor households have difficulty appreciating the value of edu-
cation if their immediate circumstances appear hopeless. In some of the poorest Roma
communities, formal unemployment was between 90 and 100 percent and the majority of
the population subsists on social assistance benefits and unskilled informal activities, such
as collecting scrap metal and waste paper for recycling. Under these conditions for some
households education is simply not a priority.
        Although the perception is widespread that demand for education among Roma is
low, the picture is highly differentiated. While Roma parents from some areas are uninter-
ested in education because of dismal economic conditions, or in other cases fear that their
children would be subject to discrimination at school, in other cases Roma parents play an
active role in their children's education. In the Roma mahala of Razgrad, Roma parents
expressed serious concerns about the quality of their children's education. Turkish Roma
from Rousse were found to be very engaged in school, as did those in a Christian Roma
community.in Loznets. Role models were found to be quite important in helping people
recognize the link between abilities, education and opportunities.
       Lack of motivation among children leads some to drop out. Teachers noted that
some students had become frustrated with school and dropped out. A parent in Haskovo
whose four sons had stopped attending school after 6th , 3rd , 2nd and 1st grade explained:
       They simply don't want to go to school, we've done our best and tried to persuade them
       in every which way, but they don't want to and that's that.

        Teachers do not consider these children who voluntarily drop out of school as for-
mal drop outs, and as a result they are not accounted for in the official data and go missing
in the system.

The Ethnic Dimension
       The enrollment rates highlight the significant gap in attainment and access among
Roma and Turks .. Children from minority communities face stiffer challenges in accessing
education than other groups. In addition to issues common to other poor households,
         6                                                                                123

minorities face additional barriers including low language proficiency and geographic isola-
tion. Cultural traditions also influence participation in education. Girls from some Roma
and Turkish communities marry early and do not continue their education. Roma, in par-
ticular, face the added issues of discrimination and exclusion, and are more likely to end up
in segregated schools, or special schools for the mentally and physically disabled which
limit future education and labor market prospects.
         Lack of Bulgarian language ability is a significant constraint for some Roma, as
well as Turkish, children. In Momchilgrad, a municipality with a large Turkish-speaking
population, many children do not speak Bulgarian, they do not go to preschool, speak
Turkish at home and watch Turkish TV, so when they start primary school they have virtu-
ally no knowledge of Bulgarian. A teacher in Momchilgrad noted:

        This is not a problem in the early grades only. Even <)th graders do not speak
        Bulgarian well. They cannot articulate their thoughts. We know that they have some
        knowledge and that the reason why they cannot demonstrate it is the language. And
        we tum a blind eye. We don't give them poor marks for underachievement.

        In this regard, preschool education can be a critical ingredient for the success of
minority children in school. Participation in preschool can expose students to the
Bulgarian language and provide them with basic knowledge, socialization and skills to facil-
itate communication with other children.
         Discrimination and Exclusion. For many Roma discrimination and social exclu-
sion are a reality which pose concerns for parents. Some Roma parents expressed fears
that their children would face hostility at school. In Rousse a teacher explained that school
officials had moved Roma from a preparatory class in a mainstream school into a separate
'neutral' building after a teacher from a mixed Bulgarian-Roma school had told them that
she was afraid to let Roma primary school students out to buy snacks during breaks
because they were bullied by older students. Tensions among ethnic groups can also dis-
courage attendance. In some cases, relations are difficult between Roma groups from dif-
ferent neighborhoods, or even between groups in the same neighborhood. In some cases
this is between Turkish and Bulgarian Roma, or between long settled Roma, and more
recent migrants.

        Roma Schools. Many Roma children study in segregated schools and classrooms.
"Roma schools" are schools in which the share of Roma is over 50 percent. The overrepre-
sentation of Roma in these schools is due to geographic reasons and the high concentration
of Roma in certain areas, as well as attempts by some municipal and education officials to
shift Roma students together into separate schools. A recent survey conducted by the
Open Society Institute in Sofia found more than 60 elementary, 350 primary and 9 sec-
ondary schools in the country in which Roma comprise between 50 and 100 percent of the
124                                                            BULGARIA POVERTY ASSESSMENT


student body. In general, quality and conditions in Roma schools are poorer than in main-
stream schools, infrastructure is deteriorated and materials lacking (Denkov, et aI., 2001).
There are also serious problems with attendance in Roma schools. Teachers from Haskovo
noted that in some cases Roma students do not show up to class for an entire year.

         Roma schools reinforce segregation between Roma and non-Roma. This lack of
contact contributes to social exclusion and breeds mistrust between communities. A recent
cross-country study of Roma in Hungary, Romania and Bulgaria found empirical evidence
that geographic separation of Roma in settlements has an adverse impact on living stan-
dards (Revenga, et aI., 2002). In this regard, recent attempts by Roma NGOs to promote
desegregation of schools are promising. In Vidin, in northern Bulgaria, the NGO DROM
has been implcmenting a school integration program to allow Roma students to study in
the mainstream school in the town (Box 6.3). Such initiatives may improve educational
opportunities, but require careful evaluation, as well as coordination with national educa-
tion policy. In the current context of downsizing within the education system, there is a risk
that desegregation initiatives could lead to the closure of schools, without appropriate
mechanisms in place to allow all students to continue their education.

         A similar problem is the issue of the over representation of Roma children in special
schools for the mentally and physically disabled, which provide room and board. These
schools can have serious adverse implications for children's development, as they limit future
participation in education and on the labor market. The OSI survey found 85 such schools,
where the share of Roma was (except for in the district of Smolyan), over 50 percent. In the
majority of cases, children in these schools are not disabled. Roma children end up in these
schools for various reasons. If they are unprepared for primary school, if they are not profi-
cient in the Bulgarian language, and/or if they did not attend preschool. Some parents sup-
port their children's enrollment in special schools, explaining that they felt that their children
were safer and more protected in special schools, away from the risks of discrimination in
mainstream schools. Poorer families, in particular, encouraged their children to enroll in
special schools, because of the attraction of free room and board. This issue highlights the
need for interventions to help households overcome the costs of schooling.

                         c. Access and Education Reform
        Bulgaria's education system is in the midst of systemic reform along a number of
dimensions. One of the main challenges facing the sector is to address the overcapacity
inherited from the socialist period. The excess number of small schools and teachers in the
system has been exacerbated by a dramatic and steady population decline. Bulgaria had
negative population growth in the 1980s and this trend has continued. The current fertility
rate of 1.09 is among the lowest in the region, and is slightly over half the level required to
maintain a constant popUlation size. As a result, the number of children entering the
          6                                                                                                     125


                     Box 6.3: Desegregation of Roma Schools in Bulgaria: The Vidin Model
           In Vidin, the Open Society Institute and the Roma NGO, DROM, have been collaborating on a
 innovative program to integrate Roma students into the mainstream school system. Vidin is a town of 85,000
 in north-west Bulgaria, 6 percent of the population identified as Roma in the 1992 census. In the 2000/2001
 school year 460 students, or 50 percent of school-age students, were integrated into the mainstream school sys-
 tem, more are expected to follow in the next school ycar. Under the project students are bussed from the set-
 tlement to school, and back. In addition to transportation, the project involves Roma monitors who interact
 with parents and the school to encourage attendance. Low income students also receive shoes and school
 lunches - students are given lunch on the bus to reduce the stigma of receiving it at school.

           During the preparation of the program, DROM went door-to-door in the Roma settlement explain-
 ing the project to Roma families. DROM also sought the support of the schools, the mayor and the media.
 The project eventually gained support of all stakeholders, excluding the mayor. However, he did not try to
 block the project. With the agreement of a number of Roma parents, DROM invited the 6 mainstream
 schools in Vidin to participate in a TV program at which cach school presented its program, philosophy, and
 teachers. Roma parents selected the school they wanted their children to attend. This lessened their concerns
 and was the first time, that their views had been solicited by the authorities.

            Project success at the end of the first semester of the project was measured by 100 percent atten-
 dance; first term final grade averages were identical to the level of the non-Roma pupils; parental and teacher
 satisfaction; no known anti-Roma racism in the schools; full support from the Regional Directorate of the
 Ministry of Education and encouragement to scale up in other cities. In addition, 35 Roma parents of the
 bussed children have returned to school in adult education programs; 3 teenagers who had dropped out in the
 third grade asked to join the program and teachers agreed to work extra hours with them and others. On the
 negative side, twenty-four pupils received failing grades in one or more subjects and three have left the pro-
 gram. One returned to the Roma school and two 8th graders who were functionally illiterate dropped out.
            The success to date of the program is attributable to three major factors. First, the parents feel (a)
 that their children are protected from racial humiliation because of being bussed to and from school and moni-
 tored throughout the day by adult Roma and (b) that they can meet the higher scholastic standards. Second,
 the schools have accepted young adult Roma monitors in the schools who assure the children aren't mistreat-
 ed. The monitors also monitor the engagement of the parents in overseeing homework, the participation of
 the pupils in extra-curricula activities and the cleanliness, feeding and appropriate attire of the children. The
 monitors help the teachers with teaching aides and understanding cultural differences. Working through the
 monitors and the local Roma NGO which employs them, grades and progress are monitored every day; prob-
 lems are addressed on the spot. Third, the children are happy to be in schools where learning takes place.
 On-going assessment of projeet outcomes will be essential to understand the longer-term implieations of the
 Vidin project.
          Source: Open Society Institute.


school system is expected to continue to decline over the medium and longer term.

        These demographic developments have serious implications for the size of the edu-
cation system and the allocation of resources across the country_ Under pressure from the
Ministry of Finance and the IMF, the Ministry of Education has committed to reducing the
number of teachers in the system by 10 percent before the start of the 2002/2003 school
year and over 724 schools are slated for closure. Further downsizing may occur in subse-
quent years. This process requires careful consideration and planning in order to ensure
that the downsizing within the sector does not have unintended adverse effects on access.
126                                                          BULGARIA POVERTY ASSESSMENT


         School and local government officials have already begun to respond to the chal-
lenge posed by these reforms. Because local governments are responsible for financing
nearly all pre-secondary education, and have some limited administrative responsibilities,
many take an active interest in the schools in their municipality. Local officials face incen-
tives to ensure that their schools are not closed and that teachers are not laid off. School
closure is viewed as a sign of failure for towns and villages which have already lost a large
share of their working age population to migration. Officials are also wary about the
affects on employment. In Razgrad village in the Vulchedrum municipality the school is
the largest employer in the village - larger than the local cooperative and the municipal
government. As a result, the mayor and teachers are actively engaged to ensure that no
jobs will be lost.
         The threat of downsizing has resulted in the implementation of innovative coping
strategies in some municipalities. School and local officials have a strong interest in mak-
ing sure that all children attend school and that class sizes are maintained. Strategies have
included a combination of initiatives to provide incentives for children to attend school, as
well as sanctions for those who do not. The most common approach has been to make
receipt of social assistance benefits contingent on school attendance. In Varbitza, this
increased the number of students in the school by 25 percent when it was first introduced.
However, there are risks that linking social assistance and school attendance could backfire
in some of the poorest communities if funds are not available to pay social assistance. The
mayor of Razgrad explained:
        In the fall we had problems with social assistance. The municipality did not have the
        money to make the payments. Then they said that if there was no social assistance
        they would not send their children to school.
        These risks require careful consideration before the link between social assistance
and enrollmcnts can be adopted as a national policy. In other municipalities, school and
municipal officials provided free food and clothing to parents as an incentive for sending
children to school. Such initiatives can make an important difference for poor households
who otherwise would not be able to afford to send their children to school. However, in
the study sites concerns were raised about the criteria for distributing the assistance. In all
cases targeting was done in an ad hoc and discretionary way, rather than using the existing
targeting mechanism for social assistance to deliver support to poor households with school
age children. As discussed in Chapter 5, incentives for receiving benefits need to be
assessed to avoid dependency traps.

        An adverse outcome of the attempts by teachers to preserve mandatory class sizes
to avoid layoffs has been an increase in social promotions. Teachers face incentives to pass
children on to the next grade, even if the child is unprepared, in order to keep classes suffi-
         6                                                                                  127

ciently large to meet national norms. A teacher explained:
        We had students who managed to reach fourth grade at school, or even higher. We see
        that the student does not know anything, that he/she does not even come to school, but
        shall we do. If he/she does not go further, our colleagues will remain unemployed.

        The incentives faced by school and local officials to keep schools open may ulti-
mately have a positive affect on enrollment. However, this process needs to be managed to
ensure that education quality is not effected through social promotion, and that measures to
provide assistance to poor households are transparent and effective.
        School Closures. In some cases it may be necessary to close schools due to unsus-
tainably low classroom levels. In these areas measures are needed to ensure that the chil-
dren in the locality are able to attend school elsewhere. The examples from the case stud-
ies highlight the issues. In Chernoochene, where nearly 35 percent of all students commute
to school every day, a parent expressed fear about having their children travel by bus:
        We are afraid throughout the whole day, we pretend to work in the fields but think
        whether something bad will happen to the children. Around half past three, when we
        see the bus arriving, we begin working.

         In the village of Bezvodno four families representing half of the children in the
village - moved away after the school was closed in 2000. In other areas, parents explained
that it was difficult to have children attending school far away when they were needed to
help work. For some Turkish communities involved in tobacco cultivation, children are
needed to help with planting in May and early June. In Roma communities, children work
in seasonal jobs between April and October.

                       D. Findings and Policy Implications
         Despite the rosy picture provided by the national data, there are serious gaps in
access to education in Bulgaria which have been widening for vulnerable groups. In partic-
ular, enrollments for children in rural areas and ethnic minorities - especially Roma - are
significantly lower than the national average. Gaps in pre-school attendance, which is criti-
cal for future educational success, and at the secondary level are most pronounced. In 2001
only 6 percent of Roma children were enrolled in secondary education. This has substan-
tial implications for their future employment prospects, and consequently the country.
Another worrisome trend is the widening gap in access between rich and poor households.
In 2001 children from the bottom quintile were 21 percent less likely to attend basic school
and 74 percent less likely to attend secondary school than those in the richest quintile of the
population. These developments have important policy implications as follows:

        Improving the database. A major impediment to addressing access gaps in Bulgaria
128                                         BULGARIA
------------------------------------------------- POVERTY ASSESSMENT
is the lack of reliable information on school attendance. Education officials simply lack
accurate information on how many children are in the area. In most cases it is the poorest
and most marginalized children who are missed in the data. Improving the information
base will require close coordination at the local level between local government officials,
the municipal social assistance office and the police. Specific measures should involve:

          - Providing opportunities for residents with illegal housing to obtain identification
papers;

         - Coordinating between public institutions which maintain various registers of the
population (e.g. the Standard Public Registry Numbers (ESGRAON), social assistance
registers, and health registers);

        - Information sharing between schools to inform schools if a child is attending
school outside their home district;

       - Introducing follow up mechanisms for children who have been expelled or have
dropped out of school.

        Overcoming economic barriers to school attendance. Measures to help poor house-
holds overcome the costs of education are critical for facilitating attendance. An important
step in this regard would be to make preschool attendance affordable for all children by
waiving fees for low income households.74 For compulsory education, a number of the
approaches introduced at the local level could be scaled up nation-wide, including making
receipt of social benefits contingent on school attendance, and providing cash and in-kind
support for school materials to low income families.

         However, as discussed, these measures need to be careful coordinated with overall
social assistance policies to ensure that procedures for allocating assistance are transparent
and well understood. Social benefits should only be linked to school attendance if the
financing base for social assistance is secure. In the current environment when some local
governments (frequently the poorest) are unable to maintain financing for social assistance,
this will not have its intended impact. Other approaches to overcoming economic con-
straints could include school feeding and scholarship programs.

          Reaching at risk children. The qualitative study underscored the complex relation-
ship between school attendance and poverty. In many cases extreme poverty is linked with
adverse household circumstances, including family dissolution, if one or more parents travel
abroad for work, alcoholism and even abuse. Children in these circumstances are at risk of
falling through the cracks and losing contact with schools and other institutions which can
provide support, such as municipal social assistance offices. Improving information bases

74 A directive issued by the Ministry of Education in 2002 indicates the Ministry's intention to waive preschool
fees.
         6                                                                                 129

to track these children is the first step in identifying them. School counselors and social
workers have a potentially critical role to play in providing support to these children. The
recently passed Child Protection Act establishes the institutional framework for reaching
children at risk.
         Improving education for Roma. The wide gaps in educational attainment and
enrollments for the Roma population highlight the need for focused interventions to
address the needs of this particular group. In many Roma communities NGOs are already
active in implementing specialized programs to facilitate Roma school attendance. At the
policy level a number of measures can be undertaken including:
       - Addressing the language constraint for Roma who do not speak Bulgarian at
home. Initiatives, particularly at the preschool level, can help Roma make the transition to
Bulgarian schools;
          Teacher training to prepare teachers for work in a multicultural environment;
         Supporting Roma teachers assistants. In some schools with a large share of
Roma students, having a Roma assistant in the teacher can help overcome language issues
and can provide a link between the school, parents and community.
        - Facilitating secondary school attendance by providing support to prevent students
from dropping out. Experimental programs in Hungary have adopted various approaches
including mentoring and extracurricular activities to supplement school work (Box 6.4).
        - Reducing the prevalence of segregation into "Roma schools" and classrooms.
        Managing downsizing. There is no question that the Bulgarian education system will
need to be restructured to adjust to the significant demographic decline in the country. The
Ministry of Education is currently undertaking a detailed assessment of the school network
to develop a feasible rationalization program for the sector. This will require attention to
the issues identified above, to ensure that schools and classes which are closed will not have
adverse effects on access. In the cases where school closures are necessary, it will be criti-
cal to have tailored plans to assist those children who may have to travel to attend school.
This could include working with parents to discuss transportation arrangements and subsidy
programs to ensure that transportation costs do not deter families from sending their chil-
dren to school. Other approaches could include bussing teachers into village schools and
greater use of multigrade classrooms.
130                                                                          BULGARIA POVERTY ASSESSMENT



                                 Box 6.4: Alternative Secondary Schools in Hungary

             There have heen a numher of experiments in Hungary with alternative approaches to secondary
  school education which aim to help Roma children hridge the gap hetween hasic and secondary school, and to
  improve their performance and future opportunities. Roma in Hungary are much less likely to start and com-
  plete secondary school than other children. A 1993 survey of Roma found that only 1 percent of Roma took
  the final examination for secondary schools and only 13 percent received training as a skilled worker.

            A recent rcview of alternative approaches commissioned hy the World Bank looked at six different
  schools, most of which have heen estahlished during the past five years 75 All of the schools are private and
  receive support from a range of local and international foundations and NGOs, as well as state hudget suhsi-
  dies. While the majority of students in each of the schools is Roma, not all of the institutions explicitly target
  Roma children.

            The type of education provided hy the different schools varies greatly. In some cases, the schools
  provide vocational training, such as the "Roma Chance" Alternative Vocational Foundation School, the Don
  Bosco Vocational Training Center and Primary School and the Budapest Kalyi Jag School. Others, such as
  the Jyszefv6ros School and the Collegium Martineum, support students enrolled in secondary schools through
  extracurricular activities and classes and, in the case of the latter, dormitory accommodation in a supportive
  home environment. Finally, the Gandhi School and Students' Hostel in Pucs is a six year secondary school (or
  gymnasium) which prepares students for continuation to university education.

            The schools differ in the extent to which they emphasize the Roma hackground of their students in
  their curricula and approach. In most of the schools, strengthening of Roma identity and community and
  preservation of traditions are an explicit and integral component of the mission of the school, and teaching
  includes classes in such topics as Roma language, history and art. Others, such as Don Bosco, focus on huild-
  ing the self-confidence of students through professional training and support for entering the labor market.
  There are also differences in the extent to which the schools address the underlying socioeconomic disadvan-
  tages of students. Some, such as the Collegium Martineum, target disadvantaged students and address the
  economic barriers to school attendance hy providing housing and other support. Most of the schools involve
  parents in the educational process.

            Characteristics of the schools and their approaches can be incorporated into mainstream public
  schools and/or schools which focus on education for Roma students and other disadvantaged groups. Many of
  the ingredients of success identified in these initiatives, including involving parents, supporting students outside
  of the classroom and incorporating multicultural approaches to education have the potential to improve the
  quality and inclusiveness of the education system as a whole.




75 An exception is the Don Bosco School which was started in 1988.
          6                                                                                          131

                                               Health
                                        A. Health Status
         Health status is an important element of welfare, which influences the ability of
individuals to work, attend school and participate in society. Health indicators in Bulgaria
have stagnated, and in some cases have worsened, during the transition period. Life
expectancy at birth has declined over the past decade-from 68.1 in 1990 to 67.2 in 1997 -
while it has increased in most other countries in Central and Eastern Europe. Although
infant mortality has fallen slightly over the transition from 14.8 in 1990 to 13.3 in 1998, the
decline in infant mortality has been less than for other countries in the region. The mater-
nal mortality rate in 1999 increased significantly from 15.3 in 1998 to 23.5 in 2000, following
a period of decline. Increasing incidence of certain infectious diseases, particularly tuber-
culosis and hepatitis is of particular concern as it suggests failures in public health efforts. 76

Table 6.6: Basic Health Indicators in Bulgaria
                                                      1990 1995     1996 1997      1998   1999    2000
Infant Mortality (per 1,000 live births)              14.8   14.8    15.6   17.5   14.4    14.6    13.3
Maternal Mortality Rate (per 100,000 live births)     20.9   19.5    19.4   18.7   15.3    23.5
Tuberculosis Incidence (new cases per 100,000)        25.9   40.5    37.2   41.3   49.9    45.5
Polio Immunization Rate                               99.7   96.8    95.4   95.9   96.5    97.2   94.4
Hospital Beds ~2er 1,000)                          10.3 10.6       10.7     10.4    8.6    7.8     7.4
Source: UNICEF-IRC, TransMONEE datahase, Ministry of Health of Bulgaria.

         Bulgaria's health system has been undergoing a broad systemic reform, involving
the introduction of health insurance financed through payroll taxes, and a the introduction
of general practitioners. The reform also includes streamlining and downsizing to improve
efficiency. Until 1997, Bulgaria's health care system was characterized as one of the most
inefficient in Central and Eastern Europe, with the highest numbers of hospital beds and
physicians per population. With downsizing efforts, Bulgaria has reduced capacity, howev-
er further reforms are needed to ensure the fiscal sustainability of the system and increase
efficiency gains.
        Little is known about the extent to which these developments in the health sector
and trends in health status have had an impact on the poor. Existing instruments, including
the BIHS survey, are limited in their ability to assess health and welfare status. Previous
qualitative analysis has indicated that ethnic minorities, especially Roma, face greater
health risks (Turnev et aI., 2002). In particular, Roma are more susceptible to problems
stemming from low education which is associated with a higher incidence of illness and
mortality. Moreover, living conditions of Roma related to overcrowding, lack of sanitation

76 Data from UNICEF/IRC, 2000. "Regional Monitoring Report No.7: Young People in Changing Societies."
132                                                                          BULGARIA POVERTY ASSESSMENT


and substandard housing conditions in settlements place them at a much higher risk of ill-
ness. Chapter 1 illustrated that Roma were much less likely to have access to modern toilet
facilities and sewage than non-Roma. Reports of outbreaks of communicable diseases,
including hepatitis, polio, diphtheria and tuberculosis in Roma neighborhoods are not
uncommon (Zoon, 2000). Researchers have also recently identified a number of health
conditions which are specific to Roma, including a neurological disorder known as Lorn
disease (Turnev et al., 2002).

                                         B. Barriers to Access
Utilization of Health Care Services
          In 2001 about 15 percent of the population reported having an illness in the month
preceding the survey and nearly one-third reported having a chronic illness during the year
preceding the survey. Of those who reported having a chronic illness, over 80 percent
received treatment at home, in most cases with a general practitioner, while a smaller
share, 11 percent, were hospitalized. Residents of rural areas and ethnic minorities were
less likely to receive hospital care, than those in urban areas and ethnic Bulgarians.

Table 6.7: Utilization of Health Services (% of individuals reporting a chronic illness)
                                  None          Home         Hospital     Sanatorium
Total                             7.04          80.94          11.27          0.75              100.00
                          Urban         7.62            79.50              12.53      0.36      100.00
                          Rural        5.66             84.39              8.23       1.72      100.00
                      Bulgarian        7.12             80.78              11.64      0.45      100.00
                         Roma          4.39             79.82              9.65       6.14      100.00
                          Turk         4.82            90.36               4.82       0.00      100.00
                      Quintile 1       11.25           73.75               10.00      5.00      100.00
                      Quintile 2       4.66            85.05               9.80       0.49      100.00
                      Quintile 3       6.84            86.33               6.84       0.00      100.00
                      Quintile 4       4.70            79.19               16.11      0.00      100.00
                      Quintile 5       9.24            78.31               12.25      0.20      100.00
# of observations                       140             1609               224         15       1988
Source: BIHS 2001.

        The main reason for not seeking treatment in the month prior to the survey was
that treatment because the individual was not seriously ill and felt that treatment was not
needed. Over one-quarter of respondents reported that they did not get care because it was
too expensive. Ethnic minorities and those in the bottom two consumption quintiles most
frequently avoided care because of its costs.77 The cost constraint is also reflected in the
fact that a smaller share of low income households reported missing work because of ill-
ness. Only 44 percent of working adults in the bottom two quintiles who reported illness
77 Note that sample sizes are very small and results are not conclusive.
            6                                                                                            133

missed work, in comparison with 66 percent for the top three quintiles. Poor households
both cannot afford to pay for care and cannot afford to miss work.

Table 6.8: Reasons for not Seeking Treatment (% of individuals reporting recent illness in the last 4 weeks)
                 Not needed        Too Far Wait too long Too expensive                Other          Total
Total                59.36           2.26           3.23              26.13            9.03         100.00
Male                 56.67           2.50           5.83             25.00             10.00        100.00
Female               61.06           2.11           1.58             26.84             8.42         100.00
Urban                52.83           5.66           0.00             33.02             8.49         100.00
Rural                 62.74           0.49            4.90             22.55            9.31       100.00
Bulgarian              60             2.75            3.92             24.31            9.02       100.00
Roma                   60             0.00           0.00              40.00           0.00        100.00
Turk                    50            0.00           0.00              50.00           0.00        100.00
Quintile 1             35.9           10.26          0.00              53.85           0.00        100.00
Quintile 2            44.18           4.65           0.00              51.16           0.00        100.00
Quintile 3            65.98           0.00           6.19              15.46           12.37       100.00
Quintile 4              80            1.43           0.00               0.00           18.57       100.00
Quintile 5            50.82           0.00           6.56              37.70           4.92        100.00
# of observations      184             7              10                 81             28          310
Source: BIHS 2001.




Out~of~Pocket        Payments
        The cost barrier is among the most important impediments to seeking care. Many
patients report making formal and informal payments for services. Such payments are
common in the region. The health reform introduced co-payments for services in 1999.
Copayments for at risk groups, including the unemployed and those on social assistance are
supposed to be exempt from these payments. In 2001, 24 percent of households reported
making payments for health, which reflects a decrease from 33 percent in 1997. However,
the share of monthly expenditures spent on health has more than doubled during the same
period, from 2 percent in 1997 to 4.5 percent in 2001. This increase has been largely borne
by the poor, as the share spent by the bottom two quintiles is higher than for the top of the
consumption distribution (Table 6.9). It is not clear why the incidence of payments has
declined, as utilization of services increased between 1995 and 2001. In 199561 percent of
those reporting a recent illness sought care. This increased to 65 percent in 2001.

        Out-of-pocket payments take different forms, ranging from expenditures on consul-
tations and tests, medications and transportation, to 'gifts' to providers. Patients most fre-
quently reported making payments for treatment and drugs (11.5%); the next most com-
mon payments were payments for consultations and tests (10%). A small share (0.4%) of
patients reported making informal payments, however making distinctions between cate-
134                                                                      BULGARIA POVERTY AsSESSMENT


gories in this area is difficult. Roma, on average, paid almost twice as much as Bulgarians
for consultations and tests and for transportation.

Table 6.9. Out-of-Pocket Payments for Health Care (% of total monthly expenditures)
                                                      1995                    1997          2001
Total                                                 2.62                     1.92          4.48
                                 Urban                2.54                     1.96          4.39
                                 Rural                2.79                     1.83         4.69
                              Bulgarian               2.70                     1.96         4.49
                                  Roma                3.04                     1.17          3.92
                                   Turk               1.30                    1.64          4.77
                             Quintne 1                3.40                    2.41          5.77
                             Quintile 2               3.01                    2.16          5.12
                             Quintile 3               2.78                     1.83         4.27
                             Quintile 4               2.23                     1.75         4.05
                             Quintne 5                1.86                     1.59         3.87
% of households making payments                       30.15                   32.90         23.88
# of observations                                      744                     764           597
Source: BIHS 1995, 1997,2001.
Note: Based on household expenditures in the last four weeks preceding the survey.


Coverage of Health Insurance
        The transition to payroll based health insurance has led to gaps in coverage, partic-
ularly of lower income groups. Health care is financed through a 6 percent payroll tax
divided between employers and employees. Non-working individuals are covered through
general revenues. Contributions are limited to 870 leva per month, which makes the system
somewhat regressive and creates a potential barrier for the working poor. Pensioners are
covered by the state budget and c0verage for the unemployed and other non-working indi-
viduals is paid through municipal budgets. The insurance contribution for these groups is
based upon 70 percent of the minimum monthly wage, and as a result is significantly lower
than the contributions for working individuals.

        Coverage of the poor and unemployed is limited by municipal budget constraints.
As is the case with social assistance, it is the poorest local governments which have the
largest number of people in need of health coverage due to high unemployment levels.
Qualitative evidence has indicated that these payment arrangements have had the greatest
impact on vulnerable groups. In the town of Senovo, which has a popl1lation of 500 Roma,
health insurance for nearly 90 percent of the Roma population is covered by the municipal-
ity because they are unemployed, the remaining 10 pereent are not covered because they
lack proper identification documents (Turnev et aI., 2002). In other municipalities, local
governmcnts arc not able to cover health insurance contributions.
         6                                                                                 135

Barriers for Roma
        As is the case with education, Roma are more likely to fall through the cracks of
the health system than other groups, because they lack necessary identification and regis-
tration papers. Lack of information and poor communication with providers has also
meant that many Roma are not signed up with primary care physicians. In Senovo 80 per-
cent of Roma did not know who their primary care doctor was. In other cases, discrimina-
tion and exclusion limit Roma access to care. There are reports of doctors refusing to add
Roma patients to their general practitioner lists and of hospitals which put Roma in rooms
away from non-Roma (Turnev et ai, 2002).
        Poor communication between Roma and health care providers reinforces exclusion
and mistrust on both sides. In a 1999 qualitative survey, doctors complained that Roma
refused to follow their instructions, and would only purchase part of the medicine that they
prescribed, and would then stop treatment once the symptoms abated. Physicians also
noted that some Roma women were fearful of immunizations and were reluctant to let they
children be vaccinated. Customs among some Roma communities may also lead to
adverse health, including the high rate of young marriages and pregnancy, which can lead
to premature births, and intra-family marriages which increases the risk of congenital dis-
eases.

                      C. Findings and Policy Implications
        A priority for improving health status and the effectiveness of the health system is
to improve the information base. This chapter has highlighted the need for a better under-
standing of the linkages between health status and poverty. The BlHS survey provides a
limited view of utilization patterns and barriers to care. In this vein, a priority will be to
design a more robust module on health for the mUlti-topic household survey planned by the
National Statistical Institute.
        Ensuring health insurance coverage for the non-working population. The current sys-
tem of financing contributions for the unemployed and poor through municipal budgets is
not financially viable for the poorest municipalities. Alongside measures to strengthen the
system of intergovernmental finance in Bulgaria, measures should be introduced to ensure
coverage for vulnerable groups. Possibilities include shifting responsibility for payments to
general revenue, or providing earmarked transfers to municipalities to cover contributions.

       Overcoming costs of care for poor households. For poor households which are not
covered by current payment exemptions, copayments for doctor visits and medicines may
be unaffordable and may deter them from seeking needed care. Subsidies for the poorest
groups could be provided through the social assistance system, taking advantage of the
existing means-testing mechanism.
136                                                      BULGARIA POVERTY ASSESSMENT


       Improving access to care for Roma. As is the case with education, specific measures
can overcome barriers to access for Roma. Health interventions can be designed to over-
come exclusion and cultural barriers to accessing care. These could include:
       - Training for physicians and nurses working with Roma communities.
       - Involvement of Roma health mediators to act as a liaison between Roma patients
and non-Roma physicians.
         Targeted public health information programs for Roma.
         Greater involvement of social workers in health promotion.
References                                                                                  137


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