Decentralisation and Regionalisation in Bulgaria

2. The context: Strong socio-economic progress, yet large territorial disparities

Abstract

Bulgaria has made significant progress in its democratic and socio-economic development since 1991 but gaps remain, particularly in terms of economic performance and quality of governance. Despite improvements in macroeconomic stability and growth, convergence has been slower in Bulgaria than among its Central and Eastern European counterparts and has not translated into sustainable and inclusive growth across the entire territory. The increased territorial disparities at the regional, district and municipal levels call for a new approach to regional development and governance that is more place-based and decentralised.

Bulgaria has made solid progress in terms of socio-economic development and democratic governance

The history of modern Bulgaria is quite short, beginning around a century and a half ago. Its origins are marked by the Treaty of Berlin in 1878, which set up an autonomous state within the Ottoman Empire, and the Tarnovo Constitution, Bulgaria’s first democratic constitution in 1879, which established a parliamentary monarchy and recognised the principles of self-government at the district and municipal levels (Troeva, 2016[1]). After Bulgaria gained its full independence from the Ottoman Empire on 22 September 1908, the country went through drastic political changes, including 43 years under a communist regime. The fall of the People’s Republic of Bulgaria in November 1989, followed by the organisation of the first multi-party elections and the ratification of the constitution in 1991, opened the way to the democratisation and liberalisation of the country’s economy. The integration of Bulgaria into the European Union (EU) in 2007, following years of preparation, was also another major catalyst of both economic and governance reform. Bulgaria had to integrate the acquis communautaires in several policy areas. Since then, Bulgaria has made strong progress in terms of socio-economic development, from a planned economy to an open, market-based and upper-middle-income economy, as well as towards democratic governance and a multi-level governance system, with stronger institutions at the national and subnational levels.

The socio-economic transition: From a planned economy to an open, market-based, upper-middle-income economy

Bulgaria’s structural reforms in the late 1990s and its accession to the EU in 2007 led to macroeconomic stabilisation and improvements in living standards, after a decade of slow growth, high indebtedness and loss of savings (World Bank, 2019[2]). This progress was slowed by the 2008 economic crisis and a period of political instability in 2013-14. Overall, the country’s economic development was characterised by a positive change in key macroeconomic indicators. Bulgaria’s GDP per capita (PPS) grew from 29% of the European Union average in 2000 to 53% in 2019. Since 2011, its real annual gross domestic product (GDP) grew faster than the EU-28 average. Before the pandemic, growth had exceeded 3% for five years, with wages rising strongly and unemployment at historic low rates. The share of the Bulgarian population at risk of social exclusion declined from 61.3% of the population in 2006 to 32.5% in 2019.

Since 2006, Bulgaria has become an upper-middle-income country securely anchored in the EU (World Bank, 2019[2]). Its Human Development Index (HDI) has increased linearly from 0.709 in 1999 to 0.816 in 2018 (after stagnating around 0.700 in the 1990s), placing Bulgaria 52^nd out of a ranking of 189 countries (UNDP, 2020[3]).

In 2019, Bulgaria continued to see positive trends in its economic activities and public finance. Unemployment was low, amounting to only 4.2% of the active population aged 15-74 in 2019. Economic growth remained robust, reaching 3.7% for the year, with the main drivers being private consumption and investment. Private final consumption has been supported by the increase in real wages, due to public salary increases and labour market shortages, as well as by persistently low interest rates, which have fuelled consumer and mortgage credit. Private investment has also been strong, supported by improvements in the domestic banking sector’s profitability and asset quality. Spurred by EU funding, the participation of public investment in GDP has been significant, higher than in the EU-28 on average between 2010 and 2019, except in 2016 and 2017. Public investment dropped from 6.5% of GDP in 2015 to 2.6% of GDP in 2016 and even 2.2% in 2017. In 2018 and 2019, it started to increase again to reach 3.4% of GDP in 2019 (versus 3.0% in the EU) (EC, 2019[4]; Eurostat, 2020[5]).

In 2018, fiscal revenues grew by 18.1% thanks to improved revenue collection, strong economic activity and higher minimum wages. In 2017, Bulgaria registered a budget surplus of 1.1% of GDP, which increased to 1.8% of GDP in 2018 (World Bank, 2019[2]; OECD, 2019[6]). Furthermore, government debt has remained low according to the Maastricht definition, at 22.6% of GDP in 2018, compared to 80.0% on average in the EU28 (OECD, 2019[7]). These positive trends, however, have been interrupted by the COVID-19 pandemic that hit Europe in the first quarter of 2020 (Box 2.1).

Box 2.1. The economic and social impact of the COVID-19 crisis in Bulgaria and globally

Beyond the health and human tragedy of the coronavirus, the widespread lockdowns and the shuttering of most economic activity are expected to have a serious negative impact in many countries in Europe and around the world. COVID-19 is proving unique in its generation as both a supply-side and a demand-side shock. All economic sectors are affected by disrupted global supply chains, weaker demand for imported goods and services, a drop in international tourism (OECD, 2020[8]), or a decline in business travel, and most often a combination of these. Measures to contain the virus’ spread have hit small- and medium-sized enterprises (SMEs) and entrepreneurs particularly hard (OECD, 2020[9]). Unemployment levels and the number of aid seekers have increased, in some cases dramatically. The second wave emerging in several countries since September-October 2020, has brought renewed lockdowns making estimates even more pessimistic. The latest estimates from the OECD released in June 2020 indicated that, absent a second wave, global economic activity would fall by 6% in 2020 and OECD unemployment would climb to 9.2% from 5.4% in 2019. In the case of the second wave, the OECD estimates a drop of 7.6% in global economic output in 2020, before climbing back to a positive growth rate of 2.8% in 2021 (OECD, 2020[10]).

According to OECD estimates from December 2020, the impact of the COVID-19 crisis on the Bulgarian economy will result in a contraction of real GDP of 4.1% in 2020. This mainly reflects a fall in gross fixed capital formation (-8.4 percentage points) and, to a lesser extent, a decline in private consumption (a contribution of -0.7 percentage points) and the negative contribution of net exports (-0.8 percentage points). The OECD forecasts a return to pre-pandemic activity level by the end of 2022. The economic contraction has been milder than expected as confinement measures have been less severe in the first half of 2020 compared to many OECD countries. The first COVID-19 outbreak in Bulgaria was smaller than in many countries but the current second wave is putting high pressure on the health system and the government responded at the end of November by closing public spaces, shopping malls and education facilities. The unemployment rate is expected to rise moderately in 2020, to 6.4%, thanks to strong fiscal measures to assist firms and households. Low public debt and high fiscal reserves, together with EU financial resources, will allow the government to sustain and expand its fiscal assistance (OECD, 2020[11]).

As part of a package of economic and social measures to cope with the crisis, the government announced various fiscal measures to support the economy, which are expected to remain in place in 2021 (OECD, 2020[11]). These include increased spending on medical equipment, wage bonuses and/or increases for medical and security staff, subsidies, tax deferrals, state guarantees and a reallocation of investment funds to support the economy. Combined with an increase in unemployment and social benefits and a decrease in tax revenues, these measures will be a burden on public finance. The budget balance is estimated to turn into a deficit of around 2.7% of GDP in 2020 and 1.7% in 2021. Public debt is expected to increase and reach over 25% of GDP in both 2020 and 2021 (EC, 2020[12]). However, the still low public debt and high fiscal reserves, and EU financial assistance, have put Bulgaria in a solid position to avoid withdrawing fiscal assistance prematurely. EU funding is due to be high with strong investment expected at the beginning of the next programming period in 2021 and substantial resources, of about 10% of pre-crisis GDP, to come from the EU Recovery and Resilience Facility (OECD, 2020[11]). Large public investment, due to EU resources, is planned to close the gaps in housing efficiency and transport infrastructure, increase innovation and speed up the transition to a more digitalised and less carbon-intensive economy (OECD, 2020[11]).

Source: OECD (2020[8]), “Tourism policy responses to the coronavirus (COVID-19)”, https://www.oecd.org/coronavirus/policy-responses/tourism-policy-responses-to-the-coronavirus-covid-19-6466aa20/; OECD (2020[9]), “Coronavirus (COVID-19): SME policy responses”, https://www.oecd.org/coronavirus/policy-responses/coronavirus-covid-19-sme-policy-responses-04440101/; OECD (2020[10]), “A collapse in output followed by a slow recovery (chart)”, https://oecd.github.io/EO-Outlook_chart_2/; OECD (2020[11]), OECD Economic Outlook, Volume 2020 Issue 2, https://doi.org/10.1787/39a88ab1-en; EC (EC, 2020[12]), “European Economic Forecast, Spring 2020”, https://ec.europa.eu/info/sites/info/files/economy-finance/ip125_en.pdf.

The democratic transition: From a monocentric model of governance to a multi-level governance system

Since the adoption of the 1991 Constitution, Bulgaria has substantially improved its governance, transitioning from a monocentric model of governance (Termeer, Dewulf and Van Lieshout, 2016[13]) to a multi-level governance system (Box 2.2).

Box 2.2. Governance, public governance, good governance and multi-level governance

Governance is the exercise of political, economic and administrative authority necessary to manage the affairs of a nation. Institutions are the rules of the game in society. They determine the constraints and incentives that economic and political actors are subject to (EBRD, 2019[14]).

Public governance is the process within government by which public institutions conduct public affairs and manage public resources.

Good governance refers to the management of government in a manner that is essentially free of abuse and corruption, and with due regard for the rule of law (IMF, 2007[15]). Quality of governance is characterised by participation, transparency, accountability, rule of law, efficiency, effectiveness, responsiveness, equity and clear institutional responsibilities etc. (OECD, 2006[16]).

Monocentric governance refers to an approach in which the state is the centre of political power and has sole authority over the economy, society and resources. Power is exercised by the top-down implementation of policies and by the unilateral establishment of the agenda of societal problems and policy goals (Termeer, Dewulf and Van Lieshout, 2016[13]).

Multi-level governance is the interaction between levels of government and a broad range of stakeholders, including private actors and citizens, when designing and implementing public policies with subnational impact. This is particularly the case when it comes to regional development policy and public investment. This interaction is characterised by a mutual dependence among levels of government and runs vertically (among different levels of government), horizontally (across the same level of government) and in a networked manner with a broader range of stakeholders (citizens, private actors). Multi-level governance practices are part of every country’s governance system regardless of its institutional form (federal or unitary, centralised or decentralised).

Source: EBRD (2019[14]), Transition Report 2019-20: Better Governance, Better Economies, https://www.ebrd.com/transition-report-2019-20; IMF (2007[15]), Manual on Fiscal Transparency, https://www.imf.org/external/np/pp/2007/eng/051507m.pdf; OECD (2006[16]), Applying Strategic Environmental Assessment: Good Practice Guidance for Development Co-operation, https://www.oecd.org/environment/environment-development/37353858.pdf; Termeer, C., A. Dewulf and M. Van Lieshout (2016[13]), “Disentangling scale approaches in governance research: Comparing monocentric, multilevel, and adaptive governance”, http://www.ecologyandsociety.org/vol15/iss4/art29/.

The 1991 Constitution established a unitary country with a new governance framework based on a clear division of powers, stronger institutions at the national (legislative, executive, judicial powers) and subnational levels, and a political and administrative system with checks and balances (Figure 2.1).

Figure 2.1. Bulgarian multi-level government system

Note: * Planning regions have no administrative structure and act simply as conduits for regional planning and programming linked to EU funds.

Bulgaria is now a “consolidated democracy” based on a parliamentary representative republic with a multi-party system. The unicameral parliament is composed of 240 deputies, directly elected by the population for a 4-year term. Members of the parliament elect the prime minister, who as head of government chairs the Council of Ministers (CoM), which is the executive state body that directs the internal and foreign policy. The president, i.e. the head of state, is also directly elected by universal suffrage for five years.

Article 117 of the 1991 Constitution recognised the independence of the judicial system but reforms in this area have been slower compared to those of the political system. The judicial branch, managed by the Supreme Judicial Council, is composed of three separate systems of law enforcement or law protection authorities: the courts, the public prosecution and the investigation offices. The constitutional court is separated from the rest of the judiciary and is in charge of interpreting the constitution and checking the constitutionality of laws and treaties. Bulgaria implemented public administration reforms in three main stages: the first stage was a political transition (1991-94), the second stage was the introduction of practices and concepts of the traditional administration model and New Public Management (1994-2000), and the third stage – the current stage – is directed primarily at achieving European conditionality and implementing the concept of good governance (Tomova and Petrov, 2017[17]).

At the subnational level, the territorial organisation is quite complex, comprising of a mix of decentralised authorities and state deconcentrated administrations. Bulgaria has three subnational levels: two regional levels, one consisting of 6 larger-scale planning regions at NUTS 2 and the other of 28 districts at NUTS 3 (oblast)1; and the local level with 265 municipalities, which can be further subdivided by sub-municipal level into wards and mayoralties. The districts are “administrative territorial units”, whereas the planning regions are only “territorial units” without administration (see map in Figure 2.2).

The municipal level and its localities

The only decentralised level of government is the municipal level, with 265 municipalities (obshtini). It was reinstated in 1991 with the new constitution, after decades of a centralised socialist system, to restore local democracy and autonomy. Bulgaria belongs to a group of 13 EU and OECD countries with only 1 level of decentralised administration (Table 2.1). Within the EU and OECD combined, 21 countries have 2 decentralised levels of government (municipal and regional) while 7 countries have 3 levels (municipal, regional and intermediate). Note that 5 federal countries are two-tiered and 4 are three-tiered (including Spain, which is a quasi-federation).

Table 2.1. Number of subnational government levels in the OECD and EU in 2020

	13 countries with only 1 level: Municipalities	21 countries with 2 levels: Municipalities + regions	7 countries with 3 levels: Municipalities + intermediate entities + regions
9 federal countries		Australia, Austria, Canada, Mexico, Switzerland	Belgium, Germany, Spain,* United States
32 unitary countries	Bulgaria, Cyprus, Estonia, Finland,* Iceland, Ireland, Israel, Latvia, Lithuania, Luxembourg, Malta, Portugal,* Slovenia	Chile, Croatia, Czech Republic, Denmark, Greece, Hungary, Italy,* Japan, Korea, Netherlands, New Zealand, Norway, Romania, Slovak Republic, Sweden, Turkey	France, Poland, United Kingdom*

Note: * Spain: quasi-federal country; * Portugal: existence of two autonomous regions; * Finland: existence of one autonomous region (ongoing regional reform); * Italy: the provincial level is no longer a self-governing level; * UK: existence of three “devolved nations” at the regional level.

In Bulgaria, municipalities are administrative territorial units within which local self-governance is exercised. Their self-governing status is enshrined in the country’s constitution (Article 136, Chapter VII Local self-government and local administration). The Local Self-Government and Local Administration Act, adopted later in 1991 to regulate the administrative territorial structure of Bulgaria, consolidates the guidelines provided by the constitution and includes the modern legal framework for municipalities defining their organisation and functions.

The 265 municipalities are legal entities with their own assets that manage their own budget and have their own staff to serve the local population’s interest. They are represented by the municipal council, which determines the municipality’s policies, while the mayor (executive body) performs executive functions with the support of the municipal administration. The mayor and municipal councillors are elected for a four‑year term by a popular vote and a proportional vote respectively. Municipal councils consist of between 11 and 61 members depending on the size of the municipal population. Stolitchna municipality (Sofia), for example, has 7 deputy mayors while in the smallest municipalities (under 10 000 inhabitants) there are only 2 deputy mayors. Municipal councils are headed by a chairperson elected from among their members. Additionally, they have standing and ad hoc committees with each municipal councillor being a member of at least one standing committee.

Bulgaria also has a dense system of localities at the sub-municipal level, totalling 5 256 in 2019, i.e. on average 20 localities per municipality. It comprises 3 187 mayoralties (kmetstvo) in rural areas, 35 urban wards (gradski rayon) in the large main cities and around 1 070 villages (settlements below 350 inhabitants). Only mayoralties and urban wards are governed by mayors elected through universal suffrage for a four-year term. For a settlement below 350 inhabitants, which is not an administrative centre of a mayoralty, the municipality mayor may appoint a mayor’s representative (a delegate mayor) for the term of office to carry out executive duties.

The district level

The intermediate regional level is made of 28 districts. Districts have existed since the birth of the Bulgarian state in 1879 but under the name of “okrag” and with self-governing status up until 1959. Their number has fluctuated over the years. In 1987, the then-existing 28 districts were transformed into 9 large units, which survived until 1999, when the previous 28 districts were re-established without self-governing status. The re-established districts took the name of “regions” (oblasts) to be consistent with the 1991 Constitution, which defines them as administrative territorial units. Representing the central government at the NUTS 3 level, a district has its delimited territory, population, name and an administrative centre. The territory of a district encompasses that of the municipalities united within it.

According to Article 142 of the constitution, districts are in charge of regional policy, implementation of state governance at the local level and of ensuring the conciliation between national and local interests. They are headed by a governor appointed by the CoM and supported by deconcentrated administrations. A district governor ensures the implementation of the state’s policy, safeguards the national interests, law and public order, manages state property located in its territory and carries out administrative control, i.e. the monitoring of the compliance of municipal decisions with the law (Articles 143 and 144 of the constitution) as well as the control of the legal acts and activities of governmental entities located in the district.

Since the 1999 Regional Development Act, which initiated the creation of a regional development policy in Bulgaria, districts also comprise a deliberative organ, the District Development Council (DDC), responsible for regional development at the NUTS 3 level. The DDC is chaired by the district governor and comprises the mayors of all municipalities within the respective district, as well as representatives of the municipal councils and organisations of employers and employees.

The planning region level

The macro-regional level is made up of six planning regions. They were created by the 1999 Regional Development Act as statistical regions corresponding to Eurostat standards of NUTS 2 regions, to access the EU structural and pre-accession funds and design regional development policies. They are – according to Article 2 of the Regional Development Act – the “authorities for conducting state regional development policy regarding the respective regions”.

Planning regions are not administrative entities with legal status but rather territorial units. Thus, they do not have their own administration, budget or permanent staff and they do not exert control over administrative functions. The secretariat of each region is carried out by the Ministry of Regional Development and Public Works (MRDPW) at the central level, through its deconcentrated regional units (Troeva, 2016[1]).

The Regional Development Act of 2009 introduced some governance tools for the planning regions, in particular “regional development councils (RDCs)”. Members of these councils are appointed by the central government and represent national and subnational governments as well as partner organisations of employers and employees. RDCs are chaired on a six-month basis by a “rotating” governor, who is one of the district governors from the 28 districts.

Figure 2.2. The territorial organisation in Bulgaria: Planning regions, districts and municipalities

Source: Ministry of Regional Development and Public Works of Bulgaria (2012[18]), https://www.mrrb.bg/bg/nacionalna-koncepciya-za-prostranstveno-razvitie-za-perioda-2013-2025-godina/.

Despite improvements, several economic and governance gaps remain

Despite economic and governance improvements, some structural challenges may be limiting further socio-economic transformation in Bulgaria. These challenges have prevented Bulgaria from catching up with the rest of the EU and have resulted in it falling behind the other EU cohesion countries.

Bulgaria performs less well than other EU cohesion countries in several socio-economic areas

Despite its relatively good overall economic performance, Bulgaria has been slow to catch up with the rest of the EU. Even though Bulgaria’s income per capita and labour productivity grew much faster than the EU-28 on average over the last ten years, the levels remain the EU’s lowest. In 2019, the Bulgarian GDP per capita in Purchasing Power Standards (PPS) amounted to 53% of the EU-28 average, compared to all other Central and Eastern European countries which accounted for more than 65% (Eurostat, 2020[19]). Bulgaria also had the lowest labour productivity in 2019, which amounted to 48.7% of EU-28 average, with the second-lowest level being Latvia at 68.7%, 20 percentage points above Bulgaria’s level. Romania had the same level as Bulgaria in 2007 but reached 72.6% in 2019 (Eurostat, 2020[20]).

Bulgaria’s overall productivity gains did not translate into sustainable and inclusive growth across the entire society, resulting in increased social disparities. Decreases in unemployment and rising wages have helped to lower poverty levels but this improvement has been very uneven according to the socio‑economic and geographical location of individuals. Although absolute poverty has declined during the past decade, it remains high. Levels of poverty and social exclusion are still among the highest in the EU. In 2018, the at-risk-of-poverty rate2 (after social transfers) was 22.0% versus 16.8% in the EU, placing Bulgaria among the five highest in the EU-28 (Eurostat, 2020[21]). In 2019, the share of Bulgarian population at risk of social exclusion was the highest in the EU – 1.5 times higher than the EU average (Eurostat, 2020[22]). The Roma population and ethnic Turkish groups are among the most disadvantaged communities. The Roma represent 10% of the population in Bulgaria, the largest share across all EU countries, followed by the Slovak Republic and Romania. In 2018, almost 65% of Roma and 31.6% of individuals from Turkish ethnic groups were at risk of poverty (OECD, 2021[23]). In a similar vein, income inequality has been increasing since the global crisis, and especially the mid-2010. The Gini coefficient for disposable income has risen from 35 in 2007 to 41 in 2019 (Eurostat, 2020[24]), and is is the highest in the EU since 2016, nearly 30% higher than the 2019 EU average of 30.7 (Eurostat, 2020[24]). High income inequality could be related to the fiscal system which has a low redistributive impact, especially compared to other EU countries. Furthermore, the poor quality of public services, in part resulting from the low effectiveness of government spending, reinforces the vulnerability of the left-behind groups which are already more likely to be in poverty (EC, 2019[4]).

Insufficient improvements in health, education and innovation limit future economic potential and well-being. Since 2000, Bulgaria has had one of the lowest life expectancies at birth in the EU, below those of most Central and Eastern European countries: 74.8 years in 2017 compared to 80.9 on average in the EU (Eurostat, 2019[25]). In 2018, the crude death rate in Bulgaria was 15.4 deaths per 1 000 residents, the highest in the EU and almost 50% higher than the EU-28 average of 10.4 deaths per 1 000 residents (Eurostat, 2019[26]). Infant mortality is also high, second only to Romania in the EU-28, at 6.4 deaths per 1 000 live births in 2017 versus 3.6 deaths per 1 000 live births in the EU-28.

Despite progress on education, Bulgaria is still behind many EU and OECD countries. Programme for International Student Assessment (PISA) scores have been poorly progressing (OECD, 2019[27]). The early school leaving rate remains high and there is a large proportion of young people who are neither in employment nor in education or training (NEET): 18.6% in 2017, roughly 30% higher than the EU-28 average. In 2019, Bulgaria has among the highest school dropout rates (13.9%) together with Malta, Romania and Spain, in comparison to 10.2% in the EU in 2019 (Eurostat, 2020[28]).

Higher education remains insufficiently aligned with the needs of the job market, especially in terms of soft and digital skills. These remaining challenges in education create a skills shortage, which hinders labour productivity and reinforces inequality (Eurostat, 2020[29]; EC, 2019[4]). Bulgaria also suffers from a low level of innovation, as reflected by low research and development (R&D) public and private spending, limited issuance of patents and a low share of employment and export in high and medium high-tech manufacturing. Relative to the EU average, Bulgaria’s share of innovative firms is very low. In 2019, Bulgaria scored 27^th on the European Innovation Scoreboard (EC, 2019[30]).

Amounting to 18.8% of GDP in 2018, total investment remains relatively low in Bulgaria compared to most of its regional peers, and below the EU average of 21%. Investment – both public and private – has been declining since 2014, sitting slightly below the EU average level relative to GDP. The recovery of private investment after the 2008 crisis was subdued and unstable. Public investment highly depends on European Structural and Investment Funds (ESIF), which explains strong fluctuations related to the EU funding programming cycle. The contribution of EU funds can be more than two-thirds of total public investment depending on the year (EC, 2019[4]). In particular, public investment significantly decreased in 2016 (from 6.5% of GDP in 2015 to 2.6% in 2016), as the result of the “cliff effect” whereby it suddenly turned negative after the 2015 deadline for payments under the last EU programming period. Public investment has started to rebound in 2018, reaching 3.0% of GDP, on par with the EU-28 average (2.9%).

Bulgaria has made notable improvements in its infrastructure – both in terms of coverage and quality – with the support of EU funds. Nevertheless, significant infrastructure investment gaps remain and several sectors require higher public investment. By 2019, the overall quality of infrastructure in Bulgaria ranked 76^th out of 140 economies according to the World Economic Forum Global Competitive Index (World Economic Forum, 2019[31]). In particular, inadequate maintenance of existing roads and municipal infrastructure is a widespread problem. Road infrastructure is struggling to keep up with demand driven by a steady increase in traffic and car ownership. In 2018, Bulgaria ranks 26^th in the EU Transport Scoreboard for transport infrastructure efficiency and quality (EC, 2020[32]). Beyond transport, large investments are also needed in energy, waste and water infrastructure, and R&D. Over 20% of the water and sanitation infrastructure is amortised and needs reconstruction. It is estimated that over EUR 6 billion is needed for the basic improvement of water structure while elevating the quality of the Bulgarian water services to that of its European peers would require over EUR 21 billion (Ministry of Environment of Bulgaria, 2012[33]). Moreover, significant investment efforts are needed to raise the municipal waste recycling rate from 25% to its 50% target, or even just to the EU average level of 44% (World Bank, 2015[34]). The low infrastructure quality remains a bottleneck for unlocking the country’s growth potential. In the coming years, investment needs are further pushed up by the increasing emphasis on urban and inter-regional infrastructure (EBRD, 2020[35]). Institutional shortcomings, regulatory uncertainty and corruption remain among the main obstacles to investment (EC, 2019[4]).

Bulgaria faces long-term growth, fiscal and social challenges due to megatrends, especially unfavourable demographic prospects. Demographic and social changes already in play hinder Bulgaria’s socio-economic development and limit future development by creating labour shortages and skill mismatches. An ageing and shrinking population due to emigration and a declining fertility rate are two especially acute challenges in many OECD countries, particularly in Central and Eastern Europe, and even more so in Bulgaria. Between 2002 and 2017, Bulgaria saw its population decline by 9.7% and its elderly dependency ratio increase by 6.9% (OECD, 2020[36]), placing it among the highest ratios within EU and OECD countries (Figure 2.3). While the Bulgarian population has continuously decreased since the late 1980s, new declines are expected by 2030 and 2060. Only Japan, Latvia and Lithuania have recorded higher population decreases (Figure 2.4).

A major demographic challenge for Bulgaria is the continuous emigration of inhabitants, in particular educated and qualified people of active age. The number of Bulgarian emigrants in the world has increased by 51%, from over 600 000 in 1990 to 1.5 million in 2019. While in 2018, a total of 22 of the EU-27 member states reported more immigration than emigration in 2018, the number of emigrants outnumbered the number of immigrants in Bulgaria, together with Croatia, Latvia, Lithuania and Romania. In 2017, the crude rate of net migration of Bulgaria was negative at around -0.8 per 1 000 inhabitants, significantly below the positive EU-28 average of 2.3 per 1 000 inhabitants (Eurostat, 2020[37]).

Despite favourable economic and social conditions before the COVID-19 crisis, the crisis threatens the Bulgarian economy and society as in many countries around the world and the OECD (see above Box 2.1). The crisis will also certainly highlight some structural weaknesses in Bulgaria, including persistent governance gaps and territorial disparities.

Figure 2.3. Ageing and population decline between 2002 and 2017

Note: The sample includes all EU and OECD countries, except Luxembourg that has a decreasing elderly dependency ratio during 2002-17. Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database – Regional Demography https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR

Figure 2.4. Bulgaria is projected to be one of the countries with the highest level of population decline

Negative population growth among EU and OECD countries plus selection of country group averages

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database – Regional Demography, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR

Bulgaria has made significant strides in governance system, and certain dimensions could be further reinforced

Bulgaria has made substantial progress by consolidating its legal and institutional framework concerning administrative and judicial reform, and by strengthening the fight against corruption and tackling organised crime (OECD, 2021[23]). However, persistently weak governance limits Bulgaria’s economic performance. Weak governance distorts markets and results in an inefficient allocation of capital and labour within the economy, leading to reduced investment and income growth (EBRD, 2019[14]). Effective institutions are critical for promoting economic growth and development.

Compared to other EU and OECD countries, Bulgaria faces difficult and significant governance gaps at the national and local levels. According to the World Bank’s Worldwide Governance Indicators (WGI), the “control of corruption” and “rule of law”, both of which can affect government performance and regional resilience, are considered the most worrying governance issues in Bulgaria. The “control of corruption” indicator has not improved between 1996 and 2018. In the Transparency International Corruption Perceptions Index, Bulgaria ranks 77^th out of 180 countries, below all EU members. The “rule of law” indicator has improved but remains very low, with negative values (Figure 2.5). Estimates of government effectiveness, voice and accountability are also among the lowest within the EU‑28 since the late 1990s (Kaufmann, Kraay and Mastruzzi, 2011[38]).

Citizen trust in the political system and judiciary system is low. Responses to a 2018 public opinion poll indicated that only 4% to 5% of the population trusted political parties or the parliament, while 10% of the population trusted government (BTI, 2018[39]). Finally, “institutions” remain among the poorest performing of the 13 areas of the Global Competitiveness Index 2019. Bulgaria ranked 57^th out of 141 countries in 2019 with regards to this area (World Economic Forum, 2019[31]).

Finally, at the regional level, according to the 2017 European Quality of Government Index, Bulgaria ranks last out of all 28 EU countries. Bulgarian regions are among the lowest-scoring NUTS 2 regions in the EU, with the North West, South East, and the capital region of South West ranking respectively in 200^th, 199^th and 195^th place out of the 202 regions represented. This is also explained by the fact that Bulgaria does not have elected regional governments, therefore current regions are not politically meaningful, which makes the assessment of quality governance more difficult (Charron, Lapuente and Annoni, 2019[40]).

Figure 2.5. Worldwide Governance Indicators in Bulgaria from 1996 to 2018

Note: Governance score (-2.5 to +2.5) estimate of governance measured on a scale from approximately -2.5 to 2.5. Higher values correspond to better governance.

Source: World Bank (2020[41]), World Governance Indicators, https://info.worldbank.org/governance/wgi/, data extracted in July 2020.

Territorial disparities have increased in Bulgaria, despite active regional development policies

During the 1960s and 1970s, territorial imbalances were strengthened due to high industrialisation and the rural exodus from villages to cities (Boulineau, 2016[42]). After the 1980s, direct intervention from the state, through infrastructure investment allocations, reinforced territorial disparities instead of correcting imbalances. Despite huge investments and many positive outcomes, regional development policies, implemented in the framework of EU Cohesion Policy, were not able to counteract these trends. As in other less developed EU countries, it seems that the process of EU integration and socio-economic convergence and the move to market-based economic systems has led to an increase in territorial socio-economic disparities (Totev, 2017[43]).

The 2008 global crisis and the difficulty to address megatrends have exacerbated the negative demographic and socio-economic trends in several Bulgarian regions. Today, territorial disparities are found at the regional, district, and municipal levels and can be summarised by the concept of the “island of prosperity” dilemma, with significant differences between the core and other regions. National prosperity tends to concentrate in the South West region, and within it, the Sofia (capital) district. All other regions lag behind the South West region and seem to be more homogeneous. However, some cities are emerging as economic centres and might rebalance this trend towards concentration in the capital region, such as Burgas, Plovdiv and Varna.

The COVID-19 crisis has a strong territorial impact in most EU and OECD countries (OECD, 2020[44]), including Bulgaria. These impacts could deepen Bulgarian regional and local disparities even further (Box 2.3).

Box 2.3. The COVID-19 crisis has a differentiated impact on territories and subnational governments

The COVID-19 crisis is multi-dimensional: it is a health, economic, social and fiscal crisis. For each of these dimensions, there is a strong territorial aspect whereby short-, medium- and long-term impacts are heterogeneous across regions and localities. Moreover, the territorial impacts of the various dimensions of the crisis do not necessarily coincide.

The impact of the health crisis seems highly differentiated in Bulgaria, with clusters in large cities and Roma settlements. But low testing rates prevent from understanding the whole picture. As of 3 November 2020, Sofia had the highest number of COVID-19 cases, followed by Plovdiv (9%), Blagoevgrad (7%), Varna (6%) and Burgas (4%) (own calculations based on ESRI Bulgaria (2020[45])).

The economic and social crisis related to COVID-19 also has asymmetric effects across regions and localities. In the OECD, the economic impact of the COVID-19 crisis differs across regions, depending on the region’s exposure to tradeable sectors and global value chains. For example, regions with economies that are heavily dependent on the tourism industry are more affected by the COVID-19 pandemic than in other regions. Capital or other metropolitan regions show a relatively higher risk of job disruption compared to other regions (OECD, 2020[46]). In Bulgaria, while employment levels have been negatively impacted in all regions, existing high unemployment rates have increased even further in some rural regions. Touristic regions, such as the Burgas and Varna regions by the Black Sea, are particularly suffering from the economic crisis and it will likely take a long time for them to recover (OECD, 2021[23]). Hunger is expected to increase, especially in Roma communities and municipalities with higher-than-average poverty and unemployment rates such as in the North West region (ESPN, 2020[47]; World Bank, 2020[48]).

The COVID-19 crisis also has differentiated fiscal impacts on subnational governments. Subnational governments are at the frontline of the health, economic and social crisis. In EU and OECD countries, regional and local governments are in charge of critical aspects of healthcare, social services (elderly care, education), utility services and local economic development. During the crisis, they have to ensure the continuity of local public services, whilst protecting vulnerable populations that are most affected by the virus. This situation puts strong pressure on subnational expenditure while the economic and social crisis tends to reduce their revenues, in particular those coming from taxes, user charges and fees. The extent of the impact on subnational government finance will depend on the structure of their expenditure and revenues and their fiscal health, including the level of indebtedness and the capacity to activate reserves or rainy-day funds (OECD, 2020[44]; 2020[49]).

In Bulgaria, the impact of the 2008 crisis revealed that local governments were not equipped with sufficient capacity or resilience to cope with the shock. Municipal revenues shrank significantly, leading to deficits and debt at the municipal level, in a context of little fiscal reserve. Budgetary consolidation occurred relatively rapidly resulting in spending cuts in 2009-10 (OECD, 2020[49]). For the current crisis, according to the National Association of Municipalities in the Republic of Bulgaria (NAMRB), the bulk of income losses stem from tax revenues, in particular from real estate tax, vehicle tax, transaction tax on property acquisition and tourist tax. Fees are also affected, such as the waste fee, use of kindergartens, nurseries and other healthcare facilities, use of markets and marketplaces, technical and administrative services and more.

Source: OECD (2021[23]), 2020 Economic Assessment of Bulgaria, OECD Publishing, Paris; ESRI Bulgaria (2020[45]), Homepage, https://esribulgaria.maps.arcgis.com/home/index.html; OECD (2020[46]), “From pandemic to recovery: Local employment and economic development”, http://www.oecd.org/coronavirus/policy-responses/from-pandemic-to-recovery-local-employment-and-economic-development-879d2913/; ESPN (2020[47]), “The impact of the COVID-19 crisis on poverty and social exclusion in Bulgaria”, https://ec.europa.eu/social/BlobServlet?docId=22934&langId=en; World Bank (2020[48]), “Europe and Central Asia”, http://pubdocs.worldbank.org/en/825681588788164258/Global-Economic-Prospects-June-2020-Analysis-ECA.pdf; OECD (2020[44]), “The territorial impact of COVID-19: Managing the crisis across levels of government (revised version June 2020)”, http://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of-covid-19-managing-the-crisis-across-levels-of-government-d3e314e1/; OECD (2020[49]), “COVID-19 and fiscal relations across levels of government”, https://www.oecd.org/coronavirus/policy-responses/covid-19-and-fiscal-relations-across-levels-of-government-ab438b9f/#section-d1e1704.

Regional development policies are not yet yielding the expected results

The lack of regional development policy until the late 1990s

As with most transition economies, Bulgaria emerged from the central planning period with very little experience of conducting regional policy. There were initial efforts in the 1960s and 1970s to unite central planning with regional and district-level needs (e.g. through the creation of district-level planning committees and the General Directorate for Territorial Location of Production Forces within the State Planning Committee), however, they were not particularly successful and the concept of regional policy had not materialised.

For the first time, the 1990 Constitution of Bulgaria mentions “balanced regional growth” as an objective and responsibility of the state. There has been no subsequent legislation or development of specific formal institutional structures to implement regional policies and as such territorial disparities have continued to deepen in the context of significant political, economic and financial instability (Monastiriotis, 2008[50]).

Until the late 1990s, national growth was prioritised over regional development and convergence, leaving limited resources for comprehensive regional policy design. In fact, until 1996, regional policy was largely conducted on an ad hoc basis, mainly through several subsidies for municipal-level intervention (Kamenova, 1999[51]), initiated by the municipalities and financed directly by the state budget. There was no clear design of regional allocation formula to correct the inter-regional imbalances and, importantly, no “regional identification” of the allocation of funds (Monastiriotis, 2008[50]).

The prospect of EU accession: A driver for regional development policy

The prospect of EU accession was an important driver for Bulgaria to establish the regulatory, institutional and administrative framework for regional policy. In the pre-accession period (1991-2006), Bulgaria mainly received EU funding for institution- and capacity-building from the Poland and Hungary Assistance for the Restructuring of the Economy (PHARE) programme as a means to assist with the accession process. Nevertheless, these funds had positive impacts on regional policy development. Support from PHARE initiated early-stage regional policy framework development, including the establishment of the Territorial Units for Statistics (NUTS) and the creation of the first Operational Programme for Regional Development for 2000-06, which financed a wider range of more targeted regional interventions in Bulgaria.

This period was also marked by the adoption of the first Regional Development Act in 1999 and, with it, a new approach to regional policy emerged, with the introduction of important changes in the regional administrative structure and the planning of regional interventions. It was decided to share overall responsibility for regional and development policy between the CoM and the MRDPW. Two new planning instruments were defined: a National Economic Development Plan (NEDP), which includes a National Regional Development Plan (NRDP). Furthermore, six planning regions at NUTS 2 level were created. At the subnational level, a RDC was established to allow for the participation of several ministries, district governors and representatives from the NAMRB to develop policy proposals under the NRDP and to co‑ordinate the implementation of regional policies. Development councils were also created in each planning region and each district. A development office or directorate was established in each of Bulgaria’s 264 municipal councils (Monastiriotis, 2008[50]).

In 2004, a new Regional Development Act was enacted and a new National Strategy for Regional Development for 2005-10 was developed, leading in 2005 to the formulation of the new Operational Programme for Regional Development for the country’s first post-accession planning period 2007-13. The most significant policy innovations were, for the first time, to explicitly identify intra-regional disparities and to set wider objectives of regional policy.

Regional development policy after the EU accession has mixed results, despite many positive outcomes

After the EU accession, in the 2007-13 programming period, Bulgaria made great progress in setting the framework and priorities for regional development. However, the framework was rather complex, with numerous institutions sharing the responsibilities of policy design leading to overlaps or contradictions in objectives, priorities and funding allocation. One example is that while the CoM considered the elimination of regional disparities as the fundamental objective of regional policy, the National Strategic Reference Framework at that time prioritised the achievement of balanced and sustainable development. Meanwhile, the areas that were mapped out to receive regional development funding are not consistent in the view of the Ministry of Finance and MRDPW. All territories are eligible for EU funds, including Stolitchna municipality (Sofia), with no mechanism thereof favouring the least developed regions. According to the Assembly of European Regions, this period allows the introduction of a series of important, hierarchically related statutory strategic documents in regional and spatial planning, however, a lot of work still needs to be done regarding institutional and expert capacity development (Assembly of European Regions, 2018[52]).

In the 2014-20 period, Bulgaria has constructed its regional policy framework with a focus on reducing regional disparities through creating a polycentric spatial development model with multiple urban centres to allow for more sustainable and balanced growth across regions (MRDPW, 2019[53]). This regional policy has not yet yielded the expected results of regional growth and convergence. Territorial disparities have deepened.

Territorial disparities have increased at the regional, district and municipal levels

While national disparities between EU countries measured by GDP per capita were decreasing thanks to EU regional policy, internal regional disparities have increased in several countries, including Bulgaria. In other words, there is a clear reverse relationship between the economic level reached by less developed EU countries and intra-regional dispersion (Totev, 2017[43]). Despite the significant intervention of EU Cohesion Policy, the 2008 global crisis and the difficulty to address megatrends have exacerbated the negative demographic and socio-economic trends in several Bulgarian regions. Today, territorial disparities are found at all levels: planning regions (NUTS 2), districts (NUTS 3), and municipalities, and are higher in Bulgaria than in most EU and OECD countries. In the 2018 ranking of European regions, three Bulgarian regions ranked just above last place in terms of GDP per capita, ranging between 34% and 36% of the European average (Eurostat, 2020[54]). The Sofia City region, home to one fifth of the population, has a GDP per capita corresponding to the United Kingdom’s in purchasing power parities. By contrast, the poorest regions in the northwest are also the poorest in the entire EU and compare to Colombia by GDP per capita (OECD, 2021[23]).

The increase in territorial disparities resulted in an “island of prosperity dilemma” that is more intense in Bulgaria than in other Central and Eastern European countries (Totev, 2017[43]). Regional income differences are now larger than in most OECD countries (OECD, 2021[23]). The South West region contains Sofia (capital) district, which tends to concentrate the national prosperity. All other regions are lagging behind. These regions seem to be more homogeneous, even though some economic centres are emerging (e.g. Burgas, Plovdiv and Varna) and could possibly rebalance the trend toward concentration in the South West region and capital district.

Regional disparities at the NUTS 2 level: The South West region, driven by Sofia (capital) district, stands out above all other planning regions

Bulgarian territorial disparities at the planning region level are relatively high compared to EU and OECD countries. To analyse these territorial disparities, two concepts are used: dispersion and polarisation (Figure 2.6). Dispersion is the main lens through which OECD Regions and Cities (OECD, 2020[55]) analyses territorial disparities: it measures the gap between the worst and best performing regions as a percentage of the country value. Polarisation enables one to look at another dimension of territorial disparities by highlighting if one region or a group of regions (i.e. outliers) performs significantly better (or worse) than the majority of regions. For instance, a country that does not experience a large gap in educational performance among its regions but has one of its regions performing significantly worse than the others in education might want to specifically address education policy in this region to ensure that the gap between the lagging region and the others will not deepen (see Annex A). The methodology has been applied to 11 socio-economic indicators including demography, GDP and income, health, labour, education and employment.

In Figure 2.6, the polarisation coefficient measures the difference in distance between the maximum and the median, and the minimum and the median, as a share of the total distance between the maximum and the minimum. For instance, for population growth, disposable income, GDP per capita and labour productivity, the higher the coefficient, the greater the gap between the best performing regions and the rest. A coefficient of zero means that all regions have the same levels, e.g. of GDP per capita, while a coefficient of 100 means that all regions except one have the same levels and the remaining one is performing significantly differently.

Dispersion in Bulgaria is higher than in most EU and OECD countries for most socio-economic dimensions, such as in GDP per capita for which Bulgaria is among the 30% highest. It means that 70% of the sample countries have dispersion in terms of GDP per capita lower than Bulgaria. Bulgaria’s dispersion score for GDP per capita is 100, meaning that the difference between the worst regional GDP per capita and the best regional GDP per capita is equal to one time the country average. This dispersion score, while normalised by the country average, highlights that the GDP per capita of the best performing region is at least two times higher than the GDP per capita of the worst-performing region.

Polarisation is also high for most socio-economic dimensions, with the South West and North West regions standing out. Compared to EU and OECD countries, Bulgaria has the fifth-highest polarisation coefficient in 2017 in terms of elderly dependency and is in the highest 20% in terms of labour productivity polarisation. In other words, for labour productivity, at least 80% of the sample countries have a polarisation score lower than Bulgaria. Bulgaria’s labour productivity polarisation score is 75 while the sample median score is 49. This polarisation score indicates that the distance between the best performing region and the median is three times higher than the distance between the median and the worst-performing region. This highlights the gap between the best performing region, which performs significantly better than the other regions, and the other regions, which are concentrated around the median.

On one hand, the South West region, which represents an island of prosperity, is the only Bulgarian region with positive population growth between 2002 and 2017 and in 2017, its GDP per capita was 1.5 times higher than the national average versus 1.2 times in 2000. This is largely driven by prosperity of Sofia (capital) district. On the other hand, the North West region has the highest population decline, two times higher than the national average, the lowest GDP per capita, the highest elderly dependency ratio and the highest unemployment rate (1.8 times that of the national average). As looking at all dimensions goes beyond the scope of this report, two dimensions are selected below: demography and economy.

Figure 2.6. Regional disparities are higher in Bulgaria than in most EU and OECD countries

Note: All EU and OECD countries are part of the sample, except for Cyprus, Estonia, Latvia, Luxembourg and Malta, which have only one region at Territorial Level 2 (TL2)3. Therefore, the full sample is composed of 36 countries. The median is the median value for all EU and OECD countries included in the sample. Data comes from 2017 for the proportion of NEETS and dropouts, for the elderly dependency ratio and population growth (2002‑17); otherwise, data comes from 2016. Due to a lack of data, not all 36 countries are included for all indicators. Population growth and the elderly dependency ratio comprise the full sample. For infant mortality, the sample comprises 33 countries since data for Australia, Iceland and the United States are missing. For the crude death rate, the sample comprises 34 countries since data for Australia and Ireland are missing. For hospital beds, the sample comprises 23 countries, it includes all EU-27 countries (at the exception of Ireland and the Netherlands), Norway, Switzerland and Turkey. For the proportion of NEETS and dropouts, the samples comprise 29 and 28 countries respectively since data are missing for Canada, France, Iceland, Ireland, Korea, Lithuania and Mexico; data for Japan are also missing for the proportion of dropouts. For labour productivity, the sample comprises 33 countries since data are missing for Iceland, Israel and Turkey. For GDP per capita, the sample comprises 33 countries since data are missing for Iceland, Israel and Japan. For disposable income, the sample comprises 31 countries since data are missing for Chile, Iceland, Japan, Switzerland and Turkey. For unemployment, the sample comprises 31 countries since data are missing for Croatia, Finland, Iceland, New Zealand and the United States.

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR , and Eurostat (2020[20]), https://ec.europa.eu/eurostat/databrowser/view/tesem160/default/table?lang=en

Demographic disparities across Bulgarian regions

On the demographic side, the South West region is the only Bulgarian region with a positive population change between 2002 and 2017. The South West region has the most positive regional values in Bulgaria in terms of natural change and net migration while the North West and North Central regions have the most negative figures on net migration and the most negative rate of natural change among all European regions. The North West region lost one-fourth of its population during the 2002-17 period, the worst population decline among all 403 EU and OECD regions in the sample. Its elderly dependency ratio reached 42.0% in 2017 and is the highest among Bulgarian regions since 2002 while that of South West (28.1%) is below the EU-28 average. As a result, the South West region is the most populated, containing 30% of the Bulgarian population. It is followed by the South Central region (20%) and the other 4 regions, which range from 11% to 15%.

The territorial disparities among Bulgarian regions facing demographic changes are higher than in most EU and OECD countries. In Bulgaria, the dispersion between the lowest and the highest regional values for population growth and elderly dependency is higher than in half (or more) of the 36 sample countries. The dispersion of population growth in 2017 among Bulgarian regions is higher than in most EU countries, except for France, Hungary and Spain. For the 2017 elderly dependency ratio and growth rate, Bulgaria’s regional dispersion is close to the sample median (Figure 2.7). Additionally, Bulgaria had among the largest polarisation coefficient in the elderly dependency ratio in 2017.

Figure 2.7. Regional dispersion in terms of demographic change in EU and OECD countries

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR, and Eurostat, 2020.

Figure 2.8. Regional polarisation in terms of demographic change in EU and OECD countries

Note: All EU and OECD countries are part of the sample, except Cyprus, Estonia, Latvia, Luxembourg and Malta, which have only one region at TL2 level. The country value is the weighted average of the regional values.

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR

Economic disparities across Bulgarian regions

The South West region stands out with its relatively good economic performance regarding European standards, concentrating 48% of the Bulgarian GDP. Between 2000 and 2018, the South West concentration of GDP has increased by more than 35%. At the other end of the spectrum, the highest declines in GDP concentration were experienced in the North West and North Central regions.

Since the early 2000s, the South West region experienced the highest increase in GDP per capita and labour productivity, exceeding the national averages in GDP per capita and labour productivity; hence, it is the only Bulgarian region with figures higher than the national average. During the past decade, the South West GDP per capita and labour productivity were respectively on average 63% and 34% higher than the national average (OECD, 2020[36]). Regional dispersion in GDP per capita and disposable income as well as the regional polarisation in labour productivity and disposable income are particularly high in Bulgaria (Figure 2.9 and Figure 2.10)

Since 2004, unemployment in the South West region has been significantly lower than the EU-28 average and remains, since 2008, significantly lower than the unemployment rate in the five other Bulgarian regions. By contrast, unemployment reached 10.9% in the North West region in 2017, which is the highest rate in Bulgaria and almost twice the national average (OECD, 2020[36]).

Figure 2.9. Regional dispersion in GDP per capita and disposable income is high in Bulgaria

Graphs ordered from the lowest to the highest dispersion

Note: All EU and OECD countries are part of the sample, except Cyprus, Estonia, Latvia, Luxembourg and Malta, which have only one region at TL2 level. For disposable income, Chile, Iceland, Japan, Switzerland and Turkey are not included due to lack of data. The country value is the weighted average of the regional values.

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR

Figure 2.10. Regional polarisation in labour productivity and disposable income is high in Bulgaria

Note: 33 EU and OECD countries are covered. Cyprus, Estonia, Latvia, Luxembourg and Malta are excluded because they have only one region at the TL2 level. Iceland, Israel and Mexico are not included due to a lack of data. For disposable income, Chile, Japan and Switzerland are also not included due to a lack of data. The country value is the weighted average of the regional values.

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR.

The 2019 EU regional competitiveness index (RCI) confirms the weak performance of Bulgaria, at the regional level compared to other regions in the European Union as well internal disparities between the South West Region and the others. Bulgarian regions also perform worse that the great majority of EU regions in terms of income inequality (Box 2.4).

Box 2.4. How Bulgarian regions rank in the 2019 Regional Competitiveness Index (RCI)

The EU RCI confirms the weak performance of Bulgaria at the regional level, compared to other EU countries. Based on the map, there is a significant divide between the North West and South East across the EU, with Bulgarian, Greek and Romanian regions performing particularly poorly. The map also confirms a polycentric pattern, with capital and metropolitan regions being the more competitive in many parts of the EU, thanks to agglomeration and connectivity of economic activities and human capital making them engines of growth and competitiveness (EC, 2019[56]). In Bulgaria, the capital region of the South West is the only region with a competitive index of between -0.5 and -0.2, the others having the highest negative value (below -1) among EU regions. It is the most competitive region in the country, although it is still one of the less competitive among the majority of other EU capital and metropolitan regions. Among the 10 worst-performing regions in the EU, we find one Bulgarian region, the North West, with GDP per head reaching only 29% of the EU average and a competitiveness score of -1.4.

Bulgarian regions also perform worse that the great majority of EU regions in terms of income inequality. Data from the RCI 2019 incorporated social elements for the first time (Annoni and Dijkstra, 2017[57]). Income inequality has become a more and more prominent indication of social integration and fairness in the EU and worldwide. Data from 2016 show wide inequalities in the distribution of income across EU regions. Bulgarian, Romanian and some Italian regions combine low competitiveness with high-income inequality.

Figure 2.11. Regional Competitiveness Index (RCI) 2019 in the EU

Note: RCI 2019 tracks the performance of 268 regions at the NUTS 2 level across 28 EU member states. It measures 11 dimensions of competitiveness capturing concepts that are relevant to productivity and long-term development: infrastructure, labour market efficiency, market size, innovation, business sophistication, technological readiness, higher education and lifelong learning, basic education, health, macroeconomic stability and institutions. Each dimension comprises a series of indicators.

Source: (EC, 2019[56]).

Source (box): Annoni, P. and L. Dijkstra (2017[57]), “Measuring and monitoring regional competitiveness in the European Union”, in Huggins, R. and P. Thompson (eds.), Handbook of Regions and Competitiveness; EC (2019[56]), The EU Regional Competitiveness Index 2019, https://ec.europa.eu/regional_policy/sources/docgener/work/2019_03_rci2019.pdf.

The “island of prosperity” dilemma at the district level: The gap between Sofia (capital) district and the other districts

The concentration of wealth in the South West region, which represents an “island of prosperity”, stems mostly from the good performance of Sofia (capital) district. Sofia (capital) district attracts economic activity and people seeking job opportunities. It is the only Bulgarian district for which the positive net migration compensates the negative natural change of population; hence, it is the only Bulgarian district with positive annual population growth since 2002. Sofia (capital) district accounted for 18.8% of the national population in 2018. Due to agglomeration effects, the concentration of economic activity is much more important than the concentration of population, reaching almost 40% of national GDP (versus 29% in 2002) and receiving more than 50% of the non-financial foreign direct investment (FDI) in 2017 while its unemployment rate is among the lowest in Bulgaria. As a comparison, the remaining districts individually account for less than 10% of the national GDP. Sofia (capital) district’s GDP per capita was 1.9 times higher than the national average in 2002 but 2.1 times higher in 2017.

Sofia (capital) district is also characterised by high well-being conditions alongside high-income inequality, which is typical of major economic hubs. Sofia (capital) district had the fourth-highest level income inequality, as measured by the Gini index, among Bulgarian districts in 2017, reaching 42.3, and the highest growth in income inequality between 2014 and 2017, growing by 28% compared to 14% on average in Bulgaria.

Figure 2.12. Population change and economic activity in Bulgarian districts

Note: Sofia (Stolitsa) is Sofia (capital) district.

Source: Author’s compilation based on OECD (2020[36]), OECD Regional Database, https://stats.oecd.org/Index.aspx?DataSetCode=REGION_DEMOGR

The growing polarisation trend towards the most populated districts, especially Plovdiv and Varna, might, however, soften this “island of prosperity” dilemma by fostering the development of new socio-economic hubs. The most populated districts seem to benefit from agglomeration effects. Plovdiv and Varna, in the South Central and North East regions respectively, are the leading districts in their respective regions. They perform better than the country average for most indicators, with a GDP per capita among the 25% highest, crude death rates among the lowest and an average grade on the matriculation exam in 2017 among the highest in Bulgaria. For their part, Stara Zagora and Burgas are two good candidates for leading the South East region.

Nevertheless, the development of these balancing centres should not be done at the detriment of surrounding districts. Indeed, during the past decade, territorial disparities have been deepening. The worst-performing districts had difficulties catching up with the other districts while the best performing districts were hardly challenged by others. Several rural areas do experience deconcentration trends because of the attractive pulling forces from more populated areas. Support policies might thus be needed to help lagging districts from falling further behind. A positive note is that the most rural and remote districts are not the worst performing in terms of education, health and poverty.4

The North West districts seem to be the most affected by these polarisation forces. The five districts in the North West region have among the lowest performances for most socio-economic indicators, which explains the weak overall performance of the region. A study shows that the dispersion of GDP per capita among districts in Bulgaria is 45.5, much higher than the EU average of 28.3 (Totev, 2017[43]).

An application of the EU RCI at the NUTS 3 level in Bulgaria by Ivanov (2018[58]) shows that, in 2016 in the North West region, all of its five districts are considered “less competitive”. This study also highlights the leading role of Sofia (capital) district, which is at least twice as competitive as any other districts in Bulgaria and ranks first in terms of competitiveness during the whole period 2004-16. Among the other districts, the differences are smaller, supporting the hypothesis of an “island of prosperity” dilemma. With the exception of the North West region, in the other regions, there is always a combination of competitive districts, moderately competitive districts and less competitive districts. These disparities likely reflect a concentration of investment and better infrastructure, fostering better conditions for doing business, as is the case in the southern regions.

Figure 2.13. Regional competitiveness index at NUTS 3 level in Bulgaria, 2016

Source: Ivanov, I. (2018[58]), “Study of regional inequalities: Case of Bulgaria”, http://dx.doi.org/10.3846/bme.2018.2275.

Municipalities differ considerably in area, population size and economic potential

Compared to European municipalities, Bulgarian municipalities are on average larger in terms of land area, amounting to around 420 km² compared to an EU-28 average of 51 km² (OECD, 2019[59]). However, there is great variation across municipalities, from 44 km² for the smallest to 1 354 km² for the largest; 60% of Bulgarian municipalities are under the national average.

In terms of population, compared to EU and OECD countries, the average municipal size (26 600 inhabitants in 2018-19) is quite large compared to the OECD average (9 600 inhabitants) and, especially, to the EU-28 average (5 900 inhabitants). The median size of municipalities in Bulgaria remains also quite high compared to the median size in the EU: 10 100 inhabitants versus 5 370 (Figure 2.14).

Figure 2.14. Average and median municipal sizes in EU and OECD countries, 2018-19

Note: Three countries are not shown on the graph because of very high values (average/median): Ireland (155 820/123 850), the United Kingdom (173 490/130 630) and Korea (228 350/125 110).

Source: OECD (2020[60]), Subnational Governments in OECD Countries: Key Data - 2020 Edition, OECD, Paris; OECD (2019[59]), Key Data on Local and Regional Governments in the European Union (brochure), https://www.oecd.org/regional/regional‑policy/Subnational_Finance_Nuancier_EU_2019.pdf.

The majority of Bulgarian municipalities (54%) have between 5 000 and 20 000 inhabitants which is twice the EU and OECD averages (around 27%) (Figure 2.15). Around 20% of Bulgarian municipalities have fewer than 5 000 inhabitants compared to 47% in the EU-28 and 41% in the OECD.

This does not mean, however, that Bulgaria is spared from the problem of municipal fragmentation. Bulgaria has some very small municipalities (3% of total). Overall, 76 municipalities had less than 6 000 inhabitants in 2019, the minimum population threshold for creating a new municipality as determined by the Administrative and Territorial Act, versus 56 municipalities in 2010, i.e. 29% in 2019 versus 21% in 2010 (NSI, 2020[61]). Ninety-two percent of Bulgarian municipalities saw their population decline between 2010 and 2019. For 21% of municipalities, their population declined by more than 20% over the 9-year period (Figure 2.16). One can anticipate that this trend will continue given predicted demographic changes. Between 2000 and 2019, 92% of municipalities saw their populations decline due to the effects of the natural balance of births and deaths and migration. In 2019, 63% of Bulgarian municipalities had a negative rate of net migration (NSI, 2020[62]). Moreover, within these municipalities, the majority of them (52) also has an extremely low density of fewer than 20 inhabitants per km². Most of them are located in the border regions, with a particularly clear concentration observed in the North West region of Bulgaria.

Figure 2.15. The share of municipalities by population size class in the OECD and EU

Note: Calculations do not comprise French Guyana for France. EU and OECD averages are unweighted (UWA).

1. United States: size classes are slightly different: less than 2 499 inhabitants, 2 500 to 4 999, 5 000 to 24 999, 25 000 or more.

2. Turkey: metropolitan municipalities are not included to avoid double counting.

Source: OECD (2020[60]), Subnational Governments in OECD Countries: Key Data - 2020 Edition, OECD, Paris; OECD (2019[59]), Key Data on Local and Regional Governments in the European Union (brochure), https://www.oecd.org/regional/regional‑policy/Subnational_Finance_Nuancier_EU_2019.pdf.

Figure 2.16. Population change by municipality between 2010 and 2019 (%)

Source: OECD calculations based on NSI (2020[61]), Population by Districts, Municipalities, Place of Residence and Sex, https://www.nsi.bg/en/content/6704/population-districts-municipalities-place-residence-and-sex.

At the other end of the spectrum, there are no large municipalities to balance the demographic weight of Stolitchna municipality (Sofia). Only 10% of municipalities are above 50 000 inhabitants and 9 municipalities are above 100 000 inhabitants. Plovdiv and Varna, which are the two largest cities after Stolitchna municipality (Sofia) with around 345 000 inhabitants each, are almost 4 times smaller than the capital city (1.328 million inhabitants in 2019). Stolitchna municipality (Sofia) accounts for 19% of the population in 2019, and Plovdiv and Varna, 5% each. The other 6 municipalities above 100 000 inhabitants account for between 1.5% and 3% of the total population. The polarisation of the population towards the Stolitchna municipality has grown by 6% between 2000 and 2019 while the total Bulgarian population decreased by 7% over the same period (NSI, 2020[61]).

In terms of socio-economic development, Sofia (capital) district, i.e. the Stolitchna municipality (Sofia), makes up 40% of the total GDP for Bulgaria. Sofia (capital) district’s GDP per capita is more than twice the national average and is above the EU average since 2017 in purchasing power parity (PPP) terms. By the end of 2018, Sofia attracted half of the foreign investments in Bulgaria, i.e. EUR 9 800 per resident - 3 times the national average. The average salary in Sofia exceeds the country’s average by 38%, approaching the EU average. Sofia has a highly concentrated, highly educated working-age population. For example, the share of the population with higher education is around 51%, while it was below 28% at the national level in 2017. Sofia has also the highest employment rate in Bulgaria – 76.4% in 2019 (versus 70.1% at the national level) – and therefore also has the lowest unemployment rate in the country – 1.6% (versus 4.2% at the national level) (NSI, 2020[63]). Sofia’s economy is dominated by the service sector, which produces over 80% of the regional GDP (IME/Sofia Investment Agency, 2019[64]). This lack of polycentrism hinders the promotion of balanced regional development in Bulgaria (Boulineau, 2016[42]).

Figure 2.17. Distribution of municipalities less than 6 000 inhabitants in Bulgaria, 2019

Source: IME (2019[65]), “News: Which municipalities use the most European funds? (in Bulgarian)”, https://www.regionalprofiles.bg/bg/news/which-municipalities-absorb-the-most-eu-funds-2019/.

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Notes

← 1.  The Nomenclature of Territorial Units for Statistics (NUTS) is a geocode standard for referencing the subdivisions of countries for statistical purposes. For each EU member country, a hierarchy of three NUTS levels is established by Eurostat and is instrumental in the EU Structural Fund delivery mechanism. Though the NUTS regions are based on existing national administrative subdivisions, the subdivisions in some levels do not necessarily correspond to administrative divisions within the country. Depending on their size, some countries do not have all three levels. The following thresholds are used as guidelines for establishing the regions but they are not applied rigidly: NUTS 1 region (3 million to 7 million inhabitants); NUTS 2 region (800 000 to 3 million inhabitants); and NUTS 3 region (150 000 to 800 000 inhabitants) (OECD, 2010[71]).

← 2.  The at-risk-of-poverty rate is the share of people with an equivalised disposable income (after social transfer) below the at-risk-of-poverty threshold, which is set at 60 % of the national median equivalised disposable income after social transfers.

← 3.  Regions within the 36 OECD countries are classified on two territorial levels reflecting the administrative organisation of countries. The 394 OECD large (TL2) regions represent the first administrative tier of subnational government, for example, the Ontario Province in Canada. The 2 258 OECD small (TL3) regions correspond to administrative regions, with the exception of Australia, Canada and the United States (OECD, 2020[69]).

← 4.  With the exception of Silistra, with education and economic performances (the lowest GDP per capita and third-highest unemployment rate in 2017) among the lowest.